Banking Terminology
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.
History
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".
During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. TheGovernment of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
§ The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
§ In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
§ The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
[edit]Nationalisation
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
Liberalisation
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[1][2][3]dsggiph indian
RBI
History
1935—1950
The central bank was founded in 1935 to respond to economic troubles after the first world war.[3] The Reserve Bank of India was set up on the recommendations of the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for another nine years. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937. The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank forPakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders’ bank, the RBI has been fully owned by the government of India since its nationalization in 1949.[4]
1950—1960
Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the agricultural sector. The administration nationalized commercial banks[5] and established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans.
1960—1969
As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector.
1969—1985
Between 1969 and 1980, the Indian government nationalized 6 more commercial banks, following 14 major commercial banks being nationalized in 1969(As mentioned in RBI website). The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s.[7] The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[8] The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.[9]
The branch was forced to establish two new offices in the country for every newly established office in a town.[10] The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects.[11] 12
1985—1991
A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw).[12] The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.[13]
1991—2000
The national economy came down in July 1991 and the Indian rupee was devalued.[14] The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal.[15] The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.[16] This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998.[17]
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary company—theBharatiya Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes.[18]
Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004 - 2005 (National Electronic Fund Transfer).[19] The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.[20]
The national economy's growth rate came down to 5.8% in the last quarter of 2008 - 2009[21] and the central bank promotes the economic development.[22]
Structure
Central Board of Directors
The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, four directors to represent the regional boards, and ten other directors from various fields.
Governors
The central bank till now was governed by 21 governors. The 22nd, Current Governor of Reserve Bank of India is Dr Subbarao
Supportive bodies
The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and serve - beside the advice of the Central Board of Directors - as a forum for regional banks and to deal with delegated tasks from the central board.[23] The institution has 22 regional offices.
The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems.
The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S S Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999-2000.
On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India constituted a new department — Customer Service Department (CSD).
Offices and branches
The Reserve Bank of India has 4 regional offices,15 branches and 5 sub-offices.[24] It has 22 branch offices at most state capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar,Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-offices at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi,Shimla and Srinagar.
The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training Centres at Belapur, Chennai, Kolkata and New Delhi.
Main functions
Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[25]
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s.[26]
The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Schemehas been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like thegross domestic product and has to decide the design of the rupee banknotes as well as coins.[27]
Manager of exchange control
The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans tocommercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.
Minimum Reserve System - Principle of Currency Note Issue
RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'.
Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries.[6] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[28]
Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[29] The institution maintains banking accounts of all scheduled banks, too.
There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.
Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%.
Cash Reserve Ratio (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%.
Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.
In well-developed economies, central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.
Generally RBI uses three kinds of selective credit controls:
1. Minimum margins for lending against specific securities.
2. Ceiling on the amounts of credit for certain purposes.
3. Discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set.
2. Banks are mandatorily required to keep 24% of their deposits in the form of government securities.
3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.
IMPORTANT BUDGET TERMINOLOGY
REVENUE BUDGET: it consists of the revenue receipts of the government (which is tax revenues plus other revnues) and the expenditure met from these revenues. It has two components : Revenue receipt and revenue expenxditure.
CAPITAL BUDGET: it consists of capital receipts and payments. It also incorporates transactions in the Public Account. It has two components : Capital receipt and capital expenditure.
CAPITAL EXPENDITURE: it consists of payments for acquisition of assests like land, buildings, machinery, equipment, and also investments in shares etc, and loans and advances granted by the central government to state and union territory govt, govt campainies, corporations and other parties.
CAPITAL RECEIPT: The main items of capital receipts are loans raised by the govt from public which are called market loans, borrowing by the govt from the reserve bank of India and other parites thorugh sale of treasury bills, loans received from foreign govts, and bodies and recoveries of loans granted by the central govt to state and UT govt. and other parties. It also includes proceeds from disinvestment of govt equity in public enterprises.
What is Open Market operations(OMO)?
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system by RBI. Open market operations are the principal tools of monetary policy.
· What is Micro Credit?
It is a term used to extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.
· What is Liquidity Adjustment Facility(LAF)?
A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.
· What is RTGS System?
The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction.
· What is Bancassurance?
It is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.
· What is Wholesale Price Index(WPI)?
The Wholesale Price Index (WPI) is the index used to measure the changes in the average price level of goods traded in wholesale market. A total of 435 commodity prices make up the index. It is available on a weekly basis. It is generally taken as an indicator of the inflation rate in the Indian economy. The Indian Wholesale Price Index (WPI) was first published in 1902, and was used by policy makers until it was replaced by the Producer Price Index (PPI) in 1978.
· What is Consumer price Index(CPI)?
It is a measure estimating the average price of consumer goods and services purchased by households.
· What is Venture Capital?
Venture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return.
· What is a Treasury Bills?
Treasury Bills (T-Bills) are short term, Rupee denominated obligations issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.
· What is Banking Ombudsmen Scheme?
The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks.
The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.
The Banking Ombudsman Scheme was first introduced in India in 1995, and was revised in 2002. The current scheme became operative from the 1 January 2006, and replaced and superseded the banking Ombudsman Scheme 2002.
· What is Subsidy?
A subsidy is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or to encourage it to hire more labor.
· What is a Debenture? How many types of debentures are there? What are they?
A debenture is basically an unsecured loan to a corporation. A type of debt instrument that is not secured by physical asset. Debentures are backed only by the general creditworthiness and reputation of the issuer.
i)Convertible Debentures: Any type of debenture that can be converted into some other security or it can be converted into stock..
ii)Non-Convertibility Debentures(NCB): Non Convertible Debentures are those that cannot be converted into equity shares of the issuing company, as opposed to Convertible debentures. Non-convertible debentures normally earn a higher interest rate than convertible debentures do.
· What is a hedge fund?
‘Hedge’ means to reduce financial risk.
A hedge fund is an investment fund open to a limited range of investors and requires a very large initial minimum investment. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment.
· What is FCCB?
A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A company may issue an FCCB if it intends to make a large investment in a country using that foreign currency.
· What is Capital Account Convertibility(CAC)?
It is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back.
The Reserve Bank of India has appointed a committee to set out the framework for fuller Capital Account Convertibility.
Capital account convertibility is considered to be one of the major features of a developed economy. It helps attract foreign investment. capital account convertibility makes it easier for domestic companies to tap foreign markets.
· What is Current Account Convertibility?
It defines at one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted.
· What is Arbitrage?
The opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price.
· What is Capitalism?
Capitalism as an economy is based on a democratic political ideology and produces a free market economy, where businesses are privately owned and operated for profit; in capitalism, all of the capital investments and decisions about production, distribution, and the prices of goods, services, and labor, are determined in the free market and affected by the forces of supply and demand.
· What is Socialism?
Socialism as an economy is based on a collectivist type of political ideology and involves the running of businesses to benefit the common good of a vast majority of people rather than of a small upper class segment of society.
CERTIFICATE OF DEPOSITS
This scheme was introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest.
The major features are:
Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit’.
CRR/SLR Applicable on the issue price in case of banks Investors Individuals (other than minors), corporations, companies, trusts, funds, associations etc
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years).
Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac Intt. rate Market related. Fixed or floating
Loan Against collateral of CD not permitted Pre-mature cancellation Not allowed
Transfer Endorsement & delivery. Any time Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June 30, 2002
The major features are:
Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions within their `Umbrella limit’.
CRR/SLR Applicable on the issue price in case of banks Investors Individuals (other than minors), corporations, companies, trusts, funds, associations etc
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years).
Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac Intt. rate Market related. Fixed or floating
Loan Against collateral of CD not permitted Pre-mature cancellation Not allowed
Transfer Endorsement & delivery. Any time Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June 30, 2002
Other conditions
• If payment day is holiday, to be paid on next preceding business day
• Issued at a discount to face value
• Duplicate can be issued after giving a public notice & obtaining indemnity
CORE BANKING SOLUTIONS
Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is
completed in a centralized environment i.e. under which the information relating to the
customer’s account (i.e. financial dealings, profession, income, family members etc.) is stored in
the Central Server of the bank (that is available to all the networked branches) instead of the
branch server. Depending upon the size and needs of a bank, it could be for the all the
operations or for limited operations. This task is carried through an advance software by making
use of the services provided by specialized agencies.
Due to its benefits, a no. of banks in India in recent years have taken steps to implement the
CBS with a view to build relationship with the customer based on the information captured and
offering to the customer, the customised financial products according to their need.
Advantages: The CBS process is advantageous both to the customers and the banks in the
following manner:
Customer:
• Transaction of business from any branch, ATM that offers him anytime anywhere banking
facility.
• Lower incidence of errors. Hence accuracy in transactions.
• Better funds management due to immediate availability of funds.
Banks:
• Standardisation of process within the bank.
• Better customer service leading to retention of customer and increased customer traffic.
• Availability of accurate data & Better use of available infrastructure
• Better MIS and reporting to external agencies such as Govt., RBI etc.
• Increased business volume with better asset liability management and risk management.
• Issued at a discount to face value
• Duplicate can be issued after giving a public notice & obtaining indemnity
CORE BANKING SOLUTIONS
Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is
completed in a centralized environment i.e. under which the information relating to the
customer’s account (i.e. financial dealings, profession, income, family members etc.) is stored in
the Central Server of the bank (that is available to all the networked branches) instead of the
branch server. Depending upon the size and needs of a bank, it could be for the all the
operations or for limited operations. This task is carried through an advance software by making
use of the services provided by specialized agencies.
Due to its benefits, a no. of banks in India in recent years have taken steps to implement the
CBS with a view to build relationship with the customer based on the information captured and
offering to the customer, the customised financial products according to their need.
Advantages: The CBS process is advantageous both to the customers and the banks in the
following manner:
Customer:
• Transaction of business from any branch, ATM that offers him anytime anywhere banking
facility.
• Lower incidence of errors. Hence accuracy in transactions.
• Better funds management due to immediate availability of funds.
Banks:
• Standardisation of process within the bank.
• Better customer service leading to retention of customer and increased customer traffic.
• Availability of accurate data & Better use of available infrastructure
• Better MIS and reporting to external agencies such as Govt., RBI etc.
• Increased business volume with better asset liability management and risk management.
DERIVATIVES
A derivative is a financial contract that derives its value from another financial
product/commodity (say spot rate) called underlying (that may be a stock, stock index, a foreign
currency, a commodity). Forward contract in foreign exchange transaction, is a simple form of a
derivative.
Objectives and instruments of derivates: The major purpose that is served by derivatives is to
hedge the risk. Futures, forwards, options, swaps etc. are the common instruments of
derivatives. The derivatives do not have any independent existent and are based on the
underlying assets that could be a stock index, a foreign currency, a commodity or an individual
stocks.
Operators in the derivative market : There are various kinds of operators in the derivative
market such as hedgers (which manage the risk), the speculators (who undertake risk for
realization of profit) and the arbitrageurs (who make purchase and sales simultaneously but in
different market to take benefit of price differentials). The players in option market include
development finance institutions, mutual funds, institutional investors, brokers, retail investors.
Components: The derivatives have components such as Options, Futures-forwards and Swaps.
Option It is contract that provides a right but does not impose any obligation to buy or sell a
financial instrument, say a share or security. It can be exercised by the owner. Options offer the
buyers, profits from favourable movement of prices say of shares or foreign exchange.
Variants of option: There are two variants of options i.e. European (where the holder can
exercise his right on the expiry date) and American (where the holder can exercise the right,
anytime between purchase date and the expiry date). It is important to note that option can be
exercised by the owner (the buyer, who has the right to buy or sell), who has limited liability but
possibility of realization of profits from favourable movement in the rates. Option writers on the
other hand have high risk and they cover their risk through counter buying.
Components of options: Options have two components i.e. call option and put option. The
owner’s liability is restricted to the premium he is to pay.
Call option : The owner i.e. the buyer, has the right to purchase and the seller has to obligation
to sell, a specified no. of instruments say shares at a specified price during the time prior to
expirydate.
Put option : Owner or the buyer has the right to sell and the seller has the obligation to buy
during a particular period.
Futures and forwards
The futures are the contracts between sellers and buyers under which the sellers (termed ‘short’)
have to deliver, a pre-fixed quantity, at a pre-fixed time in future, at a pre-fixed price, to the
buyers (known as ‘long’). It is a legally binding obligation between two parties to give/take
delivery at a certain point of time in future. The main features of a futures contract are that these
are traded in organised exchanges, regulated by institutions such as SEBI, they need only
margin payment on a daily basis. The future positions can be closed easily. Futures contract are
made primarily for hedging, speculation, price determination and allocation of resources.
The forward on the other hand is a contract that is traded off-the-stock exchange, is self
regulatory and has certain flexibility unlike future which are traded at stock exchange only, do not
have flexibility of quantity and quality of commodity to be delivered and these are regulated by
SEBI, RBI or other agencies.
A derivative is a financial contract that derives its value from another financial
product/commodity (say spot rate) called underlying (that may be a stock, stock index, a foreign
currency, a commodity). Forward contract in foreign exchange transaction, is a simple form of a
derivative.
Objectives and instruments of derivates: The major purpose that is served by derivatives is to
hedge the risk. Futures, forwards, options, swaps etc. are the common instruments of
derivatives. The derivatives do not have any independent existent and are based on the
underlying assets that could be a stock index, a foreign currency, a commodity or an individual
stocks.
Operators in the derivative market : There are various kinds of operators in the derivative
market such as hedgers (which manage the risk), the speculators (who undertake risk for
realization of profit) and the arbitrageurs (who make purchase and sales simultaneously but in
different market to take benefit of price differentials). The players in option market include
development finance institutions, mutual funds, institutional investors, brokers, retail investors.
Components: The derivatives have components such as Options, Futures-forwards and Swaps.
Option It is contract that provides a right but does not impose any obligation to buy or sell a
financial instrument, say a share or security. It can be exercised by the owner. Options offer the
buyers, profits from favourable movement of prices say of shares or foreign exchange.
Variants of option: There are two variants of options i.e. European (where the holder can
exercise his right on the expiry date) and American (where the holder can exercise the right,
anytime between purchase date and the expiry date). It is important to note that option can be
exercised by the owner (the buyer, who has the right to buy or sell), who has limited liability but
possibility of realization of profits from favourable movement in the rates. Option writers on the
other hand have high risk and they cover their risk through counter buying.
Components of options: Options have two components i.e. call option and put option. The
owner’s liability is restricted to the premium he is to pay.
Call option : The owner i.e. the buyer, has the right to purchase and the seller has to obligation
to sell, a specified no. of instruments say shares at a specified price during the time prior to
expirydate.
Put option : Owner or the buyer has the right to sell and the seller has the obligation to buy
during a particular period.
Futures and forwards
The futures are the contracts between sellers and buyers under which the sellers (termed ‘short’)
have to deliver, a pre-fixed quantity, at a pre-fixed time in future, at a pre-fixed price, to the
buyers (known as ‘long’). It is a legally binding obligation between two parties to give/take
delivery at a certain point of time in future. The main features of a futures contract are that these
are traded in organised exchanges, regulated by institutions such as SEBI, they need only
margin payment on a daily basis. The future positions can be closed easily. Futures contract are
made primarily for hedging, speculation, price determination and allocation of resources.
