Commercial Banking

Are you looking for a job in Banking Sector, if yes. Then checkout the popular interview questions in commercial banking that are likely to be asked in the job interview.

Q.1 Can you describe what are different types of banks?
There are two broad categories under which banks are classified in India - Scheduled and Non-Scheduled Banks. The scheduled banks include Commercial Banks and Cooperative Banks. The commercial banks include Regional Rular Banks, Small Finance Banks, Foreign Banks, Private Sector, and Public Sector Banks.
Q.2 How will you determine the creditworthiness of a company?
There are two ways to determine the creditworthiness of a company namely - Assets and cash Flows. This requires a thorough approach involves a full financial analysis of the business based on its financial statements, market conditions, and the management team. On the asset approach, it’s important to understand how much the assets are truly worth, how liquid they are, and how much you think you could get for them. On the cash flow approach, the historical ability to generate cash flow (or net income, EBIT, EBITDA, etc.) will be relied on, in conjunction with a realistic forecast to assess how much debt they can service.
Q.3 When you are asked to analyse a set of financial statements, what would you do?
The first thing I would do is put them in a clean Excel workbook, or company template, in an organized format. Next, I would calculate a variety of ratios: profitability, growth, margins, leverage, and liquidity (see question below for specific examples). Finally, I would analyse these ratios and identify trends (based on at least 3 years of historical information), which I would try to extrapolate into the future.
Q.4 What are the most important credit metrics?

Some of the most important credit metrics include -

1. Leverage - debt to equity, debt to capital, debt to EBITDA, interest coverage ratio (or fixed charge coverage ratio), and other variations of these ratios.

2. Liquidity - working capital, current ratio, quick ratio, cash ratio.

Q.5 Let us suppose you have been given an income statement where revenue was going up and net income was going down, what could be the problem in this case?
Given the situation, there could be many reasons for such an issue - One of the most likely reason could be that the company is fueling its revenue growth by, 1. Increasing its marketing expenses (see: return on ad spend), 2. Decreasing prices, 3. Experiencing an increase in cost of goods sold, 4. Changing accounting policies, like no longer capitalizing an expense that used to be capitalized. The key concern is, that more investigation into the income statement is required, but it’s often an indication that growth is being pursued in an uneconomic way.
Q.6 In personal life, how do you manage risk?
This questions gives you the opportunity to showcase your potential and skills by applying the principles of risk management in a different way. Remember this is a behavioural question and there is no right or wrong answer. The point here to understand is that there are various ways to think about a risk situation like risk of loss, the risk of missing out, risk vs reward, etc. It is suggested that you should speak about your finances, and you could even highlight about personal activities done to manage such risks.
Q.7 According to you what is the key to become a great commercial banker?
Now this is a open-ended interview question and indeed there are a lots of ways to answer it. You are expected to highlight the skillset required in commercial banking and then link your response to that. Primarily the key skills required are - Analytics, and Sales/relationship management.
Q.8 What are investment banks and how do they work?
A financial intermediary that conducts a variety of services is known as an investment bank (IB). Underwriting, acting as a middleman between a securities issuer and the investing public, aiding mergers and other corporate reorganisations, and acting as a broker and/or financial consultant for institutional clients are all services provided by investment banks.
Q.9 What are the sources and uses of commercial bank funds?
  • Funding Sources: Capitalization of Shares Surplus and Reserves Deposits Borrowings
  • Application of Funds: Cash and cash Balance with RBI Cash balance with other banks Investments Advances Source
Q.10 What role do commercial banks play?
The general role of commercial banks is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, credit creation is the most significant function of commercial banks.
Q.11 What are the different types of Commercial banks?
Commercial banks are categorised into three types.

1. Public Sector Banks: Public sector banks refer to a type of financial institution that is state-owned by the corresponding Government. A significant part of the share of such organisations is held by the Government.  In India, the Reserve Bank of India, which acts as the central bank, creates operating guidelines for the public sector banks. 

