Bank Management System Bbanking Notes

BANK KING
BANKING AWARNESS
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2015
Written By,
Rahul Rituraj
(Junior Associate in Indian Institute Of Banking)
Edited By,
Vivek Singh
(PAT- Cognizant Technology Solution)
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INDIAN BANKING
History:
The first bank of limited liability managed by Indians was Oudh
Commercial Bank founded in 1881.
Punjab National Bank was established in 1894.
Swadeshi movement, which began in 1906, encouraged the formation of a
number of commercial banks. Banking crisis during 1913 -1917 and
failure of 588 banks in various States during the decade ended 1949
underlined the need for regulating and controlling commercial banks.
The Banking Companies Act was passed in February1949, which was
subsequently amended to read as Banking Regulation Act, 1949.This Act
provided the legal framework for regulation of the banking system by RBI.
The largest bank - Imperial Bank of India - was taken over by the RBI in
1955 and rechristened as State Bank of India, followed by inclusion of its 7
Associate Banks in1959.
At present SBI has five associate banks. With a view to bring commercial
banks into the mainstream of economic development with definite social
obligations and objectives, the Government issued an ordinance on 19 July
1969 acquiring ownership and control of 14 major banks in the
country.
Six more commercial banks were nationalized from 15 April 1980.
What is a Bank ?
Bank is a lawful organisation, which accepts deposits that can be withdrawn
on demand. It alsolends money to individuals and business houses that need it.
Role of Banking
Banks provide funds for business as well as personal needs of individuals. They
play a significant role in the economy of a nation. Let us know about the role of
banking.
It encourages savings habit amongst people and thereby makes funds
available for productive use.
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It acts as an intermediary between people having surplus money and

those requiring money for various
var
business activities.
It facilitates business transactions through receipts and payments by
cheques instead of currency.
It provides loans and advances to businessmen for short term and long
long-term
purposes.
It also facilitates import-export
import
transactions.
It helps in national development by providing credit to farmers, small
-scale
scale industries and self-employed people as well as to large
business houses which lead to balanced economic development in the
country.
TYPES OF BANKS
Types of banks
CENTRAL
BANK (RBI)
COMMERCIAL
BANK
DEVELOPMENT
BANKS-IFCI,SFCs
COOPERATIVE
BANKS
PUBLIC SECTOR
BANKS
PRIMARY CREDIT
SOCIETIES
PRIVATE SECTOR
BANKS
CENTRAL
COOPERATIVE
BANKS
FOREIGN BANKS
STATE
COOPERATIVE
BANKS
SPECIALISED BANKSEXIM,SIDBI,NABARD
Central Bank
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A bank which is entrusted with the functions of guiding and

regulating the banking system of a country is known as its Central bank.
Such a bank does not deal with the general public.
It acts essentially as Governments banker, maintain deposit accounts of
all other banks and advances money to other banks, when needed.
The Central Bank provides guidance to other banks whenever they face any
problem. It is therefore known as the bankers bank. The Reserve Bank of
India is the central bank of our country.
The Central Bank maintains record of Government revenue and
expenditure under various heads. It also advises the Government on
monetary and credit policies and decides on the interest rates for bank
deposits and bank loans.
In addition, foreign exchange rates are also determined by the central bank.
Another important function of the Central Bank is the issuance of currency
notes, regulating their circulation in the country by different methods. No
other bank than the Central Bank can issue currency.
COMMERCIAL BANKS
Commercial Banks are banking institutions that accept deposits and grant
short-term loans and advances to their customers. In addition to giving shortterm loans, commercial banks also give medium-term and long-term loan to
business enterprises. Now-a-days some of the commercial banks are also
providing housing loan on a long-term basis to individuals.
Types of Commercial banks:

Public Sector Banks:
These are banks where majority stake is held by the Government of India or
Reserve Bank of India. Examples of public sector banks are: State Bank of India,
Corporation Bank, Bank of Baroda and Dena Bank, etc.
Private Sectors Banks:
In case of private sector banks majority of share capital of the bank is held by
private individuals. These banks are registered as companies with limited liability.
For example: The ICICI Bank, Axis Bank, Federal Bank etc.
Development Banks
Business often requires medium and long-term capital for purchase of machinery
and equipment, for using latest technology, or for expansion and modernization.
Such financial assistance is provided by Development Banks. They also undertake
other development measures like subscribing to the shares and debentures issued
by companies, in case of under subscription of the issue by the public.
Industrial Finance Corporation of India (IFCI) and State Financial Corporations
(SFCs) are examples of development banks in India.
Foreign Banks:
These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Some of the foreign banks operating in
our country are Hong Kong and Shanghai Banking Corporation (HSBC),
Citibank, American Express Bank, Standard & Chartered Bank.The number
of foreign banks operating in our country has increased since the financial
sector reforms of 1991. According to a report by RBI there are 47 Foreign Banks
branches in India as on March 31, 2013.
Co-operative Banks
People who come together to jointly serve their common interest often form a cooperative society under the Co-operative Societies Act. When a co-operative
society engages itself in banking business it is called a Co-operative Bank. The
society has to obtain a license from the Reserve Bank of India before starting
banking business. Any co-operative bank as a society has to function under the
overall supervision of the Registrar, Co-operative Societies of the State. As
regardsbanking business, the society must follow the guidelines set issued by the
Reserve Bank of India.
NATIONAL BANK FOR AGRICULTURE AND RURAL

DEVELOPMENT (NABARD)
INTRODUCTION
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.
It also has the mandate to support all other allied economic activities
in rural areas, promote integrated and sustainable rural development and
secure prosperity of rural areas.
In discharging its role as a facilitator for rural prosperity NABARD is
entrusted with Providing refinance to lending institutions in rural areas
Bringing about or promoting institutional development and Evaluating,
monitoring and inspecting the client banks Besides this pivotal role,
NABARD also:
Acts as a coordinator in the operations of rural credit institutionsExtends
assistance to the government, the Reserve Bank of India and other
organizations in matters relating to rural developmentOffers training and
research facilities for banks, cooperatives and organizations working in the
field of rural development
Helps the state governments in reaching their targets of providing assistance
to eligible institutions in agriculture and rural developmentActs as regulator
for cooperative banks and RRBs
SUBSIDIARIES OF NABARD
Nab cons : NABARD Consultancy Services (Nabcons) is a wholly owned
subsidiary promoted by National Bank for Agriculture and Rural
Development (NABARD) and is engaged in providing consultancy in all
spheres of agriculture, rural development and allied areas. Nabcons
leverages on the core competence of the NABARD in the areas of
agricultural and rural development, especially Multidisciplinary projects,
banking, institutional development, infrastructure, training, etc., internalized

for more than two decades.
The Company is registered under the Company's Act, 1956, with an
authorized capital of Rs 250 million (US $5.75 million) and paid up capital
of Rs 50 million (US $1.15 million).In tune with NABARD's mission to
bring about rural prosperity, Nabcons has more than just commercial
interest in the assignments it undertakes.
NABARD Financial Services Limited, [NABFINS] is a subsidiary of
National Bank for Agriculture and Rural Development (NABARD) with
equity participation from NABARD, Government of Karnataka, Canara
Bank of India, Dhanalakshmi Bank and Federal Bank. It is a non-deposit
taking
BANKERS INSTITUTE OF RURAL DEVELOPMENT (BIRD)
Established in 1983, at Lucknow, is an autonomous institute promoted and
funded by NABARD. BIRD was established primarily to cater to the training
needs of RRB personnel. The Institute, has, since 1st April 1992, been catering to
the training and information needs of rural bankers through its topical training
programs/seminars . The Institutes mandate also includes Research and
Consultancy in the related areas
FUNCTIONS OF COMMERCIAL BANKS

The functions of commercial banks are of two types.
(A) Primary functions; and
(B) Secondary functions.
Primary functions
The primary functions of a commercial bank include:
Accepting deposits; and
Granting loans and advances.
ACCEPTING DEPOSITS
The most important activity of a commercial bank is to mobilize deposits from the
public. People who have surplus income and savings find it convenient to deposit
the amounts with banks. Depending upon the nature of deposits, funds deposited
with bank also earn interest. Thus, deposits with the bank grow along withthe
interest earned. If the rate of interest is higher, public feels motivated to deposit
more funds with the bank. There is also safety of funds deposited with the bank.
Grant of loans and advances

The second important function of a commercial bank is to grant loans and
advances. Such loans and advances are given to members of the public and to
the business community at a higher rate of interest than allowed by banks on
various deposit accounts. The rate of interest charged on loans and advances varies
according to the purpose and period of loan and also the mode of repayment.
Loans
A loan is granted for a specific time period. Generally commercial banks provide
short-term loans. But term loans, i.e., loans for more than a year may also be
granted. The borrower may be given the entire amount in lump sum or in
instalments. Loans are generally granted against the security of certain assets.
A loan is normally repaid in instalments. However, it may also be repaid in lump
sum.
Advances
An advance is a credit facility provided by the bank to its customers. It differs from
loan in the sense that loans may be granted for longer period, but advances are
normally granted for a short period of time. Further the purpose of granting
advances is to meet the day-to-day requirements of business.
The rate of interest charged on advances varies from bank to bank. Interest is
charged only on the amount withdrawn and not on the sanctioned amount.
Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and
bill discounting.
Cash Credit
Cash credit is an arrangement whereby the bank allows the borrower to
draw amount upto a specified limit. The amount is credited to the account of the
customer. The customer can withdraw this amount as and when he requires.
Interest is charged on the amount actually withdrawn. Cash Credit is granted as per
terms and conditions agreed with the customers.
Overdraft
Overdraft is also a credit facility granted by bank. A customer who has a current
account with the bank is allowed to withdraw more than the amount of credit
balance in his account. It is a temporary arrangement. Overdraft facility with a
specified limit may be allowed either on the security of assets, or on personal
security, or both.
Discounting of Bills
Banks provide short-term finance by discounting bills, that is, making payment of
the amount before the due date of the bills after deducting a certain rate of
discount. The party gets the funds without waiting for the date of maturity of the
bills. In case any bill is dishonored on the due date, the bank can recover the
amount from the customer.
Secondary functions
In addition to the primary functions of accepting deposits and lending
money, banks perform a number of other functions, which are called secondary
functions. These are as follows:
Issuing letters of credit, travelers cheque, etc.
Undertaking safe custody of valuables, important documents and
securities by providing safe deposit vaults or lockers.
Providing customers with facilities of foreign exchange dealings.
Transferring money from one account to another; and from one branch
to another branch of the bank through cheque, pay order and demand
draft.
Standing guarantee on behalf of its customers, for making payment for

purchase of goods, machinery, vehicles etc.
Collecting and supplying business information.
Providing reports on the credit worthiness of customers.
NON BANKING FINANCIAL COMPANIES (NBFC)

