Answer-1

A financial intermediary is an entity that acts as the

middleman between two parties in a financial transaction,
such as a commercial bank, investment bank, mutual
fund, or pension fund. Financial intermediaries offer a
number of benefits to the average consumer, including
safety, liquidity, and economies of scale involved in
banking and asset management. Although in certain
areas, such as investing, advances in technology threaten
to eliminate the financial intermediary, disintermediation is
much less of a threat in other areas of finance, including
banking and insurance. This intermediary role is crucial
for the growth of trade and commerce in the economy for
several reasons:
1.Capital Allocation: Banks efficiently allocate capital by
directing funds from savers to borrowers, thereby
facilitating productive investments in businesses,
infrastructure, and other economic activities.
2. Risk Management: Banks help manage risk by
diversifying their loan portfolios and assessing the
creditworthiness of borrowers. This enables them to
absorb losses from defaulted loans without significantly
impacting depositors' funds.
3. Liquidity Provision: Banks offer liquidity to depositors by
allowing them to withdraw funds on demand, while
simultaneously providing longer-term financing to
borrowers. This liquidity transformation function enhances
economic stability and supports ongoing trade and
commerce activities.
4. Payment Facilitation: Banks facilitate payments
between buyers and sellers through various channels
such as checks, electronic transfers, and debit/credit
cards. This enables smooth transactions and fosters
economic exchanges.
Now, regarding attracting young millennial customers,
banks need to offer products and services that align with
their preferences, lifestyles, and financial needs. Some
potential offerings could include:
1. Digital Banking Solutions: Millennial are tech-savvy and
prefer conducting banking activities online or through
mobile apps. Banks should prioritize developing user-
friendly, secure, and feature-rich digital platforms for
services like account management, bill payments, and
fund transfers.
2. Personalized Financial Planning Tools: Millennial often
prioritize financial literacy and long-term planning. Banks
can provide personalized budgeting tools, investment
calculators, and educational resources to help them
manage their finances effectively and achieve their
financial goals.
3. Flexible Savings and Investment Options: Offering
innovative savings and investment products tailored to
Millennial preferences can be attractive. For example,
automated savings plans, robo-advisory services, and
socially responsible investment portfolios may appeal to
this demographic.
4. Rewards and Incentives: Millennials appreciate
rewards and incentives for their banking activities.
Seventy-five percent of millennials have used a digital gift
card, the most of any generation, according to Capital
One shopping research. Similarly, our own survey found
that 72% of millennial respondents say they have used e-
gift cards.
5. Socially Conscious Banking: Millennial preferences for
socially responsible banking are prompting financial
institutions to adopt sustainable and ethical business
practices, such as funding environmentally friendly
projects and promoting financial inclusion..
6. Peer-to-Peer Payment Integration: Integration with
popular peer-to-peer payment platforms allows millennials
to easily split bills, share expenses, and send money to
friends and family, catering to their social and
collaborative nature.
By incorporating these elements into their service
offerings, banks can effectively attract and retain young
millennial customers while also contributing to the growth
of trade and commerce in the economy.

