This post collects BNK603 (Consumer Banking) midterm solved MCQs and subjective questions from several files in one place. Part 1 has 93 MCQs (duplicates removed); tap Show answer to check yourself. Part 2 has 18 subjective questions with model answers.
Part 1: MCQs
Q1. Farming techniques and inputs should be developed to address:
- Environmental concerns
- Enhancing farmers' incomes
- Raising production rate
- Raising environmental concerns and farmers income
Show answer
Answer: (d) Raising environmental concerns and farmers income
Note: The lesson says farming techniques should address environmental concerns while also enhancing farmers' incomes, so the combined option is correct (one solved file marks only the first part).
Q2. Which of the following is the significant achievement of the consumer financing?
- Providing access to purchasing power to the middle class consumer
- Providing access to purchasing power to the Elite class Consumer
- Providing access to purchasing power to the lower class consumer
- Providing access to purchasing power to all type of consumers
Show answer
Answer: (a) Providing access to purchasing power to the middle class consumer
Note: Lesson 9: this is the most significant achievement of consumer financing.
Q3. ______________could include property for which a family has tenancy rights but no legal title.
- Undocumented capital
- Personal resources
- Community resources
- Underutilized assets
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Answer: (a) Undocumented capital
Q4. Why Banks in Europe and North America are relatively confident in their capabilities for credit risk, market risk, and asset-liability management?
- Since they face risk management challenges rapidly
- Since they went through dramatic structural changes
- Since they have made significant improvements over the past decade
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Answer: (c) Since they have made significant improvements over the past decade
Q5. At which of the following stage banks focus on integrating Enterprise Risk Management (ERM) into business processes?
- Yellow belt
- Green belt
- Brown belt
- Black belt
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Answer: (c) Brown belt
Q6. Consumer financing is designed for which type of services??
- Financial support to enhance living standard
- Financial support for education purposes
- Financial Support for wedding expenses
- None of the given options
Show answer
Answer: (a) Financial support to enhance living standard
Q7. Developing customer insight and "institutional memory" includes:
- Records of processes executed for the client
- Record of client preferences
- Record of past interactions through all channels
- All of the given options
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Answer: (d) All of the given options
Q8. Which of the following is appointed for acknowledging, addressing, handling and investing all the complaints in a fair and prompt manner?
- National Bank of Pakistan is appointed for this purpose
- Any Commercial Bank of Pakistan is appointed for this purpose
- A person and the unit/section is appointed for this purpose
- A team nominated by the scheduled banks is appointed for this purpose
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Answer: (c) A person and the unit/section is appointed for this purpose
Q9. Which of the following customer interface refers to the way the firm "goes to the market", how it actually reaches the customers?
- Fulfillment and Support
- Information and Insight
- Relationship Dynamics
- Pricing Structure
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Answer: (a) Fulfillment and Support
Q10. While extending financing facilities to the customers, the banks / DFIs should ensure that the _____________ is commensurate with monthly income and repayment capacity of the borrower.
- Total installment of the loans
- Principal amount of the loan
- Interest on the loan
- None of the given options
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Answer: (a) Total installment of the loans
Q11. People who have little discretionary spending power, they are generally able to support their basic needs and will require intervention only to improve the level and consistency of their existing incomes, belong to which income segment?
- Lowest
- Middle
- Top
- Belong to middle and lowest level
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Answer: (b) Middle
Q12. Operating costs and default rates for consumer finance loans in emerging markets are generally low, making these loans extremely_________.
- Attractive
- Expensive
- Cheaper
- Profitable
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Answer: (d) Profitable
Q13. Customers also vary in their opinions about what it means to be treated well in a service environment" this challenge belongs to which type of the variability?
- Request variability
- Capability variability
- Arrival variability
- Subjective preference variability
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Answer: (d) Subjective preference variability
Q14. Consumers in this market are more likely to trust a friend or family member than a salesperson they don't know, such type of networks comes under the head of:
- Formal communication
- Informal communication
- Direct communication
- Indirect communication
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Answer: (b) Informal communication
Q15. Which of the following is NOT the code of consumer banking?
- To promote good banking practice
- To increase transparency
- To foster confidence in the banking system
- To promote personal relations
Show answer
Answer: (d) To promote personal relations
Q16. Which of the following customer interface refers to the nature of the interaction between the producer and the consumer?