A Non-Banking Financial Company (NBFC) is a company a) registered under the
Companies Act. 1956, b) its principal business is lending, investments in
various types of shares/stocks/bonds/debentures/securities, leasing, hirepurchase, insurance business, chit business, and c) its principal business is
receiving deposits under any scheme or arrangement in one lump sum or in
installments. However, a Non-Banking Financial Company does not include any
institution whose principal business is agricultural activity , industrial activity,
trading activity or sale/purchase/construction of immovable property. (Section 45
I (c) of the RBI Act, 1934) . One key aspect to be kept in view is that the financial
activity of loans/advances as stated in 45 I ( c) , should be for activity other than
its own. In the absence of this provision, all companies would have been NBFCs.
NBFCs whose asset size are of Rs.100 cr or more as per last audited balance
sheet are considered as systemically important NBFCs. The rationale for
such classification is that the activities of such NBFCs will have a bearing
on the financial stability in our country.
The Reserve Bank of India regulates and supervises Non-Banking Financial
Companies which are into the business of (i) lending (ii) acquisition of
shares, stocks, bonds, etc., or (iii) financial leasing or hire purchase.
The Reserve Bank also regulates companies whose principal business is to
accept deposits. (Section 45I (c) of the RBI Act, 1934)
The Reserve Bank has been given the powers under the RBI Act 1934 to register,
lay down policy, issue directions, inspect, regulate, supervise and exercise
surveillance over NBFCs that meet the 50-50 criteria of principal business. The
Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act
or the directions or orders issued by RBI under RBI Act. The penal action can also
result in RBI cancelling the Certificate of Registration issued to the NBFC, or
prohibiting them from accepting deposits and alienating their assets or filing a
winding up petition.
REGIONAL RURAL BANKS

The M.Narisaman committee in 1975 after studying the impact of the
Lead Bank Scheme recommended the establishment of rural banks in
each district that may be dedicated to rural
The first Gramin Banks started functioning on 2nd October 1975 under an
ordinanceandsubsquently the Regional Rural Banks Act was passed in 1976.
The management of Regional Rural banks was with a public sector bank
generally the lead bank of the district. The Regional Rural Bank operates
within a given geographical area.
The Capital for these banks was contributed by the Central Government
(50%), the Sponsor Bank (35%) and the State Government (15%).
Initially around 186 Gramin Bank established all over India but now in
keeping with the government directive to merge the gramin banks there were
57 gramin banks as on November 2013.
FINANCIAL INCLUSION
Financial inclusion is delivery of banking services at an affordable
cost to the vast sections of disadvantaged and low income groups.
Unrestrained access to public goods and services is the sine qua non
(an essential condition) of an open and efficient society. As banking services
are in the nature of public good, it is essential that availability of
banking and payment services to the entire population without
discrimination is the prime objective of the public policy.
The former United Nations Secretary General Mr. Kofi Annan on
December 29th 2003, while addressing Unesco highlighted that 84% of
the world population were not financially included.
In 2004 a committee headed by Shri. Haroon Rashid Khan studied the
functioning of gramin banks and found that 67% of the Indian population
were not financially included.
This matter was highlighted in the Reserve Bank of India term policy paper
of 2005-2006 and banks were asked to take up financial inclusion for the
country. The government of India has initiated a movement called
Swabhiman for financial inclusion and had targeted all villages with
population of 2000 or above by March 2012 and villages with population of
1000 or above by March 2015.
As result to the campaign, States or Union territories like Pondicherry,
Himanchal Pradesh and Kerala have announced 100% financial inclusion
in all the districts. RBIs vision for 2020 is to open nearly 600 million new
customers accounts and service them through a variety of channels by
leveraging on IT.
The financial institutions have taken the following steps to bring in financial
inclusion Publicity- Widepulicity of the utility of financial service are being done to
apprise the rural foik are the important of banks.
Basic Saving Bank Deposit Accounts-These accounts are opened on relaxed
KYC norms and need not have any balance in them. These accounts were formerly
called No frill accounts but were renominated as basic saving bank deposit
account by the RBI in September 2012.
The main features of the account are: The BSBDA should be considered a normal banking service available to all.
This account shall not have the requirement of any minimum balance.
The services available in the account will include deposit and withdrawal of
cash at bank branch as well as ATMs; receipt/credit of money through
electronic payment channels or by means of deposit/collection of
cheques drawn by Central/State Government agencies and departments;
While there will be no limit on the number of deposits that can be made in a
month, account holders will be allowed a maximum of four withdrawals in a
month, including ATM withdrawals; andFacility of ATM card or ATM-cum-Debit Card;
The above facilities are to be provided without any charges. Further, no charges
will be levied for non-operation/activation of Basic Savings Bank Deposit
Account.
Banks are free to evolve other requirements including pricing structure for
additional value-added services beyond the stipulated basic minimum services
on reasonable and transparent basis and applied in a non-discriminatory
manner.
The Basic Savings Bank Deposit Accountis subject to RBI instructions on Know
Your Customer (KYC) / Anti-Money Laundering (AMI) for opening of bank
accounts issued from time to time.
If such account is opened on the basis of simplified KYC norms, the account
would additionally be treated as a Small Account and would be subject to
conditions stipulated for such accounts.
Holders of Basic Savings Bank Deposit Account will not be eligible for
opening any other savings bank deposit account in that bank. If a customer
has any other existing savings bank deposit account in that bank, he/ she will
be required to close it within 30 days from the date of opening a BSBDA.
The existing basic banking no-frills accounts should be converted to Basic
Savings Bank Deposit Account.
Kisan Credit CardThe banks are providing credit cards to the farmers having land
on basis of the annual produce of their land. They amount avialable in the credit
card (appropriately named Kisan Credit Card) can be drawn by the farmer any time
as per his needs and has to be repaid after reaping the crop in the next croping
season. Interest as applicable to agriculture loan is charged on loans given from
Kisan Credit Cards. These cards are normally valid for five years.
General Purpose Credit Card-Small consumption loans are given to
landless people through general purpose credit card having limits up toRs. 15,000
and carrying an interest rate of 4%. This loan can be used by the beneficiaries for
opening small business.
Business Correspondents- As banks were unable to open branches immediately

in all villages they adopted the Business Correspondent model from Jan 2006. In
this model persons living near the respective villages who may be educated are
used as banks commission agents to provide door step banking to the villagers.
These persons could be retired employees of banks, post offices, Railways,Armed
forces etc. are could even be NGOs or SHGs. They carry with them a hand
held computer and through the use of Electronic Smart Card allow withdrawal
uptoRs. 10,000 from Saving Bank Accounts or Kisan Credit Cards. They
can also open deposit accounts and deposit money in the accounts. The Bussiness
Correspondents goes back to his base bank every day updates his computer,
submits the relevant accounts.
Electronic Banking- To facility financial inclusion banks are also adopting
Electronic Banking through the use of biometric Atms and mobile banking.
Ultra Small Branches- In villages serviced by the business correspondent,
an officer of the base branch visits the village once in a week and attends to the
banking functions that could not be carried out by the business correspondent.
He also accepts small loan applications and sanctions them on the spot.
Financial Inclusion Index

On June 25th, 2013 CRISIL, Indias leading credit rating and reasearch company
launched an index to measure the status of finacial inclusion in India. The
Index -Inclusix is one of its kind tool to measure the extent of inclusion in
India right down to each of the 632 districts. CRISIL Inclusix is on scale of 0 to
100 and includes parameters of basic banking services-branch penetration,
deposit penetration and credit penetration into one metric. The all India CRISIL
Inclusix score is 40%.
Micro finance and Micro Credit

Micro credit is giving a small loan to a person. How ever if the person is trained
for the project for which he is taking the loan and financial untilization and
then given the loan it is called Micro Finance.
Micro Finance = Micro Credit + Financial and Project Literacy
Rural Self Employment Training Institute (RSETI)

These Institutes have been established by the Government of India in almost
all districts of the country. These Institutes train the rural youth for agriculture
and non-agricultural activities is through residential training of 6 to 10 days. All
the expenses of these Institute are brone by the Government of India while it is
generally manned by officers of the lead bank. The youth trained by these
Institutes are given credit by the banks and this will amount to Micro Finance.
Financial Literacy and Counselling Centre (FLCC)
A working group under Shri. C.P.Swanker was constituted on 10th May 2007
to examine the procedures and processes of disbursement of agricultural loans.
This group found that rural people were quiet ignorant of the types of
agricultural credit facilities available to them. The group recommended the
formation of Financial Literacy and Counseling Centre (FLCC) at different rural
locations to help the farmers obtain credit facilities easily. These centers are
generally manned by retired officers of the banks who are well versed with rural
landing.
PRIORITY SECTOR CREDIT
The National Credit Council in July 1968 and the Reserve Bank of India informal
study group on statistics relating to advances to priority sector in 1971,
recommended that some part of the total credit given by banks should be set a side
for priority sector. In terms of the directive of Reserve Bank of India domestic
commercial banks, urban cooperative banks and foreign banks with 20 or more
branches have to provide 40% of their addjusted net bank credit every year
to the priority sector. Out of this 18% have to be set aside to agriculture credit.
Foreign banks with less than 20 branches have to provide 32% of their credit to the
priority sector.
Description of the Categories under priority sector
Agriculture
Direct Agriculture
Loans to individual farmers [including SHGs or (JLGs),] engaged in Agriculture

and Allied Activities. Loans to others [corporate, partnership firms and
institutions] for Agriculture and Allied Activities
(Dairy, fishery, piggery, poultry, bee-keeping, etc.) up to an limit of Rs. 2 crore per
borrower (these loans above Rs.2 cr are indirect agriculture loans) for :
Short-term crop loans. This will include traditional/non-traditional
plantations, horticulture and allied activities,
Medium & long-term loans for purchase of agricultural implements
and machinery, loans for irrigation and other developmental activities at
farm and development loans for allied activities),
Loans for pre-harvest and post-harvest activities viz.spraying, weeding,
harvesting, sorting, and transporting of their own farm produce.
Loans to farmers up toRs. 50 lakh against pledge / hypothecation of
agricultural produce (including warehouse receipts) for a period up to
12 months. Such loans to others are indirect agriculture loans,
Loans to small/marginal farmers for purchase of land for agriculture.
Loans to distressed farmers indebted to non-institutional lenders, against
appropriate collateral,
Export credit for exporting their own farm produce.
Indirect agriculture
Loans to corporates, partnership firms and institutions engaged in
Agriculture and Allied Activities more than Rs.2 crore Loans up to Rs.5
crore to Producer Companies set up exclusively by only small and marginal
farmers for agricultural/allied activities.
Other indirect agriculture loans
Loans up to Rs.5 crore per borrower to dealers / sellers of fertilizers,
pesticides, seeds, cattle feed, poultry feed, agricultural implements and other
inputs.
Loans for setting up of Agricultures and Agribusiness Centers.
Loans to Custom Service Units to maintain a fleet of tractors,

bulldozers, well-boring equipment, threshers, combines, etc., and undertake
farm work for farmers on contract basis.
Loans for construction/running of storage facilities (warehouse, market
yards, go downs and silos), including cold storage units to store agriculture
produce/products, irrespective of location.
Loan to MSE storage unit will be classified under loans to MSE.
Micro and small enterprises include:

