Handbook on Banking Awareness 9350874121, 9789350874127

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A complete Book on Banking and Financial Awareness

BANKING AWARENESS with 15 sets of m u l t i p l e c h o i c e q u e s t i o n s

N K Gupta

I B CA IBC Academy (Publications)

Banking Awareness

Printed and Bound at: SRS Printers, Bangalore Fourth Revised Edition 2020 ISBN: 978-93-5087-412-7 Declaration: No part or whole of this book/publication may be re-produced, copied, stenciled, stored in a retrieval system and/or distributed in any form or by any means: mechanical, electronic, photocopying, scanning, recording, webcasting or otherwise without the written permission of the Publishers. The Publishers have acquired information in this book from the reliable sources. The Publishers or Distributers do not take any responsibility for the accuracy of the information published and the damages or loss, if any.

All disputes are subject to Bengaluru jurisdiction only.

ALL RIGHTS RESERVED @ Publishers

Publication & Marketing:

I B CA IBC Academy (Publications) # No. 68, 1st Main Road, S T Bed Layout, Koramangala, Bangalore 560 034

Phone: 97425 94250 / 80736 53583

E-mail: [email protected] Website: www.ibcacademy.in

Preface I am pleased to deliver 4th revised edition of the Book, which has been widely accepted and recommended for preparation of competitive exams. in the banking and financial sector. The content has been updated, revised and new topics added, in tune with the recent times. I am glad to receive feedback and requests from a host of students which has immensely helped me in compiling this revised edition of the Book. Knowledge provides you strength and courage to stand up and face the challenges in this dynamic environment. This Book –Banking Awareness – is a sincere effort in this direction and would ensure that the candidate is well conversant and updated with macro-level concepts of the Financial Sector and gets good understanding and awareness of Indian Banking sector and the terminology used by Professionals. This Book is compiled by a Senior Banker with over 26 years of rich working experience in Banking Industry. The Book coverage is comprehensive and presented in a lucid manner. The Book also includes a section of Multiple Choice Questions, which shall be very helpful for your competitive exams. The compilation the book required extensive support from a number of books, journals, RBI circulars and web contents, so as to update the book with latest inputs and the factual contents. I extend my sincere gratitude to all of them and acknowledge their contribution. Best Wishes for your success. N K Gupta (mail your suggestions to [email protected])

IBC Academy Publications

INDEX CHAPTER -1: FINANCIAL MARKETS IN INDIA

01 – 14

History of Banking Industry Definition and Classification of Banks Functions of Commercial Banks Commercial Bank & Economic Development Islamic Banking

CHAPTER -2: INDIAN BANKING SECTOR

15 – 36

Indian Banking System Classification of Banks Nationalization of Banks State Bank & its Associate Banks Private Sector Banks New Generation Private Sector Banks & Foreign Banks Small Finance Banks Scheduled Bank Vs Non-Scheduled Bank

CHAPTER -3: REGULATORY MACHINERY IN THE FINANCIAL MARKETS

37 – 64

Reserve Bank of India Monetary Policy of the Reserve Bank of India National Bank for Agriculture & Rural Development Securities & Exchange Board of India Insurance Regulatory & Development Authority Global Development Institutions

CHAPTER -4: INDIAN CURRENCY & NOTE ISSUING POLICIES IN INDIA Indian Currency System Methods of issuing currency Exchange Rate System Convertibility of Rupee Partial Convertibility Some Facts about Indian Currency Banking Awareness

65 – 72

CHAPTER -5: REPORTS – FINANCIAL & BANKING SECTOR REFORMS IN INDIA

73 – 80

Chakravarthy Report on the Working of the Monetary System (1985) Narasimham Committee Report (1991) Goiporia Committee Report (1991) Narasimham Committee Report (1999) Kapoor Committee Report on Co-operative Banking Reform (1999)

CHAPTER -6: GOVERNMENT SPONSORED SCHEMES

81 – 102

Swarnajayanti Gram Swarojgar Yojana (SGSY) Swarna Jayanti Shahari Rozgar Yojana (SJSRY) Urban Self Employment Programme (USEP) Urban Women Self-Help Programme (UWSP) Skill Training for Employment Promotion among Urban Poor (Step-Up) Urban Wage Employment Programme (UWEP) Urban Community Development Network (UCDN) Prime Minister’s Employment Generation Programme (PMEGP) Atal Pension Yojana (APY) Sukanya Samriddhi Yojana (SSY) Scheme of Liberation and Rehabilitation of Scavengers (SLRs)

CHAPTER -7: FINANCIAL PRODUCTS & SERVICES Credit Cards Debit Cards Smart Cards RuPay Payment System Automated Teller Machines / White Label ATMs E-Banking/ Internet Banking Electronic Funds Transfer Mobile Banking One-Time Password Point of sale Terminal Reverse Mortgage

Banking Awareness

103 – 124

CHAPTER -8: DEFINING BANK & CUSTOMER RELATIONSHIP

125 – 146

Banker & Customer Special Types of Customers Banker – Customer Relationship Rights of a Bank Know Your Customer (KYC) Guidelines Obligation of a Bank Obligation of the Customers RTGS / NEFT System ECS

CHAPTER -9: BANK ACCOUNTS & NEGOTIABLE INSTRUMENTS

147 – 166

Types of Accounts with the Bank Deposit Insurance & Guarantee Corporation (DICGC) Facility of Nomination Negotiable Instruments MICR cheques/Drafts Alterations Crossings and Endorsements Hundi Clayton’s Rule Holder & Holder in Due Course Cheque Truncation System-(CTS-2010)

CHAPTER -10: LOAN & ADVANCES PRODUCTS General Rules of Sound Lending Loans & Advances Letter of Credit Guarantees Credit Information Bureau of India (CIBIL) Risk Management in Banks BASEL Guidelines

Banking Awareness

167 – 194

CHAPTER -11: NON PERFORMING ASSETS

195 – 206

Non-Performing Asset Classification of Asset Willful Defaulter Recovery measures available to Banks –DRT, SARDAESI Act, Lok Adalat Debt Restructuring ARC and ARCIL

CHAPTER -12: FINANCIAL MARKETS-RATING AGENCIES IN INDIA

207– 216

Determining Creditworthiness of a Borrower Credit Rating and Credit Reporting Credit Rating Agencies in India Credit Information Bureau in India Best Rating Agencies in World Financial Markets

CHAPTER -13: CAPITAL MARKETS IN INDIA

217 – 230

Money Market & Capital Market Composition of Money Market The Repo Market Financial Instruments under Money Market Capital Market /Stock Exchanges Money Market Mutual Funds Bombay Stock Exchange National Stock Exchange OTC Exchange of India Multi Commodity Exchange of India (MCX)

CHAPTER -14: CO-OPERATIVE BANKS & REGIONAL RURAL BANKS Co-operative Banks Structure of Co-operative Banks in India Central Co-operative Banks State Co-operative Banks Urban Co-operative Banks Regional Rural Banks Problems faced by Regional Rural banks Banking Awareness

231 –242

CHAPTER -15: INSURANCE COMPANIES IN INDIA

243 – 254

Insurance Sector Insurance Companies in India Product and Services Offered Non-Life Insurance Companies in India Private Sector Players in India Bancassurance

CHAPTER -16: MUTUAL FUNDS IN INDIA

255 – 262

History of Mutual Funds in India Regulations Net Asset Value (NAV) Various Types of Mutual Funds Important Terms used in Mutual Funds Industry

CHAPTER -17: NBFC SECTOR IN INDIA

263 – 276

NBFC Sector NBFC Vs NBFI Venture Capital Micro Finance Institutions Financial Inclusion Grameen Bank

CHAPTER -18: CURRENT TOPICS AND FINANCIAL TERMS Foreign Direct Investments (FDI) Public Private Partnership (PPP) General Anti-Avoidance Rules (GAAR) Unique Identification Authority of India (UIDAI) & AADHAR Bill 2016 National Citizens Register (NPR) Licensing of New Banks in Private Sector Licensing of Payment Banks and Small Finance Banks Stand-Up India Scheme Make in India Scheme Start Up India Programme Pradhan Mantri Fasal Bima Yogana Weather Based Crop Insurance Scheme (WBCIS)

Banking Awareness

277-294

CHAPTER -19: LOGOS OF BANKS AND PUNCHLINES

295 – 304

Headquarters of Banks in India Bank Logos Punch lines of Insurance Companies Punch lines of Famous Financial Companies & Others

CHAPTER -20: ABBREVIATION: BANKING & FINANCE TERMS CHAPTER -21: GLOSSARY OF BANKING TERMINOLOGY CHAPTER -22: OBJECTIVE TYPE QUESTIONS AND ANSWERS (Practice Sets – 01 to 15)

Banking Awareness

305-308 i – xxiv (0 1 – 90 )

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CHAPTER - 1

FINANCIAL MARKETS IN INDIA

INTRODUCTION According to some authorities, the work “Bank” itself is derived from the words “bancus” or “banque,” i.e, a bench. The early bankers, the Jews in Lombardy, transacted their business on benches in the market place. When a banker failed, his “banco” was broken up by the people, hence the word “bankrupt.” There are others, who are of the opinion that the word “bank” is originally derived from the German word “back” meaning a “joint stock fund”, which was italianised into “banco” when the Germans were masters of a great part of Italy. This appears to be more possible. But “whatever” be the origin of the word “bank‟, “as Professor Ramchandra Rao says “It would trace the history of banking in Europe from the Middle Ages.”

EARLY HISTORY OF BANKING As early as 2000 B.C., the Babylonians had developed a banking system. There is evidence to show that the temples of Babylon were used as banks and such great temples as those of Ephesus and of Delbhi were the most powerful of the Greek banking institutions. The origin of modern banking in India dates back to 1770 when the first joint-stock bank, named the Hindustan Bank, was started by the English Agency house of Alexander & Co, in Calcutta. The bank was, however, would closed up in 1832.

PRESIDENCY BANKS The real growth of modern commercial banking began in the country when the government was awakened to the need for banks in 1806 with the establishment of the first Presidency Bank, called the Bank of Bengal, in IBC Academy Publications

2 | Financial Markets in India

Calcutta. Then followed the establishment of two other Presidency Banks, namely, the Bank of Bombay in 1840 and the Bank of Madras in 1843. To each of these banks, the government had subscribed Rs. 3 lacs to their share capital. These Presidency Banks, however, enjoyed the monopoly of government banking. These three Presidency Banks continued till 1920. In 1921 they were amalgamated into the Imperial Bank of India.