- Fulfillment and Support
- Information and Insight
- Relationship Dynamics
- Pricing Structure
Show answer
Answer: (c) Relationship Dynamics
Q17. Which of the following approach to poverty reduction focuses on people as consumers and producers and on solutions that can make markets more efficient, competitive and inclusive?
- Traditional approach
- Market based approach
- Marked driven approach
- Both market based approach and traditional approach
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Answer: (b) Market based approach
Q18. To succeed in this challenging market, companies need to work with other players to develop the right:
- Products
- Services
- Delivery mechanism
- All of the given options
Show answer
Answer: (d) All of the given options
Q19. Which of the following constitutes a significant portion of banks' lending portfolios?
- Credit finance
- Foreign Exchange
- Consumer finance
- Money laundering
Show answer
Answer: (c) Consumer finance
Q20. Risk professionals from different banks interact and learn about each other's risk management practices by which of the following strategy?
- Hiring risk experts
- Establishing training and certification program
- Revise performance measurement and incentives
- Conducting industry benchmarking exercises
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Answer: (d) Conducting industry benchmarking exercises
Q21. Raising the income and consumption level of the BOP will place immense pressure on already-stretched resources such as:
- Land
- Water
- Energy & ecosystems
- All of the given options
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Answer: (d) All of the given options
Q22. Understanding _____________is vital toward the success of banks' customer experience initiatives.
- Emotional relevance
- Customer interaction
- Moments of truth
- Customer's expectations
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Answer: (c) Moments of truth
Q23. SBP (State Bank of Pakistan) has issued guidelines for which type of customer complaints?
- Complaints regarding financial losses
- Complaints regarding damages to the businesses
- Complaints regarding delayed response of the banks
- All of the given options
Show answer
Answer: (d) All of the given options
Q24. What is the objective of a relationship based approach?
- To develop strong trust
- To develop long term relations
- To understand client needs and meet them
- All of the given options
Show answer
Answer: (d) All of the given options
Q25. For which of the following area(s) Bank regulators in Asia are establishing new standards?
- Risk and capital management
- Portfolio management techniques
- Financial examination
- Reporting requirements
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Answer: (a) Risk and capital management
Q26. Any act or attempted act to disguise the source of money or assets derived from criminal activity is known as:
- White money
- Credit creation
- Money laundering
- Withdrawal of money
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Answer: (c) Money laundering
Q27. System is a group of which of the following components?
- Interacting
- Interrelated
- Interdependent
- All of the given options
Show answer
Answer: (d) All of the given options
Q28. Which of the following approach tend to endorse the status quo and the existing risk profile?
- Top-down
- Down the line
- Down-top
- Bottom-up
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Answer: (d) Bottom-up
Q29. Why most of the people in the BOP are being exploited by the middlemen?
- They lack access to market to sell their labor
- They lack access to market to sell their crops
- They are bound to sell to the local employees only
- All of the given options
Show answer
Answer: (d) All of the given options
Q30. The emerging technology-driven financial service(s) may include:
- Bank-centric models
- Electronic currency
- Mobile commerce systems
- All of the given options
Show answer
Answer: (d) All of the given options
Q31. How bank can improve ethical standards regarding dealing with their customers?
- By increasing awareness and the level of financial literacy
- By reviewing the transparency of the pricing mechanism
- By offering a choice between fixed and floating rates
- By informing them the pros and cons of financial lending
Show answer
Answer: all four options are correct
Note: All four options are correct, according to the lesson.
Q32. To build and sustain a growing business in financial services, institutions need:
- Vision
- Mission
- Pragmatism
- Vision and Pragmatism
Show answer
Answer: (d) Vision and Pragmatism
Q33. Which of the following approach to poverty reduction tend to address unmet needs for health care, clean water or other basic necessities by setting targets for meeting those needs through direct public investments, subsidies, or other handouts?
- Traditional approach
- Market based approach
- Marked driven approach
- Both market based approach and traditional approach
Show answer
Answer: (a) Traditional approach
Q34. Finalta believes that ______________is driven by the comparison of expectation and actual experience.
- Emotional relevance
- Customer interaction
- Interactive expectations
- Customer satisfaction
Show answer
Answer: (d) Customer satisfaction
Q35. The potential for increased agricultural production is one of the "________" that often lies untapped in BOP communities.