2. Private Sector Banks: Private sector banks are financial institutions registered as companies with limited liabilities. The major part of the share capital of such companies is owned by individuals or private businesses. 

3. Foreign Banks: Foreign banks are financial institutions that are operating overseas within a foreign nation. Post the financial reform of India (in 1991), there was a marked increase in the number of foreign banks on Indian soil. They are essential for the economic development of a nation.
Q.12 What is cash reserve ratio and what does it mean?
The Cash Reserve Ratio (CRR) is a minimum percentage of total customer deposits that commercial banks must retain as reserves, either in cash or in central bank deposits. The CRR is determined by a country's central bank's standards.
Q.13 What is the characteristic of commercial banks?
Commercial banks are businesses that handle certain financial transactions. Its goal is to make money. Socially and legally, transactions are acceptable. In charge of the bank's customer deposits. The central bank of a country is in charge of establishing and operating it.
Q.14 What is the purposes of commercial banks?

The main purpose of commercial banks is to provide financial services to the general public and also provide loan facilities to the business which helps in ensuring economic stability and growth of the economy.

Q.15 List the banks under retail banks?
  • Commercial Banks
  • Community Banks
  • Credit Union Banks
  • Postal Saving Banks
  • Ethical Banks
Q.16 What does the term "Combined banks" mean?
Universal banks are another name for combined banks. These are generally referred to as financial services companies, and they provide a variety of financial services.
Q.17 What is the primary function of commercial banks?
A commercial bank is a financial organisation that accepts deposits, provides business and auto loans, mortgage lending, and basic investment products such as savings accounts and certificates of deposit.
Q.18 What does non-performing asset (npa) mean?
The principal and interest payments on a loan or lease are not being met. Commercial loans that are more than 90 days past due and consumer loans that are more than 180 days past due are often classified as nonperforming assets by banks. In a broader sense, an asset that does not generate income.
Q.19 What are the principles of commercial banks' investing policy?
  • Liquidity
  • Profitability
  • Safety
  • Diversity
  • Stability of securities
Q.20 What does the capital adequacy ratio (CAR) mean?
A measure of a financial institution's financial strength and stability is the percentage ratio of its primary capital to its assets (loans and investments). Banks must maintain a primary capital base equivalent to at least 8% of their assets, according to the Bank for International Settlements' (BIS) Capital Adequacy Standard: a bank that lends 12 dollars for every dollar of its capital is within the allowed limits.
Q.21 State what is the narasimham committee's purpose?
  • To investigate all areas of the financial systems' structure and practises.
  • To make suggestions for increasing their efficiency and output.
  • To reform the Indian Banking sector
Q.22 What is the point of the debate between liquidity and profitability?
The link between profits and capital is known as profitability (the "static" resources set aside to earn those profits). When it comes to determining profitability, you must link a profit figure (from the Profit and Loss Account) to a resource figure (from the Balance Sheet). The ability of a company to satisfy its financial commitments when they become due is known as liquidity. These resources and claims are measured on the balance sheet, which is defined as "a structured summary of assets and liabilities."
Q.23 What were the names of the two expert committees that were established in the 1990s?
On August 14, 1991, Manmohan Singh, India's Finance Minister, appointed the first Narasimham Committee. P. Chidambaram, the Finance Minister, appointed the second one in December 1997.
Q.24 Could you please provide a list of commercial banks in India?