INDIAN JOINT-STOCK BANKS The year 1860 was a landmark in the history of public banks in India, since in that year the principle of limited liability was first applied to join-stock banks. Since 1860 till the end of the nineteenth century, a number of Indian joint stock banks come into existence. For instance, the Allahabad Bank was started at Allahabad in 1865. In 1875, the Alliance Bank of Simla was started. In 1889, another Indian bank called Oudh Commercial Bank was established. In 1895, the famous Punjab National Bank came into existence. Inspired by the Swadeshi Movement, several Indian entrepreneurs ventured into the modern banking business. During the boom period of 1906-13, there was a mushroom growth of banks. Many prominent banks also came into existence during this period. These were the Bank of India (1906), Canara Bank (1906), Bank of Baroda (1908), and Central Bank of India (1911).

BANKING DEVELOPMENTS/ REFORMS DURING THE PLANNING ERA After independence, the Government of India launched economic planning in the country since 1951. During the last 40 years of the planning era, commercial banking has undergone drastic transformation through several important developments/ reforms and policy measures introduced by the government. Some of the major changes introduced in the Indian banking system are as follows: (1) Liquidation and amalgamation of banks; (2) Nationalization of the Reserve Bank of India; (3) Banking legislation; (4) Evolution of public sector banking through bank nationalization. (5) Declining significance of foreign banks; (6) Structural changes of commercial banking; (7) New strategies in banking business. IBC Academy Publications

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EVOLUTION OF FINANCIAL SYSTEM IN INDIA 1. 2. 3. 4.

5.

6.

7.

8.

9.

Bombay Stock Exchange (BSE) became operational in 1870. Life Insurance Corporation of India (LIC) was started and became functional as the first Life Insurance Company in 1818. General Insurance Company (GIC) was established in 1850 to undertake Non-Life Insurance business in India. Reserve Bank of India (RBI) was established on 1st April, 1935 as Central Bank of India. Later it was converted into a Public Institution controlled by Central Government in 1949. Deposit Insurance Company, now called DICGC, was incorporated in 1962 to provide protection to their deposits with banks and insurance for a minimum of their deposits with Banks. In order to provide an avenue for Retail Investors to participate into Stock Exchanges and help national economy to grow by channelizing public resources, Unit Trust of India was established in 1964. Export Credit & Guarantee Corporation (ECGC) was established in 1964 to provide protection to Indian exporters against the associated risk involved in the international trade. In July, 1969, Government of India nationalized 14 large Banks with a view to accelerate economic growth of the country and channelizing resources to the needy sectors of economy. In April, 1980, six more Banks were further nationalized. In 1975, Regional Rural banks were set up with the sole objective to provide credit to Agriculture sector in a more efficient and cost effective manner.

In 1969, the Government of India felt that the Commercial Banks are not participating efficiently in the socio-economic development of the masses and rather it is confining its area of operations in urban centers where credit concentration was with Large Industrial units. Thus, started the spate of Nationalisation of 20 commercial Banks in 2 phases, in 1969 and in 1980. For the focused growth of Agriculture sector, Banking sector was strengthen with Multi-agency approach to enhance credit availability to the sector viz. by Commercial Banks, Co-operative Banks and Regional Rural Banks. In 1982, National Bank for Agriculture and Rural Development (NABARD) was formed by separating the Agriculture Department of RBI, with an objective to regulate the flow of credit to Agriculture sector and Rural markets as an Regulator. IBC Academy Publications

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While the Indian banking system was dominated by public sector and Government owned players till 1990. Later, the Government of India took several steps to de-regulate the financial sector and allowed Foreign Banks to open branch offices in India liberally. The ownership pattern and domain of operating environment of Developmental Institutions were also reviewed which impacted significantly to the institutions like ICICI, IDBI, IFCI etc. This led to a fierce competitive environment in the Banking sector and the next 2 decades have seen enormous growth in the Indian Banking Industry with size of banks as well as business volumes growing rapidly. Most of the Banks have embraced new-age technology and the prudential exposure norms, Capital structure and the supervisory systems have strengthened. In 2002, Foreign Direct Investment (FDI) in the Banking sector was allowed upto a max. of 49%. This saw a huge inflow of capital into the Indian banking Industry and listing of Banks into capital Markets. Later, in 2004, the ceiling of FDI investment in the Banking sector was enhanced to 74%, though with adequate safeguards.

DEFINITION OF A BANK A banking company is defined as a company which transacts the business of banking in India. The Banking Regulation Act defines the business of banking by stating the essential functions of a banker. It also states the various other businesses a banking company may be engaged in and prohibits certain businesses to be performed by it. The term “Banking‟ is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order of otherwise” Section 5 (b). The salient features of this definition are as follows: (i) A banking company must perform both of the essential functions, viz., (a) accepting of deposits, and (b) lending or investing the same. If the purpose of accepting of deposits is not to lend or invest, the business will not be called banking business. The explanation to Section 5(c) makes it clear that any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business, such as manufacturer or trader shall not be deemed to transact the business of banking. (ii) The phrase “deposit of money from the public is significant. The banker accepts deposits of money and not anything else. The word “public” implies that a banker accepts deposits from anyone who offers his/her money for such purpose. The banker however, can refuse to open an account in the name of the person who is considered as an undesirable person, e.g., a thief, insane person, IBC Academy Publications

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etc. Acceptance of deposits should be the known business of a banker. (iii) The definition also specifies the time and mode of withdrawal of the deposits. The deposited money should be repayable to the depositor on demand made by the latter or according to the agreement reached between the two parties. It is thus clear that the underlying principle of the business is that the resources mobilized through the acceptance of deposits must constitute the main stream of funds which are to be utilized for lending or investment purposes. The banker is, thus, an intermediary and deals with the money belonging to the public. A number of other institutions, which also deal with money, are not designated as banking institutions, because they do not fulfill all the above mentioned pre-requisites. The specialized financial institutions, e.g., Industrial Finance Corporation of India and State Finance Corporations, are not banks because they do not accept the deposits in the prescribed manner. The essence of banking business lies in the two essential functions. Name must include the word “Bank‟, “Banker‟ or “Banking‟ - Section 7 makes it essential for every company carrying on the business of baking in India to use as part of its name at least one of the words- bank, banker, banker, banking or banking company. Besides, it prohibits any other company of firm, individual or group of individuals, from using any of these words as parts of its/his name. Section 7 has been amended in 1983 with the effect that none of these words be used by any company even “in connection with its business.” According to Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a machine for facilitating exchange.” The Banking Companies Act of India defines Bank as “A Bank is a financial institution which accepts money from the public for the purpose of lending or investment repayable on demand or otherwise withdrawable by cheques, drafts or order or otherwise.” Thus, we can say that a bank is a financial institution which deals in debts and credits. It accepts deposits, lends money and also creates money. It bridges the gap between the savers and borrowers. Banks are not merely traders in money but also in an important sense, manufacturers of money.

CLASSIFICATION OF BANKS Broadly speaking, banks can be classified into Commercial Banks and Central Bank.  Commercial banks are those which provide banking services for profit. IBC Academy Publications

6 | Financial Markets in India

 The Central bank has the function of controlling commercial banks and various other economic activities. There are many types of commercial banks such as: 1. Deposit Banks: The most important type of deposit banks, is the commercial banks. They have connection with the commercial class of people. These banks accept deposits from the public and lend them to needy parties. Since their deposits are for short period only, these banks extend loans only for a short period. Ordinarily, these banks lend money for a period between 3 to 6 months. They usually do not like to lend money for long periods or to invest their funds in any way in long term securities to avoid mismatch in liquidity position. 2. Industrial Banks: Industries require huge capital resources for a long period to buy machinery and equipments. Industrial banks help such industrialists. They provide long term loans to industries. Besides, they buy shares and debentures of companies, and enable them to have fixed capital. The important functions of industrial banks are: 1. They accept long term deposits. 2. They meet the credit requirements of industries by extending long term loans. 3. These banks advise the industrial firms regarding the sale and purchase of shares and debentures. The industrial banks play a vital role in accelerating industrial development. Post-independence India, several industrial banks were started with large paid up capital. They are, The Industrial Finance Corporation (IFCI), The State Financial Corporations (SFC), Industrial Credit & Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI) etc. 3. Savings Banks: These banks were specially established to encourage thrift among small savers and therefore, they were willing to accept small sums as deposits. They encourage savings of the poor and middle class people. In India, we do not have such special institutions, but post offices perform such functions. 4. Agricultural Banks: Agriculture has its own problems and hence there are separate banks to finance it. These banks are organized on cooperative lines and therefore, do not work on the principle of maximum profit for the shareholders. These banks meet the credit requirements of the farmers through term loans, viz., short, medium and long term loans. There are two types of agricultural banks, (a) Agricultural Co-operative Banks, and (b) Land Mortgage Banks. IBC Academy Publications

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5.

6.

Co-operative Banks are mainly for short period loans. For long period loans, there are Land Mortgage Banks. Both these types of banks are performing useful functions in India. Exchange Banks: These banks finance mostly for the foreign trade of a country. Their main function is to discount, accept and collect foreign bills of exchange. They buy and sell foreign currency and thus help businessmen in their transactions. They also carry on the ordinary banking business. In India, there are some commercial banks which are branches of the foreign banks. These banks facilitate conversion of Indian currency into foreign currency to make payments relating to overseas travel, education expenses and foreign exporters. They purchase bills from exporters and sell their proceeds to importers. They purchase and sell forward “foreign exchange” too and thus minimise the difference in exchange rates between different periods, and also protect merchants from losses arising out of exchange fluctuations by bearing the risk. Miscellaneous Banks: There are certain kinds of banks which have arisen in due course to meet the specialized needs of the people. In England and America, there are investment banks whose object is to control the distribution of capital into several uses. American Trade Unions have got labour banks, where the savings of the labourers are pooled together. In London, there is London Discount House whose business is “to go about the city seeking for bills to discount.” There are numerous types of different banks in the world, carrying on one or the other banking business.

FUNCTIONS OF COMMERCIAL BANKS A commercial bank is a financial institution whose main business is to accept deposits from the public and to give loans to those who require it for short periods. The general functions of a commercial bank may be summarized as follows:-

1. RECEIVING OF DEPOSITS The most important functions of the commercial banks is to receive deposits from the public. The commercial banks not only protect them but also help transfer of funds through cheques and even undertake to repay the money in legal tender money. Deposits received by the commercial banks are of various types, - fixed deposits, savings deposits, current deposits and recurring deposits. Fixed deposits or Time deposits are with the bank for a specified period of time and they can be withdrawn only after the expiry of the said period. The interest rate depends on the time agreed upon. The longer the IBC Academy Publications

8 | Financial Markets in India

maturity period, the higher the interest rate and vice versa. Form the point of view of safety and interest, fixed deposits are preferable. Savings deposits or demand deposits are subject to certain restrictions. Rate of interest is normally lower on and withdrawals restricted, may be made once or twice a week. At present, RBI stipulates all Banks to pay a minimum floor of interest rate on Savings Bank account at 4% p.a. however, the upper ceiling is freed; as such the Banks are free to determine their interest rates payable on Savings Bank accounts. Most of the Banks now pay interest on Savings Bank account in the range of 4.00% - 7.00% p.a. Current deposit or demand deposits, are the deposits withdrawable by the depositor at any time without any prior notice by means of cheques. The banks do not pay any interest on demand deposits, but in fact levy a small charge on customers for their service. Recurring deposits are those deposits received by the banks in equal monthly premium for a certain number of years the total of which will be paid to the depositor with interest due thereon after the expiry of the date of maturity. Deposits at call according to which, deposits may be withdrawn when asked for by the depositor. The deposits at short notice and depositors are required to give notice before certain number of days (7, 21, 30, 45 or 90) for withdrawal of deposits. CASA means low cost deposits for a bank, viz. Current Account, Savings Account. The higher a Bank hold CASA deposits, its average cost of Deposits would be lower and vice versa. As a result, it makes a bank business profitable and thus are in high demand for Bankers.