The forward on the other hand is a contract that is traded off-the-stock exchange, is self
regulatory and has certain flexibility unlike future which are traded at stock exchange only, do not
have flexibility of quantity and quality of commodity to be delivered and these are regulated by
SEBI, RBI or other agencies.
Futures and options.
Futures can also be distinguished from options because in futures, both the parties have to
perform the contract and no premium is required to be paid by either party, where as in case of
option, only the writer has to perform while the buyers makes payment of the premium to the
seller in consideration for his performance. In addition, in futures the contract is to be performed
on the settlement date and not before that whereas in case of option the buyer can exercise the
option any time prior to the expiry date.
Credit derivatives.
Credit derivatives are over the counter financial contracts (i.e. off-balance sheet) through which
the transferor can transfer the credit risk to another party without actually selling the asset. It can
be defined as a contract on the basis of which one party has to make payment to another party on the basis of performance of a specified underlying credit assets. In a credit derivative there
are two parties i.e. protection seller and protection buyer.
Protection seller assumes the credit risk in consideration of premium that the protection buyer
pays. Protection buyer on the other hand transfer the risk to the protection seller for a premium.
Under the arrangement, the protection seller makes the payment to the protection buyer on
credit event (such as failure to pay, insolvency, bankruptcy, repudiation, price decline etc. of the
underlying asset) taking place.
Futures can also be distinguished from options because in futures, both the parties have to
perform the contract and no premium is required to be paid by either party, where as in case of
option, only the writer has to perform while the buyers makes payment of the premium to the
seller in consideration for his performance. In addition, in futures the contract is to be performed
on the settlement date and not before that whereas in case of option the buyer can exercise the
option any time prior to the expiry date.
Credit derivatives.
Credit derivatives are over the counter financial contracts (i.e. off-balance sheet) through which
the transferor can transfer the credit risk to another party without actually selling the asset. It can
be defined as a contract on the basis of which one party has to make payment to another party on the basis of performance of a specified underlying credit assets. In a credit derivative there
are two parties i.e. protection seller and protection buyer.
Protection seller assumes the credit risk in consideration of premium that the protection buyer
pays. Protection buyer on the other hand transfer the risk to the protection seller for a premium.
Under the arrangement, the protection seller makes the payment to the protection buyer on
credit event (such as failure to pay, insolvency, bankruptcy, repudiation, price decline etc. of the
underlying asset) taking place.
CUSTOMER RELATIONSHIP MANAGEMENT
Customer satisfaction is the degree of happiness a customer realises with a product or service
and is the most important driving force for retention of an existing customer which in turn results
in growth of any business organisation including banks, since it determines the size of cash flows
into the business. The satisfied customers always help in improving the toplines (i.e. business
turnover) through referrals and positive publicity which lead to improvement in bottomlines. In
order to maintain their position, while the business organisations have to retain their existing
customers, but for better growth in future, fresh customers are also required to be added.
New VS old customer
It needs to be borne in mind that to attract new customers involves huge cost in terms of set up
costs, promotion costs, advertising cost, follow up cost etc. Due to these costs the operating cost
for new customer is generally higher for new customers. As a result, the longer relationship of a
customer brings better returns to the business. The defection by customers is a major factor for
loss of revenue to the business and it should be appreciated that higher the rate of defection
causing lower average length of relationship, higher would be the rate of reduction in profits.
Emergence of CRM
Hence, every deregulated market has to veer around to retaining existing customers besides
identifying and attracting new customers. In US decreasing interest in traditional marketing was
witnessed as early as 1980s when returns dipped to 3%, companies had to look for an alternative
to mass marketing through ads and promos. This led to a finer segmentation of the market. The
technological innovation like data warehouses and call centres allowed a micro approach i.e. a
segment called customer relationship management or CRM and eCRM. With the size, location
or past history not being that relevant which it used to be in the past and the market forces being
in favour of the customer, the organisations caring for customers are likely to be the winners.
The availability of information technology tools are arousing additional expectations of the
customer which these organisation can think of ignoring.
Customer Relationship Management (CRM) refers to the ability to understand, anticipate and
manage the needs of the customer, interaction and relationship resulting in increased profitability
through revenue and margin growth and operational efficiencies. eCRM can address other
factors like personalisation, customization, one to many and many to many transactions. It
permit business speed, agility and real time response to customers or markets through the new
tools such as eMail, internet telephony, chat facility etc. It reduces the cost of customer contract.
Customer satisfaction is the degree of happiness a customer realises with a product or service
and is the most important driving force for retention of an existing customer which in turn results
in growth of any business organisation including banks, since it determines the size of cash flows
into the business. The satisfied customers always help in improving the toplines (i.e. business
turnover) through referrals and positive publicity which lead to improvement in bottomlines. In
order to maintain their position, while the business organisations have to retain their existing
customers, but for better growth in future, fresh customers are also required to be added.
New VS old customer
It needs to be borne in mind that to attract new customers involves huge cost in terms of set up
costs, promotion costs, advertising cost, follow up cost etc. Due to these costs the operating cost
for new customer is generally higher for new customers. As a result, the longer relationship of a
customer brings better returns to the business. The defection by customers is a major factor for
loss of revenue to the business and it should be appreciated that higher the rate of defection
causing lower average length of relationship, higher would be the rate of reduction in profits.
Emergence of CRM
Hence, every deregulated market has to veer around to retaining existing customers besides
identifying and attracting new customers. In US decreasing interest in traditional marketing was
witnessed as early as 1980s when returns dipped to 3%, companies had to look for an alternative
to mass marketing through ads and promos. This led to a finer segmentation of the market. The
technological innovation like data warehouses and call centres allowed a micro approach i.e. a
segment called customer relationship management or CRM and eCRM. With the size, location
or past history not being that relevant which it used to be in the past and the market forces being
in favour of the customer, the organisations caring for customers are likely to be the winners.
The availability of information technology tools are arousing additional expectations of the
customer which these organisation can think of ignoring.
Customer Relationship Management (CRM) refers to the ability to understand, anticipate and
manage the needs of the customer, interaction and relationship resulting in increased profitability
through revenue and margin growth and operational efficiencies. eCRM can address other
factors like personalisation, customization, one to many and many to many transactions. It
permit business speed, agility and real time response to customers or markets through the new
tools such as eMail, internet telephony, chat facility etc. It reduces the cost of customer contract.
BANKING VISION 2010
An IBA’s Committee prepared a vision report in the backdrop of globalisation of Indian economy,
developments taking place in and around the globe and those that are expected as per the
projections made in the Planning Commission’s India Vision Document 2020 & 10th Five Year
Plan, the on-going reforms measures, expected Basel II needs and the expected pace of
expansion in the balance sheets of banks.
Focus of banking: The focus of banking has to move in favour of cost control as that would be
the key factor to higher profits in future. The cost will have to be determined as revenue minus
profit which would necessitate efficient use of resources including manpower resources with
proper reconfiguration of human minds, as the increase in productivity would determine the
winners and laggards. Financial services system could see the emergence of highly varied
financial products, tailored to meet specific needs of the customers in the retail as well as
corporate segments. The advent of new technologies could see the emergence of new financial
players doing financial intermediation (such as utility service providers offering bill payment
services or supermarkets or retailers doing basic lending operations).