- Hidden assets
- Capital assets
- Fixed assets
- Biological assets
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Answer: (a) Hidden assets
Q36. Why Asian banks should adopt Enterprise Risk Management (ERM)?
- Banks face complex risks that are highly interdependent, and an ERM framework enables a bank to manage all major risks and their interdependencies.
- An ERM framework provides the overall architecture for a bank's risk management program.
- Empirical research and industry surveys have indicated that there are clear business benefits for adopting an ERM program.
- All of the given options
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Answer: (d) All of the given options
Q37. Equity investors want to see ________; rating agencies want to minimize________.
- Return; risk of default
- Risk of default; return
- Profit; per unit cost
- Dividend; interest rate
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Answer: (a) Return; risk of default
Q38. Dealing with _____________ is a central challenge in making a service offering profitable.
- Variability
- Reliability
- Consistency
- Inefficiency
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Answer: (a) Variability
Q39. The ___________means the way in which business and affairs of each institution is directed and managed by their 'Board of Directors' and the 'Management'.
- Audit
- Compliance
- Good Governance
- Corporate governance
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Answer: (d) Corporate governance
Q40. How the loan is continuously watched over, after it is approved and draws down allowed?
- By keeping track of borrower's compliance with credit terms
- By identifying early signs of irregularity
- By conducting periodic valuation of collateral and monitoring timely repayments
- All of the given options
Show answer
Answer: (d) All of the given options
Q41. This holistic approach is based upon the view that a Moment of Truth is any interaction that, if done correctly:
- Increases the trust of the customer for the bank
- Increases the profit of the bank
- Increases the expectations of the customers
- None of the given options
Show answer
Answer: (a) Increases the trust of the customer for the bank
Q42. Which of the following Key component of an Enterprise Risk Management (ERM) integrate risk management into the revenue generating activities of the bank, including business development, product and relationship management, pricing and so on?
- Corporate governance
- Line management
- Portfolio management
- Risk modeling
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Answer: (b) Line management
Q43. Which of the following Key component of an Enterprise Risk Management (ERM) aggregate risk exposures, incorporate diversification effects and monitor risk concentrations against established risk limits?
- Corporate governance
- Line management
- Portfolio management
- Stakeholders' management
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Answer: (c) Portfolio management
Q44. Why low income consumers are generally more willing to accept an unfamiliar product?
- It carries a well-known brand
- It is endorsed by a trustworthy institution
- It carries low price with high quality
- It is a well-known brand and endorsed by a trustworthy institution
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Answer: (d) It is a well-known brand and endorsed by a trustworthy institution
Q45. Which of the following stakeholders increasingly demand enhanced risk disclosure?
- Rating agencies
- Business partners
- Institutional investors
- All of the given options
Show answer
Answer: (d) All of the given options
Q46. Customers who are not a natural fit with the company and who are not happy anyway are categorized as:
- False profits
- True Profits
- Dissatisfied
- Unhappy and unprofitable
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Answer: (d) Unhappy and unprofitable
Q47. To serve customers efficiently, companies often work to reduce the___________ and achieve economies of scale through centralized production in large factories.
- Fixed cost of products
- Variable cost of products
- Unit cost of products
- All of the given options
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Answer: (c) Unit cost of products
Q48. How leading institutions can improve their chances of sustainable growth?
- By using technology appropriately
- Invest in, develop and reward the right talent
- By investing time in careful planning and communication
- All of the given options
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Answer: (d) All of the given options
Q49. In a ___________ employees' performance is measured by the number of products they sell.
- Product-push approach'
- Relationship approach'
- Customer-push approach'
- Performance measurement approach
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Answer: (a) Product-push approach'
Q50. What does the high interest rate spread in Pakistan indicates?
- Competitiveness in the banking sector is absent
- Competitiveness in the banking sector is very poor
- Competitiveness in the banking sector is very good
- Competitiveness in the banking sector is either absent or very poor
Show answer
Answer: (d) Competitiveness in the banking sector is either absent or very poor
Note: Lesson 13: the spread shows competitiveness is either absent or very poor. Another solved file marks every option.
Q51. As per the SBP guidelines what is the definition of financial risk in a banking organization?