2. MAKING LOANS AND ADVANCES The second principal functions of the commercial banks are to make loans and advances out of the public deposits. Direct loans and advances are given to all persons against personal security, gold and silver and other movable and immovable assets. This, the banks do by overdraft facilities, that is, by allowing the borrower or overdraw his current account and also by discounting bills of exchange. The merchants and manufacturers are enabled to obtain adequate funds for production of goods and services. The loans and advances made by the commercial banks are of various forms, like cash credit, overdraft, demand loan, hire purchase loan, etc. Cash credit is that loan given by a commercial bank in a running operative account against the security of raw materials, produced goods, etc. IBC Academy Publications

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Overdraft is made on security against stock and shares, insurance policies, etc., under current account. Demand loan is paid in full to the debtor at a time. Hire purchase loans are made to all persons for the purchase of customer durable goods like radio, bicycle, tailoring machine, sites for buildings etc. and these loans are repayable to the bank in easy installments with interest due thereon.

3. AGENCY SERVICES A commercial bank provides a range of investment services. Customers can arrange for dividends to be sent to their bank and directly remitted into their bank accounts, or for the bank to detach coupons from bearer bonds and present them for payments and to act upon announcements in the Press of drawn bonds, coupons payable, etc. Orders for the purchase or sale of stock exchange securities are executed through the bank’s brokers, who may also offer their opinions or advisory on securities or lists of securities. Similarly, banks will make applications on behalf of their customers for allotments arising from new capital issues, pay call monies as they fall due (viz. subscriptions to capital issues), and ultimately obtain the share certificate or other documents of title. On certain agreed terms, the banks also allow their names to appear on approved prospectuses or other documents as bankers for the issue of new capital, they will receive applications and carry out other instructions. A commercial bank undertakes the payment of subscriptions, premia, rents and collection of cheques, bills, promissory notes etc., on behalf of its customers. It also acts as a correspondent or representative of its customers, other banks and financial corporations. Most of the commercial banks have an executor and trustee departments; some may have affiliated companies to deal with this branch of their business. They aim to provide, before, a complete range of trustee, executor, or advisory services for a small charge. The business of banks acting as trustees, executors, administrators, etc., has continuously expanded with considerable usefulness to their customers. By appointing a bank as an executor or trustee of his will, the customer secures the advantage of continuity, and avoids having to make changes; impartiality in dealing with beneficiaries and in the exercise of discretions; and the legal and specialized knowledge pertaining to executor and trustee services. When a person dies without making a will, the next-of-kin can appoint the Bank to act as administrator and to deal with the estate in accordance with the rules relating to intestacies. Alternatively, if a testator makes a will but fails to appoint an executor, or if an executor is unable or unwilling to act, the bank can usually undertake the administration with the consent of the persons who are immediately concerned. IBC Academy Publications

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4. GENERAL UTILITY SERVICES These services are those in which the bankers position in not that of an agent for his customer. They include the issue of credit instruments like letters of credit and travelers cheques, the acceptance of bills of exchange, the safe custody of valuables and documents, the transaction of foreign exchange business, acting as a referee as to the respectability and financial standing of customers and providing specialized advisory service to customers. A bankers draft is an order, addressed by one office of a bank to any other of its branches or by any one bank to another, to pay a specified sum to the person concerned. A letter of credit is a document issued by a bank, authorizing another bank to whom it is addressed, to honour the cheques of a person named in the document, to the extent of a stated amount in the letter and to charge the same to the account of the opener of the letter of credit. A letter of credit includes a promise by the issuing banker to accept all bills to the limits of credit. When the promise to accept is conditional on the receipt of the documents of title to goods, it is called a documentary letter of credit. But the banker will still be liable for bills negotiated before the expiry of the period of its currency. A Circular letter of Credit is generally intended for travelers who may require money in different countries. A letter of credit may be divided into traveler’s letters of credit and guarantee letters of credit. A travelers letter of credit carries the instruction of the issuing bank to its foreign agents to honour the beneficiary’s drafts, cheques, etc., to a stated amount which it undertakes to meet on presentation. While issuing guarantee or letters of credit, the banker secures a guarantee for reimbursement at an agree rate of interest or he may insist on sufficient security for the grant of the credit. There is yet another type which is known as Revolving Credit. Here, the letter is so worded that the amount of credit available automatically reverts to the original amount after the bills negotiated under them are duly honored. Travellers cheques are documents similar to circular notes with the exception that they are not accompanied by any letter of indication. Circular cheques are issued by banks in certain countries to their agents abroad. These agents sell them to intending visitors to the country of the issuing bank. Another important service rendered by a modern commercial bank is that of keeping in Safe custody valuables such as negotiable securities, jewellery, documents of title, wills, deed-boxes, etc. Some branches are also equipped with specially constructed strong rooms, each containing a large number of private steel safes of various sizes known as “Lockers”. IBC Academy Publications

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These may be used by non-customers for a small fee as well as by regular customers. Credit cards are introduced for the use of credit-worthy customers. Users are issued with a card on production of which their signature is accepted on bills in shops and establishments participating in the scheme. The banks thereby guarantee to meet the bill and recover from the cardholders through a single account presented periodically. In some cases, uses are required to pay a regular subscription for the use of the service as well.

OVERSEAS TRADING SERVICES Recognition of overseas trade has led modern commercial banks to set up branches specializing in the finance of foreign trade to facilitate export houses and factoring organizations. Assisted by banks affiliated to them in overseas territories, they are able to provide a comprehensive range of services for foreign banking business, and many transactions can be carried through from start to finish by a home bank or its subsidiary. In places where banks are not directly represented by such affiliated undertakings, they have working arrangements with correspondent banks so that banks are in a position to undertake foreign banking business in any part of the world.

5. INFORMATION AND OTHER SERVICES As part of their comprehensive banking services, many banks act as a major source of information on overseas trade in all aspects. Some banks produce regular bulletins on trade and economic environment at home and abroad, and special reports on commodities and markets. On request, banks obtain for customers, for business houses, confidential opinions on the financial standing of companies, firms or individuals at home or overseas. Commercial banks furnish advice and information outside the scope merely of trade. If it is desired to set up a subsidiary or branch overseas (or for an overseas company to set up in the home country) they help to establish contracts with local banking organizations.

COMMERCIAL BANKS & ECONOMIC DEVELOPMENT Commercial banks play a significant role in the development of nation. In fact, without the evolution of commercial banking in the 18th and the 19th centuries, Industrial Revolution would not have taken place in England. It will be equally true to state that without the development of sound commercial banking, underdeveloped countries cannot hope to join the ranks of advanced countries. The important services provided by commercial banks and significant role played in the economic development of nations are: IBC Academy Publications

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I.

II.

III.

IV.

V.

Banks are necessary for trade and industry: All economic progress in the last two centuries or so has been based on extensive growth of trade and industrialization, which could not have taken place without the use of money. But money does not mean coins and currency notes only, since this form only a small proportion of the total volume of money supply. It is the bank deposits on which cheques can be issued that constitute the important sources of money. In all large transactions, payments are not made in terms of money but in terms of cheques and drafts. Between the countries, International trade is financed through bill of exchange which are discounted (i.e., bought) by banks. Banks help in distribution of funds between regions: Another way by which commercial banks encourage production and enhance national income is by transfer of surplus capital from regions where it is not wanted so much, to regions where it can be more usefully and efficiently employed. This distribution of funds between regions has the effect of opening up backward regions and paying the way for their economic development. Banks create credit and help in business expansion: Fluctuations in bank credit have an important bearing on the level of economic activity. Expansion of bank credit will provide more funds to entrepreneurs and, hence, will lead to more investment. Under conditions of full employment, expansion of bank credit will have the effect of inflationary pressure. But under conditions of unemployment, it will push up production in the country. On the other hand, a decline in bank credit may result in decline in production, employment, sales and prices. From the view of an underdeveloped economy, the expansion of bank credit reveal greater financial resources to industries and it is one of the contributory causes for higher economic development. Banks monetize debt: A very important service the banks render to the community is the creation of demand deposits in exchange of debts of other (viz., short and long-term securities). Commercial banks buy debts of others which are not generally acceptable as money, either because the debtors are not sufficiently known or because their debt is payable only after a period of time. In return for them, they issue demand deposits which are generally accepted as money. By these exchange operations, banks monetize debt. Banks promote capital formation: Commercial banks afford facilities for saving and thus encourage habits of thrift. They mobilize the idle and dormant capital of the community and make it available for productive purposes. Economic development IBC Academy Publications

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VI.

depends upon the diversion of economic resources from consumption to capital formation. A higher rate of saving and investment is, therefore, what constitutes real capital formation. In this, the role of banks is invaluable. Banks influence interest rates: Banks can influence economic activity in another way also. They often influence the rate of interest in the money market through its supply of funds. By offering more or less funds, it can exert a powerful influence upon interest rates. Besides, it can also influence the people to hold more money in the bank and less of other assets or vice-versa. In this way too, it can influence the interest rates. A cheap money policy with low rate of interest will tend to stimulate economic activity, if other conditions are favourable. Thus, banks have come to occupy an important place in the industrial and commercial life of a nation. A developed banking organization is a necessary condition for the industrial development of a country.