Specialisation : Some players might emerge as specialists in mortgage products, credit cards
etc. whereas some could choose to concentrate on particular segments of business system,
while outsourcing all other functions. Some other banks may concentrate on SME segments or
high net worth individuals by providing specially tailored services beyond traditional banking
offerings to satisfy the needs of customers they understand better than a more generalist
competitor.
Growth with quality : The future growth of banking business has to focus on the qualitative
aspects rather than quantitative only. Total assets of the Scheduled Commercial Banks by March
2010 would be at Rs.40,90,000 cr. Bank assets are expected to increase at annual compounded
rate of 13.4% till March 2010 compared with 16.7% increase during 1995-2003 period. Deposits
are expected to grow from Rs.1356000 cr to Rs.3500000 cr i.e. 14.5% CAGR and investments
with a CAGR of 23.6%.
Need for consolidation: Consolidation of banking institutions is expected through mergers and
acquisitions, globalisation of their operations, development of new technology and
universalisation of banking.
There would be greater presence of international players in the Indian financial system. Some of
the leading Indian banks, may emerge as global players since there are opportunities available
to Indian banks abroad to expand their business. The market led mergers between private banks
and also between public sector banks, are not ruled out This could see the emergence of 4-5
world class Indian Banks.
Risk and reward : For success of banking transactions, the ability of the banking institutions to
perceive risk and take suitable steps to manage the risk, will have to be ensured. The risk
managers could prosper and the risk takers are likely to survive. The risk management has to be
given substantial attention and this has to be initiated at the branch level instead of corporate
offices.
Information technology: Faster decision making and faster appraisal are likely to be in place
with faster information and data flow. This could help banks to improve their credit management
effectively in addition to reduction in transaction cost and improved revenues.
An IBA’s Committee prepared a vision report in the backdrop of globalisation of Indian economy,
developments taking place in and around the globe and those that are expected as per the
projections made in the Planning Commission’s India Vision Document 2020 & 10th Five Year
Plan, the on-going reforms measures, expected Basel II needs and the expected pace of
expansion in the balance sheets of banks.
Focus of banking: The focus of banking has to move in favour of cost control as that would be
the key factor to higher profits in future. The cost will have to be determined as revenue minus
profit which would necessitate efficient use of resources including manpower resources with
proper reconfiguration of human minds, as the increase in productivity would determine the
winners and laggards. Financial services system could see the emergence of highly varied
financial products, tailored to meet specific needs of the customers in the retail as well as
corporate segments. The advent of new technologies could see the emergence of new financial
players doing financial intermediation (such as utility service providers offering bill payment
services or supermarkets or retailers doing basic lending operations).
Specialisation : Some players might emerge as specialists in mortgage products, credit cards
etc. whereas some could choose to concentrate on particular segments of business system,
while outsourcing all other functions. Some other banks may concentrate on SME segments or
high net worth individuals by providing specially tailored services beyond traditional banking
offerings to satisfy the needs of customers they understand better than a more generalist
competitor.
Growth with quality : The future growth of banking business has to focus on the qualitative
aspects rather than quantitative only. Total assets of the Scheduled Commercial Banks by March
2010 would be at Rs.40,90,000 cr. Bank assets are expected to increase at annual compounded
rate of 13.4% till March 2010 compared with 16.7% increase during 1995-2003 period. Deposits
are expected to grow from Rs.1356000 cr to Rs.3500000 cr i.e. 14.5% CAGR and investments
with a CAGR of 23.6%.
Need for consolidation: Consolidation of banking institutions is expected through mergers and
acquisitions, globalisation of their operations, development of new technology and
universalisation of banking.
There would be greater presence of international players in the Indian financial system. Some of
the leading Indian banks, may emerge as global players since there are opportunities available
to Indian banks abroad to expand their business. The market led mergers between private banks
and also between public sector banks, are not ruled out This could see the emergence of 4-5
world class Indian Banks.
Risk and reward : For success of banking transactions, the ability of the banking institutions to
perceive risk and take suitable steps to manage the risk, will have to be ensured. The risk
managers could prosper and the risk takers are likely to survive. The risk management has to be
given substantial attention and this has to be initiated at the branch level instead of corporate
offices.
Information technology: Faster decision making and faster appraisal are likely to be in place
with faster information and data flow. This could help banks to improve their credit management
effectively in addition to reduction in transaction cost and improved revenues.
Continued from Banking vision 2010:
Credit delivery : The most significant challenge before banks is the maintenance of rigorous
credit standards, especially in an environment of increased competition for new and existing
clients. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and
monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash
flow based analysis to “borrower account behaviour”, so that the state of readiness of Indian
banks for Basle II regime improves.
Retail lending and Social banking: Retail banking is expected to receive greater attention. The
concept of social lending would undergo a change and instead of being seen as directed lending,
the priority sector lending would be business driven. With rural market comprising big size of the
population and disposable surplus, there is likely to be greater emphasis on rural and semi-urban
areas for business growth.
Regulatory framework: The expected integration of various intermediaries in the financial system would require a strong regulatory frame work. There have to be various legislative
changes to enable the banking system to remain contemporary/competitive. However, the
emphasis would be on self regulation instead of regulatory prescriptions based on putting in
practice the best practices. Banks are likely to migrate to the global accounting standards which
would require greater transparency, more disclosures and tighter norms for enlisting the
confidence of global investors and international market players.
Credit delivery : The most significant challenge before banks is the maintenance of rigorous
credit standards, especially in an environment of increased competition for new and existing
clients. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and
monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash
flow based analysis to “borrower account behaviour”, so that the state of readiness of Indian
banks for Basle II regime improves.
Retail lending and Social banking: Retail banking is expected to receive greater attention. The
concept of social lending would undergo a change and instead of being seen as directed lending,
the priority sector lending would be business driven. With rural market comprising big size of the
population and disposable surplus, there is likely to be greater emphasis on rural and semi-urban
areas for business growth.
Regulatory framework: The expected integration of various intermediaries in the financial system would require a strong regulatory frame work. There have to be various legislative
changes to enable the banking system to remain contemporary/competitive. However, the
emphasis would be on self regulation instead of regulatory prescriptions based on putting in
practice the best practices. Banks are likely to migrate to the global accounting standards which
would require greater transparency, more disclosures and tighter norms for enlisting the
confidence of global investors and international market players.
1. What is a Repo Rate?
A: Repo rate is the rate at which our banks borrow rupees from RBI. Whenever the banks have any shortage of funds they can borrow it from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases, borrowing from RBI becomes more expensive.
2. What is Reverse Repo Rate?
A: This is exact opposite of Repo rate. Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. RBI uses this tool when it feels there is too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates.
3. What is CRR Rate?
A: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.3
4. What is SLR Rate?
A: SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers.
SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.
5. What is Bank Rate?
A: Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply.
6. What is Inflation?
A: Inflation is as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are fewer Goods and more buyers; this will result in increase in the price of Goods, since there is more demand and less supply of the goods.
7. What is Deflation?
A: Deflation is the continuous decrease in prices of goods and services. Deflation occurs when the inflation rate becomes negative (below zero) and stays there for a longer period.
8. What is PLR?
A: The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis. The Prime Rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate. The rates reported below are based upon the prime rates on the first day of each respective month. Some banks use the name "Reference Rate" or "Base Lending Rate" to refer to their Prime Lending Rate.
9. What is Deposit Rate?
A: Interest Rates paid by a depository institution on the cash on deposit.
Policy Rates:
· Bank Rate: 6.00%
· Repo Rate: 5.25%
· Reverse Repo Rate: 3.75%
Reserve Ratios:
· CRR: 6.00%
· SLR: 25.0%
Lending/Deposit Rates:
· PLR: 11.00%-12.00%.