Manufacturing Enterprises (Investment in P&M): Micro max Rs.25 lac.
Small Enterprises - Above Rs.25 lac up to Rs. 5 cr.
Service Sector Enterprises: Micro Enterprises - MaxRs. 10 lakh. Small
Enterprises - Above 10 lakh up to Rs. 2 crore.
Direct Finance
Need based loans to Manufacturing Enterprises and loans up to Rs.5 cr to
service enterprises.
Food/agro processing if units satisfy investment criteria.
Export credit to MSE units for export by them.
All loans to Khadiand Village Industries Sector will be classified under subtarget of 60 % for micro Enterprises within MSE sector.
Indirect Finance Loans to persons assisting decentralized sector in supply of inputs &
marketing of outputs of artisans, village cottage industries.
Loans to producers in the decentralised sector viz. artisans, village and
cottage industries.
Education:Loans to individuals including vocational courses max Rs.10
lakh for studies in India and Rs. 20 lakh abroad.
Micro Credit-Provision of credit and other financial services and
products of amounts up to Rs.50,000.
Housing -Loans up to Rs. 25 lakh irrespective of location, to

individuals for purchase / construction of a dwelling unit per family,
excluding loans sanctioned by banks to their own employees,
Loans for repairs to damaged dwelling units up to Rs. 2 lakh in rural and
semi-urban areas and up to Rs. 5 lakh in urban and metropolitan areas.
Loan to a governmental agency for construction of dwelling units or
for slum clearance and rehabilitation of slum dwellers subject to a ceiling
of loan component of Rs. 5 lakh per dwelling unit,
Loan to a non-governmental agency approved by NHB for refinance for
construction / reconstruction of dwelling units or for slum clearance and
rehabilitation of slum dwellers, subject to a ceiling of loan component of Rs.
10 lakh per dwelling unit.
Others
Loans up to Rs. 50,000 provided directly by banks to individuals;
Loans to distressed persons [other than farmers] max Rs. 50,000 per
borrower to prepay their debt to non-institutional lenders.
Loans to SHGs / JLGs for agricultural and allied activities. Other loans to
SHGs / JLGs up to Rs. 50,000 to be part of Micro Credit.
Loans sanctioned to State Sponsored Organizations for SC/ST for purchase
and supply of inputs to and / or the marketing of the outputs of the
beneficiaries of these organizations.
INTEREST SUBVENTION SCHEME
In pursuance of announcement in Budget 2012-13, Govt. of India was to provide
interest subvention of 2 % p.a. to Public Sector Banks (PSBs) in case of short-term
production credit up to Rs.3 lakh during the year 2012-13. This amount will be
calculated on the crop loan amount from the date of disbursement/drawl up to the
date of actual repayment or up to the fixed due date, whichever is earlier, subject to
a maximum period of one year. The subvention is available on the condition that
banks make available at ground level at 7% p.a. rate of interest.
Additional subsidy: Govt. will also provide additional interest subvention of
3% p.a. to PSBs in respect of those prompt paying farmers who repay their
short-term production credit within one year of disbursement/drawal of such loans
for a maximum amount of Rs.3 lakh availed of by them during the yeaf from the
date of disbursement of the crop loan up to the actual date of repayment or up to
the fixed due date, whichever is earlier, subject to a max period of one year
from the date of disbursement. The additional subvention will be available only
if the effective rate of interest is 4 % p.a. This benefit would not accrue if
repayment is after one year of availing the loans. The benefits of interest
subvention will also be available to small and marginal farmers having Kisan
Credit Card for a further period of up to 6 months post harvest, on the same rate as
available to crop loan against negotiable warehouse receipt for keeping their
produce in warehouses. Claims in respect of 2% interest subvention and 3%
additional interest subvention may be submitted respectively to RBI.
KHASRA, KHATUNI, KISAN BHAI
Khasra, Khatuni and Kisan Bhai are documents that establish the ownership and
produce of farm land. While Khasra in-corporates the plotwise/seasonwise
produce the Khatauni is the discription of plotwise ownership details. The
Khasra and Khatuani are now being issued in the form of a consolidated
booklet called the Kisan Bhai.
CROP LOAN
The crop loan is provided to meet all expenses involved in raising a particular crop
including various agronomic practices.
Eligibility:Farmers cultivating owned/Registered leased lands hare croppers. Quantum of
loan:-As per the scale of finance fixed by the Technical Committee of each district.
[Depending on merits of each case, branches may sanction crop Loans 35%
more than the scale of finance fixed by district technical committee. In other
cases where scale of finance is not specified, the branch - will work out the credit
requirements of the farmer.Where loan limit is fixed based on scale of finance
approved by Technical Committee, irrespective of
loan amount - Nil
For others: [where scale of finance is not approved]
UpoRs. 1,00,000/ Nil

Rate of Interest:-Above Rs. 1,00,000/ 10% to 15%
Repayment:- Repayment period will be less than one year for all crops except in
the case oi long duration crops such as Sugarcane [Pineapple, Banana etc where if
will be 12-18 months.
Security:- Up to Rs, 1,00,000/- DPN. Hypothecation of assets created and
crops. Over Rs. 1,00,000. DPN, Hypothecation of assets created and crops,
mongage of land &/or third party guarantee.
Insurance:- All eligible crops will be covered iiiicer National Agriculture
Insurance Scheme/ RashtriyaKrishiBimaYojana.
RBI & MONETARY POLICY

The Reserve Bank of India was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934.The Central Office of the
Reserve Bank was initially established in Calcutta but was permanently moved to
Mumbai in 1937. The Central Office is where the Governor sits and where policies
are formulated. Though originally privately owned, since nationalizationin 1949,
the Reserve Bank is fully owned by the Government of India.
Monetary Authority
Formulates implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit
to productive sectors.
REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM
Prescribes broad parameters of banking operations within which the countrys
banking and financial system functions.
Objective: maintain public confidence in the system, protect depositors
interest and provide costeffective banking services to the public.
MANAGER OF FOREIGN EXCHANGE
Manages the foreign exchange in accordance with the provision of 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
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes
and coins and in good quality.
Developmental role
Performs a wide range of promotional functions to support national
objectives.
Related Functions
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.
Monetary policy
Monetary policy refers to the use of instruments under the control of the central
bank to regulate the availability, cost and use of money and credit.
The goal: achieving specific economic objectives, such as low and
stable inflation and promoting growth.
The main objectives of Monetary Policy in India are:
Maintaining price stability
Ensuring adequate flow of credit to the productive sectors of the
economy to support economic growth
Financial stability
DIRECT INSTRUMENTS
Cash Reserve Ratio (CRR)
The share of net demand and time liabilities that banks must maintain as
cash balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR)
Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in
India. It is the amount which a bank has to maintain in the form of cash, gold or
approved securities balance in current account with other commercial bank. The
quantum is specified as some percentage of the total demand and time
liabilities of a bank. This percentage is fixed by the Reserve Bank of India.
Presently the SLR is 23%.
The 23% is the minimum SLR (the statutory requirements to park their
money in government bonds)limit the RBI can fix at present.
INDIRECT INSTRUMENTS
Liquidity Adjustment Facility (LAF)
Consists of daily infusion or absorption of liquidity on a repurchase basis,
through repo (liquidity injection) and reverse repo (liquidity absorption) auction
operations, using government securities as collateral.
Open Market Operations (OMO)
Outright sales/purchases of government securities, in addition to LAF, as a
tool to determine the level of liquidity over the medium term.
Market Stabilisation Scheme (MSS)
This instrument for monetary management was introduced in 2004. Liquidity
of a more enduring nature arising from large capital flows is absorbed through
sale of short-dated government securities and treasury bills. The mobilized cash is
held in a separate government account with the Reserve Bank.
Repo/Reverse Repo Rate
These rates under the Liquidity Adjustment Facility (LAF) determine the
corridor for short-term money market interest rates. In turn, this is expected to
trigger movement in other segments of the financial market and the real economy.
Term Repos under Liquidity Adjustment Facility

On Oct 08, 2013, RBI decided to conduct auctions for Term Repos of 7-day and
14-day tenor, for a notified amount, through variable rate auction mechanism. The
details are as under:
Term Repo under the Liquidity Adjustment Facility (LAF) for 14 days
and 7 days tenors will be introduced for banks (scheduled commercial banks
other than RRBs) in addition to the existing daily
LAF (repo and reverse repo) and MSF.
Term repo auctions will be conducted on CBS (E-KUBER) platform through
electronic bidding as is done in the case of OMO auctions.
The total amount of liquidity injected through term repos would be limited to
0.50% of NDTL of the banking system.
The 14 day term repo would be conducted every reporting Friday and the 7 day
term repo would be conducted on every non-reporting Friday.
In case the notified amount for the 14-day term repo is not fully subscribed, a 7day term repo would be conducted on the following Friday for the remaining
un-subscribed amount. In case of full subscription in 14-day term repo, there
will be no 7 day term repo auction on following Friday.
Banks would be required to place their bids with the term repo rate that they are
willing to pay to RBI, for the tenor of the repo expressed in percentage terms up to
two decimal places.
Once the bidding time is over, all the bids would be arranged in descending
order of the term repo rates quoted and the cut-off rate would be arrived at the rate
corresponding to the notified amount of the auction. Successful bidders would be
those, who have placed their bids at or above the cut-off rate.
No bids would be accepted at or below prevailing Repo Rate under LAF.
On the day prior to the auction, RBI will announce the amount to be auctioned
under term repo along
with its tenor. The minimum bid amount for the auction would be Rs.1 cr and
multiples thereof.
BANK RATE
It is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers. It also signals the medium-term stance
of monetary policy.
National Electronic Funds Transfer (NEFT)
National Electronic Funds Transfer (NEFT) is a nation-wide payment system
facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and
corporate can electronically transfer funds from any bank branch to any individual,
firm or corporate having an account with any other bankbranch in the country
participating in the Scheme. For being part of the NEFT funds transfer network, a
bank branch has to be NEFT- enabled. Individuals, firms or corporate maintaining
accounts with a bank branch can transfer funds using NEFT. Even such individuals
who do not have a bank account (walk-in customers) can also deposit cash at the
NEFT-enabled branches with instructions to transfer funds using NEFT. However,
such cash remittances will be restricted to a maximum of Rs.50,000/- per
transaction. Such customers have to furnish full details including complete address,
telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate
funds transfer transactions even without having a bank account.
Individuals, firms or corporate maintaining accounts with a bank branch can
receive funds through the NEFT system. It is, therefore, necessary for the
beneficiary to have an account with the NEFT
enabled destination bank branch in the country. The NEFT system also facilitates
one-way cross-border transfer of funds from India to Nepal. This is known as the
Indo-Nepal Remittance Facility Scheme. A remitter can transfer funds from any of
the NEFT-enabled branches to Nepal, irrespective of whether the beneficiary in
Nepal maintains an account with a bank branch in Nepal or not.
There is no limit - either minimum or maximum - on the amount of funds
that could be transferred using NEFT. However, maximum amount per
transaction is limited to Rs.50,000/- for cash-based remittances and