ISLAMIC BANKING Islamic Banking in brief can be described as a banking activity that is consistent with the principles of sharia and its practical application through the development of Islamic economics. The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the Shariah in all of its actions and deeds. The major governing principles of an Islamic Bank are: No interest-based (In Islam is is called Riba) transactions i.e. neither the interest is paid to depositor nor it is charged from the borrower;  No support to economic activities involving oppression (zulm)  No financing to economic activities involving speculation (gharar);  The introduction of an Islamic tax, zakat;  *No financing for the production of goods and services which contradict the Islamic value (haram) The word "Riba" means interest, usury, excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). Riba is deemed haram in Islam, for the reason that it is ‘unfairly’ exploitive in nature. It is ‘unfair’ because Riba requires the lender to return the borrowed money plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount. Islamic Banking, as the name suggests, is popular in Middle East countries and other Islamic nations. However, it is prohibited by RBI and thus cannot be practiced in India. IBC Academy Publications

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CHAPTER - 2

INDIAN BANKING SECTOR

HISTORY At the time of independence, financial markets were at the nascent stage and the Indian banking system was not sound and efficient. There were hundreds of small banks under unscrupulous managements. Hence, in 1949, two important actions were taken from the point of view of structural reforms in the banking sector: - First, the Banking Regulation Act was passed in year 1949. It gave extensive regulatory powers to Reserve Bank of India over the commercial banks and also to inspect their workings. - Secondly, another significant development was the nationalisation of the RBI, in year 1949. RBI was established, as the Central Bank of India, in year 1934. These two major developments in the immediate Post-Independence period proved to be the turning points in India’s commercial banking. (a) Policy of Liberalization: In 1990s, the then Narasimha Rao Government embarked a policy of Liberalisation, licensing a small number of Private Banks – known as New Generation (Tech-savvy) Banks, mainly with a view to encourage competition and a healthy growth of banking sector from equal participation from all players under Government-owned sector, Private banks as well as Foreign banks. (b) FDI Policy: Later, the Government relaxed the norms for Foreign Direct Investment (FDI) into banking sector, where all Foreign Investors in Banks were given voting rights in excess of earlier ceiling of 10%. FDI investments were allowed, initially, upto 49% which was later enhanced upto 74%. IBC Academy Publications

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At present, a foreign bank or its wholly owned subsidiary can invest upto 100% in an Indian private sector bank. This option of 100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment companies. Other foreign investors can invest up to 74% in an Indian private sector bank, through direct or portfolio investment. The new FDI norms will not apply to PSU banks, where the FDI ceiling is still capped at 20%. The government is though considering hiking foreign direct investment (FDI) in public sector banks (PSBs) from the current 20 percent to 49 percent. This action led to transformation of Banking Industry and the Banks became modern and tech savvy. This encouraged Banks to shift its focus to Retail sector which saw an unprecedented growth in subsequent years. Indian banking system comprises of: - Unorganised banking includes indigenous bankers and village moneylenders. - Organised banking which includes Reserve Bank of India, Commercial Banks, (including Foreign Banks), Development Banks, Exim Bank, Cooperative Banks, Regional Rural Banks, National Bank for Agriculture and Rural Development, Land Development Banks etc.

1.

INDIGENOUS BANKS

From very ancient days, India has had banking of some type, known as indigenous banking which were organised in the form of family or individual business. They are popularly known as Shroffs, Sahukars, Mahajans, Chettis, Seths, Kathiwals etc. Their scale of business operations were as low as petty money lenders to substantial shroffs who carry on large and specialised banking business. Since their activities were not regulated, they belong to the unorganised segment of the money market. With the growth of commercial and cooperative banking, the area of the operations of the indigenous bankers has contracted. Functions of Indigenous Bankers 1. Accepting Deposits 2. Advancing Loans 3. Business in Hundies They write hundies and buy and sell hundies. 4. Acceptance of Valuables for Safe Custody 5. Non-banking Functions

2.

MONEYLENDERS

Moneylenders are those persons whose primary business is money lending. They lend money from their own funds and are classified into two categories: IBC Academy Publications

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(a) the professional moneylenders, such as The Maharajas, Sahukars and Banias are professional moneylenders. They usually hold licenses for money lending. (b) the non-professional moneylenders: They combine money lending with other activities and do not depend entirely on money lending business, such as landlords, agriculturists, traders, pensioners, etc. They hold no license to carry on money lending business.

3.

CO-OPERATIVE BANKS

Co-operative banks, originated in India with the enactment of the Cooperative Credit Societies Act of 1904 which provided for the formation of co-operative credit societies. Under the Act of 1904, a number of cooperative credit societies were started. Due to the increasing demand of cooperative credit, a new Act was passed in 1912, which provided for the establishment of cooperative central banks by a union of primary credit societies. Co-operative Bank is an institution, established on the cooperative basis and dealing in ordinary banking business. Like other banks, the cooperative banks collect funds through shares. They accept deposits and grant loans. They are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.

Structure of Co-operative Banks Co-operative banking in India is federal in its structure. It has three sections: - At the top - the State Cooperative Bank, which is the Apex Bank at the state level. - At the intermediate level - the Central unions or the Central cooperative banks. There is generally one central co-operative bank for each district. - At the base of the pyramid - the Primary Credit Societies which cover the small towns and villages. Each higher level institution is a federation of those below, with membership and loan operations restricted to the affiliated units.

4.

LAND DEVELOPMENT BANK

The Government wanted a special credit institution to cater to the longterm credit needs of the farmers, in order to assist farmers with long-term loans carrying modest rates of interest and convenient methods of repayment. The Government started the land mortgage banks for this purpose it is called as Land Development Banks. The land development banks were setup during the 1920’s but their progress has been quite slow. After independence, they have been IBC Academy Publications

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enjoying growth and prosperity, but whatever progress has been achieved is concentrated in only a few states particularly from South India viz., Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra and Gujarat. There are two types of land development banks in the country. - At state level, there are Central Land Development Banks, and - Under each central bank, there are Primary Land Development Banks.

5.

REGIONAL RURAL BANKS

In spite of the rapid expansion programmes undertaken by the commercial banks in recent years, a large segment of the rural economy was still beyond the reach of the organized commercial banks. To fill this gap it was thought necessary to create a new agency which could combine the advantages of having adequate resources but operating relatively at a lower cost at the village level. On September 26, 1975, the Regional Rural Bank Ordinance was promulgated, to set up regional rural banks throughout the country; later the Ordinance was replaced by the Regional Rural Banks Act, 1976. Objectives of Regional Rural Banks 1.

2. 3.

4. 5.

To provide credit and other facilities particularly to the small and marginal farmers, agricultural labourers, artisans, small entrepreneurs etc. To develop agriculture, trade, commerce, industry and other productive activities in the rural areas. To provide easy, cheap and sufficient credit to the rural poor and backward classes and save them from the clutches of money lenders. To encourage entrepreneurship and increase employment opportunities. To reconcile rural business aims and social responsibilities.

Capital Structure At present, the authorized capital of regional rural banks is Rs. 5 crores, and the issued capital is Rs. 1 crore. 50% of the issued capital is to be subscribed by the Central Government, 15% by the concerned State Government, and 35% by the sponsoring commercial banks. The shares of regional rural banks are to be treated as “approved securities.” Features of Regional Rural Banks 1. The regional rural bank, like a commercial bank, is a scheduled bank. IBC Academy Publications

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2. 3. 4. 5. 6.

The RRB is a sponsored bank. It is sponsored by a scheduled commercial bank. It is deemed to be co-operative society for the purposes of Income Tax Act, 1961. The area of operations of the RRB is limited to a specified region relating to one or more districts in the concerned state. RRB charges interest rates as adopted by the co-operative societies in the state. The interest paid by the RRB on its term deposits may be 1% or 2% more than that is paid by the commercial banks.

6. COMMERCIAL BANKS A commercial bank may be defined as a financial institution which accepts deposits, against which cheques can be drawn, lends money to commerce and industry and renders a number of other useful services to the customers and the society. Commercial Banks borrow money from those who have surplus funds and lend to those who need funds for commercial and industrial purposes. Commercial Banks receive deposits in different deposit accounts and advance money, generally for short periods. They also render a number of services to their customers, such as collection of cheques, safe custody of valuables, remittance facilities and payment of insurance premium, electricity bills, etc. Commercial Banks are entities which have been established in accordance with Indian Companies Act, 1913. Bank of Hindustan was the FIRST commercial Bank in India, established in 1770. The commercial banks perform the following major functions: (a) Receiving deposits from the public and the business firms. (b) Lending money to various sections of the economy for productive activities. (c) Provision of locker facility to the customers. (d) Issue of demand drafts, traveler’s cheques, bank cards, etc., for the smooth remittance of funds. (e) Safe custody of documents, ornaments and other valuables of customers. (f) Payment of telephone, electricity and water bills on behalf of the customers. (g) Collection of cheques of the customers. (h) Issue of letters of credit. (i) Acting as trustees, executors of wills, etc. IBC Academy Publications

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NATIONALISATION OF BANKS The Government of India nationalised 14 major banks in the country in July, 1969, which had deposits of more than Rs. 50 crores and another 6 Banks in April, 1980, each of these Banks had deposits of Rs. 200 crores. Banks which were nationalised in July 1969 (Nos. 14) Allahabad Bank, Bank of India, Bank of Baroda, Bank of Maharashtra, Central Bank, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, United Bank of India, United Commercial Bank, Union Bank. Banks which were nationalised in April 1980 (Nos. 6) Andhra Bank, Punjab & Sind Bank, New Bank of India, Vijaya Bank, Corporation Bank, Oriental Bank of Commerce (TOTAL NUMBER OF NATIONALISED BANKS IN INDIA: 20) The oldest of the major commercial banks was Allahabad Bank (1865) and the youngest was United Bank of India (1950). Since, United Bank of India was set up by amalgamating four existing banks, it would not be proper to consider it as an altogether new Bank. This way, United Commercial Bank established in 1943 was the youngest of all these banks. The most important reasons for nationalization of banks related to the structure, policies and working of the private commercial banks. The banks had expanded their business and increased the number of their officers. Though there was a five-fold increase in their deposits between 1951 and 1969, the banks were seen not serving the public interest and they had IBC Academy Publications

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failed to provide credit for the desired priority channels. Instead, they had become tools in the hands of monopolists and been encouraging speculative activity. All these factors led to the take-over the major banks in 1969. The State Bank of India and its seven subsidiaries (now five) had already been nationalised. SBI and its (former) 7 associates Banks are not included in the category of Commercial banks because these were established under a separate Act. The regional rural banks from their very inception are in the public sector. Thus, about 90% of the country’s commercial banking system, i.e. deposits and advances, is now in the public sector. Punjab National Bank (set up in 1984) was FIRST PURELY INDIAN BANK of India & SECOND LARGEST BANK under the Nationalised Banks. Objectives of Nationalization 1. 2. 3. 4.

