CAIIB · Bank Financial Management · Module D — Balance Sheet Management
CAIIB BFM Unit 31 — RAROC and Profit Planning: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 31 — RAROC and Profit Planning (Module D — Balance Sheet Management). The CAIIB Mock Centre holds 309 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module D309 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Profit planning: the banker's balancing act — profit = what the balance sheet earns (interest, fees, trading) minus what it costs (interest, staff, other), managed within the trustee's duty of prudence.
Asset mix, yield and capital — every rupee moved down the rating scale buys more yield with more capital; plan the mix by return per unit of capital.
NPAs and profitability — a bad loan shrinks the numerator (profit) and swells the denominator (capital) of the return on capital.
Changed since the textbook
Current risk weights for rated corporates (in force at 30 Jun 2026). AAA 20%, AA 30%, A 50%, BBB 100%, BB and below 150%; unrated 100% (150% for large unrated exposures above ₹200 crore). Source: RBI Basel III framework / Capital Adequacy Directions, 2025
Financial Stability Report, June 2026 (30 Jun 2026). SCBs' profit after tax ₹4,05,268 crore in 2025-26, up from ₹3,78,163 crore (+7.2%; 16.8% a year earlier); RoA 1.3% (1.4%), RoE 12.6% (13.5%), NIM 3.3% (3.5%); GNPA 1.8%, NNPA 0.4%, PCR 75.6%; CRAR 17.7%; profits from securities trading shrank through 2025-26 and turned into losses for all bank groups in January–March 2026 (PSBs −₹158 crore, private banks −₹280 crore, foreign banks −₹9,597 crore). Source: RBI Financial Stability Report, June 2026 (30 Jun 2026)
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 309 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
"Treasury income from government securities is risk-free, because G-secs carry no credit risk." Why is this a trap?
Why (d): 31.2: trading is speculative; Lesson 5.1: a duration-4 portfolio loses about 2% when yields rise 0.5%. (a) is wrong: They are practically free of credit risk. (b) is wrong: It depends on market prices. (c) is wrong: Banks trade G-secs.
Question 2 of 5
A candidate computes ROA as net profit divided by risk-weighted assets. What is wrong?
Why (a): 31.4: ROA relates net profit to the bank's total assets at book value, usually the average for the year, showing how productively the whole balance sheet is used; profit over risk-weighted assets is a different, risk-adjusted ratio. Dividing by equity gives ROE, and average earning assets are the usual base for net interest margin. (b) is wrong: The textbook relates profit to the book value of assets. (c) is wrong: Dividing by equity gives ROE. (d) is wrong: Earning assets are the base for NIM, not ROA.
Question 3 of 5
A ₹1,000 crore loan portfolio has a probability of default of 2% and a loss given default of 50%, with full exposure at default. What is its expected loss, and how should the bank cover it?
Why (c): Expected loss = PD × LGD × EAD = 2% × 50% × ₹1,000 crore = ₹10 crore; being expected, it is a cost of doing business, covered by pricing and provisions (31.3–31.4). Economic capital is held for unexpected loss, the losses above that average, and ₹20 crore ignores the 50% recovery. (a) is wrong: Capital is for unexpected loss, not the expected ₹10 crore. (b) is wrong: ₹20 crore ignores the 50% recovery. (d) is wrong: Wrong amount, and capital is not for expected loss.
Question 4 of 5
A business line earns a profit of ₹45 crore on economic capital of ₹400 crore. Shareholders require a return of 14% on capital. What is its Economic Value Added?
Why (d): EVA = profit − capital × required return = 45 − (400 × 14%) = 45 − 56 = −₹11 crore: the line earns 11.25% on its capital against the 14% required, so it destroys value even though it shows a profit. The charge applies to the capital used, not to the profit. (a) is wrong: Profit ignores the charge for capital. (b) is wrong: The charge applies to capital, not to profit. (c) is wrong: The sign is wrong: the charge exceeds the profit.
Question 5 of 5
Two trading desks each made a profit of ₹12 crore last year. The FX desk used risk capital of ₹60 crore and the bond desk ₹40 crore. How do they compare on a risk-adjusted basis?
Why (d): Risk-adjusted performance is profit per unit of risk capital: 12 ÷ 40 = 30% for the bond desk against 12 ÷ 60 = 20% for the FX desk, so the bond desk earned more for the risk it ran. Equal profits say nothing about the risk taken, and once risk capital is known the notional size adds nothing. (a) is wrong: Equal profits hide unequal risk. (b) is wrong: More capital for the same profit is a worse result. (c) is wrong: Risk capital already reflects notional and volatility.
0 of 5 answered.
Traps in this unit
"Minimise expenses" ≠ cut every cost: some costs bring income.
RWA = amount × RW (not yield × RW).
Not just lost interest: the capital side too.
Practise all 309 questions on Unit 31. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
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