· Deposit Rate: 6.00%-7.50%.
. Savings Bank rate: 3.5%.
Note: Rates as on 14-05-10.
10. What is FII?
A: FII (Foreign Institutional Investor) used to denote an investor, mostly in the form of an institution. An institution established outside India, which proposes to invest in Indian market, in other words buying Indian stocks. FII's generally buy in large volumes which has an impact on the stock markets. Institutional Investors includes pension funds, mutual funds, Insurance Companies, Banks, etc.
11. What is FDI?
A: FDI (Foreign Direct Investment) occurs with the purchase of the “physical assets or a significant amount of ownership (stock) of a company in another country in order to gain a measure of management control” (Or) A foreign company having a stake in a Indian Company.
12. What is IPO?
A: IPO is Initial Public Offering. This is the first offering of shares to the general public from a company wishes to list on the stock exchanges.
13. What is Disinvestment?
A: The Selling of the government stake in public sector undertakings.
14. What is Fiscal Deficit?
A: It is the difference between the government’s total receipts (excluding borrowings) and total expenditure. Fiscal deficit in 2009-10 is proposed at 6.8% of GDP.
15. What is Revenue deficit?
A: It defines that, where the net amount received (by taxes & other forms) fails to meet the predicted net amount to be received by the government. Revenue deficit in 2009-10 is proposed at 4.8% of GDP.
16. What is GDP?
A: The Gross Domestic Product or GDP is a measure of all of the services and goods produced in a country over a specific period; classically a year. GDP during 2008-09 is 6.7%.
17. What is GNP?
A: Gross National Product is measured as GDP plus income of residents from investments made abroad minus income earned by foreigners in domestic market.
18. What is National Income?
A: National Income is the money value of all goods and services produced in a country during the year.
19. What is Per Capita Income?
A: The national income of a country, or region, divided by its population. Per capita income is often used to measure a country's standard of living.Per capita income during 2008-09 estimated by CSO: Rs.25, 494.
20. What is Vote on Account?
A: A vote-on account is basically a statement ,where the government presents an estimate of a sum required to meet the expenditure that it incurs during the first three to four months of an election financial year until a new government is in place, to keep the machinery running.
21. Difference between Vote on Account and Interim Budget?
A: Vote-on-account deals only with the expenditure side of the government's budget, an interim Budget is a complete set of accounts, including both expenditure and receipts.
22. What is SDR?
A: The SDR (Special Drawing Rights) is an artificial currency created by the IMF in 1969. SDRs are allocated to member countries and can be fully converted into international currencies so they serve as a supplement to the official foreign reserves of member countries. Its value is based on a basket of key international currencies (U.S. dollar, euro, yen and pound sterling).
23. What is SEZ?
A: SEZ means Special Economic Zone is the one of the part of government’s policies in India. A special Economic zone is a geographical region that economic laws which are more liberal than the usual economic laws in the country. The basic motto behind this is to increase foreign investment, development of infrastructure, job opportunities and increase the income level of the people.
What is corporate governance?
The way in which a company is governed and how it deals with the various interests of its customers, shareholders, employees and society at large. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.Is defined as the general set of customs, regulations, habits, and laws that determine to what end a firm should be run.
· Functions of RBI?
The Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years.To regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.Banker to banks: maintains banking accounts of all scheduled banks.
· What is monetary policy?
A Monetary policy is the process by which the government, central bank, of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
· What is Fiscal Policy?
Fiscal policy is the use of government spending and revenue collection to influence the economy. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal policy is an additional method to determine public revenue and public expenditure.
· What is Core Banking Solutions?
Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices. It will cut down time, working simultaneously on different issues and increasing efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions.
· What is bank and its features and types?
A bank is a financial organization where people deposit their money to keep it safe.Banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. Regional Rural Banks were established with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural labourers and rural artisans. The area of operation of RRBs is limited to the area as notified by GoI covering one or more districts in the State.
ii. Banking services for individual customers is known as retail banking.
iii. A bank that deals mostly in but international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public
iv. Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank.
v. Mobile Banking is a service that allows you to do banking transactions on your mobile phone without making a call , using the SMS facility. Is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone.
vi. Traditional banking is the normal bank accounts we have. Like, put your money in the bank and they act as a security and you will get only the normal interests (decided by RBI in our case, FED bank in US).
vii. Investment banking is entirely different. Here, people who are having so much money (money in excess which will yield only less interest if in Banks) will invest their money and get higher returns. For example, If i have more money instead of
taking the pain of investing in share market, buying properties etc. I will give to investment banks and they will do the money management and give me higher returns when compared to traditional banks.
· What is E-Governance?
E-Governance is the public sector’s use of information and communication technologies with the aim of improving information and service delivery, encouraging citizen participation in the decision-making process and making government more accountable,transparent and effective.
· What is Right to information Act?
The Right to Information act is a law enacted by the Parliament of India giving citizens of India access to records of the Central Government and State overnments.The Act applies to all States and Union Territories of India, except the State of Jammu and Kashmir - which is covered under a State-level law. This law was passed by Parliament on 15 June 2005 and came fully into force on 13 October 2005.
· Credit Rating Agencies in India?
The credit rating agencies in India mainly include ICRA and CRISIL. ICRA wasformerly referred to the Investment Information and Credit Rating Agency of India Limited. Their main function is to grade the different sector and companies in terms of performance and offer solutions for up gradation. The credit rating agencies in India mainly include ICRA and CRISIL(Credit Rating Information Services of India Limited)
· What is Cheque?
Cheque is a negotiable instrument instructing a Bank to pay a specific amount from a specified account held in the maker/depositor's name with that Bank.A bill of exchange drawn on a specified banker and payable on demand.“Written order directing a bank to pay money”.
· What is demand Draft?
A demand draft is an instrument used for effecting transfer of money. It is a Negotiable Instrument. Cheque and Demand-Draft both are used for Transfer of money. You can 100% trust a DD. It is a banker's check. A check may be dishonored for lack of funds a DD can not. Cheque is written by an individual and Demand draft is issued by a bank. People believe banks more than individuals.
· What is a NBFC?
A non-banking financial company (NBFC) is a company registered under the
Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
NBFCs are doing functions akin to that of banks; however there are a few differences:
(i)A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)
(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and
(iii) Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
· Diff between banking & Finance?
Finance is generally related to all types of financial, this could be accounting, insurances and policies. Whereas banking is everything that happens in a bank only.The term Banking and Finance are two very different terms but are often associated together. These two terms are often used to denote services that a bank and other financial institutions provide to its customers.
· What is NASSCOM ?
The National Association of Software and Services Companies (NASSCOM), the Indian chamber of commerce is a consortium that serves as an interface to the Indian software industry and Indian BPO industry. Maintaining close interaction with the Government of India in formulating National IT policies with specific focus on IT software and services maintaining a state of the art information database of IT software and services related activities for use of both the software developers as well as interested companies overseas. Mr. Som Mittal – President. Chairman-Pramod Bhasin
· What is ASSOCHAM?
The Associated Chambers of Commerce and Industry of India (ASSOCHAM), India's premier apex chamber covers a membership of over 2 lakh companies and professionals across the country. It was established in 1920 by promoter chambers, representing all regions of India. As an apex industry body, ASSOCHAM represents the interests of industry and trade, interfaces with Government on policy issues and interacts with counterpart international organizations to promote bilateral economic issues. President-Swati Piramal
· What is NABARD?
NABARD was established by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agency to provide credit in rural areas. NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.
· What is SIDBI?
The Small Industries Development Bank of India is a state-run bank aimed to aid the growth and development of micro, small and medium scale industries in India. Set up in 1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India.