remittances to Nepal.
There is no restriction of centres or of any geographical area within the
country. The NEFT system takes advantage of the core banking system in
banks. Accordingly, the settlement of funds between originating and
receiving banks takes places centrally at Mumbai, whereas the
branches participating in NEFT can be located anywhere across the length
and breadth of the country.
Presently, NEFT operates in hourly batches - there are twelve settlements
from 8 am to 7 pm on week days (Monday through Friday) and six
settlements from 8 am to 1 pm on Saturdays.
REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM
The acronym 'RTGS' stands for Real Time Gross Settlement, which can be
defined as the continuous (real-time) settlement of funds transfers individually on
an order by order basis (without netting). 'Real Time' means the processing of
instructions at the time they are received rather than at some later time.'Gross
Settlement' means the settlement of funds transfer instructions occurs individually
(on an instruction by instruction basis). Considering that the funds settlement takes
place in the books of the Reserve Bank of India, the payments are final and
irrevocable. RBI hasoperationalised a new ISO 20022 complaint RTGS system
October 19-2-2013.
The RTGS system is primarily meant for large value transactions. The
minimum amount to be remitted through RTGS is Rs.2 lakh. There is no
upper ceiling for RTGS transactions.
Under normal circumstances the beneficiary branches are expected to
receive the funds in real time as soon as funds are transferred by the
remitting bank. The beneficiary bank has to credit the beneficiary's
account within two hours of receiving the funds transfer message.
The remitting bank receives a message from the Reserve Bank that money
has been credited to the receiving bank. Based on this the remitting bank can
advise the remitting customer that money has been delivered to the receiving
bank.
It is expected that the receiving bank will credit the account of the
beneficiary instantly. If the money cannot be credited for any reason, the
receiving bank would have to return the money to the remitting bank
within 2 hours.
Once the money is received back by the remitting bank, the original debit
entry in the customer's account is reversed.The RTGS service window for
customer's transactions is available from 9.00 hours to 16.30 hours on week
days and from 9.00 hours to 13.30 hours on Saturdays for settlement
at the RBI end.
However, the timings that the banks follow may vary depending on the
customer timings of the bank branches.With a view to rationalize the
service charges levied by banks for offering funds transfer through
RTGS system, a broad framework has been mandated as under:
Inward Transactions
Free, no charge to be levied.
Outward Transactions
Rs. 2 lakh to Rs. 5 lakh - not exceeding Rs. 30 per transaction
Above Rs. 5 lakh - not exceeding Rs. 55 per transaction
DeMat Account
A DeMat account is one that allows you to buy, sell as well as transact
without the need of any paperwork. DeMat accounts are very safe, convenient
and secure.
What is a DeMat Account?
DeMat is nothing but a dematerialized account. If one has to save money
or make cheque payments, then he/she needs to open a bank account.
Similarly, one needs to open a DeMat account if he/she wants to buy or sell
stocks. Thus, DeMat account is similar to a bank account wherein the actual
money is being replaced by shares. In order to open a DeMat account, one needs to
approach the Depository Participants [DPs].
In India, a DeMat account is a type of banking account that

dematerializes paper-based physical stock shares. The DeMat account is
used to avoid holding of physical shares.
The shares are bought as well as sold through a stock broker. In this case, the
advantage is that one does not need any physical evidence for possessing
these shares. All the things are taken care of by the DPs.
This account is very popular in India. Physically only 500 shares can be
traded as per the provision given by SEBI. From April 2006, it has
become mandatory for any person holding a DeMat account to possess a
Permanent Account Number (PAN).
MARGINAL STANDING FACILITY - SCHEME
As announced in the Monetary Policy for the year 2011-12, a new Marginal
Standing Facility (MSF) is being introduced with effect from May 9, 2011.
The Scheme will be operationalized on the lines of the existing Liquidity
Adjustment Facility - Repo Scheme (LAF - Repo). The salient features of the
Scheme are as under: This facility is effective from May 9, 2011.
Eligibility
All Scheduled Commercial Banks having Current Account and SGL Account
with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.
Tenor and Amount
Under the facility, the eligible entities can avail overnight, up to one per cent of
their respective Net Demand and Time Liabilities (NDTL) outstanding at the end
of the second preceding fortnight. But for the intervening holidays, the MSF
facility will be for one day except on Fridays when the facility will be for three
days or more, maturing on the following working day. In the event, the banks' SLR
holdings fall below the statutory requirement up to one per cent of their NDTL,
banks will not have the obligation to seek a specific waiver for default in SLR
compliance arising out of use of this facility in terms of notification issued under
sub section (2A) of Section 24 of the Banking Regulation Act, 1949.
Timing
17
The Facility will be available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.
Rate of Interest
The rate of interest on amount availed under this facility will be 100 basis points
above the LAF repo rate, or as decided by the Reserve Bank from time to time.
Discretion to Reserve Bank
The Reserve Bank will reserve the right to accept or reject partially or fully, the
request for funds under this facility.
Mechanics of Operations
The requests will be submitted electronically in the Negotiated Dealing
System (NDS). Eligible members facing genuine system problem on
any specific day, may submit physical requests in sealed cover in the
box provided in the Mumbai Office, Reserve Bank of India, to the
Manager, Reserve Bank of India, Securities Section, Public Accounts
Department (PAD), Mumbai Office by 4.30 P.M.
The NDS provides for submission of single or multiple applications by the
member. However, as far as possible only one request should be submitted
by an applicant.
The MSF will be conducted as "Hold-in-Custody" repo, similar to LAF Repo.
On acceptance of MSF requests, the applicant's RC SGL Account will be
debited by the required quantum of securities and credited to Bank's RC
SGL Account. Accordingly, the applicant's current account will be credited
with the MSF application amount. The transactions will be reversed in the
second leg. In case the second leg falls on a holiday, the reversal date will be
the next working day.
The MSF transactions between Reserve Bank and counter parties which
would involve operation of the RC SGL Account would not require separate
SGL forms.
Pricing of all securities including Treasury Bills will be at face value for
MSF operations by Reserve Bank. Accrued interest as on the date of
transaction will be ignored for the purpose of pricing of securities.
Minimum Request Size :Requests will be received for a minimum amount of
Rs. One crore and in multiples of Rs. One crore thereafter.
Eligible Securities :MSF will be undertaken in all SLR-eligible
transferable Government of India (GoI) dated Securities/Treasury Bills
and State Development Loans (SDL).
Margin Requirement :A margin of five per cent will be applied in
respect of GoI dated securities and Treasury Bills. In respect of SDLs, a
margin of 10 per cent will be applied. Thus, the amount of securities offered
on acceptance of a request for Rs.100 will be Rs.105 (face value) of GoI
dated securities and Treasury Bills or Rs.110 (face value) of SDLs.
Settlement of Transactions :The settlement of all applications received under
the MSF Scheme will take place on the same day after the closure of the
window for acceptance of applications.
BASEL COMMITTEE
The Basel Committee on Banking Supervision provides a forum for regular
cooperation on banking supervisory matters. Its objective is to enhance
understanding of key supervisory issues and improve the quality of banking
supervision worldwide. It seeks to do so by exchanging information on national
supervisory issues, approaches and techniques, with a view to promoting
common understanding. The Committees Secretariat is located at the Bank
for International Settlements (BIS) in Basel, Switzerland.
NEED FOR SUCH NORMS
The first accord by the name .Basel Accord I. was established in 1988
and was implemented by 1992. It was the very first attempt to
introduce the concept of minimum standards of capital adequacy.
Then the second accord by the name Basel Accord II was established in
1999 with a final directive in 2003 for implementation by 2006 as Basel II
Norms. Unfortunately, India could not fully implement this but, is now
gearing up under the guidance from the Reserve Bank of India to

implement it from 1 April, 2009.
Basel II Norms have been introduced to overcome the drawbacks of
Basel I Accord. For Indian Banks, its the need of the hour to buckleup and practice banking business at par with global standards and make
the banking system in India more reliable, transparent and safe. These
Norms are necessary since India is and will witness increased capital flows
from foreign countries and there is increasing cross-border economic &
financial transactions.
FEATURES OF BASEL II NORMS
Basel II Norms are considered as the reformed & refined form of Basel I
Accord. The Basel II Norms primarily stress on 3 factors, viz. Capital
Adequacy, Supervisory Review and Market discipline. The Basel
Committee calls these factors as the Three Pillars to manage risks.
Pillar I: Capital Adequacy RequirementsUnder the Basel II Norms, banks
should maintain a minimum capital adequacy requirement of 8% of risk
assets. For India, the Reserve Bank of India has mandated maintaining of
9% minimum capital adequacy requirement. This requirement is
popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk
Weighted Assets Ratio (CRAR).
Pillar II: Supervisory Review :Banks majorly encounter with 3 Risks, viz.
Credit, Operational & Market Risks. Basel II Norms under this Pillar wants
to ensure that not only banks have adequate capital to support all the risks,
but also to encourage them to develop and use better risk management
techniques in monitoring and managing their risks.
The process has four key principles:
Banks should have a process for assessing their overall capital
adequacy in relation to their risk profile and a strategy for monitoring
their capital levels.
Supervisors should review and evaluate banks internal capital
adequacy assessment and strategies, as well as their ability to monitor
and ensure their compliance with regulatory capital ratios.
Supervisors should expect banks to operate above the minimum regulatory

capital ratios and should have the ability to require banks to hold capital in
excess of the minimum.
Supervisors should seek to intervene at an early stage to prevent capital from
falling below minimum
level and should require rapid remedial action if capital is not mentioned or
restored.
Pillar III: Market Discipline:

Market discipline imposes banks to conduct their banking business in a safe, sound
and effective manner. Mandatory disclosure requirements on capital, risk
exposure (semiannually or more frequently, if appropriate) are required to be
made so that market participants can assess a banks capital adequacy.
Qualitative disclosures such as risk management objectives and policies,
definitions etc. may be also published.
BASEL III
The Reserve Bank released, guidelines outlining proposed implementation of
Basel III capital regulation in India. These guidelines are in response to the
comprehensive reform package entitled
Basel III: A global regulatory framework for more resilient banks and banking
systems of the Basel Committee on Banking Supervision (BCBS) issued in
December 2010.The major highlights of the draft guidelines are:
Minimum Capital Requirements
Common Equity Tier 1 (CET1) capital must be at least 5.5% of riskweighted assets (RWAs);
Tier 1 capital must be at least 7% of RWAs; and
Total capital must be at least 9% of RWAs.
Capital Conservation Buffer
The capital conservation buffer in the form of Common Equity of 2.5% of
RWAs. A such minimum Capital Adequacy ratio for banks will be 11.5%
after full application of the capital conservation buffer by 31 March 2018.
Transitional Arrangements
It is proposed that the implementation period of minimum capital
requirements and deductions from Common Equity will begin from January
1, 2013 and be fully implemented as on March 31, 2018.
Capital conservation buffer requirement is proposed to be implemented
between March 31, 2014 and March 31, 2018.
The implementation schedule indicated above will be finalized taking
into account the feedback received on these guidelines.
Instruments which no longer qualify as regulatory capital instruments will be
phased-out during the period beginning from January 1, 2013 to March 31,
2022.
Enhancing Risk Coverage
For OTC derivatives, in addition to the capital charge for counterparty
default risk under Current Exposure Method, banks will be required to
compute an additional credit value adjustments (CVA) risk capital charge.
Leverage Ratio
The parallel run for the leverage ratio will be from January 1, 2013 to
January 1, 2018, during which banks would be expected to strive to operate
at a minimum Tier 1 leverage ratio of 5%.
The leverage ratio requirement will be finalized taking into account the final
proposal of the Basel Committee.
KNOW YOUR CUSTOMER
The Reserve Bank of India (RBI) has advised banks to follow KYC
guidelines, wherein certain personal information of the account-opening
prospect or the customer is obtained. The objective of doing so is to enable the
Bank to have positive identification of its customers. This is also in the interest of
customers to safeguard their hard earned money.
The KYC guidelines of RBI mandate banks to collect three proofs from their
customers. They are
Photograph
Proof of identity
Proof of address
What is KYC?
KYC enables banks to know/ understand their customers and their financial
dealings to be able to serve them better .
Who is a customer of the Bank?
For the purpose of KYC Policy, a Customer is defined as:
A person or entity that maintains an account and/or has a business
relationship with the Bank;
One on whose behalf the account is maintained (i.e. the beneficial
owner);Beneficiaries of transactions conducted by professional
intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors,
etc. as permitted under the law, and
Any person or entity connected with a financial transaction, which can pose
significant reputation or other risks to the Bank, say, a wire transfer or
issue of a high value demand draft as a single transaction
CAMEL RATING OF BANKS
CAMEL model of rating was first developed in the 1970s by the 3 federal banking
supervisors of the U.S (the Federal Reserve, the FDIC and the OCC) as part of the
Regulators Uniform Financial Institutions Rating System, to provide a
convenient summary of bank condition at the tirfie of its on-site examination.The
banks were judged on 5 different components under the acronym
C-A-M-E-L:
Capital adequacy,
Asset quality,
Management,
Earnings and
Liquidity.
The system of CAMEL was revised in 1996,
when agencies added an additional parameter S for assessing sensitivity to
market risk, thus making it CAMELS that is in vogue today.
In india the Padhmanabhan Committee (1996) recommended the application
of CAMEL RATING for compliance of norms by Indian Banks. Thus CAMELS
means
C- Capital Adequacy
A- Asset Quality
M- Management Quality
E- Earnings
L- Liquidity
S- Sensivity to Market Risk
MONEY
Money is a thing that is usually accepted as payment for goods and services
as well as for the repayment of debts.
Types of Money
Commodity Money -Commodity money value is derived from the
commodity out of which it is made. The commodity itself represents money
and the money is the commodity. For instance, commodities that have been
used as mediums of exchange include gold, silver, copper, salt, peppercorns,
rice, large stones, etc.
Representative Money -Representative Money includes token coins, or any
other physical tokens like certificates, that can be reliably exchanged for a
fixed amount/quantity of a commodity like gold or silver.
Fiat Money -Fiat money, also known as fiat currency is the money whose
value is not derived from any intrinsic value or any guarantee that it can
be converted into valuable commodity (like gold). Instead, it derives

value only based on government order (fiat).
Commercial Bank Money -Commercial bank money or the demand deposits
are claims against financial institutions which can be used for purchasing
goods and services.
Narrow and Broad Money
Money supply, like money demand, is a stock variable. The total stock of money in
circulation among the public at a particular point of time is called money
supply. RBI publishes figures for four alternative measures of money supply,
viz. M1, M2, M3 and M4.
They are defined as follows -M1 = CU + DD
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks
M4 = M3 + Total deposits with Post Office savings organisations
(excluding National Savings Certificates)
where, CU is currency (notes plus coins) held by the public and DD is net demand
deposits held by commercial banks. The word net implies that only deposits of
the public held by the banks are to be included in money supply.The interbank
deposits, which a commercial bank holds in other commercial banks, are not to be
regarded as part of money supply.
M1 and M2 are known as narrow money. M3 and M4 are known as broad
money.These gradations are in decreasing order of liquidity. M1 is most liquid and
easiest for transactions whereas
M4 is least liquid of all. M3 is the most commonly used measure of money supply.
It is also known as aggregate monetary resources.
ANTI MONEY LAUNDERING
Prevention of Money Laundering Act, 2002
Prevention of Money Laundering Act in Indian Law was passed in 2002, to

prevent moneylaundering and to provide for confiscation of property derived
from money -laundering.
The main objective of this act are to prevent money-laundering as well as to
provide for confiscation of property either derived from or involved in, moneylaundering.
Salient Features
Punishment for Money-laundering : The act prescribes that any person
found guilty of moneylaundering shall be punishable with rigorous
imprisonment from three years to seven years. He could also be liable to fine
of uptoRs. 5 lakh.
Powers of Attachment of Tainted : Property Appropriate authorities, appointed
by the Government of India, can provisionally attach property believed to be
proceeds of crime for 90 days. Such an order is required to be confirmed by an
independent adjudicating authority.
Adjudicating Authority : It is the authority appointed by the Central
Government. It decides whether any of the property attached or seized is
involved in money-laundering.
Appellate Tribunal : It is the body appointed by Government of India. It has
given the power to hear appeals against the orders of the adjudicating
authority and any other authority under the act. Orders of the tribunal can
be appealed in appropriate High Court (for that jurisdiction) and
finally to the Supreme Court.
Special Courts : The trial for the offences mentioned in the act are
conducted by a special court, also called PMLA Court. The Central
Government (in consultation with the Chief Justice of the High Court),
designates a Session Court as Special Court Any appeal against order
passed by PMLA court can directly be filed in the High Court (for that
jurisdiction).
Burden of Proof: A person, who is accused of having committed the offence
of money-laundering, has to prove that alleged proceeds of crime are in fact
lawful property.
Money laundering occurs in three stages

Placement: refers to the initial point of entry for funds derived from any
criminal activities.
Layering: refers to the creation of a complex network of transactions which
attempts to obscure the link between the initial entry point and the end of the
laundry cycle
Integration: refers to the return of funds to the legitimate economy for later
extraction.
SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT)
operates a worldwide financial messaging network which exchanges messages
between banks and other financial institutions. SWIFT also markets software
and services to financial institutions, much of it for use on the SWIFT Net
Network, and ISO 9362 bank identifier codes (BICs) are popularly known as
SWIFT codes.
The majority of international interbank messages use the SWIFT network. As of
September 2010, SWIFT linked more than 9,000 financial institutions in 209
countries and territories, who were exchanging an average of over 15 million
messages per day. SWIFT transports financial messages in a highly secure way,
but does not hold accounts for its members and does not perform any form
of clearing or settlement. SWIFT does not facilitate funds transfer, rather, it sends
payment orders, which must be settled via correspondent accounts that the
institutions have with each other. Each financial institution, to exchange
banking transactions, must have a banking relationship by either being a bank or
affiliating itself with one (or more) so as to enjoy those particular business
features.
INFLATION
Inflation is defined as a sustained increase in the general level of prices for goods
and services. It is measured as an annual percentage increase. As inflation rises,
every rupee you own buys a smaller percentage of a good or service. The value of
a rupee does not stay constant when there is inflation. The value of a rupee is
observed in terms of purchasing power, which is the real, tangible goods that
money can buy. When inflation goes up, there is a decline in the purchasing power
of money. For example, if the inflation rate is 2% annually, then theoretically a
Re 1 pack of gum will cost Rs 1.02 in a year. After inflation, your money
cant buy the same amount of goods it could beforehand.
DiFference between WPI and CPI

WPI and CPIs differ in terms of their weighting pattern. First, food has a
larger weight in CPI ranging From 46 per cent in CPI-IW to 69 per cent in
CPI-AL whereas it has a weight of only 27 per cent in WPI.
The CPIs are, therefore, more sensitive to changes in prices of food items.
Second, the fuel group has a much higher weight in the WPI (14.2 percent)
than the CPIs (5.5 to 8.4 per cent). As a result, movement in international
crude prices has a greater bearing on WPI than on the CPIs.
Third, services are not covered under WPI while they are, to different
degrees, covered under CPIs. Consequently, service price inflation has a
greater influence on CPIs. In general, revision of base in every 5 years is an
accepted principle in major developed and emerging countries.
NEW WPI SERIES
Following the recommendation of the Working Group for Revision of
Wholesale Price Index under the Chairmanship of Prof. AbhijitSen, the base
year has been revised to 2004-05 from September 2010.
The proposed basket of manufactured products in the new series covers
significantly a higher number of commodities and integrates items from both
organized and unorganized manufacturing sectors.
The revisedWPI basket, however, doesnot include services prices. An
Expert Group (Chairman: Prof. C. P. Chandrasekhar) is looking into process
of developing a service price index.
In order to enhance the representativeness of WPI index, it is important
to expand the coverage to include services. The new WPI series aims at
capturing the price movement in a more realistic way
in keeping with the times.
The basic difference between the two series is that the new WPI index with
2004-05 as the base year has a total of 676 items instead of 435 items under
the old series which had 1993-94 as the base year.
Among the 241 items added to the basket for better reflection of the
inflationary spiral are consumer items - essentially used by the middle-class
- such as ice-cream, mineral water, readymade food, refrigerators,
VCDs, dish antennas, microwave ovens, washing machines, computers
and computer stationery and gold as well as silver.
PRODUCER PRICE INDEX
India revised the WPI, but still dont have a Producer Price Index (PPI).
The PPI covers price changes faced by the producers on primary, intermediate
and finished goods and services ready for the market. The primary difference
between the WPI and the PPI is, in addition to the coverage, that the WPI reflects
changes in the average cost of production including mark-ups and taxes, while the
PPI measures price changes of transacted goods at the gate excluding taxes. The
purpose of the PPI is to provide a measure of prices received by producers of
commodities. The PPI usually covers the industrial (manufacturing) sector as well
as public utilities (electricity, gas and communications).
NEW CONSUMER PRICE INDEX
At the retail level, CPI is meant to reflect the cost of living conditions and is
computed on the basis of the changes in the level of retail prices of selected goods
and services on which consumers spend the major part of their income. Therefore,
a broad based CPI for the country as a whole, including both services and
manufacturing products, has greater relevance for monetary policy formulation. In
India, however, data on CPI relates to different segments of the population rather
than the entire population. With a view to addressing this issue, the Reserve
Bank had taken the initiative and prepared an approach paper on CPI (Urban)
and CPI (Rural).Subsequently, the Central Statistical Organization (CSO) has
taken up the work for generating data on CPI (Urban) and CPI (Rural). The new
CPIs once complied will go a long way in filling a major data gap in price
statistics.
MONEY MARKET IN INDIA

The money market is the market in which short term funds are borrowed
and lent. The lending money market institutions are - Government of India and
other sovereign bodies
Banks and Development Financial Institutions

