1. The "Transfer Price Mechanism" (TPM) is used in banks to:
Fix the service charges.
Determine the interest rate for customers.
Transfer funds between customer accounts.
Calculate the profitability of branches by assigning a notional cost/value to funds lent to/borrowed from the Head Office (Central Pool).
Explanation:
TPM ensures fair assessment. A branch collecting deposits "lends" them to the HO and gets paid interest (Transfer Price). A branch giving loans "borrows" from HO and pays interest. The net margin determines branch profit.
2. Which of the following strategies is most effective for improving Branch Profitability?
Increasing the share of low-cost deposits (CASA) and fee-based income.
Increasing interest rates on deposits above market rates.
Reducing staff salary.
Closing down the branch.
Explanation:
CASA (Current and Savings Account) deposits have the lowest cost of funds. Increasing CASA reduces interest expense. Fee-based income (Cross-selling insurance, MF) adds revenue without using capital. This combination maximizes profit.
3. Branch Operating Profit is calculated as:
Interest Income - Interest Expense.
Net Interest Income - Non-Interest Income + Operating Expenses.
Total Income - Provisions for NPA.
Total Income (Interest + Non-Interest) - Total Operating Expenses (Interest + Staff + Overheads).
Explanation:
Operating Profit reflects the core earnings from business operations. It deducts all expenses (cost of funds, salaries, rent, etc.) from all income sources, but BEFORE deducting provisions for bad debts or taxes.
4. A branch with a high CASA ratio is likely to have:
High NPA.
Low Fee Income.
Low Cost of Funds.
High Cost of Funds.
Explanation:
CASA (Current Account Savings Account) deposits pay very low or no interest. A high proportion of CASA means the bank pays less interest overall, reducing its Cost of Funds.
5. To arrive at "Net Profit" of a branch, what must be deducted from the Operating Profit?
Provisions for Loan Losses/NPAs and Taxes.
Rent and Electricity.
Staff Salaries.
Interest paid on deposits.
Explanation:
Operating Profit is profit before provisions and taxes. To calculate the final Net Profit, the branch must account for credit costs (provisions for bad loans) and taxation.
6. If a branch is "Deposit Heavy" (High Deposits, Low Advances), under the Transfer Price Mechanism, it will primarily earn income from:
Interest on Loans.
Penal interest.
Interest paid to Head Office.
Interest received from Head Office on surplus funds lent to the central pool.
Explanation:
A deposit-heavy branch collects more funds than it lends locally. It transfers the surplus to the Head Office and earns interest (Transfer Price) on it, which becomes its major income source.
7. Which of the following products has the lowest cost of funds for a bank?
Savings Accounts
Recurring Deposits
Term Deposits (1 year)
Current Accounts
Explanation:
Current Accounts typically carry 0% interest. Therefore, they are the cheapest source of funds for a bank. Savings accounts carry low interest (2.7%-3%), while Term Deposits carry high interest.
8. Treating branches as "Profit Centers" means:
They are only responsible for collecting deposits.
They have no targets.
They only provide service, not sales.
They are evaluated based on their individual profitability (Income - Expenses).
Explanation:
This approach holds branch managers accountable for the bottom line. They must generate enough income (interest + fee) to cover their operating costs (staff, rent, etc.) and generate a surplus.
9. Income from selling Third Party Products (Insurance/Mutual Funds) is classified as:
Non-Interest Income / Fee-based Income
Interest Income
Capital Gain
Operating Expense
Explanation:
Since the bank does not use its own funds to create an asset but acts as an agent earning commission, this is Non-Interest Income. It is crucial for boosting Return on Assets (RoA).
10. The point at which a branch's Total Revenue equals its Total Cost (No Profit, No Loss) is called:
Saturation Point
Shut-down Point
Break-even Point
Max Profit Point
Explanation:
Branch managers monitor the Break-even point to know the minimum business volume required to cover fixed and variable costs.
11. The "Cost-to-Income Ratio" is a key metric for efficiency. A lower ratio indicates:
Lower interest income.
Lower efficiency and lower profitability.
Higher efficiency and higher profitability.
Higher NPA.
Explanation:
Cost-to-Income ratio measures operating expenses as a percentage of operating income. A lower ratio means the bank is spending less to generate each rupee of income, indicating high operational efficiency.
12. "Activity Based Management" (ABM) in branch profitability aims to:
Ignore customer feedback.
Identify and eliminate non-value-adding activities to reduce costs and improve efficiency.
Increase the number of transactions indiscriminately.
Increase staff working hours.
Explanation:
ABM analyzes the costs of specific activities (e.g., processing a cheque) to see if they add value. If not, processes are re-engineered or automated to save costs.
13. "Net Interest Income" (NII) is defined as:
Interest Earned on Assets - Interest Paid on Liabilities.
Interest Earned on Advances + Interest Paid on Deposits.
Total Assets - Total Liabilities.
Fee Income - Operating Expenses.
Explanation:
NII is the difference between the interest income a bank earns from lending and the interest it pays to depositors. It is the primary source of profit for a retail bank.
14. In branch profitability analysis, "Direct Costs" include:
Salary of branch staff and rent of branch premises.
Marketing costs for a national campaign.
IT infrastructure costs shared across the bank.
Head Office administrative expenses.
Explanation:
Direct costs are those that can be directly attributed to the branch's operations. HO expenses and IT costs are typically indirect or allocated costs.
15. In the "Matched Maturity" method of Transfer Pricing:
A single rate is applied to all funds.
Rates are decided by the branch manager.
Rates are fixed for 10 years.
Rates are applied based on the maturity (tenor) of the deposit or loan, matching market rates for that tenor.
Explanation:
This method is more accurate as it recognizes that long-term funds have a different cost/value than short-term funds, aligning internal pricing with market realities.
16. How do Non-Performing Assets (NPAs) affect branch profitability?
They increase interest income.
They have no impact.
They stop generating interest income and require provisioning, reducing net profit.
They reduce operating expenses.
Explanation:
NPAs are a double blow: the bank loses interest income (income leakage) and must also set aside funds as provisions from its profits (expense), directly hitting the bottom line.