· What is SENSEX and NIFTY?
SENSEX is the short term for the words "Sensitive Index" and is associated with the Bombay (Mumbai) Stock Exchange (BSE). The SENSEX was first formed on 1-1-1986 and used the market capitalization of the 30 most traded stocks of BSE. Where as NSE has 50 most traded stocks of NSE.SENSEX IS THE INDEX OF BSE. AND NIFTY IS THE INDEX OF NSE.BOTH WILL SHOW DAILY TRADING MARKS. Sensex and Nifty both are an "index”. An index is basically an indicator it indicates whether most of the stocks have gone up or most of the stocks have gone down.
· What is SEBI?
SEBI is the regulator for the Securities Market in India. Originally set up by the
Government of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C B Bhave.
· What is Mutual funds?
Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually.
· What is Asset Management Companies?
A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves. Mutual funds, hedge funds and pension plans are all run by asset management companies. These companies earn income by charging service fees to their clients.
· What are non-perfoming assets?
Non-performing assets, also called non-performing loans, are loans,made by a bank or finance company, on which repayments or interest payments are not being made on time. A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.
· What is Recession?
A true economic recession can only be confirmed if GDP (Gross Domestic Product)growth is negative for a period of two or more consecutive quarters.
· What is foreign exchange reservers?
Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities.However, the term in popular usage commonly includes foreign exchange and gold,SDRs and IMF reserve positions
First Quarter Review of Monetary Policy 2010-11:
Monetary policy is the process by which the government, central bank of a country controls (i) the supply of money, (ii) availability of money, and (iii)cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
As expected, RBI has raised the policy rates in the first quarter review of monetary policy on 27-07-2010. This is the fourth rate hike since March this year raising the Repo by a total of 100 bps and Reverse Repo by 125 bps.
Highlights of the policy:
· Repo rates hiked by 25 bps to 5.75% with immediate effect.
· Reverse Repo rates hiked by 50 bps to 4.50% with immediate effect.
· CRR, SLR and Bank rate kept unchanged at 6%, 25% and 6%, respectively.
· Estimated for GDP growth for 2010-11 revised to 8.5% from 8%.
· Inflation projection for March 2010 increased to 6% from 5.5%.
The next mid-quarter review of Monetary Policy for 2010-11 will be announced through a press release on September 16, 2010.
The second quarter review of Monetary Policy 2010-11, including developmental and regulatory policies, is scheduled on November 2, 2010.
August Current Affairs:
· China has eclipsed Japan as the world's second-biggest economy after three decades of blistering growth that put overtaking the U.S. in reach within 10 years.
· Former Union Power Secretary Harishankar Brahma has been appointed as the Election Commissioner in the Election Commission of India.
· Britain’s Andy Murray won the 2010 Rogers Cup over Roger Federer 7–5, 7–5 on Sunday in Toronto.
· The President Mrs. Pratibha Devisingh Patil this evening conferred the prestigious Best Parliamentarian Awards to Priya Ranjan Dasmunsi, Mohan Singh and Dr. Murali Manohar Joshi at an impressive function in the Central Hall of Parliament. The Awards were given for the year 2007, 2008 and 2009 respectively for their outstanding contributions to parliamentary debates.
· Former Lok Sabha Speaker Somnath Chatterjee's book, "Keeping the Faith: Memoirs of a Parliamentarian", which was released by Prime Minister Dr. Manmohan Singh.
· The Centre cleared for implementation the Rajiv Gandhi Scheme for Empowerment of Adolescent Girls — known as ‘Sabla' — aimed at enhancing their nutritional and economic status. The scheme will be run along with the Integrated Child Development Services (ICDS) project in anganwadi centres in 200 select districts, targeting girls in the age group 11-18.
· Senior IPS officer R K Medhekar will be the new Director General of elite commando force -- National Security Guard. Medhekar, a 1975 batch officer of Kerala cadre, currently serving as Special Director General of Border Security Force. He will take over from 1972 batch IPS officer N P S Aulakh.
· Vineet Jain, Managing Director, The Times of India (TOI) Group, has been elected as the new chairman of Press Trust of India (PTI), the leading news agency of India. Jain succeeds Vjiay Kumar Chopra, Editor, Punjab Kesari Group.
· Union Minister of State for Environment and Forests Jairam Ramesh launched the Green Action for National Dandi Heritage Initiative(GANDHI) project in the historic coastal village in south Gujarat. It was at Dandi that Mahatma Gandhi launched his salt Satyagraha 80 years ago.
· The postal department released a stamp(of Rs.5) in Visakhapatnam to commemorate the first death anniversary of the former chief minister late Y.S. Rajasekhar Reddy.
First Quarter Review of Monetary Policy 2010-11:
Monetary policy is the process by which the government, central bank of a country controls (i) the supply of money, (ii) availability of money, and (iii)cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
As expected, RBI has raised the policy rates in the first quarter review of monetary policy on 27-07-2010. This is the fourth rate hike since March this year raising the Repo by a total of 100 bps and Reverse Repo by 125 bps.
Highlights of the policy:
· Repo rates hiked by 25 bps to 5.75% with immediate effect.
· Reverse Repo rates hiked by 50 bps to 4.50% with immediate effect.
· CRR, SLR and Bank rate kept unchanged at 6%, 25% and 6%, respectively.
· Estimated for GDP growth for 2010-11 revised to 8.5% from 8%.
· Inflation projection for March 2010 increased to 6% from 5.5%.
The next mid-quarter review of Monetary Policy for 2010-11 will be announced through a press release on September 16, 2010.
The second quarter review of Monetary Policy 2010-11, including developmental and regulatory policies, is scheduled on November 2, 2010.
August Current Affairs:
· China has eclipsed Japan as the world's second-biggest economy after three decades of blistering growth that put overtaking the U.S. in reach within 10 years.
· Former Union Power Secretary Harishankar Brahma has been appointed as the Election Commissioner in the Election Commission of India.
· Britain’s Andy Murray won the 2010 Rogers Cup over Roger Federer 7–5, 7–5 on Sunday in Toronto.
· The President Mrs. Pratibha Devisingh Patil this evening conferred the prestigious Best Parliamentarian Awards to Priya Ranjan Dasmunsi, Mohan Singh and Dr. Murali Manohar Joshi at an impressive function in the Central Hall of Parliament. The Awards were given for the year 2007, 2008 and 2009 respectively for their outstanding contributions to parliamentary debates.
· Former Lok Sabha Speaker Somnath Chatterjee's book, "Keeping the Faith: Memoirs of a Parliamentarian", which was released by Prime Minister Dr. Manmohan Singh.
· The Centre cleared for implementation the Rajiv Gandhi Scheme for Empowerment of Adolescent Girls — known as ‘Sabla' — aimed at enhancing their nutritional and economic status. The scheme will be run along with the Integrated Child Development Services (ICDS) project in anganwadi centres in 200 select districts, targeting girls in the age group 11-18.
· Senior IPS officer R K Medhekar will be the new Director General of elite commando force -- National Security Guard. Medhekar, a 1975 batch officer of Kerala cadre, currently serving as Special Director General of Border Security Force. He will take over from 1972 batch IPS officer N P S Aulakh.
· Vineet Jain, Managing Director, The Times of India (TOI) Group, has been elected as the new chairman of Press Trust of India (PTI), the leading news agency of India. Jain succeeds Vjiay Kumar Chopra, Editor, Punjab Kesari Group.
· Union Minister of State for Environment and Forests Jairam Ramesh launched the Green Action for National Dandi Heritage Initiative(GANDHI) project in the historic coastal village in south Gujarat. It was at Dandi that Mahatma Gandhi launched his salt Satyagraha 80 years ago.