PSUs [Public Sector Undertakings]
Private sector organizations
The Government /Quasi government owned non-corporate entities.
Large numbers of instruments that are traded in the money market are issued by
Government of India, State governments and other statutory bodies.
Instruments that are issued by the Development Financial Institutions [DFI]
and banks carry the highest credit ratings amongst nongovernment issuers
mainly due to their connection with the Indian Government.
INSTRUMENTS OF MONEY MARKET
Call Money - Call or notice money is an amount borrowed or lent on
demand for a very short period. If the period is greater than one day and
up to 14 days it is called Notice money; otherwise the amount is
known as Call money. No collateral security is needed to cover these
transactions.
The call market enables the banks and institutions to even out their
day-to-day deficits and surpluses of money. Co-operative banks,
commercial banks and primary dealers are allowed to borrow and lend
in this market for adjusting their cash reserve requirements.
This is a completely inter-bank market. Interest rates are market
determined. In view of the short tenure of these transactions, both
borrowers and lenders are required to have current accounts with
Reserve Bank of India.
Treasury Bills - These are the lowest risk category instruments for
the short term. RBI issues treasury bills [T-bills] at a prefixed day and for
a fixed amount. There are 3 types of treasury bills.
91-day T-bill: maturity is in 91 days, it is auctioned on every Friday
of every week and the notified amount for auction is Rs. 100 crores.
182-day T-bill: maturity is in 182 days, it is auctioned on every

alternate Wednesday, which is not a reporting week and the notified
amount for auction is Rs. 100 crores.
364-day T-bill: maturity is 64 days, it is auctioned on every
alternate Wednesday which is a reporting week and the notified
amount for the auction is Rs. 500 crores.
Certificates of Deposits - After treasury bills, the next lowest risk
category investment option is Certificate of Deposit (CD) issued by
banks and Financial Institutions (FI). Allowed in 1989, CDs were one of
RBIs measures to deregulate the cost of funds for banks and FIs. A CD is a
negotiable promissory note, secure and short term, of up to a year, in nature.
A CD is issued at a discount to the face value, the discount rate being negotiated
between the issuer and the investor. Although RBI allows CDs up to one-year
maturity, the maturity most quoted in the market is for 90 days.
Commercial Papers - Commercial papers [CPs] are negotiable short-term
unsecured promissory notes with fixed maturities, issued by well-rated
organizations. These are generally sold on discount basis. Organizations can
issue CPs either directly or through banks or merchant banks [called as
dealers]. These instruments are normally issued in the multiples of
five crores for 30/45/60/90/120/180/270/364 days.
Inter-Corporate Deposits - An Inter-Corporate Deposit or ICD is an
unsecured loan extended by one corporate to another. Existing mainly as
a refuge for low rated corporate, this market allows funds surplus
corporate to lend to other corporate.
A better rated corporate can borrow from the banking system and lend in this
market. As the cost of funds for a corporate is much higher than a bank, the rates in
this market are higher than those in other markets. ICDs are unsecured, and
therefore the risk inherent is high. The ICD market is not well organized with very
little information available about transaction details.
Ready Forward Contracts - These are transactions in which two
parties agree to sell and repurchase the same security. Under such an
agreement the seller sells specified securities with an agreement to
repurchase the same at a mutually decided future date and price. Similarly,
the buyer purchases the securities with an agreement to resell the same to the
seller on an agreed date in future at a predetermined price. Such a
transaction is called Repo when viewed from the prospective of the buyer of
securities that is the party acquiring fund. It is called reverse repo when
viewed from the prospective of supplier of funds.
Commercial Bills - Bills of exchange are negotiable instruments drawn by
the seller or drawer of the goods on the buyer or drawee of the good for the
value of the goods delivered. These bills are called trade bills. These trade
bills are called commercial bills when they are accepted by commercial
banks. If the bill is payable at a future date and the seller needs
money during the currency of the bill then the seller may approach the bank
for discounting the bill.
Pass through Certificates - This is an instrument with cash flows derived
from the cash flow of another underlying instrument or loan. The issuer is a
Special Purpose Vehicle (SPV), which only receives money, from a
multitude of, may be several hundreds or thousands, underlying loans and
passes the money to the holders of the PTCs. This process is called
securitization. Legally speaking PTCs are promissory notes and hence
tradable freely with no stamp duty payable on transfer. Most PTCs have 2-3
year maturity because the issuance stamp duty rate makes shorter duration
PTCs unviable.
Dated Government Securities - These are securities issued by the
Government of India and State Governments. The date of maturity is
specified in the securities therefore they are known as dated securities. The
Government borrows funds through the issue of long term dated
securities, the lowest risk category instruments in the economy. They are
issued through auctions conducted by RBI, where RBI decides the coupon or
discount rate based on the response received. Most of these securities are
issued as fixed interest bearing securities, although the government
sometimes issues zero coupon instruments and floating rate securities.
MONEY MARKET CONCEPTS
Issued Capital: that part of a companys capital that has been subscribed to
by shareholders. It is a broader concept than paid up capital.
Paid Up capital: It is that part of the issued capital of a company,
paid up by the shareholders (promoters). It is that part, invested by the
promoters. Therefore, an issued capital may or may not be a paid up capital.
Authorized Capital: It is the amount of share capital fixed in the
Memorandum of an Association and the Articles of the Association of a
company as required by the Companys act. They are also known as nominal
capital.
Repo Operations: In order to absorb and to neutralize excess liquidity from
the system and even to out call money rates a system of announcing calendar
of Repos auctions on a monthly basis was introduced with effect from
January 13,1997.
Fixed Rate Repos: The fixed rate repo was introduced with effect
from November 29,1997. The repo rate and the period of repo is
announced by the RBI in the evening of the previous day.
Net Asset Value (NAV) : The investment efficiency of the mutual fund can
be measured in terms of the NAV values and Net Sales. NAV is the
indicator of the investment performance and it indicates the amount each
unit holder will get per unit on redemption or winding up of mutual fund.
Net Sales given by the difference between the total sales and total
repurchases of the units of a fund.
Floating Rate Note : It adopts a reference rate of interest which reflects the
market rate of interest. The interest rate of FRN then in certain
percentage points over the reference rate or benchmark rate.
Stock-Invest: Under this scheme a provision of special payment system for
investors in the primary market. Stock invest is a non-negotiable bank
instrument and its validity is for four months from the date of the issue.
Zero -Cupon Bonds: It is issued at a discount to face value. No interest is
paid during the period of the bond. But at the time of maturity full payment
or bullet payment of the face value would be done.
Deep-Discount Bonds: It was first introduced by IDBI in June 1994
followed by ICICI. It is similar to zero-coupon bonds with longer maturity.
Jumboo Lot: It is issued in primary and secondary market to reduce the

paper work connected with the processing. The certificates are issued in
bulk.
Book Building: This is the first draft or preliminary prospectus, which
carries the information of the company and the project.
Dabba Trading: The illegal badla trading, banned since 1993, has
resurfaced in the form of DabbaTrading, a modified form of CFTS. It is
based on bucketing system. It is an illegal practice where a stockbroker
executes a customers trade without taking it to a stock exchange
with the hope of earning profit in future. The Dabba trader keeps record in
a separate book. The trades to be settled on Friday. SEBI has conducted
raids on large scale on dabba trading and investigations are on. These trading
have intensified the speculative nature of the market. Therefore, despite the
fact that market has a cash market with T + 1 rolling settlement and
derivatives market with four types of options and Futures products, a
huge amount of illegal mode is also adopted in the transactions of stock
market.
NEGOTIABLE INSTRUMENTS
Definition of Negotiable Instrument
According to section 13 of the Negotiable Instruments Act, 1881, a
negotiable instrument means promissory note, bill of exchange, or cheque,
payable either to order or to bearer.
Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types
of negotiable instruments i.e., promissory note, bill of exchange and cheque.
However many other documents are also recognized as negotiable instruments on
the basis of custom and usage, like hundis, treasury bills, share warrants, etc.,
provided they possess the features of negotiability. In the following sections,
we shall study about Promissory Notes (popularly called p-onotes), Bills of
Exchange (popularly called bills), Cheques and Hundis (a popular indigenous
document prevalent in India), in detail.
Promissory Note
Suppose you take a loan of Rupees Five Thousand from your friend
Ramesh. You can make a document stating that you will pay the money to
Ramesh or the bearer on demand. Or you can mention in the document that you
would like to pay the amount after three months. This document, once signed by
you, duly stamped and handed over to Ramesh, becomes a negotiable instrument.
Now Ramesh can personally present it before you for payment or give this
document to some other person to collect money on his behalf. He can endorse it in
somebody elses name who in turn can endorse it further till the final payment is
made by you to whosoever presents it before you. This type of a document is
called a Promissory Note.
Bill of Exchange
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer
has to return.Now, Rajiv also has to give some money to Tarun. In this
case, Rajiv can make a document directing Sameer to make payment up to
Rupees Ten Thousand to Tarun on demand or after expiryof a specified period.
This document is called a Bill of Exchange, which can be transferred to some
other persons name by Tarun.
Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as an
instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to or to the order of a
certain person, or to the bearer of the instrument.
Cheques
Cheque is a very common form of negotiable instrument. If you have a
savings bank account or current account in a bank, you can issue a cheque in
your own name or in favour of others, thereby directing the bank to pay the
specified amount to the person named in the cheque.Therefore, a cheque may be
regarded as a bill of exchange; the only difference is that the bank is always the
drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise than on
demand. Actually, a cheque is an order by the account holder of the bank directing
his banker to pay on demand, the specified amount, to or to the order of the person
named therein or to the bearer.
Types of Cheque
Open cheque: A cheque is called Open when it is possible to get cash
over the counter at the bank. The holder of an open cheque can do the
following:
Receive its payment over the counter at the bank,
Deposit the cheque in his own account
Pass it to some one else by signing on the back of a cheque.
Crossed cheque: Since open cheque is subject to risk of theft, it is
dangerous to issue such cheques. This risk can be avoided by issuing
another types of cheque called Crossed cheque. The payment of such cheque
is not made over the counter at the bank. It is only credited to the bank
account of the payee. A chequecan be crossed by drawing two transverse
parallel lines across the cheque, with or without the writing Account payee
or Not Negotiable.
Bearer cheque: A cheque which is payable to any person who presents it for
payment at the bank counter is called Bearer cheque. A bearer cheque
can be transferred by mere delivery and requires no endorsement.
Order cheque: An order cheque is one which is payable to a particular
person. In such a cheque the word bearer may be cut out or cancelled and
the word order may be written. The payee can transfer an order cheque to
someone else by signing his or her name on the back of it.
Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill of
exchange drawn in any local language in accordance with the custom of the place.
Some times it can also be in the form of a promissory note. A hundi is the oldest
known instrument used for the purpose of transfer of money without its actual
physical movement. The provisions of the Negotiable Instruments Act shall apply
to hundis only when there is no customary rule known to the people.
INDIAS FOREIGN TRADE
Each country has to keep economic transaction with other countries of the world
and India also has a healthy trade relationship with several countries. Foreign
trade brings into play the commercial transaction of payment and receipt for
goods and services sent (export) or received (import). The difference between
these two creates the concept of Balance of Payment and Balance of Trade.
According to Benham,Balance of Payments of a country is a record of the
monetary transactions over a period with rest of the world. Ordinarily, a country
has to deal with other countries in respect of three items, namely;
Visible items, which include all types of physical goods exported and
imported.
Invisible items, which include all those services, whose export and import
are not visible.
Capital transfer, which are concerned with capital receipts and capital
payments. Each country has to work out a balance in respect of its dealings,
in all the above three items with other countries of the world in a given
period. Such a balance may assume any one of the three positions : balanced
negative (unfavorable)
positive (favorable)
Balance of Trade (BoT)
When the difference in the value of imports and exports of only physical goods or
visible items, is taken into account, it is called Balance of Trade or Net Exports.
Balance of trade may be
Surplus or Favorable In this situation, exports are greater than imports,
Deficit or Unfavorable In this situation, imports are greater than exports,
Equilibrium in Balance of Trade In this situation, total value of goods
exported is equal to the total value of goods imported by a country.
Balance of Payments (BoP)
When the difference in the value of imports and exports of all the three items i.e.,
visible, invisible and capital transfers, is taken into account, it is called
Balance of Payments (BoP). Balance of Payments (BoP) is thus an overall
record of all economic transactions of a country in a given period, with rest of the
world. Balance of Payments (BoP) account broadly comprises of the
following components : Current account transactions: These are the transactions relating to inflows
and outflows of forex of a routine transactions such as exports of goods
and services, remittances received from nonresident Indians, foreign
tourists visiting India and bringing forex into India and outflows in the form
of imports of goods and services, remittances by expatriates to their home
countries, expenses of resident Indians travelling abroad. These
inflowsand outflows never match. When the outflows exceed the inflows,
a country has current account deficit.
Components of Current Account
Current account records the following transactions
Export and import of goods (or of visible items).
Export and import of services (or of invisible items),
Unilateral transfers from one country to the other.
Capital account transactions : These are the transactions that lead to change
in asset or liability position of residents of a country, outside their own
country. These are longer-term flows in the form of borrowings (ECB),
investments (FDI), assistance by India to other countries or to India by other
countries etc. The difference between outflows & inflows is either the
capital account surplus or capital account deficit. If there is current
account deficit, it will be covered by the capital account surplus. But if
the capital account surplus is not enough to cover the current account
deficit, the country will have to use the forex reserves leading to reduction
in forex reserves.
Components of Capital Account
Following are the principal forms of capital account transactions
Foreign Investment : It has two sub-components
(i) Foreign Direct Investment (FDI) referring to the purchase of assets in the
rest of the world, which allows control over that assets. Example Purchase of a
firm by TATA in the rest of the world.
(ii) Portfolio Investment referring to purchase of an asset in the rest of the
world, without any control over that asset. Portfolio investment into India also
consists of Foreign Institutional Investment (FIl).Example Purchase of some shares
of a company by TATA in the rest of the world.
Loans : It has two sub-components