- The possibility that the organization will not achieve the targeted profit
- That possibility that the EBIT of the organization will not be adequate
- The possibility that the outcome of an action or event could bring up
Show answer
Answer: (c) The possibility that the outcome of an action or event could bring up
Q52. Which of the facilities are NOT available in e-banking?
- Fast withdrawal of cash
- Balance inquiry
- Transfer funds
- None of the given option
Show answer
Answer: (d) None of the given option
Q53. The high difference between lending and deposit rates indicates that:
- The depositors are not getting due returns
- Huge profits are being earned by the banks
- Banks are earning more at the cost of the depositors
- All of the given options
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Answer: (d) All of the given options
Q54. How outsourcing has become significant in recent past?
- Because various core activities are being handled by outside vendors
- Because various core activities are being handled by stakeholders
- Because various core activities are being handled by shareholders
- Because various core activities are being handled by the Government
Show answer
Answer: (a) Because various core activities are being handled by outside vendors
Note: The lesson says outsourcing grew because core activities are handled by outside vendors.
Q55. Banks are required to maintain a general reserve at least equivalent to _______ of the consumer portfolio which is unsecured.
- 0.5%
- 1%
- 1.5%
- 5%
Show answer
Answer: (d) 5%
Note: Fully secured portfolio: 1.5%; unsecured portfolio: 5%.
Q56. State recognizes people as_____________, whereas markets treat people as consumers and value them as customers Citizens Nation Civilians Population Which of the following constitutes a significant portion of banks' lending portfolios?
- Credit finance
- Foreign Exchange
- Consumer finance
- Money laundering
Show answer
Answer: (c) Consumer finance
Q57. ___________is an established financial product across the globe, particularly in mature economies.
- Terrorist finance
- Credit finance
- Consumer finance
- Money laundering
Show answer
Answer: (c) Consumer finance
Q58. Which of the following changes are rarely undertaken by the business and operating models?
- Transformational changes
- Transitional changes
- Structural changes
- All of the given options
Show answer
Answer: (a) Transformational changes
Q59. Which of the following is/are the basic step/s in the action theory learning process?
- Invention of new meanings
- Discovery of espoused and theory-in-use
- Production of new actions and generalization of results
- All of the given options
Show answer
Answer: (d) All of the given options
Q60. Which of the following factors have influenced more customers to shop around for financial services?
- Growth in online banking
- Awareness of financial services products
- Increased competition between established players
- All of the given options
Show answer
Answer: (d) All of the given options
Q61. Which of the following could be indicator of financial health of the household sector?
- Pace of growth in individual accounts
- Individual customer's investments in the stock market
- Increased purchasing power of the middle class consumer
- None of the given options
Show answer
Answer: (b) Individual customer's investments in the stock market
Note: The lesson lists individual investments in the stock market as an indicator of household financial health, so "None" (the key in one file) is wrong.
Q62. How diversified portfolio enables bank to reduce their dependence on few or single borrower?
- Due to small customer base
- Due to huge customer base
- Due to economies of scale
- Due to large deposits
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Answer: (b) Due to huge customer base
Q63. Risk is defined as the volatility of a corporation's ____________.
- Book Value
- Market value
- Intrinsic value
- Fair value
Show answer
Answer: (b) Market value
Q64. Who has the responsibility of recovery of dues from borrowers?
- Collection department
- Loan recovery department
- Credit department
- Cash department
Show answer
Answer: (a) Collection department
Q65. Which of the following could be considered as drawback(s) of consumer financing?
- Fueled inflation
- Increases speculative activities in the asset market
- Consumerism has contributed to the low level of national savings
- All of the given options
Show answer
Answer: (d) All of the given options
Q66. Average lending rates in Pakistan are ___________ as compared to the average deposit rates.
- Very high
- Very low
- Stable
- Incomplete information
Show answer
Answer: (a) Very high
Q67. Their low-balance customers are happy using self-assisted channels, what is required by High-balance customers?
- They like internet banking
- ATM is required the most
- They need experienced branch staffers
- Their need is fulfilled by the call centre
Show answer
Answer: (c) They need experienced branch staffers
Q68. Among different dimensions of the customer value package which one of the dimension represents that Banking is a service business with no tangible products but still it needs actual delivery in certain items?
- Financial
- Procedural
- Interpersonal
- Deliverable
Show answer
Answer: (d) Deliverable
Q69. Which of the following is not the key component of profit boosters?