· The postal department released a stamp(of Rs.5) in Visakhapatnam to commemorate the first death anniversary of the former chief minister late Y.S. Rajasekhar Reddy.
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RBI Annual Policy Statement 2010-11
The RBI on Tuesday(20-04-10) hiked short-term lending and borrowing rates(Repo and Reverse repo Rates) and the portion of money banks deposit with it by 25 basis points each, in a move aimed at controlling the double digit inflation.
The below list shows the present and increased key rates:
| Policy Rates/Reserve Ratios | Present rate | Increased rates |
| 1. Bank Rate | 6.00% | Unchanged |
| 2 Repo Rate | 5.00% | 5.25% |
| Reverse Repo Rate | 3.50% | 3.75% |
| 4 Cash Reserve Ratio | 5.75% | 6.00% |
| 5. Statutory Liquid Ratio | 25.0% | Unchanged |
Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with the Reserve Bank of India. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The hike in CRR, which will come into effect from April 24.
As a result of the increase in the CRR, about Rs 12,500 crore of excess liquidity will be absorbed from the banking system.
With the RBI deciding that banks now need to increase the amount of cash they have to keep with the central bank (the cash reserves), the problem is that banks will not earn any interest on this amount.
So banks will be left with little option but to hike interest rates to make up for that loss of interest they would normally have earned had CRR been lower.
So Home loan, car loan and personal loans are likely to rise marginally that might burden for the common man.
Why RBI was forced to hike rates?
The RBI said that the Indian economy is firmly on the recovery path. Exports have been expanding since October 2009, a trend that is expected to continue.
On balance, under the assumption of a normal monsoon and sustenance of good performance of the industrial and services sectors on the back of rising domestic and external demand, for policy purposes the baseline projection of real GDP growth for 2010-11 is placed at 8.0 per cent with an upside bias.(Inputs from: Rediff)
Assuring that the policy actions would not halt the recovery, the RBI pegged the FY'11 GDP growth at 8 per cent. It also pegged the wholesale inflation, which is currently hovering close to the double-digits (9.9 per cent in March), at 5.5 per cent for FY' 11.
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Types of Banks in India - 2010
What is a Bank?
A Bank is a financial organization which accepts deposits that can be withdrawn on
demand and also lends money to individuals and business houses that need it.
Structure of banking sector in India:
What is RBI?
The RBI is India's central bank. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
RBI acts as a banker to the Government and Banks.
The Central Bank maintains record of Government revenue and expenditure under various heads. It maintains deposit accounts of all other banks and advances money to other banks, when needed.
Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods.
What is Scheduled Bank?
All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled banks.These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks. The type of banks comes under these Scheduled Commercial Banks and Scheduled Cooperative Banks can be seen in the above figure.All most all banks are Scheduled banks in India.
What are Commercial Banks?
Commercial banks may be defined as, any banking organization that deals with the deposits and loans of business organizations.Commercial banks issue bank checks and drafts, as well as accept money on term deposits. Commercial banks also act as moneylenders, by way of installment loans and overdrafts.Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.
Types of Loans offered by Commercial banks:
1)Secured Loan: A secured loan is one where the borrower provides a certain property or asset as collateral against the loan. The main condition of these loans is that if the loan remains unpaid, the bank has the right to use the property in any way they like to realize the outstanding amount.
2)Unsecured Loan: Unsecured loans have no collateral and therefore command higher interest rates. There are a variety of unsecured loans available today and these include credit cars, credit facilities such as a lines of credit, corporate bonds, and bank overdrafts.
3)Mortgage Loans: Mortgage loans that are provided by commercial banks are similar to secured loans but are used specifically to buy real estate property for commercial purposes. In most of these cases, the banks hold a lien on the title to the particular property purchased with the loan. If the borrower is unable to pay the loan back, the bank leverages this item against the loan to generate funds or recover the principal.
What are Public Sector Banks?
These are banks where majority stake is held by the Government of India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.
What are Private Sector Banks?
These are banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability.
Examples of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.
What are Foreign Banks?
These banks are registered and have their headquarters in a foreign country but operate their branches in our country.
Examples of foreign banks in India are: HSBC, Citibank, Standard Chartered Bank, etc.
What are Regional Rural Banks?
Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area as notified by GoI covering one or more districts in the State.
RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of 50%, 15% and 35% respectively.
Prathama bank is the first Regional Rural Bank in India located in the city Moradabad in Uttar Pradesh.
What are Cooperative Banks?
A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts, etc).
They provide limited banking products and are specialists in agriculture-related products.
Cooperative banks are the primary financiers of agricultural activities, some small-scale industries and self-employed workers.
Co-operative banks function on the basis of "no-profit no-loss".
Anyonya Co-operative Bank Limited (ACBL) is the first co-operative bank in India located in the city of Vadodara in Gujarat.
How Bank gets Money?
Banks make money by lending your money out at interest and by charging you for services provided. Banks keep on lending money.
The other big revenue items generated by banks are the fees they charge. Bank charge for every service, whether it is for an electronic transaction, or permitting a transfer through the Internet banking system.
When banks get profits they invest in other companies and in return they will get money.
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• Monetary policy is a tool used by the central bank to manage money supply in the economy in order to achieve a desirable growth. The central bank controls the money supply by increasing and decreasing the cost of money, the rate of interest.
What is Fiscal Policy? How is it different from Monetary Policy?
• The fiscal policy is used to monitor the economy. Two major tools of the fiscal policy are revenue spending and collection by government.
• So, while the monetary policy aims to stabilize the economy by controlling the money supply and interest rates, the fiscal policy uses government spending and taxation to achieve the same goal.
• A fiscal policy can be of three kinds — neutral, expansionary and contractionary.
When the revenue collection and spending of the government is equal it is called a neutral policy. An expansionary fiscal policy means higher government spending than tax collection, whereas, contractionary fiscal policy indicates lower spending than tax collections. While the former may lead to a budget deficit, the latter can result in budget surplus.
• During slowdown, the government uses expansionary fiscal policy and pumps in huge amount of money as stimulus packages and decreases the tax rates so that people have more money to spend. This is mainly to revive demand in the economy. On the contrary, when the economy becomes overheated and inflation goes up, the government increases the tax rates and decreases the spending to squeeze the money from the system.
• Central bank has two sets of tools - quantitative and qualitative - to signal easing or tight money conditions, depending on its policy objective.
While quantitative tools would include imposing cash reserve requirements (CRR) for banks, fixing the repo or reverse-repo rates, the bank rate and prescribing the level of statutory liquidity ratio (SLR) to signal the level of growth in the financial markets, pursuant with its growth objective for the economy.
Popular qualitative measures would include imposing margins on certain loans and moral suasion. However, RBI often tweaks only the repo or reverse-repo rates and CRR.
Changes in Third Quarter Review of Monetary Policy 2009-10:
• RBI has increased the cash reserve ratio (CRR) of scheduled banks by 75 basis points from 5.0 per cent to 5.75 per cent of their net demand and time liabilities.
• As a result of the increase in the CRR, about Rs. 36,000 crore of excess liquidity will be absorbed from the system.
• However key interest rates remain unchanged; Repo Rate (4.75%), Reverse Repo rate (3.25%), Bank Rate (6%).
Finance Minister Pranab Mukherjee presented the Union Budget 2010-11 in parliament on Monday(28-02-2011).