To raise public confidence in Banking system; Expansion of banking activities in rural and semi-urban areas; To reduce regional inequalities and help the poor in the society; To augment mobilization of savings from the rural and urban areas in terms of bank Deposits; 5. To decentralize economic power and spread the reach to hinterland of the country in order to reduce and/or break the monopoly of large Industrial Houses on the Banking system; 6. To augment credit flow to the Priority sectors like Agriculture, Small scale Industries and small traders; 7. To ensure adequate availability of resources for the planned growth of the country; Achievements of Nationalized Banks There has been a great change in the thinking and outlook of commercial banks after nationalisation. There has been a fundamental change in the lending policies of the nationalised banks. Indian banking has become development-oriented. It has changed from class banking to mass-banking or social banking. 1. Development-oriented Banking: Historically, Indian banks were mainly concerned with the growth of commerce and some of the traditional industries such as, cotton textile and jute. The banks were concentrated in the big commercial centre. From well-established large industries and business houses, ths focus has positively shifted to assisting small and weak industrial units, small farmers, artisans and other neglected groups of people in the country. 2. Branch Expansion: Rapid economic development pre-supposes rapid expansion of commercial banks. Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion IBC Academy Publications

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3.

4.

5.

6.

7.

gained momentum after nationalisation of top commercial banks and the introduction of “Lead Bank Scheme.” The Lead Bank Scheme has played an important role in the bank expansion programme. There are, in all, 109,811 branches of commercial Banks having about 1,175,149 employees and 1,62,543 plus ATMs in India, as at 31st March, 2014. Expansion of Bank Deposits: Since nationalisation of banks, there has been a substantial growth in the deposits of commercial banks. Bank deposits had increased almost 200 times, exponentially to Rs. 67,50,450 crores in 2014. Development of banking habit among people through publicity, extensive branch banking, growing ATM numbers and prompt service to the customers led to increase in bank deposits. Credit Expansion: The expansion of bank credit has also been more spectacular in the post-bank nationalization period. Bank credits had increased from Rs. 4,700 crores in 1970-71 to Rs. 52,60,500 crores in 2015. At present, banks are also meeting the credit requirements of industry, trade and agriculture on a much larger scale than before. Credit is the pillar of development. Investment in Government Securities: The nationalized banks are expected to provide finance for economic plans of the country through the purchase of government securities. There has been a significant increase in the investment of the banks in government and other approved securities over the years. Advances to Priority Sectors: An important change after the nationalization of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalization of banks was to extend credit facilities to the borrowers in the neglected sectors of the economy. At present, RBI has stipulated a minimum compliance by Banks at 40% of the total lendings towards advances to the priority sectors. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business. The total amount of Priority Sector Lending (PSL) by all the Scheduled Banks in India was Rs. 30,17,100 crores as on 3103-2018. Social Banking - Poverty Alleviation Programmes: Commercial banks, especially the nationalised banks have been participating in the poverty alleviation programme launched by the government. (a) Differential Interest Rate Scheme (DIRA): With a view to provide bank credit to the weaker sections of the society at a concessional rate at 4% p.a., the government introduced the “Differential interest rates scheme” from April, 1972. IBC Academy Publications

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(b) Integrated Rural Development Programme (IRDP): This is a pioneering and ambitious programme to rectify imbalances in rural economy and also for all-round progress and prosperity of the rural masses. Out of the beneficiaries, over 1 million belonged to scheduled castes and scheduled tribes and 0.7 million were women. Other important scheme introduced by the government of India and implemented through the banking system includes (a) selfemployment scheme for educated youth, (b) self-employment programme for urban poor, and (c) credit to minority communities. 8. Growing Importance of Small Customers: The importance of small customers to banks has been growing. Most of the deposits in recent years have come from people with small income. Similarly, commercial banks lending to small customers has assumed greater importance. 9. Innovative Banking: In recent years, commercial banks in India have been adopting the strategy of “innovative banking in their business operations” which implies application of new techniques, new methods and novel schemes in the areas of deposit mobilisation, deployment of credit and bank management. Mechanisation and computerisation processes are being introduced in the day-to-day working of the banks. 10. Diversification in Banking: The government had been encouraging commercial banks to diversify their functions. As a result, commercial banks have set up merchant banking divisions and are underwriting new issues, especially preference shares and debentures. Several commercial banks have also set up Mutual funds also. Commercial banks have started lending directly or indirectly for housing. Venture capital fund is also started by one public sector bank. State Bank of India and Canara Bank have set-up subsidiaries exclusively for undertaking “factoring services.” 11. Globalization: The liberalization of the economy, inflow of considerable foreign investments, frequency in exports etc., have introduced an element of globalization in the Indian banking system.

MERGER OF PUBLIC SECTOR BANKS Public Sector Banks (PSBs) are a major type of bank in India, where a majority stake (i.e. more than 50%) is held by a government. The shares of these banks are listed on stock exchanges. As a move towards consolidation and improving scale of efficiencies in Public sector Banks, on 17 September 2018, the Government of India had merged Dena Bank and Vijaya Bank with Bank of Baroda. Post-merger, IBC Academy Publications

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the Bank of Baroda became the “third-largest bank” in India, after State Bank of India and HDFC Bank. On 30th August, 2019, Government of India announced four new set of mergers of ten Public sector Banks into four Banks, as follows:  Oriental Bank of Commerce and United Bank of India will merge with Punjab National Bank, to form the nation's second-largest lender. The merged entity, Punjab National Bank with have Rs.17.95 lakh crore business and 11,437 branches;  Canara Bank and Syndicate Bank will merge together;  Union Bank of India will amalgamate with Andhra Bank and Corporation Bank; and  Indian Bank will merge together with Allahabad Bank. Government argues that the merger would enables the consolidated entities to meaningfully improve scale of operations and help their competitive position, however, there will not likely be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles”. The 12 public sector banks that India will have, after the merger of PSU Banks, as on 1st September, 2019 are: 1. State Bank of India 2. Punjab National Bank 3. Bank of Baroda 4. Bank of India 5. Central Bank of India 6. Canara Bank 7. Union Bank of India 8. Indian Overseas Bank 9. Punjab and Sind Bank 10. Indian Bank 11. UCO Bank 12. Bank of Maharashtra

STATE BANK OF INDIA All India Rural Credit Survey Committee (AIRCSC) recommended the setting up of State Bank of India, a commercial banking institution, with the special purpose of stimulating banking development in rural areas. State Bank of India was set up in July 1, 1955, when it took over the assets and liabilities of the former Imperial Bank of India. (Imperial Bank of India was established in January, 1921 by amalgamation of 3 Presidency Banks – Bank of Bengal, Bank of Bombay and Bank of Madras) State Bank of India has an authorised share capital of Rs. 20 crores and an issued share capital of Rs. 5,625 crores which has been allotted to the Reserve Bank of India. The shares of the SBI are held by the Reserve Bank of India, insurance companies and the general public who were formerly shareholders of the Imperial Bank of India. SBI is ranked as 216th in the Fortune Global 500 list of the world's biggest corporations of 2018. IBC Academy Publications

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It is the largest bank in India with a 23% market share in assets. Management The management of the State Bank vests in a Central Board constituted of A Chairman and a Vice-chairman appointed by the Central Government in consultation with the Reserve Bank; not more than 2 Managing Directors appointed by the Central Board with the approval of the Central Government; 6 Directors elected by the shareholders; 8 Directors nominated by the Central Government in consultation with the Reserve Bank to represent territorial and economic interests, not less than 2, of whom shall have special knowledge of the working of co-operative institutions and of the rural economy; 1 Director nominated by the Central Government; and 1 Director nominated by the Reserve Bank. The Bank has 8 Local Head Offices spread over the country and these are headed by the Dy. Managing Directors. SBI is one of the largest employers in India, with 209,567 employees as on 31 March, 2017. Branch Network State Bank of India is the largest commercial Bank in the Public sector of India. The State Bank of India are engaged in the economic development of the country through a wide network of over 24,000 branches in India. Further, SBI has 191 overseas branches located in 36 countries across the globe. As of 31 March 2014, SBI has over 53,000 plus ATMs. SBI account for about 26% share in Bank Deposits and Loans in the country. Names of Associate Banks (since merged) 1. State Bank of Patiala 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Travancore 5. State Bank of Mysore 6. State Bank of Saurashtra 7. State Bank of Indore  State Bank of Saurashtra got merged with Parent, SBI on 13th August, 2008.  State Bank of Indore also got merged with Parent, SBI on 26th August, 2010.  Five Associate Banks, namely - State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad and the State Bank of Patiala and Bharatiya Mahila Bank were merged with State Bank of India on 1st April, 2017. IBC Academy Publications

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Subsidiaries State Bank has the following non-banking subsidiaries: 1. SBI Capital markets Ltd. (SBICAPS) 2. SBI Funds Management Pvt. Ltd. 3. SBI Factors & Commercial Services Pvt. Ltd. 4. SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) 5. SBI DFHI Ltd. 6. SBI Life Insurance Company Ltd. 7. SBI General Insurance Ltd. Global Presence - In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo–Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria. - In Nepal, SBI owns 55% of "Nepal SBI Bank Limited". (The stateowned Employees Provident Fund of Nepal owns 15% and the general public owns the remaining 30%.) Nepal SBI Bank Limited has branches throughout the country. - In Moscow, SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. - In Indonesia, it owns 76% of PT Bank Indo Monex. Functions State Bank of India performs all the functions of a commercial bank and acts as an agent of the Reserve Bank (RBI) in those places were RBI has no branch offices. Further it is required to play a special role in rural credit, namely, promoting banking habits in the rural areas, mobilising rural savings and catering to their needs. Central Banking Functions SBI acts as the agent of the Reserve Bank in all those places where the latter does not have its own branches. As agent to the Reserve Bank, the State Bank performs some very important functions: 1. It acts as the Bankers Bank: It receives deposits from the commercial banks and also gives loans to them on demand. The State Bank rediscounts the bills of the commercial banks. It also acts as the clearing house for the other commercial banks. 2. It acts as the Government’s Banker: It collects money from the public on behalf of the government and also makes payments in accordance with its instructions. The bank also manages the public debt of the Central and the State Governments. IBC Academy Publications

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Ordinary Banking Functions State Bank performs all normal banking activities as delivered by other Public/Private sector Banks in India. The bank with its large network of branches at rural and semi-urban centers contributes significantly towards credit to agriculture and rural markets.

DIFFERENCE BETWEEN STATE BANK OF INDIA AND OTHER NATIONALIZED (PUBLIC SECTOR) BANKS IN INDIA 1.

Public Sector Banks were established under different statutes, viz. Banking Companies (Acquisition and Transfer of Undertaking) Acts, 1970 and 1980. SBI was established under the State Bank of India Act, 1955 and its associates Banks are governed under the State Bank of India (Subsidiary Banks) Act, 1959.

2.

Public Sector Banks were wholly owned by the Government of India. Later, after the amendment passed in 1994, in the Banking Companies (Acquisition and Transfer of Undertaking) Acts, 1970 and 1980, these Banks were allowed to raise capital from the Public, however with a provision that the equity stake of the Central Government shall not fall below 51% of the Paid-up Capital. In case of State Bank of India, majority share-holding is held with Reserve Bank of India at the time of conversion of Imperial Bank of India into State Bank of India. As per the State Bank of India Act, 1955, the share-holding of RBI in SBI must be above 55% of the Paid-up Capital. The Subsidiaries of SBI are fully owned by SBI except in a few Subsidiaries, some share-holding is held by the public.