- Increasing Returns
- Competitor Lock-out
- Strategic Marketing
- Strategic Flexibility
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Answer: (c) Strategic Marketing
Q70. Both the mass retail segment and the small business segment deliver the scale Bank needs and act as a ____________for future mid-market clients.
- Feeder channel
- Customer channel
- Product channel
- Both customer and product channel
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Answer: (a) Feeder channel
Q71. Which of the following factor(s) tend to reduce the financial flexibility of a business model?
- Capital intensity
- Big debt load
- High fixed cost
- All of the given options
Show answer
Answer: (d) All of the given options
Q72. A firm with a large user's base, rapidly extracting feedback from those users, can improve its products & services faster than its competitors by:
- Network Effect
- Positive Feedback Effects
- Learning Effects
- None of the given options
Show answer
Answer: (b) Positive Feedback Effects
Q73. Right to basic need does not include:
- Clothing
- Shelter
- Education
- Healthy environment
Show answer
Answer: (d) Healthy environment
Q74. ____________is basic to human survival and it must be shared, strengthening, socially responsible and sustainable.
- Creation
- Consumption
- Production
- Conservation
Show answer
Answer: (b) Consumption
Q75. What is the common trait between money laundering and terrorist financing?
- Concealment
- Legitimate
- Revelation
- None of the given options
Show answer
Answer: (a) Concealment
Q76. Risks that negatively affect the reputation and standing of banks is known as:
- Market risk
- Credit risk
- Reputational risk
- Financial risk
Show answer
Answer: (c) Reputational risk
Q77. A vision imposed by the new team at the top cascades down through the organization in the form of changes to the_________.
- Business model
- Operating model
- Both operating and business Models
- None of the given option
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Answer: (c) Both operating and business Models
Q78. The interconnectivity of business and operating model makes ________ changes highly complex.
- Transformational changes
- Transitional changes
- Structural changes
- All of the given options
Show answer
Answer: (c) Structural changes
Q79. _________ key element(s) of the core strategy include:
- Business Mission
- Product/Market Scope
- Basis of Differentiation
- All of the given options
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Answer: (d) All of the given options
Q80. Having moved from a _________to a _________approach, banks continue to employ broad brushstrokes to segment their customer base.
- Product-centric, customer-centric
- Customer-centric, Product-centric
- Product quality, customer satisfaction
- Profit oriented, customer oriented
Show answer
Answer: (a) Product-centric, customer-centric
Q81. A growing concern for___________, particularly in the context of a liberalizing economy, is the information inequity in the market.
- Consumers
- Customers
- Citizens
- People
Show answer
Answer: (a) Consumers
Q82. Which of the dimension of the customer value package refers to the various processes involved while entering into/ maintaining a relationship with the bank?
- Financial
- Procedural
- Interpersonal
- Deliverable
Show answer
Answer: (b) Procedural
Q83. How transaction cost is reduced simultaneously with increase in ability to handle huge volumes of business?
- By hiring more employees
- By adopting latest technology
- By enhancing Human Resource department
- None of the given options
Show answer
Answer: (b) By adopting latest technology
Q84. Which of the following customer interface refers to all the knowledge that is collected from and utilized on behalf of the customers?
- Fulfillment and Support
- Information and Insight
- Relationship Dynamics
- Pricing Structure
Show answer
Answer: (b) Information and Insight
Q85. Consumer Financial Protection Agency mandate is to ensure that consumers of financial products:
- Have the information they need to make wise financial decisions
- Are protected from abuse, discrimination, and unfair and deceptive practices
- Have access to financial services
- All of the given options
Show answer
Answer: (d) All of the given options
Q86. Which kind of document is required from the customer to determine their true identity?
- Attested photocopy of CNIC
- Attested copy of service card
- A thumb impression on the signature card
- Nature of the document required depends upon the type of the customer
Show answer
Answer: (d) Nature of the document required depends upon the type of the customer
Q87. The spread (higher lending rates and lower deposit rates) is much higher in which of the following country?
- Sri Lanka
- India
- Pakistan
- Bangladesh
Show answer
Answer: (c) Pakistan
Q88. Which of the following is NOT the role of CFC (Card Facilitation Centre)?