Here are some of the highlights:
· Exemption limit for the general category of individual taxpayers enhanced from
Rs 1,60,000 to Rs 1,80,000. For senior citizens, the qualifying age reduced to 60 years from the present 65 years and exemption limit raised to Rs 2.50 lakh. Citizens over 80 years to have exemption limit of Rs 5 lakh. No Change in women tax exemption limit i.e1,90,000.
· Total expenditure proposed at Rs 12, 57,729 crore. Increase of 18.3 per cent in total Plan allocation i.e Rs 4, 41,547 crores . Increase of 10.9 per cent in the Non-plan expenditure i.e Rs 8, 16,182 crores.
· Indian economy expected to grow at 9 per cent with an outside band of +/- 0.25 per cent in 2011-12. Gross Domestic Product (GDP) estimated to have grown at 8.6 per cent in 2010-11 in real terms.
· Fiscal Deficit brought down from 5.5 per cent in BE 2010-11 to 5.1 per cent of GDP in RE 2010-11. Fiscal Deficit kept at 4.6 per cent of GDP for 2011-12. Fiscal Deficit to be progressively reduced to 3.5 per cent by 2013-14.
· “Effective Revenue Deficit” estimated at 2.3 per cent of GDP in the Revised Estimates for 2010-11 and 1.8 per cent for 2011-12.
· Priority sector home loans limit raised to Rs. 25 lakh from Rs. 20 lakh.
· Current surcharge of 7.5 per cent on domestic companies proposed to be reduced to 5 per cent.
· Rate of Minimum Alternative Tax proposed to be increased from 18 per cent to
18.5 per cent of book profits.
· Central Excise Duty to be maintained at standard rate of 10 per cent.
· Disinvestment in 2011-12 seen at 400 billion rupees.
· Provision of Rs 1,64,415 crore, including Rs 69,199 crore for capital expenditure to be made for Defence Services in 2011-12.
· Rs 6,000 crore to be provided during 2011-12 to enable public sector banks to maintain a minimum of Tier I CRAR of 8 per cent.
· Rs 500 crore to be provided to enable Regional Rural Banks to maintain a CRAR of at least 9 per cent as on March 31, 2012.
· Rs 5,000 crore to be provided to SIDBI for refinancing incremental lending by banks to these enterprises.
· Rs 3,000 crore to be provided to NABARD to provide support to handloom weaver co-operative societies which have become financially unviable due to non-repayment of debt by handloom weavers facing economic stress.
· Allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased from Rs 6,755 crore to Rs 7,860 crore.
· Credit flow for farmers raised from Rs 3,75,000 crore to Rs 4,75,000 crore in 2011-12.
· Allocation of Rs 2,14,000 crore for infrastructure in 2011-12. This is an increase of 23.3 per cent over 2010-11.This also amounts to 48.5 per cent of total plan allocation.
· National Food Security Bill (NFSB) to be introduced in the Parliament during the course of this year.
· Allocation for social sector in 2011-12 (` 1,60,887 crore) increased by 17 per cent over current year. It amounts to 36.4 per cent of total plan allocation.
· Allocation for social sector in 2011-12 (` 1,60,887 crore) increased by 17 percent over current year. It amounts to 36.4 per cent of total plan allocation.
· Allocation for Bharat Nirman programme proposed to be increased by ` 10,000 crore from the current year to Rs 58,000 crore in 2011-12.
· Plan to provide Rural Broadband Connectivity to all 2,50,000 Panchayats in the country in three years.
· From 1st April, 2011, remuneration of Anganwadi workers increased from Rs 1,500 per month to Rs 3,000 per month and for Anganwadi helpers from Rs 750 per month to Rs 1,500 per month.
· Allocation for primitive Tribal groups increased from Rs185 crore in 2010-11 to Rs 244 crore in 2011-12.
· 21,000 crore allocated to Sarva Shiksha Abhiyan, which is 40 per cent higher than Budget for 2010-11.
· Target of providing banking facilities to all 73,000 habitations having a population of over 2,000 to be completed during 2011-2012.
· Eligibility for pension under Indira Gandhi National Old Age Pension Scheme for BPL beneficiaries reduced from 65 years of age to 60 years. Those above 80 years of age will get pension of Rs 500 per month instead of ` 200 at present.
· Rs 200 crore proposed to be allocated for Green India Mission from National Clean Energy Fund.
· Rs 200 crore proposed to be allocated for launching Environmental Remediation Programmes from National Clean Energy Fund.
· Special allocation of ` 200 crore proposed to be provided for clean-up of some more important lakes and rivers other than Ganga.
· Rs 8,000 crore provided in current year for development needs of Jammu and Kashmir.
· Allocation made in 2011-12 to meet the infrastructure needs for Ladakh (` 100 crore) and Jammu region (` 150 crore).
· A new scheme with an outlay of ` 300 crore to be launched to provide assistance to States to modernise their stamp and registration administration and roll out e-stamping in all the districts in the next three years.
· A new simplified form ‘Sugam’ to be introduced to reduce the compliance burden of small tax payers falling within presumptive taxation.
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Highlights of Economic Survey 2010-11
The Economic Survey of India 2010-11 was tabled by the Union Finance Minister of India Pranab Mukherjee on 25 February 2011.
Here are the some of the highlights of Economic survey:
· The Survey predicted the 9% growth for Indian economy in the next fiscal and estimated 8.6 percent growth in this financial year.
· As per the survey, the inflation stood at 8.23 per cent in January 2011.
· The economic Survey of India stated that the trade gap has narrowed to over 82 billion US dollars in the first nine months of the current fiscal and gross fiscal deficit is at 4.8 per cent which is 1.5 percent less than last fiscal(6.3%).
· The Survey stated that the spending in social sector programmes increased by five percent of the GDP over past five years.
· The Survey pointed out that Forex reserves of India are estimated to be over 297 billion US dollars. This is mainly due to growth in export sector.
· Agriculture likely to grow at 5.4% in 2010-11.
· Industrial output grows by 8.6% ; manufacturing sector registers 9.1%.
· Exports in April-December 2010 up by 29.5 %.
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What is a Budget
The Union Budget is the annual report of India as a country. It contains the government of India's revenue and expenditure for the end of a particular fiscal year, which runs from April 1 to March 31.
The Union Budget is the most extensive account of the government's finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year.
What is a revenue budget?
The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure.
Revenue receipts are divided into tax and non-tax revenue.
Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies.
In non-tax revenue, the government's sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders.
Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens.
The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.
What is a capital budget?
The capital budget is different from the revenue budget as its components are of a long-term nature.
The capital budget consists of capital receipts and payments.
The capital budget consists of capital receipts and payments.
Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.
Capital payments are capital expenditures on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.
What are direct taxes?
These are the taxes that are levied on the income of individuals or organizations. Income tax, corporate tax, inheritance tax are some instances of direct taxation.
Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc.
Corporate tax is the tax paid by companies or firms on the incomes they earn.
What are indirect taxes?
These are the taxes paid by consumers when they buy goods and services.
These include excise and customs duties.
Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter.
Excise duty is a levy paid by the manufacturer on items manufactured within the country.
Usually, these charges are passed on to the consumer.
What is plan and non-plan expenditure?
There are two components of expenditure -- plan and non-plan.
Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.
Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.
Non-plan capital expenditure mainly includes defence, loans to public enterprises, loans to States, Union Territories and foreign governments.
What is the Central Plan Outlay?
It is the division of monetary resources among the different sectors in the economy and the ministries of the government.
What is fiscal policy?
Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy.
Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.
What is a fiscal deficit?
This is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure.
What is the Finance Bill?
The government proposals for the levy of new taxes, alterations in the present tax structure or continuance of the current tax structure beyond the period approved by the Parliament, are laid down before the Parliament in this bill.
The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Act.
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