3.

State Bank of India acts as an Agent of RBI in places where RBI branches does not exist. The Nationalised PSU Banks are entrusted with the function of paying, receiving, collecting and remitting money, Bills and Securities on behalf of any State Government and Central Government, as entrusted by RBI.

INDIAN PRIVATE SECTOR BANKS Private Sector Banks are entities majorly owned by Private sector. The Private Sector Banks have played a strategic role in the growth of jointstock Banks in India. In 1951, there were 566 Private sectors Banks operating in India, out of which 474 were Non-scheduled and 92 were Scheduled Banks. Private Sector Banks include (1) Old Generation Private Sector Banks, (2) New Generation Private Sector Banks, (3) Foreign banks, and (4) NonScheduled Banks. IBC Academy Publications

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OLD PRIVATE SECTOR BANKS There were 14 Old Private Sector Banks currently operating in the Country viz: 1. Federal Bank 8. TN Mercantile Bank 2. The J & K Bank 9. Lakshmi vilas Bank 3. South Indian Bank 10. Dhanalakshmi Bank 4. United Western Bank 11. City Union Bank 5. Karur Vysya Bank 12. Nainital Bank 6. Karnataka Bank 13. SBI Commercial & International Bank 7. Catholic Syrian Bank 14. ING Vysya Bank Bank of Rajasthan has since merged with ICICI Bank; ING Bank has since acquired majority share-holdings in Vysya Bank and its name is rechristened to ING Vysya Bank.

NEW GENERATION PRIVATE SECTOR BANKS New generation Private Sector Banks were permitted to set up branches in India, in terms with the financial sector reforms recommended under Narasimham Committee Report, adopted by the Govt. of India in 1991. The minimum capital of New Private Sector Banks is stipulated at Rs. 100 crores. These Banks provided a financially viable, state-of-the-art contemporary technology infrastructure with customer-friendly services and soon became a benchmark for the Industry. Global Trust Bank was the first New Generation Bank, under the new regime of liberalization under Indian banking Industry. Two new generation banks, Centurion Bank and Bank of Punjab merged with HDFC Bank; leaving 7 Banks in the operation now. The list of New Generation Banks in India: 1. Axis Bank 2. DCB bank (erstwhile Development Credit Bank) 3. HDFC Bank 4. ICICI Bank 5. IndusInd Bank 6. Kotak Mahindra Bank 7. Yes Bank Two other important recommendations of the Narasimham Committee which bring a refreshing air for the Indian private sector banks are: (i) The Government should indicate that there shall be no further nationalization of banks, and IBC Academy Publications

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(ii) There should not be any difference in treatment between public sector and private sector banks.

SMALL FINANCE BANKS In August 1996, the RBI issued guidelines for setting up of Local Area Banks (LABs). The LABs were conceived as low cost structures which would provide efficient and competitive financial intermediation services in a limited area of operation. Taking this into account, the RBI decided to grant licenses to new “small finance banks” in the private sector. Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending. The aim behind these to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities. The objectives of setting up of small finance banks are to further financial inclusion by  provision of savings vehicles, and  supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations.

Summary of Regulations 1.

2. 3. 4. 5. 6.

7. 8. 9.

Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks. They can be promoted either by individuals, corporate, trusts or societies. They are established as public limited companies in the private sector under the Companies Act, 1956. They are governed by the provisions of Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes. The banks will not be restricted to any region. They were set up with the twin objectives of providing an institutional mechanism for promoting rural and semi urban savings and for providing credit for viable economic activities in the local areas. 75% of its net credits should be in priority sector lending and 50% of the loans in its portfolio must in Rs. 25 lakh range. The firms must have a capital of at least Rs. 100 crores. The promoters should have 10 years' experience in banking and finance. The promoters’ stake in the paid-up equity capital will be at IBC Academy Publications

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least 40% initially but must be brought down to 26% in 12 years. Joint ventures are not permitted. Foreign share-holding will be allowed in these banks as per the rules for FDI in private banks in India. 10. At net worth of Rs. 500 crores listing will be mandatory within three years. Small finance banks having net worth of below Rs. 500 crores could also get their shares listed voluntarily. List of Small Finance Banks in India 1. A U Small Finance Bank 2. Equitas Small Finance Bank 3. Ujjivan Small Finance Bank 4. Utkarsh Small Finance Bank 5. Janalakshmi Small Finance Bank 6. Capital Lab Small Finance Bank 7. Disha Small Finance Bank 8. ESAF Small Finance Bank 9. RGVN Small Finance Bank 10. Suryoday Small Finance Bank Capital Structure: The minimum paid-up equity capital for small finance banks shall be Rs. 100 crores. In view of the inherent risk of a small finance bank, it shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. Tier I capital should be at least 7.5 per cent of RWAs. Tier II capital should be limited to a maximum of 100 per cent of total Tier I capital. The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent. If the initial shareholding by promoter in the bank is in excess of 40 per cent, it should be brought down to 40 per cent within a period of five years. Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time. As per the current FDI policy, the aggregate foreign investment in a private sector bank from all sources will be allowed up to a maximum of 74 per cent of the paid-up capital of the bank (automatic up to 49 per cent and approval route beyond 49 per cent to 74 per cent). At all times, at least 26 per cent of the paid-up capital will have to be held by residents. In the case of Foreign Institutional Investors (FIIs)/ Foreign Portfolio Investors (FPIs), individual FII/ FPI holding is restricted to below 10 per cent of the total paid-up capital, aggregate limit for all FIIs /FPIs/ Qualified Foreign Investors (QFIs) cannot exceed 24 per cent of the total paid-up capital, which can be raised to 49 per cent of the total paid-up capital by the bank. IBC Academy Publications

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Deposit & Loan Exposure Ceiling: The maximum loan size and investment limit exposure to a single and group obligor would be restricted to 10 per cent and 15 per cent of its capital funds, respectively. Further, in order to ensure that the bank extends loans primarily to small borrowers, at least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh. After the initial stabilization period of five years, and after a review, RBI may relax the above exposure limits. The small finance bank, shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. It can also undertake other nonrisk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. The small finance bank can also become a Category II Authorised Dealer in foreign exchange business for its clients’ requirements. It however, cannot set up subsidiaries to undertake nonbanking financial services activities. Branch expansion: The annual branch expansion plans of the small finance banks for the initial five years would need prior approval of RBI. The annual branch expansion plans should be in compliance with the requirement of opening at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census).

FOREIGN BANKS IN INDIA In India, the role of Foreign Banks is growing significantly, post liberalization of Indian Banking Industry in 1992. Though, most of the Foreign Banks have been operating in India from pre-Independence era. A Foreign Bank is one, whose Head Office is located outside the geographical boundaries of India in another country. They are governed by the rules and regulations prevalent in their parent country. However, their branches operating in India would be mandatorily required to follow the rule of the land, i.e. Reserve Bank of India, apart from the regulatory requirements of the Central bank of their parent country. Thus, they operate under a regime of dual control. RBI Stipulations RBI stipulates minimum capital requirement for Foreign Banks, not below US $ 25 millions, spread over 3 branch offices in the manner – US$ 10 million each for the first and second branch office and US$ 5 million for the third branch. Additional branch offices may also be permitted, subject however to (a) the monitoring of the performances of the existing IBC Academy Publications

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Branches based on their financial performance, financial results, Inspection findings etc. and (b) the Internal Policy guidelines for allowing opening of foreign bank branches of RBI. In terms of the agreement under WTO relating to licensing Policy for foreign Banks, it is fixed at 12 bank branches in a year for India. However, the Indian Regulator has been allowing in excess of the commitment under WTO requirements, for Foreign Banks to open more Branches in India. Reserve Bank of India has further announced its policy for giving liberal licenses to Foreign Banks operating in India under a wholly owned Subsidiary bank, duly incorporated in India. The Subsidiary thus incorporated in India should have a minimum capital of Rs. 300 crores and at all times maintain a capital adequacy ratio of over 10%. RBI feels that the Subsidiary of Foreign Banks incorporated in India would ensure better compliance to RBI regulatory norms. Foreign Banks operating in India At present, 32 Foreign Banks with 310 branches are operating in India. Besides, about 43 Foreign Banks are operating in India through their Representative Offices, though in a limited way. Of these, 4 Banks have over 10 branch offices in India. Standard Chartered Bank (called as Stanchart Bank too) is the largest Foreign Bank with 67 branches spread over 15 states in India, followed by Citibank with 23 branches. There are a large number of Banks operating with less than 3 branches in India. At present, the Foreign Banks’ share in total banking assets stood at 10.52%, out of which 5 large Banks hold a share of 7.12% collectively.

SCHEDULED BANKS Vs NON-SCHEDULED BANKS As per Reserve Bank of India Act, 1934, Banks were classified as Scheduled Banks and Non-Scheduled Banks. The Scheduled banks are those having been entered in the Second schedule of Reserve Bank of India Act, 1934, whereas those excluded from it are called Non-Scheduled banks. All commercial banks – Indian as well as Foreign Banks, State Co-operative Banks, Regional Rural Banks are Scheduled banks. There are only a few Non-Scheduled Banks in India.