List of Commercial Banks in India:

  • Reserve Bank of India
  • Abu Dhabi Commercial Bank
  • Allahabad Bank
  • Andhra Bank of India
  • Bank of Madura
  • Bank of Punjab
  • Canara Bank
  • Chinatrust Commercial Bank
  • Citibank
  • City Union Bank
  • Corporation Bank
Q.25 How would you assess a company's creditworthiness?
(1) Assets and (2) Cash Flow are the two basic ways. A comprehensive method entails a detailed financial study of the company's financial statements, market conditions, and management team. It's critical to know how much the assets are genuinely worth, how liquid they are, and how much you think you could get for them when using the asset method. On the cash flow approach, the company's past capacity to create cash flow (or net income, EBIT, EBITDA, and so on) will be used, along with a reasonable estimate, to determine how much debt it can service.
Q.26 What does it mean to be a bank?
A government-licensed business that accepts deposits, pays interest, clears checks, makes loans, acts as a financial middleman, and provides other financial services to its customers.
Q.27 What would you do if you were given a set of financial statements to analyse?
The first thing I would do is organise them in an organised Excel workbook or corporate template. I'd then calculate a number of different ratios, including profitability, growth, margins, leverage, and liquidity (see question below for specific examples). Finally, I'd look at these ratios and try to spot trends (based on at least three years of data) that I could project into the future.
Q.28 Name three critical credit indicators.

Credit metrics come in a variety of shapes and sizes. The following are a few of the most common:

  • Debt-to-equity
  • Debt-to-capital
  • Debt-to-EBITDA 

Interest coverage ratio (or fixed charge coverage ratio), and other variations of these ratios are all examples of leverage. Working capital, current ratio, quick ratio, and cash ratio are all examples of liquidity.

Q.29 What exactly is a consumer bank?
Consumer banks are a relatively new addition to the banking sector, with only the United States of America and Germany having them. This bank offers loans to its customers for the purchase of televisions, automobiles, and furniture, among other things, with the option of making payments in installments.
Q.30 What are the different sorts of bank accounts?

a) Checking Account: This account functions similarly to a savings account, however unlike a savings account, it does not pay interest. The advantage of this account is that there is no withdrawal limit.

b) Savings Account: This type of account allows you to save money while also earning interest. The number of withdrawals is limited, and the account must maintain a minimum balance to be operational.

c) Money Market Account: This account combines the advantages of a savings and a checking account. You can withdraw the money while still earning a higher rate of interest. A minimum balance is required to open this account.

Q.31 What are the many methods in which you can manage your accounts?

You can use your bank accounts in a variety of ways, including

a)Internet banking

b) Mobile or telephone banking

c) Service in a branch or over the counter

d) Automatic Teller Machine ( Automated Teller Machine)

Q.32 What are the considerations you should make before opening a bank account?
If it is a savings account, you must evaluate the interest rate on the deposit and whether the interest rate will be consistent over time before opening the account. If you have a checking account, see how many checks you have available. Some banks will charge you a fee if you use paper checks or order new chequebooks. Check out the many debit card options available when opening an account, as well as the online banking capabilities.
Q.33 What exactly is a 'Crossed Cheque'?
A crossed check signifies that the money should be put into the payee's account and that it cannot be cashed at the bank. Two cross-lines can be seen on the left side corner of the cheque in image #2, indicating a crossed cheque.
Q.34 What is overdraft protection, and how does it work?
Overdraft protection is a service that a bank offers to its customers. For example, suppose you have two accounts in the same bank, one each for savings and credit. If one of your accounts is short on funds, it will be difficult to process checks or pay purchases. To avoid check returns or to settle your grocery or utility bills, the bank will move money from one account to another that does not have cash.
Q.35 Regional rural banks deposits are covered by which body?
DICGC covers the deposits of the Regional rural banks. 
Q.36 Is there a fee for the service of "overdraft protection" at the bank?
Yes, your bank will charge you for "overdraft protection" services, but the fees will only apply once you begin utilising the service.
Q.37 What are the key characteristic of financial derivative?

1. value is derived from an underlying instrument.