- Managing e-banking channels
- Balancing of suspense account
- Maintaining database of cases of customers (resolved/unresolved)
- Maintaining data base of cases of customers (unresolved)
Show answer
Answer: (d) Maintaining data base of cases of customers (unresolved)
Note: Per the lesson, the CFC keeps a database of both resolved and unresolved cases of its own customers, so the "unresolved only" option is not its full role.
Q89. For every type of consumer finance activity, the bank / DFI shall develop a specific program that includes the _____________parameters for the eligibility of the borrower.
- Objective
- Quantitative
- Qualitative
- Objective and Quantitative
Show answer
Answer: (d) Objective and Quantitative
Q90. A complainant not satisfied with the decision of the Banking Ombudsman, has the right to appeal to the_______.
- Governor SBP
- AVP of the concerned bank
- High Court
- Supreme court
Show answer
Answer: (a) Governor SBP
Note: Lesson 12: appeal lies to the Governor SBP within 30 days of the Ombudsman's order.
Q91. Banks are required to maintain a general reserve at least equivalent to _______ of the consumer portfolio which is fully secured.
- 0.5%
- 1%
- 1.5%
- 5%
Show answer
Answer: (c) 1.5%
Q92. State recognizes people as _____________, whereas markets treat people as consumers and value them as customers.
- Citizens
- Nation
- Civilians
- Population
Show answer
Answer: (a) Citizens
Q93. ________________ are what customers expect automatically in dealing with any bank, and in most cases, any business.
- Baselines expectations
- Interactive expectations
- Importance and relevance
- Emotional relevance and personal importance
Show answer
Answer: (a) Baselines expectations
Part 2: Subjective Questions
Q1. What type of risk and implication are associated with the growth of customer (consumer) finance? (3 marks)
Rapid growth in consumer lending mainly brings credit risk: borrowers may default, non-performing loans rise, and over-lending to households with weak repayment capacity can build up. It also brings concentration risk (too much of the portfolio in one product), interest rate risk, operational and reputational risk.
Implications: banks need sound credit assessment (loan installments should be commensurate with the borrower's monthly income and repayment capacity), proper provisioning (the SBP requires a general reserve of 1.5% on fully secured and 5% on unsecured consumer portfolios), strong collection and recovery, and compliance with the SBP's prudential regulations. At the economy level, consumer finance can also fuel inflation and speculative activity in asset markets.
Q2. Why do consumers say that information disclosure practices are poor in banks? (3 marks)
Because there is an information inequity between banks and consumers. Many consumers have a low level of financial literacy and are not clearly told about the real cost of a product: mark-up rates, fees and charges, penalties, and the difference between fixed and floating rates. Terms are often written in complex language or small print, pricing is not transparent, and the pros and cons of each option are not explained, so consumers cannot compare products and make wise financial decisions. Better disclosure, transparent pricing and financial education are needed.
Q3. What is the difference between doorstep delivery and point of sale delivery? (3 marks)
Doorstep delivery: the bank takes the product or service to the customer's home or office through its staff or agents (for example delivery of cards, cash or account-opening services), so the customer does not visit the branch.
Point of sale delivery: the product or service is offered at the place where the purchase is made, such as a merchant outlet, showroom or dealer (for example car or appliance financing and card payment at the shop), so the customer can arrange the finance at the time of buying.
Q4. What is CFC? (5 marks)
The CFC (Card Facilitation Centre, as named in the lesson) is a unit of the bank that handles matters of its own customers. It is responsible for managing the e-banking channels, maintaining a database of cases (resolved and unresolved) of its customers, and maintaining the balance in the suspense account. It works with the person and unit/section appointed by the bank to acknowledge, address, handle and investigate customer complaints in a fair and prompt manner under the SBP guidelines.
Q5. Explain money laundering. (5 marks)
According to the United Nations, money laundering is any act or attempted act to disguise the source of money or assets derived from criminal activity. The aim is to make illegally earned money appear legitimate.
It usually happens in three stages: placement (putting the cash into the financial system), layering (moving it through many transactions to hide its origin) and integration (bringing it back as apparently clean money). Its common trait with terrorist financing is concealment. Banks guard against it through know-your-customer (KYC) and customer due diligence, monitoring of unusual transactions and reporting suspicious ones, and by following anti-money laundering laws.