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BANKING REGULATION ACT, 1949 Important Provisions: 1. (Sec. 8): Prohibition of Trading A banking company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation. 2. (Sec. 9): Non-Banking Assets According to Sec. 9, “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years. 3. (Sec. 10): Management Sec. 10 (a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields: (a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d) Cooperative; (e) Economics; (f) Finance; (g) Law; (h) Small Scale Industry. The Section also states that at least not less than two directors should have special knowledge or practical experience relating to agriculture and rural economy and cooperative. Sec. 10(b) (1) further states that every banking company shall have one of its directors as Chairman of its Board of Directors. 4. (Sec. 11): Minimum Capital and Reserves It provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below: (a) Foreign Banking Companies: In case of banking company incorporated outside India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep with the RBI, either in Cash or in unencumbered approved securities: (i) The amount as required above, and (ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business. IBC Academy Publications

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(b) Indian Banking Companies: In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below: (i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs. (ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business, plus Rs. 25,000 in respect of each place of business elsewhere in the State. No such banking company shall be required to have paid-up capital and reserves exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to have paid- up capital and reserves exceeding Rs. 50,000. (iii) If it has all its places of business in one State, one or more of which are in Mumbai or Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Kolkata. No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs. 5. (Sec. 12): Capital Structure No banking company can carry on business in India, unless: (a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less than half of its subscribed capital. (b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944. This restriction does not apply to a banking company incorporated before 15th January 1937. (c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company. 6. (Sec. 13): Payment of Commission, Brokerage etc. A banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares. 7. (Sec. 15): Payment of Dividend No banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organization expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off. But Banking Company need not: (d) Write-off depreciation in the value of its investments in approved securities in any case where such depreciation has not actually been capitalized or otherwise accounted for as a loss; IBC Academy Publications

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(e) Write-off depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor; (f) Write-off bad debts in any case where adequate provision for such debts has been made to the satisfaction of the auditors of the banking company. Floating Charges: A floating charge on the undertaking or any property of a banking company can be created only if RBI certifies in writing that it is not detrimental to the interest of depositors — Sec. 14A. Similarly, any charge created by a banking company on unpaid capital is invalid — Sec. 14. 8. (Sec. 17): Reserve Fund/Statutory Reserve Every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 20% of the net profits of each year (as disclosed by its Profit and Loss Account) to a Reserve Fund. The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period. The exemption is granted if its existing reserve fund together with Securities Premium Account is not less than its paid-up capital. If it appropriates any sum from the reserve fund or the securities premium account, it shall, within 21 days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation. Moreover, banks are required to transfer 20% of the Net Profit to Statutory Reserve. 9. (Sec. 18): Cash Reserve Every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India. The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities. But every banking company’s asset in India should not be less than 75% of its time and demand liabilities in India at the close of last Friday of every quarter. 10. (Sec. 24): Liquidity Norms or Statutory Liquidity Ratio (SLR) In addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India. IBC Academy Publications

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This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank. Again, as per Sec. 24 of the Banking Regulation Act, 1949, every scheduled bank has to maintain 31.5% on domestic liabilities up to the level outstanding on 30.9.1994 and 25% on any increase in such liabilities over and above the said level as on the said date. But, w.e.f. 26.4.1997 fortnight, the maintenance of SLR for inter-bank liabilities was exempted. It must be remembered that at the start of the preceding fortnights, SLR must be maintained for outstanding liabilities. 11. (Sec. 20): Restrictions on Loans and Advances After the Amendment of the Act in 1968, a bank cannot: (i) Grant loans or advances on the security of its own shares, and (ii) Grant or agree to grant a loan or advance to or on behalf of: (a) Any of its directors; (b) Any firm in which any of its directors is interested as partner, manager or guarantor; (c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or (d) Any individual in respect of whom any of its directors is a partner or guarantor. Note: (ii)(c) Does not apply to subsidiaries of the banking company, registered under Sec. 25 of the Companies Act or a Government Company. 12. (Sees. 29 to 34A): Accounts and Audit This deals with the accounts and audit. Every banking company, incorporated in India, at the end of a financial year expiring after a period of 12 months must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year, or, according to the Third Schedule, or, as circumstances permit. According to Sec. 30 of BR Act, the Balance Sheet and Profit & Loss Account should be prepared according to Sec. 29, and it must be audited by a qualified auditor. Every banking company must take previous permission from RBI before appointing, reappointing or removing any auditor. RBI can also order special audit for public interest of depositors. Moreover, every banking company must furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditor’s report to the RBI and also the Registers of companies within three months from the end of the accounting period. IBC Academy Publications

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CHAPTER - 3

REGULATORY MACHINERY IN THE FINANCIAL MARKETS

RESERVE BANK OF INDIA (RBI) The Reserve Bank of India as being the central banking institution in India, controls the issuance and supply of the Indian rupee, controls monetary policy in India and regulates the banking system, is in terms of Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. Following India's independence on 15 August 1947, the RBI was nationalized on 1 January 1949. Banking system of every country is regulated by some authority in terms of their local laws. The bank is often referred to by the name Mint Street. RBI is also known as banker's bank. A central bank is known by different names in different countries. Find below the list of Banking Regulators in the select few countries: Bank of England - United Kingdom Federal Reserve - the USA European Central Bank (ECB) – European Union Federal Financial Supervisory Authority – Germany Financial Services Agency – Japan China Banking Regulatory Commission - China State Bank of Pakistan - Pakistan A central bank is a vital financial apex institution of an economy and the key objects of central banks may differ from country to country still they perform activities and functions with the goal of maintaining economic stability and growth of an economy. The objectives behind regulation of the financial/banking system, broadly are: • To generate, maintain and promote confidence and trust of the public in the financial/banking system. IBC Academy Publications

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• • •

To protect investor's interests by adequate/timely disclosure by the institutions and access to information by the investors. To ensure that the financial markets are both fair and efficient. To ensure that the participants measure up to the rules of the marketplace.

Brief History In 1921, the Government of India established the Imperial Bank of India to serve as the Central Bank of the country. But the Imperial Bank did not achieve any appreciable success in its functioning as the Central Bank. Based on the recommendations of the Hilton Young Commission, The Reserve Bank of India Act was passed by the Parliament in 1934, and the Reserve Bank started functioning from 1st of April, 1935. In 1949, The Government of India nationalized the Reserve Bank of India under the Reserve Bank (Transfer of Public Ownership) Act, 1948. The Reserve Bank of India is the kingpin of the Indian money market. It issues notes, buys and sells government securities, regulates the volume, direction and cost of credit, manages foreign exchange and acts as banker to the government and banking institutions. Capital The bank’s fully paid-up share capital was Rs. 5 crores. Of this, Rs.4,97,80,000 were subscribed by the private shareholders and Rs. 2,20,000 were subscribed by the Central Government for disposal of 2,200 shares at part to the Directors of the Bank (including members of the Local Boards) seeking the minimum share qualification. The share capital of the bank has remained unchanged until today. The Reserve Bank also had a Reserve Fund of Rs. 150 crores in 1982. Organization As per the Reserve Bank of India Act, the organisational structure of the Reserve Bank comprises of (A) Central Board and (B) Local Boards. (a) Central Board - The Central Board of Directors is the leading governing body of the Bank. It is entrusted with the responsibility of general superintendence and direction of the affairs and business of the Reserve Bank. Management: The Central Board of Directors consists of 21 members. Besides Governor and 4 Deputy Directors, 4 Directors are nominated each by Four Local Boards. Apart from them, 10 Government nominated directors and 2 Finance Ministry Representatives are nominated by the Government of India. The Governor is the highest official of the Reserve IBC Academy Publications

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Bank. There are four Deputy Governors to help and advise him. Each Deputy Governor is allotted a particular function. The Central Board of Directors exercises all the powers of the bank. The Central Board should meet at least six times in each year and at least once in three months. Usually, the Central Board keeps a meeting in March every year at New Delhi so as to discuss the budget with the Finance Minister after its presentation in parliament. Similarly, it keeps a meeting in August at Mumbai in order to pass the Bank’s annual report and accounts. (b) Local Boards - The Reserve Bank of India is divided into four regions: the Western, the Eastern, the Northern and the Southern regions. For each of these regions, there is a Local Board, with headquarters in Mumbai, Kolkata, New Delhi and Chennai. Each Local Board consists of five members appointed by the Central Government for four years. They represent territorial and economic interests and the interests of co-operative and indigenous banks in their respective areas. In each Local Board, a chairman is elected from amongst their members. Managers’ in-charge of the Reserve Bank’s offices in Mumbai, Kolkata, Chennai and New Delhi are ex-officio Secretaries of the respective Local Boards at these places. The Local Boards carry out the functions of advising the Central Board of Directors on such matters of local importance as may be generally or specifically referred to them or performing such duties which may be assigned to them. Generally, a Local Board deals with the management of regional commercial transactions. Offices of RBI The Central Office of the RBI was initially established in Kolkata, but later, in 1937, it was moved to Mumbai. The Governor of RBI sits in the Central Office at Mumbai and all policy issues are dealt here. RBI has 19 Regional offices, most of which are located at State Capitals. The Reserve Bank has three training establishments, viz., (a) Bankers Training College, Mumbai, (b) College of Agricultural Banking, Pune; and (c) Reserve Bank Staff College, Chennai. Functions of RBI According to the preamble of the Reserve Bank of India Act, the main functions of the bank is “to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” The various functions performed by the RBI can be broadly classified in three parts: Traditional Central banking Functions, Developmental Functions, and Regulatory Functions. IBC Academy Publications

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a. TRADITIONAL CENTRAL BANKING FUNCTIONS Reserve Bank of India discharges all those functions which are performed by a central bank, as is done by all Central banks across the Globe. 1. Monopoly of Note Issue: Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denomination of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000. However, the distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department, which is entrusted with the issue of currency notes. In accordance with the Reserve Bank of India Act, it is required to maintain Reserve Funds for Note issuing. The Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold and Rs. 85 crores in the form of foreign securities. The system as it exists today is known as, the Minimum Reserve System. Coins are minted by Govt. of India and RBI acts as an agent of the Govt. of India for its distribution, issue and handling. Four mints are in operation at Kolkata, Hyderabad, Mumbai and Noida in UP. 2. Banker to the Government: Reserve Bank of India serves as a banker to the Central Government and the State Governments and provides a range of banking services, viz.: (a) Maintaining and operating of deposit accounts of the Central and State Government. (b) Receipts and collection of payments to the Central and State Government. (c) Making payments on behalf of the Central and State Government. (d) Transfer of funds and remittance facilities of the Central and State Governments. (e) Managing the public debt and issue of new loans and Treasury Bills of the Central Government. (f) Providing ways and means advances to the Central and State governments to bridge the interval between expenditure and flow of receipts of revenue. (g) Advising the Central/State governments on financial matters, such as the quantum, timing and terms of issue of new loans. For ensuring the success of government loan operations, the RBI plays an active role in the gilt-edged market. (h) The bank also tenders advice to the government on policies concerning banking and financial issues, planning as resource mobilization. The Government of India consults the Reserve Bank on IBC Academy Publications

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certain aspects of formulation of the country’s Five Year Plans, such as financing pattern, mobilization of resources, institutional arrangements regarding banking and credit matters. The government also seeks the bank’s advice on policies regarding international finance, foreign trade and foreign exchange of the country. (i) The Reserve Bank represents the Government of India as member of the International Monetary Fund and World Bank. 3. Bank of Banker’s: The Reserve Bank controls the activities of the banks in the country. All the commercial banks, co-operative banks and foreign banks in the country have to open accounts with the bank and are required to keep a certain portion of their deposits as reserves with the Reserve Bank. The scheduled banks are also required to submit to the Reserve Bank a number of returns every Friday. 4. Lender of the Last Resort: The scheduled banks can borrow from the Reserve Bank on the basis of eligible securities. They can also get the bills of exchange rediscounted. The Reserve Bank acts as the clearing house of all the banks. It adjusts the debits and credits of various banks by merely passing the book entries. The Bank also provides free remittance facilities to the banks. Thus, it acts as the banker’s bank. Reserve Bank also acts as the lender of the last resort and an emergency bank. It grants short-term loans to scheduled commercial banks against eligible securities in time of need. 5. National Clearing House: The Reserve Bank acts as the national clearing house and helps the member banks to settle their mutual indebtedness without physically transferring cash from place to place. The Reserve Bank is managing many clearing houses in the country with the help of which, cheques worth crores of rupees are cleared every day. The ultimate balances are settled by the banks through cheques on the Reserve Bank. 6. Credit Control: The Reserve Bank of India is the controller of credit, i.e., holds power to influence the volume of credit created by banks in India. It can do so through changing the bank rate or through open market operation. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank of India. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to obtain a license from the Reserve Bank of India to do banking business within India and may cancel it if stipulated conditions are not fulfilled. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and IBC Academy Publications