2. they are vehicles for transferring risk

3. they are leveraged instruments

Q.38 What does APR (Annual Percentage Rate) stand for?
Annual Percentage Rate (APR) is a fee or interest that a bank charges its customers for using their services such as loans, credit cards, and mortgage loans. The interest rate or fees are determined on a yearly basis.
Q.39 What are the core objective of a monetary policy?
The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.
Q.40 What does it mean to have a ‘prime rate'?
Essentially, the ‘prime rate' is the interest rate set by the top banks in a country (the United States of America) for their chosen customers with a good credit score. The ‘prime rates' determine a lot of ‘variable' interest. For example, if a credit card's 'APR' (Annual Percentage Rate) is 10% plus the prime rate, and the prime rate is 3%, the current 'APR' on that credit card is 13 percent.
Q.41 Which is the instrument that is issued for automatic monetization of debt
Adhoc Treasury Bill
Q.42 What is the difference between a ‘fixed' and a ‘variable' APR?
The ‘Annual Percentage Rate' (APR) can be either ‘Fixed' or ‘Variable.' The interest rate on a ‘fixed APR' loan or mortgage remains constant during the period of the loan or mortgage, whereas the interest rate on a ‘variable APR' loan or mortgage changes without notice.
Q.43 In case of FCNR(B) Scheme, the period for fixed deposits is _____________________.
for terms not less than 1 year and not more than 5 years
Q.44 What is the meaning of the term "amortisation"?
Amortization is the process of repaying a loan in installments to cover the principal and interest.
Q.45 What is the definition of negative amortisation?
Negative amortisation happens when the loan repayment is less than the loan's cumulative interest. Instead of decreasing the loan amount, it will increase it. It's also referred to as 'delayed interest.'
Q.46 What does it mean to have a ‘cost of debt'?
The interest paid on any amount borrowed from a financial institution (bank) or other resources is known as the "cost of debt."
Q.47 What does it mean to make a "balloon payment"?
The last lump sum payment is referred to as the 'balloon payment.' The residual balance is payable as the final repayment to the lender if the entire loan payment is not amortised over the duration of the loan. An adjustable rate or fixed rate mortgage might have a balloon payment.
Q.48 What is the difference between ‘Cheque’ and ‘Demand draft’?
Both are used to transfer money between two bank accounts, whether they are from the same or separate banks. A ‘cheque' is issued by a person who has a bank account, but a ‘demand draught' is provided by the bank upon request, and you will be charged for the service. Furthermore, demand draughts cannot be cancelled once they have been issued, whereas checks can be cancelled after they have been issued.
Q.49 What is the debt-to-income ratio, and what does it mean?
A loan applicant's debt-to-income ratio is computed by dividing his total debt payment by his gross income.
Q.50 What is adjustment credit, and how does it work?
Adjustment credit is a short-term loan from the Federal Reserve Bank of the United States to a commercial bank in order to meet reserve requirements and sustain short-term lending when they are cash-strapped.
Q.51 What do you mean by ‘foreign draft’?
Foreign draft are a type of foreign currency that can be used to transmit money to another country. Commercial banks can sell it to you, and they will charge you according to their own rules and regulations. People prefer to send money via ‘foreign draft' since it is less expensive and safer. It also allows the recipient to access the funds more quickly than with a check or a cash transfer.
Q.52 What exactly is 'loan grading'?
Loan grading is the classification of a loan based on numerous risks and factors such as repayment risk, borrower credit history, and so on. This approach categorises loans into one of six groups based on their stability and risk.
Q.53 What are Investment Banks?
It is a financial intermediary Performing a variety of services. Investment banks basically specialize in large and complex financial transactions such as:
Acting as an intermediary between a securities issuer and the investing public, underwriting, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for institutional clients.
Q.54 Can you tell us about the sources and application of funds Of commercial banks?

Sources of Funds:

  • Deposits
  • Reserves and Surplus
  • Borrowings

Application of Funds:

  • Cash and cash Balance with RBI
  • Cash balance with other banks
  • Investments
  • Advances Source
Q.55 What is the role of commercial banks?

Like any other bank the Commercial banks too hold many roles like:

  • Mobilizing Saving for Capital Formation
  • Financing Industry
  • Financing Trade
  • Financing Agriculture
  • Financing Consumer Activities
  • Help in Monetary Policy
  • Financing Employment Generating Activities
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