(i) Commercial Borrowings referring to borrowing by a country (including
government and the private sector), from the international money market. This
involves market rate of interest without considerations of any concession,
(ii) Borrowings as External Assistance referring to borrowing by a country
with considerations of assistance. It involves lower rate of interest compared to
that prevailing in the open market.
Banking Capital Transactions : referring to transactions of external financial
assets and liabilities of Commercial Banks and Cooperative Banks operating as
authorized dealers in foreign exchange. These transactions include NRI deposits.
Reserve Account : The official reserve account records the change in stock of
reserve assets (also known as foreign exchange reserves) at the countrys monetary
authority.
Net Errors and Omissions : This is the last component of the Balance of
Payments and principally exists to correct any possible errors made in
accounting for the three other accounts.
They are often referred to as balancing items.
All capital transactions causing flow of foreign exchange into the country are
recorded as positive items in the capital account of Bop. Example Loans from rest
of the world, foreign direct investment or portfolio investment by the nonresidents
in our country.
All capital transactions causing flow of foreign exchange out of the country are
recorded as negative items in the capital account of BoP.
While FDI and portfolio investments are non-debt creating capital transactions,
borrowings are debt creating capital transactions.
SIGNIFICANCE OF CURRENT ACCOUNT DEFICIT
CAD measures the dependence of an economy on the capital inflows from
abroad, to cover its current requirements. If dependence high, it can create
problem, because the inflow of long term
capital is uncertain and there is obligation to service the long term capital in
the form of interest payments, dividend payments and return of principal
amount, in case it is borrowing and not the investment.
The dependency level is judged on the basis of CAD as percentage to gross
domestic product of a country (and not by amount of CAD). In case of India,
it is around 4.8% currently y which is Significantly higher than about 1.3% in
2007-08. There area no. of causes for higher demand foreign currency including
import of oil and gold while the supply could not keep pack due to
declining exports.
In normal circumstances, the increasing CAD would have been funded by inflow
of foreign capital in the form of FDI and/or FII, but due to various reasons
including policy paralysis, political uncertainty, sliding industrial output and a
weakening economy, that did not happen.
This demand-supply mismatch of foreign currencies particularly of US dollars, is
the basic reason of US currency becoming more expensive.
FOREIGN INVESTMENT
Foreign Direct Investment (FDI) - It refers to direct investment in the productive
capacities of a country by someone from outside the country. Such an investment
can be in the form of setting up a new plant or through purchase of shares of a
company, where the shareholding gives the foreign entity control over the business
of the company. IMF defines control in such a case as, holding 10 % or more of
ordinary shares or voting power in an incorporated firm. A foreign company can

set up its business in India in two ways, by setting up a company under the
Companies Act or by setting up an unincorporated entity like liaison office, project
office or branch office.
Two concepts associated with FDI are Greenfield and Brownfield investment
Greenfield Investment Its a form of foreign direct investment, where a
parent company starts a new venture in a foreign country by constructing
new operational facilities from the ground up.
Brownfield Investment It happens, when a company or government
entity purchases or leases existing production facilities to launch a new
production activity.
Foreign Institutional Investment (Fll) These are investments by entities from
outside the country into the financial assets like debts and shares of companies
from a different country, in which they are incorporated. FIIs are required to
register with SEBI (Securities and Exchange Board of India) and any foreign
individual wanting to invest into India has to copie through one of these FIIs.
Participatory Notes (P-Notes)-These are financial instruments used by
investors or hedge funds that are not registered with the Securities and
Exchange Board of India to invest in Indian securities. Indian-based
brokerages buy India-based securities and then issue participatory notes
to foreign investors. Any dividends or capital gains collected from the
underlying securities go back to the investors.
Global Depository Receipts (GDRs)- These are equity instruments issued in
international markets like London, Luxembourg etc. Indian companies use
GDRs to raise capital from abroad. GDRs are designated in dollars, euros
etc.
American Depository Receipts (ADRs)-These are the equity instruments
issued to American retail and institutional investors. They are listed in
New York, either on Nasdaq or New York Stock Exchange.
Indian Depository Receipts (IDRs)-These are similar to ADR/GDR. They
are used by non-Indian companies in the Indian stock markets for issuing
equity to Indian investors.
INDIAS FDI POLICY

To encourage FDI inflows, India has continued to be fine-tuned and
progressively liberalized, allowing FDI in more and more industries under the
automatic route. In the year 2000, government allowed FDI up to 100% on the
automatic route for most activities; a small negative list was notified, where either
the automatic route was not available or there were limits on FDI. Since then, the
policy
has been gradually simplified and rationalized and more sectors have been opened
up for foreign investment.
FDI is prohibited under the government route as well as the automatic route in the
following sectors, where FDI is not allowed
1. Atomic Energy
2. Lottery Business
3. Gambling and Betting
4. Business of Chit Fund
5. Niche Companies
6. Agricultural (excluding floriculture, horticulture, development 01 seeds,
animal husbandry, pisciculture and cultivation of vegetables, mushrooms, etc
under controlled conditions and services related to Agro and Allied Sectors) and
plantation activities (other than tea plantations).
7. Housing and Real Estate business (except development > townships,
construction of residential/commercial premises. roads or bridges to the extent
specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
8. Trading in Transferable Development Rights (TDRs).
9. Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes. Approval Mechanism Under FDI Policy
There are two routes for FDI to enter into India.
AUTOMATIC ROUTE
In most sectors, FDI is permitted on the automatic c route. FDI in such sectors does
not require any prior approval and only requires notification of RBI.
Government Approval Route
Limited activities are required to prior government approval. Proposals of FDI
are considered by FIPB. (Foreign Investment Promotion Board), now functioning
under the Department of Economic Affairs and decisions are conveyed in most
cases within 6 to 8 weeks of receipt of complete
FOREIGN INSTITUTIONAL INVESTORS [FII]
[FII] that invest in the Indian capital markets. These flows are l arge in magnitude
and have a great impact on capital market and the exchange rate.However, there is
also the danger that if FIIs pull out, the stock markets could crash which in turn can
adversely impact the economy. This danger is not only on account of the impact of
share prices but also because of the impact on exchange rate, which can
adversely affect foreign trade and consequently the price level in the country.
DIFFERENCE BETWEEN FDI AND FII
In order to remove the ambiguity that prevails on what is Foreign Direct
Investment (FDI) and what is Foreign Institutional Investment (FII) the
Finance Minister in his budget speech of 2013 clarified as under--I propose
to follow the international practice and lay down a broad principle that
where an investor has a stake of 10% or less in a company, it will be treated
as FII and, where an investor has a stake of more than 10%, it will be
treated as FDI.
A committee will be constituted to examine the application of the
principle and to work out the details expeditiously.
FIIs will be allowed to participate in the exchange traded currency derivative
segment to the extent of their rupee exposure in India.
FIIs will also be permitted to use there investment in corporate bonds and
Government securities as collateral to meet their margin requirements.
QUANTITATIVE EASING & ITS TAPERING
Following the 2008 crisis, the US Fed resorted to bond-buying as a means of

boosting the economy. When the Fed buys up bonds, it amounts to releasing more
money into the markets that leads to reducing interest rates. This is called
quantitative easing measure or QE. This made borrowing in the US cheaper and
hence incentivized borrowers to invest (in housing or in their businesses). In June
2013, Fed chief signaled that the QE process might be tapered off which would
imply that interest rates in the US will climb again. That could lead to investors
investing in US and pulling out their investment from emerging markets, including
India.
CAPITAL MARKET IN INDIA
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined
as a market in which money is provided for periods longer than a year, as the
raising of short-term funds takes place on other markets (e.g., the money market).
The capital market includes the stock market (equity securities) and the
bond market (debt).
The capital market has 3 components the equity market,
the debt market
the derivative market.
It consists of all those connected with issuing and trading in equity shares and also
medium and long term debt instruments, namely, bonds and debentures. It is well
accepted that tenures less than one year are considered as short term; while tenures
more than one year and up to three years may be taken as medium term while more
than three years can be considered as long term.
Both equity and debt market have 2 segments:
the primary market dealing with new issues of equity and debt instruments and
the secondary market which facilitates trading in equity and debt
instruments thereby imparting liquidity to the instruments and making it
possible for people with different liquidity preferences to participate in the
market. The capital market operations are

Exchange Board of India
regulated by the Securities and
SEBI [SECURITIES AND EXCHANGE BOARD OF INDIA]