Answer-2
Bank increase their revenue while optimizing the use of
funds and would help to spread their risk over variety of
activities. The non fund based financial services of the
public sector banks include loan syndication, consultancy
and advisory services, capital issue management etc.
1. Risk Management: Non-fund based loans typically
involve lower credit risk compared to fund-based loans. In
fund-based loans, banks lend money directly to
borrowers, exposing them to default risk. Credit Risk in
the non-funded based business of the Bank needs to be
assessed in a manner similar to the assessment of fund
based business as it has the potential to become a
funded liability in case the counterparty is not able to meet
their commitments
2. Capital Efficiency: Non-fund based activities require
less capital allocation compared to fund-based lending.
Banks are subject to regulatory capital requirements, and
non-fund based activities allow them to conserve capital
while still generating fee income. This capital efficiency is
particularly important in an environment of stricter capital
adequacy regulations.
3. Income Diversification: Non-fund based activities
provide banks with a source of fee-based income
diversification. In addition to interest income earned from
fund-based lending, banks earn fees for providing
guarantees, letters of credit, and other non-fund based
services. This diversification helps banks reduce reliance
on interest rate spreads and interest income.
Examples of fund-based loans:
1. Term Loans: A term loan provides borrowers with a
lump sum of cash upfront in exchange for specific
borrowing terms. Term loans are normally meant for
established small businesses with sound financial
statements. In exchange for a specified amount of cash,
the borrower agrees to a certain repayment schedule with
a fixed or floating interest rate. Term loans may require
substantial down payments to reduce the payment
amounts and the total cost of the loan.
2. Working Capital Loans: These loans provide financing
for a company's day-to-day operational needs, such as
inventory purchase, accounts receivable financing, and
meeting short-term obligations. Working capital loans are
typically revolving lines of credit with a fluctuating balance
based on the company's working capital cycle.
3. Project Finance: Long-term funding for certain projects,
such large-scale building, energy projects, or
infrastructure development, is provided through project
finance. Banks do not just base their decision on the
borrower's creditworthiness; they also consider the
project's viability and cash flow forecasts.
Examples of non-fund based loans:
1. Bank Guarantees: A bank guarantee is a guarantee
given by the bank on behalf of the applicant to cover a
payment obligation to a third party. In other words, the
bank becomes a guarantor and is answerable for the
person requesting the guarantee in the event that they are
unable to make the payment they have agreed with a third
party. 2. Letters of Credit (LC): Letters of credit are
financial instruments used in trade finance to facilitate
transactions between importers and exporters. An LC
guarantees payment to the exporter upon presentation of
compliant shipping documents, mitigating the risk for both
parties involved in the transaction.
3. Standby Letters of Credit (SBLC): A Standby Letter of
Credit (SBLC / SLOC) is a guarantee that is made by a
bank on behalf of a client, which ensures payment will be
made even if their client cannot fulfill the payment. It is a
payment of last resort from the bank, and ideally, is never
meant to be used.
These examples show how banks are expanding the
range of loans they offer beyond conventional fund-based
loans to include non-fund based services that provide
advantages for capital efficiency, revenue diversification,
and risk management.

Answer-3
A)
Answer-
In banking, reputation risk and credit risk are two critical
types of risks that financial institutions must manage
effectively to maintain stability and trust in the financial
system. Below are explanations of each risk and ways to
reduce them:
1. Reputation Risk:
Reputational risk in banking and financial services is
associated with an institution losing consumer or
stakeholder trust. It’s the risk that those consumers and
stakeholders will take on a negative perception of the
bank – whether it’s one particular branch or the entire
brand – following a particular event.
Ways to reduce reputation risk in banking include:
- Ethical Business Practices: Banks should maintain high
ethical standards in all interactions with clients, staff,
regulators, and other stakeholders. This is one strategy to
lower reputation risk in the banking industry. Reputation
damage is less likely when ethical business procedures
are followed since they increase credibility and trust.
- Open Communication: Reputation risk management
requires effective stakeholder communication. Banks
must to be open and honest about their business
processes, financial results, risk management
procedures, and any possible problems or difficulties they
may encounter.
- Customer Relationship Management: Reputation risk
can be reduced by offering top-notch customer service
and sustaining solid client connections. Banks ought to
put the requirements of their clients first, respond quickly
to complaints, and show that they are dedicated to doing
so.
- Compliance and Regulatory Compliance: Maintaining a
positive reputation depends on adhering to industry
standards and regulatory obligations. To guarantee
compliance with laws and regulations, banks should put
strong compliance programs in place, carry out frequent
audits, and keep up with any changes to the legislation.
- Crisis Management and Response: Banks can react to
unfavorable situations or emergencies that might damage
their reputation by creating thorough crisis management
strategies and procedures. During times of crisis, prompt
and open communication can assist minimize reputational
harm.
2. Credit Risk:
Credit risk is the probability of a financial loss resulting
from a borrower's failure to repay a loan. Essentially,
credit risk refers to the risk that a lender may not receive
the owed principal and interest, which results in an
interruption of cash flows and increased costs for
collection.
Ways to reduce credit risk in banking include:
- Credit assessment and due diligence: Comprehensive
credit assessment and due diligence are necessary to
assess the borrowers' creditworthiness and ability to
repay the loan. Banks must analyze financial statements,
credit history, cash flow forecasts, collateral and other
related factors to accurately assess credit risk.
- Loan Portfolio Diversification: Diversification of the loan
portfolio across sectors, lines of business, geographies
and borrowers. helps reduce concentration risk and
reduces the impact of potential defaults on the entire
portfolio.
- Guarantees and Guarantees: Obtaining guarantees or
guarantees from borrowers helps reduce credit risk by
ensuring repayment in the event of source insolvency.
Banks should carefully assess the quality and value of
collateral and ensure appropriate documentation and
legal compliance.
- Monitoring and management of credit risk: Continuous
monitoring of credit risks, borrower activity and changes in
economic or market conditions are essential to identify
early warning signs. credit deterioration Banks should
implement good credit risk management practices,
including regular portfolio reviews, stress tests and risk
management strategies.
- Risk-based pricing and loan terms: adjusting loan prices
and loan terms based on the borrower's perceived credit
risk helps adjust performance with the level of risk a bank
takes. Higher risk borrowers may be charged higher
interest rates or may be required to post additional
collateral to offset the increased credit risk..
By effectively managing reputational and credit risk
through proactive risk management practices, banks can
improve their resilience, protect the interests of their
stakeholders and maintain long-term success in the
banking industry.