Q6. How will the banker ensure the reliability of a person who is not introduced by a branch employee of the bank? (3 marks)
The banker should verify the identity and background of the person through documents: an attested photocopy of the CNIC (or other identity document, depending on the type of customer), proof of address, and details of occupation or business and source of income. The banker can also take references from an existing account holder, record a specimen signature or thumb impression on the signature card, verify the information independently (for example through a visit or telephone), and get approval from the branch manager before opening the account.
Q7. Discuss the relationship-based approach for high-potential clients. (3 marks)
In a relationship approach (unlike a product-push approach where staff are measured by the number of products sold) the bank takes a broader view of the client. Its objective is to develop strong trust and long-term relations and to understand the client's needs and meet them. For high-potential and high-balance clients this means assigning experienced relationship managers or branch staff, giving personalised service, keeping records of the client's preferences and past interactions through all channels, and offering products that fit the client's needs, which raises loyalty and profitability.
Q8. From a consumer's point of view, why are a high interest rate spread and a variable interest rate important issues in consumer financing? (5 marks)
High interest rate spread: the spread is the gap between lending and deposit rates. In Pakistan it is very high, which shows that depositors are not getting due returns while banks earn huge profits, and that competitiveness in the banking sector is either absent or very poor. For borrowers it means expensive credit, for depositors it means a low return.
Variable (floating) rate: the consumer's installment can change when market rates change, so repayment becomes uncertain and can become unaffordable. Consumers therefore need transparent pricing, a choice between fixed and floating rates, and a clear explanation of the pros and cons of each.
Q9. What challenges did the financial companies face at the time of entry into consumer finance? (5 marks)
- Lack of credit history and reliable data to assess borrowers (no credit bureau at the start)
- Low level of financial literacy and awareness among consumers
- Building risk management, credit assessment and recovery systems for a large number of small loans
- Higher operating cost of reaching many small customers, and the need for suitable delivery channels
- Competition from established players and the need to build trust and a brand
- Regulatory requirements of the State Bank, such as prudential regulations on loan limits and provisioning
Q10. What are the main impediments to the expansion of the consumer finance market? (3 marks)
- Low financial literacy and awareness of consumers about financial products and their costs
- Low and irregular incomes, and a large informal economy that makes income hard to document
- Lack of reliable credit information and weak identification of borrowers, which raises credit risk
- High interest rate spread and expensive credit, which discourage borrowing
- Weak consumer trust, poor information disclosure and limited delivery channels
- High cost of serving many small customers, and the need for strong recovery systems
Q11. Explain business risk in the risk management process. (5 marks)
Business risk is the risk that a bank will not meet its targets for earnings and growth because of uncertainty in its revenues, costs, competition, strategy, customer behavior or the economic and regulatory environment. It is different from credit and market risk, which come from specific transactions.
In the risk management process the bank (1) identifies business risks, (2) measures and assesses their likelihood and impact, (3) decides how to respond (avoid, reduce, transfer or accept the risk), and (4) monitors and reports on them, within an enterprise-wide framework with the board and senior management responsible for oversight. Because business risks are interdependent with other risks, an integrated approach such as Enterprise Risk Management is recommended.
Q12. What does CFC stand for? (1 marks)
Card Facilitation Centre (CFC), the unit that manages the e-banking channels and keeps the database of resolved and unresolved customer cases, as described in the lesson.
Q13. What does CDNS stand for? (1 marks)
Central Directorate of National Savings (CDNS), the government organization in Pakistan that runs the National Savings Schemes.
Q14. A company uses a job costing system. Its standard selling price is predetermined at Rs. 505, based on cost plus a 20% profit margin. The estimated cost of Job # 141 is: direct material 5 meters at Rs. 20 per meter; direct labor 14 hours at Rs. 8 per hour. Production overhead for the year is budgeted at Rs. 200,000 and is recovered on the basis of 40,000 direct labor hours for the year. Required: (a) calculate the cost of goods sold for Job # 141; (b) calculate the amount of profit on the job.
Overhead rate = Rs. 200,000 / 40,000 direct labor hours = Rs. 5 per direct labor hour
| Cost element | Calculation | Rs. |
|---|---|---|
| Direct material | 5 meters x Rs. 20 | 100 |
| Direct labor | 14 hours x Rs. 8 | 112 |
| Production overhead | 14 hours x Rs. 5 | 70 |
| Cost of goods sold (Job # 141) | 282 |
(b) Profit = selling price - cost = 505 - 282 = Rs. 223.