The Securities and Exchange Board of India was established on April 12,
1992 in accordance with the provisions of the Securities and Exchange
Board of India Act, 1992.
The Preamble of the Securities and Exchange Board of India describes the
basic functions of the Securities and Exchange Board of India as "..to
protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters
connected therewith or incidental thereto"
Primary Market
The primary market is that part of the capital market that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers.
Secondary Market
The secondary market, also known as the aftermarket, is the financial
market where previously issued securities and financial instruments such as stock,
bonds, options and futures are bought and sold.The term secondary market is
also used to refer to the market for any used goods or assets, or an alternative use
for an existing product or asset where the customer base is the second market (for
example, corn has been traditionally used primarily for food production and
feedstock but a second or third market has developed for use in ethanol
production).
Sensex
Sensex is an index based on shares traded on the BSE. The Sensex and
Nifty are the barometers of the Indian markets. The indices are composite in
nature in that they cover a large segment of industries.
Commodity Market
Commodity markets are markets where raw or primary products are

exchanged. These rawcommodities are traded on regulated commodities
exchanges, in which they are bought and sold in standardized contracts.
Bull Market
A bull market is associated with increasing investor confidence, and
increased investing in anticipation of future price increases (capital gains). A
bullish trend in the stock market often begins before the general economy shows
clear signs of recovery.
Bear Market
A bear market is a general decline in the stock market over a period of time. It is a
transition from high investor optimism to widespread investor fear and pessimism.
Blue Chip (Stock Market)
According to the New York Stock Exchange, a blue chip is stock in a corporation
with a national reputation for quality, reliability and the ability to operate
profitably in good times and bad. The most popular index which follows US
blue chips is the Dow Jones Industrial Average. The DowJones Industrial
Average is a price-weighted average of 30 blue-chip stocks that are generally the
leaders in their industry. It has been a widely followed indicator of the stock
market since October 1, 1928.
RIGHTS ISSUE
A rights issue is basically when a company offers existing shareholders a
right to purchase additional shares of the company at a given price, which is at a
discount to the prevailing market price of the stock, to make the offer enticing for
the shareholder and to ensure that the rights offer is fully subscribed to.
PREFERENCE SHARES
Preference shares are those shares which are given preference as regards to
payment of dividend and repayment of capital. Preference shareholders are given
preference over equity shareholders as in the case of winding up of the
company, their capital is paid back first and then the equity shareholders are
paid. Preference shareholders cannot exercise their voting rights on all the
matters. They can vote only on the matters affecting their own interest.
DEBENTURES
A debenture is a document which either creates a debt or acknowledges it.
Debenture issued by a company is in the form of a certificate acknowledging
indebtedness. The debentures are issued under the Company's Common Seal.
Debentures are one of a series issued to a number of lenders. The date of
repayment is specified in the debentures. Debentures are issued against a charge on
the assets of the Company. Debentures holders have no right to vote at the
meetings of the companies.
MUTUAL FUND
A mutual fund is a professionally managed type of collective investment scheme
that pools money from many investors to buy stocks, bonds, short-term
money market instruments, and/or other securities.
CROSS SELLING
Cross-selling stands for being able to offer to the existing bank customers, some
additional banking products, with a view to expand banking business, reduce the
per customer cost of operations and provide more satisfaction and value to the
customer. For instance, when a bank is in a position to sell to a deposit customer
(say saving bank or term deposit), a loan product such as housing loan, credit card,
personal loan or vice-versa, this would result into additional business and lead to
low per customer cost and higher per customer earning.
Mergers and Acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling, dividing and
combining of different companies and similar entities that can help an enterprise
grow rapidly in its sector or location of origin, or a new field or new location,
without creating a subsidiary, other child entity or using a joint venture. The
distinction between a "merger" and an "acquisition" has become increasingly
blurred in various respects (particularly in terms of the ultimate economic

outcome), although it has not completely disappeared in all situations.
JOINT VENTURE
A Joint Venture (JV) is a cooperative enterprises entered into by two or
more business entities. Sometimes the joint venture creates a separate
corporation, limited liability company, or partnership.
In other cases, the individual entities retain their individuality and they operate
under a joint venture agreement. In any case, the parties in the JV share in
the management, profits, and losses, according to a joint venture agreement
(contract).
AMALGAMATION
Amalgamation is a restructuring phenomenon in which two or more companies are
liquidated and a new company is formed to acquire business. In simpler
terms, it means that a new company is formed that buys the business of
minimum two companies.
PUBLIC FINANCE
Budget System was introduced in India on 7th April, 1860. James Wilson the
first Indian Finance Member delivered the budget speech expounding the Indian
financial policy as an integral whole for the first time.
The financial year for the Union and the State Governments in India is from April
to March. Each financial year is, therefore, spread over two calendar years. The
period of financial year as from April to March was introduced in India from
1867. Prior to that, the financial year in India used to commence on 1st May
and ended on 30th April (L.K. JhaCommittees Report of the Committee On
Change in Financial Year).
Although the Indian Constitution does not mention the term Budget, it provides
that the President shall in respect of every financial year cause to be laid before
both the Houses of Parliament, the House of People (LokSabha) and the
Council of States (RajyaSabha), a statement of the estimated receipts and
expenditure of the Government for that year. This statement known as the Annual
Financial Statement is the main fiscal or budgetary document of the Government.

Budget has been described in Article-112 of the Indian Constitution as Annual
Financial Statement.Article-110 describes Money Bill
CONCEPTS OF BUDGET
On the budget day, the finance minister tables 14 documents. Of these, the main
and most important document is the Annual Financial Statement.
ANNUAL FINANCIAL STATEMENT:
Article 112 of the constitution requires the government to present to the Parliament
a statement of estimated receipts and expenditure in respect of every financial
year, April 1 to March 31. This statement is the annual financial statement. The
annual financial statement is usually a white 10-page document. It is divided
into three parts, Consolidated Fund, Contingency Fund and Public Account.
For each of these funds, the government has to present a statement of
receipts and expenditure.
CONSOLIDATED FUND:
This is the most important of all the government funds. All revenues raised
by the government, money borrowed and receipts from loans given by the
government flow into the consolidated fund of India. All government expenditure
is made from this fund, except for exceptional items met from the Contingency
Fund or the Public Account. Importantly, no money can be withdrawn from this
fund without Parliaments approval.
CONTINGENCY FUND:
As the name suggests, any urgent or unforeseen expenditure is met from this fund.
The Rs 500-crore fund is at the disposal of the President. Any expenditure
incurred from this fund requires a subsequent approval from Parliament and the
amount withdrawn is returned to the fund from the consolidated fund.
PUBLIC ACCOUNT:
This fund is to account for flows for those transactions where the government is
merely acting as a banker, for instance, provident funds, small savings and so on.
These funds do not belong to the government. They have to be paid back at some
time to their rightful owners. Because of this nature of the fund, expenditures from
it are not required to be approved by Parliament.
REVENUE DEFICIT:
The excess of disbursements over receipts on revenue account is called revenue
deficit. This is an important control indicator. All expenditure on revenue
account should ideally be met from receipts on revenue account; the revenue
deficit should be zero. When revenue disbursementExceeds receipts, the
government would have to borrow. Such borrowing is considered regressive as it
is for consumption and not for creating assets. It results in a greater
proportion of revenue receipts going towards interest payment and eventually, a
debt trap. The FRBM Act, which we will take up later, requires the government to
reduce fiscal deficit to zero by 2008-09.
FISCAL DEFICIT:
When the governments non-borrowed receipts (revenue receipts plus loan
repayments received by the government plus miscellaneous capital receipts,
primarily disinvestment proceeds) fall short of its entire expenditure, it has to
borrow money from the public to meet the shortfall. The excess of total
expenditure over total non-borrowed receipts is called the fiscal deficit.
PRIMARY DEFICIT:
The revenue expenditure includes interest payments on governments earlier
borrowings. The primary deficit is the fiscal deficit less interest payments. A
shrinking primary deficit would indicate progress towards fiscal health. The
Budget document also mentions the deficit as a percentage of the GDP.
NATIONAL INCOME
Annual income of a family is the sum total of income it receives from various
sources during a year. It is on this basis that the economic position of a
family is determined. Factors ofproduction like land, labor and capital are owned
by Households and they generate income in the form of rent, wages, interest and
profit respectively. An economy is divided mainly into three sectors - Agricultural
sector, Industrial sector and Service sector. Therefore, when we calculate the
annual income of a nation, naturally we have to take into account the income from
various sectors. These sectors produce innumerable items of goods and services
ranging from ball pins to space shuttles during a year. The sum total of these
goods and services is the gross production of the country. When we express the
value of these goods and services in terms of money, we get national income.
Gross National Product and Net National Product help us to understand economic
progress.
J.M.Keynes, a famous economist defined national income as follows. National
Income is the money value of all goods and services produced in a country during
a year
While family income reflects the economic position of households, national
income shows the economic position of a nation. The basic objective of an
economy is to achieve economic progress. This is achieved by coordinating
natural resources, human resources, capital, technology etc. National income
will help to assess and compare the progress achieved by a country over a period of
time.
GDP = Money value of total goods and services + Income from abroad
Income Method
Factors of production together produce output and income. The income received
by the factors of production during a year can be obtained by adding rent to land,
wages to labor, interest to capital and profit to organizations. This will be equal to
the income of the nation. In other words, total income is equal to the reward given
to various factors of production. By adding the money sent by the Indian citizens
from abroad to the income of the various factors of production, we get the gross
national income.
GDP = Rent + Wage + Interest +Profit + Income from abroad
This method will help us to know the contributions made by different
agents like landlords, laborers, capitalists and organizers to national income.
EXPENDITURE METHOD
National income can also be calculated by adding up the expenditure incurred for
goods and services. Government as well as private individuals spend money
for consumption and production purposes. The sum total of expenditure incurred
in a country during a year will be equal to national income.
GDP = Individual Expenditure + Government Expenditure
This method will help us to identify the expenditure incurred by different agents.
Any one of the above methods can be used for calculating national income.
Production method = Income method = Expenditure method
SOME MACROECONOMIC IDENTITIES
Gross Domestic Product (GDP)
Gross Domestic Product measures the aggregate production of final goods and
services taking place within the domestic economy during a year. GDP Value of all
services produced within the country + value of all goods produced within the
country.
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What are the different types of banks mentioned?

What are the different types of banks mentioned?

What are the different methods to calculate national income?

What are the different methods to calculate national income?

BANK KING

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It acts as an intermediary between people having surplus money and

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A bank which is entrusted with the functions of guiding and

Types of Commercial banks:

Private Sectors Banks:

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NATIONAL BANK FOR AGRICULTURE AND RURAL

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banking, institutional development, infrastructure, training, etc., internalized

FUNCTIONS OF COMMERCIAL BANKS

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Grant of loans and advances

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Standing guarantee on behalf of its customers, for making payment for

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REGIONAL RURAL BANKS

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Business Correspondents- As banks were unable to open branches immediately

Financial Inclusion Index

Micro finance and Micro Credit

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Rural Self Employment Training Institute (RSETI)

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Loans to individual farmers [including SHGs or (JLGs),] engaged in Agriculture

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Loans to Custom Service Units to maintain a fleet of tractors,

Micro and small enterprises include:

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Housing -Loans up to Rs. 25 lakh irrespective of location, to

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UpoRs. 1,00,000/ Nil

RBI & MONETARY POLICY

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Term Repos under Liquidity Adjustment Facility

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In India, a DeMat account is a type of banking account that

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