B)
Answer-
Banks uses various strategies and techniques to manage
interest rate risk and market risk effectively:
1. Interest Rate Risk:
Interest rate risk is the probability of a decline in the value
of an asset resulting from unexpected fluctuations in
interest rates. Interest rate risk is mostly associated with
fixed-income assets (e.g., bonds) rather than with equity
investments. The interest rate is one of the primary
drivers of a bond's price., including:
- Asset-Liability Management (ALM): ALM covers the
management of maturities and revaluation differences
between the bank's assets and liabilities. Banks analyze
the interest rate sensitivity of their balance sheets and
adjust the composition and maturity of assets and
liabilities to minimize changes in interest rates.
- Interest rate derivatives: Banks use interest rate
instruments such as interest rates, options and futures. to
protect against adverse movements in interest rates.
These derivatives allow banks to protect their balance
sheets, manage cash flow and hedge interest rate risk by
increasing or controlling interest rate risk.
- Adjustable rate products: Banks can offer adjustable rate
products such as variable rate loans or mortgages.
transfer interest rate risk to borrowers. These products
typically have interest rates that change from time to time
according to changes in market interest rates, which
reduces the bank's exposure to interest rate fluctuations.
- Stress tests and scenario analysis: Banks perform stress
tests and scenario analyzes to assess the possible effects
of adverse interest rate changes on their financial
position. By simulating different interest rate scenarios,
banks can identify vulnerabilities, assess risks and
develop appropriate risk management strategies.
- Duration Matching: Duration Matching means matching
the durations of assets and liabilities to reduce interest
rate risk. Banks try to match the timing of asset and
liability cash flows to minimize the impact of changes in
interest rates on net interest income and economic value.
2. Market Risk:
Market risk includes the risk of financial loss due to
adverse changes in market prices, including interest
rates, exchange rates, stock prices and commodity prices.
Banks use various risk management techniques to
manage market risks, such as:
- Value at Risk (VaR): VaR is a statistical measure used
to estimate the potential loss of a bank's trading portfolio
due to adverse market movements over a period. time
time horizon and confidence level. Banks calculate VaR to
quantify and manage market risk, set risk limits and
monitor trading.
- Portfolio diversification: Diversifying your investment
portfolio across asset classes, sectors and geographies
helps reduce concentration risk and reduces the impact of
adverse market movements on overall portfolio. Banks
strategically allocate capital to spread market risk and
improve risk-adjusted returns.
- Hedging strategies: Banks use hedging strategies such
as options, futures, forwards and swaps to hedge market
risks. Hedging allows banks to protect against adverse
price movements, manage volatility and stabilize portfolio
returns.
- Risk Limits and Controls: Defining risk limits and controls
is essential for effective market risk management. Banks
set limits on various asset classes, trading positions and
risk factors to prevent excessive risk and ensure risk
appetite and regulatory compliance.
- Market risk models: Banks use complex quantitative
models and analyzes to measure and control. and
mitigate market risk. These models include factors such
as historical data, volatility, correlations and
macroeconomic variables to estimate exposure, identify
anomalies and optimize risk-adjusted returns.
Implementing strong risk management practices and
using a combination of hedging strategies, portfolio
diversification and risk. measurement techniques, banks
can effectively manage interest rate and market risks and
ensure financial stability and flexibility in a dynamic
market environment.