Note: a selling price of cost plus 20% would be Rs. 338.40 (profit Rs. 56.40), so the figure of Rs. 505 given in the question does not match the 20% margin; the profit above uses the stated price of Rs. 505.
Q15. A company makes a food item in a manufacturing process. On 1 November there was no opening stock in process. During November 500 units of material costing Rs. 9,000 were put into process. 400 units were completed and transferred out. Direct labor cost in November was Rs. 3,840. Production overhead is absorbed at 200% of direct labor cost. Closing stock on 30 November was 100 units, 100% complete as to materials and 80% complete as to labor and overhead. Required: the full production cost of the completed units during November.
Equivalent units: materials = 400 + 100 x 100% = 500; labor and overhead (conversion) = 400 + 100 x 80% = 480
Costs: materials Rs. 9,000; labor Rs. 3,840; overhead = 200% x 3,840 = Rs. 7,680 (total Rs. 20,520)
| Element | Total cost (Rs.) | Equivalent units | Cost per unit (Rs.) |
|---|---|---|---|
| Materials | 9,000 | 500 | 18 |
| Labor | 3,840 | 480 | 8 |
| Overhead | 7,680 | 480 | 16 |
| Total | 42 |
Full production cost of the 400 completed units = 400 x Rs. 42 = Rs. 16,800.
Closing work in process (100 units) = 100 x 18 + 80 x 8 + 80 x 16 = Rs. 3,720. Check: 16,800 + 3,720 = 20,520.
Q16. A manufacturer purchased materials of Rs. 550,000 and incurred direct labor of Rs. 420,000 during the year ended 30 June 2006. Factory overheads for the year were Rs. 380,000. Inventory balances: finished goods Rs. 90,000 on 1 July 2005 and Rs. 105,000 on 30 June 2006; work in process Rs. 121,000 and Rs. 110,000; materials Rs. 100,000 and Rs. 105,000. Required: prepare (a) the cost of goods manufactured statement and (b) the cost of goods sold statement.
(a) Cost of goods manufactured statement
| Opening materials inventory | 100,000 |
| Add: purchases | 550,000 |
| Less: closing materials inventory | (105,000) |
| Direct material used | 545,000 |
| Add: direct labor | 420,000 |
| Prime cost | 965,000 |
| Add: factory overhead | 380,000 |
| Total manufacturing cost | 1,345,000 |
| Add: opening work in process | 121,000 |
| Less: closing work in process | (110,000) |
| Cost of goods manufactured | 1,356,000 |
(b) Cost of goods sold statement
| Opening finished goods | 90,000 |
| Add: cost of goods manufactured | 1,356,000 |
| Goods available for sale | 1,446,000 |
| Less: closing finished goods | (105,000) |
| Cost of goods sold | 1,341,000 |
Q17. A company's factory overhead rate is Rs. 2 per hour. Budgeted overhead is Rs. 8,000 for 3,000 hours per month and Rs. 12,000 for 7,000 hours. Actual factory overhead for the month was Rs. 9,000 and the actual volume was 5,000 hours. Required: (a) the applied overhead; (b) the over- or under-applied overhead.
(a) Applied overhead = actual hours x overhead rate = 5,000 x Rs. 2 = Rs. 10,000
(b) Over- or under-applied overhead = applied - actual = 10,000 - 9,000 = Rs. 1,000 over-applied (a favorable balance, because the overhead charged to production is more than the overhead actually incurred).
Q18. In a process costing department, 9,200 units were started in process; 7,500 units were transferred to the next department, 700 units were completed and are on hand, and 1,000 units remain in process at the end of the period, complete as to materials and 4/10 complete as to labor and factory overhead. Required: prepare the quantity schedule and compute the equivalent production units.
Quantity schedule
| Units started in process | 9,200 |
| Transferred to the next department | 7,500 |
| Completed and on hand | 700 |
| Still in process at the end | 1,000 |
| Total accounted for | 9,200 |
Equivalent units produced (completed units + percentage of units in process):
- Direct material: 7,500 + 700 + (1,000 x 100%) = 9,200
- Labor and factory overhead: 7,500 + 700 + (1,000 x 4/10) = 8,600