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liabilities. This power of the bank to call for information is also intended to give it effective control of the credit system. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operation of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. The Reserve Bank has also the power to inspect the accounts of any commercial bank. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. 7. Custodian of Foreign Exchange Reserves: The Reserve Bank has the responsibility of maintaining the external value of the rupee. There is centralisation of the entire foreign exchange reserves of the country with RBI to avoid fluctuations in the exchange rate. Reserve Bank of India deals with the currencies of those countries only which are members of IMF. The RBI has the authority to enter into foreign exchange transactions both on its own account and on behalf of government. 8. Other Functions Collection of Data and Publications: The Reserve Bank of India collects statistical data and economic information through its research departments. It compiles data on the working of commercial and cooperative banks, on balance of payments, company and government finances, security markets, price trends, and credit measures. Export Assistance: Reserve Bank of India extends loan to Export oriented Industries, indirectly by refinancing the loans given by Export-Import Bank of India and other Banks.

b. DEVELOPMENTAL FUNCTIONS The scope of the developmental functions performed by the Reserve Bank: (i) Agricultural Credit: The bank’s responsibility in this sector is necessitated by the predominantly agricultural influence on the Indian economy and the urgent need to expand and coordinate the credit facilities available to the rural sector. The RBI has set up a separate agricultural department with expert staff to study related issues of agricultural credit and coordinate with the banks/ other agencies to provide agricultural finance. The RBI does not provide finance directly to the agriculturists, but through agencies like cooperative banks, land development banks, commercial bank etc. After the establishment of the National Bank for Agriculture and IBC Academy Publications

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Rural Development (NABARD) on July 12, 1982, all the functions of the RBI relating to rural credit have been transferred to this new agency. Industrial Finance: The Reserve Bank of India has taken initiative in setting up statutory Financial Institutions/corporations at the allIndia and regional levels to function as specialised institutions for long-term lending. The first being, Industrial Finance Corporation of India, set up in 1948, followed by the State Finance Corporations in each of the state from 1953 onwards. The RBI has also helped in the establishment of other financial institutions, such as the Industrial Development Bank of India, the Industrial Reconstruction Bank of India, Small Industries Development Bank of India, Unit Trust of India, etc. For the promotion of foreign trade, the Reserve Bank has established the Export and Import Bank of India. Similarly, for the development of the housing industry, the RBI has established the National Housing Bank. Furthermore, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank, operates credit guarantee schemes with the objective of providing cover against defaults in repayment of loans made to small borrowers, including small-scale industrial borrowers. (iii) Development of Bills market: Reserve Bank of India has made concerted efforts for the development of Bills market. In 1954, all scheduled banks were directed to develop and encourage financing through Trade Bills. In 1958, export bills were also brought within the purview of this scheme.

(ii)

c. SUPERVISORY FUNCTIONS Over the years, extensive powers have been conferred on the Reserve Bank of India for supervision and control of banking institutions. The Banking Regulation Act, 1949 provides wide powers to the Reserve Bank to regulate and control the activities of Banks to safeguard the interests of depositors. The supervisory/regulatory functions exercised by the Reserve Bank may be briefly mentioned as under: 1. Licensing of Banks: There is a statutory provision that a company starting banking business in India has first to obtain a license from the Reserve Bank. If the Reserve Bank is dissatisfied on account of the defective features of the proposed company, it can refuse to grant the license. The bank is also empowered to cancel the license of a bank when it will cease to carry on banking business in India. 2. Approval of Capital, Reserves and Liquid Assets of Bank: The Reserve Bank examines whether the minimum requirements of capital, reserve and liquid assets are fulfilled by the banks and approves them. IBC Academy Publications

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Branch Licensing Policy: The Reserve Bank exercises its control over expansion of branches by the banks through its branch licensing policy. 4. Inspection of Banks: The Reserve Bank is empowered to conduct inspection of banks. The inspection may relate to various aspects such as the bank’s organizational structure, branch expansion, mobilisation of deposits, investments, credit portfolio management, credit appraisal profit planning, manpower planning, as well as assessment of the performance of banks in developmental areas such as deployment of credit to the priority sectors, etc. The bank may conduct investigation whenever there are complain about major irregularities or frauds by certain banks. 5. Control over Management: The Reserve Bank also looks into the management side of the banks. The appointments, re-appointment or termination of appointment of the chairman and chief executive officer of a private sector bank is to be approved by the Reserve Bank. The bank’s approval is also required for the remuneration, perquisites and post retirement benefits given by a bank to its chairman and chief executive officer. The Boards of the public sector banks are to be constituted by the Central Government in consultation with the Reserve Bank. 6. Control Over Methods: The Reserve Bank exercises strict control over the methods of operation of the banks to ensure that no improver investment and injudicious advances made by them. 7. Audit: Banks are required to get their balance sheets and profits and loss accounts duly audited by the auditors approved by the Reserve Bank. In the case of the SBI, the auditors are appointed by the Reserve Bank. 8. Credit Information Service: The Reserve Bank is empowered to collect information about credit facilities granted by individual bank and supply the relevant information in a consolidated manner to the bank and other financial institutions seeking such information. 9. Control over Amalgamation and Liquidation: The banks have to obtain the sanction of the Reserve Bank for any voluntary amalgamation. The Reserve Bank in consultation with the central government can also suggest compulsory reconstruction or amalgamation of a bank. It also supervises banks in liquidation. The Bank under liquidation submits returns showing their positions to RBI. 10. Deposit Insurance: To protect the interest of depositors, banks are required to insure their deposits with the Deposit Insurance Corporation. The Reserve Bank of India has promoted such a corporation in 1962, which has been renamed in 1978 as the Deposit Insurance and Credit Guarantee Corporation. 3.

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11. Training and Banking Education: The RBI has played an active role in making institutional arrangement for providing training and banking education to the bank personnel, with a view to improve their efficiency. In brief, Reserve Bank of India is performing both traditional central banking functions and developmental functions for the steady growth of the Indian economy.

CREDIT CONTROL Commercial banks grant loans and advances to merchants and manufacturers. They create credit or bank deposits in the process of granting loans. A Central Bank must control the credit created by commercial banks in order to maintain the value of money at a stable level. Similarly, excessive contraction of credit leads to deflation which leads to unemployment and suffering among workers. Under such circumstances, the Central bank should encourage credit creation. Therefore, control of credit is the prime function of a Central Banks across the globe. Control of credit denotes contraction as well as expansion of credit, as desirable by the economy of the country. The two methods to control credit creation or contraction are as follows: a) Quantitative Credit Control or General methods. b) Qualitative Credit Control or Selective methods.

A. QUANTITATIVE CREDIT CONTROL OR GENERAL METHODS As traditional methods of credit control, these methods have only a quantitative effect on the supply of credit, i.e. for either increasing or reducing the volume of credit. They cannot control credit for its quality. The important quantitative methods or instruments of credit control are as follows: 1. BANK RATE The bank rate is the rate of interest at which the Reserve Bank of India makes advances to the commercial banks against approved securities. The change in the bank rate leads to changes in the market rates of interest i.e., short-term as well as long-term interest rates. This is used as a tool to keep in check inflation (i.e., state of rising prices) or deflation (i.e., state of falling prices) periodically. The Reserve Bank of India changes the bank rate from time to time to meet the changing conditions of the economy, though moderately. The Bank Rate is, at present, pegged at 5.65%. IBC Academy Publications

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2.

OPEN MARKET OPERATIONS Open market operations means buying and selling of government securities by the Reserve Bank. Open market operations have a direct effect on the availability and cost of credit. When the central bank purchases securities from the banks, it increases their cash reserve position and hence, their credit creation capacity. On the other hand, when the central bank sells securities to the banks, it reduces their cash reserves and the credit creation capacity. The open market operations of the Reserve Bank are restricted to Government securities.

3.

CASH-RESERVE RATIO REQUIREMENT (CRR) The Reserve Bank of India Act, 1934 requires the commercial banks to keep with them a minimum cash reserve. The RBI can change the cash reserve requirement of the commercial banks in order to affect their credit creation capacity. An increase in the cash reserve ratio reduces the excess reserves of the banks and similarly, a decrease in the cash reserve ratio increases their excess reserves. The variability in cash reserve ratios directly affects the availability and cost of credit. The variable cash-reserve ratio is the most direct, immediate and the most effective tool for credit control. This method is mainly intended to control and stabilise the prices of commodities, stocks and shares and prevent speculation and hoarding. RBI uses the CRR as a drastic measure to curb credit expansion. The CRR requirements is revised frequently and now it is pegged at 4.00%, w.e.f. March, 2013. There has been no change since then.

4.

STATUTORY LIQUIDITY RATIO (SLR) Under the Banking Regulation Act, 1949, banks are required to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposits. Maintenance of adequate liquid assets is a basic principle of sound banking. The Reserve Bank has been empowered to change the minimum liquidity ratio. There are two reasons for raising the statutory liquidity requirements or ratio i.e. a) It reduces commercial bank’s capacity to create credit and thus helps to check inflationary pressures. b) It makes larger resources available to the government. c) As per Narasimham committee report, the government decided to reduce the statutory liquidity ratio in stages over a 3 year period from 38.5% to 25%. The SLR requirement is revised frequently to check liquidity position, and currently it is pegged at 18.75%. IBC Academy Publications

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B. QUALITATIVE CREDIT CONTROL OR SELECTIVE CREDIT CONTROL METHODS Selective credit controls are qualitative credit control measures undertaken by the central bank to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities. They encourage credit to essential industries and at the same time discourage credit to non-essential industries. Similarly, they encourage productive activities and at the same time discourage speculative activities.

METHODS OF SELECTIVE CREDIT CONTROLS - RBI The Banking Regulation Act, 1949, granted wide powers to the Reserve Bank of India to adopt selective methods of credit control. These directives may relate to the following: (a) The purpose for which advances may or may not be made. (b) The margins to be maintained on secured loans. (c) The maximum amount of advances to any firm or company, and (d) The rate of interest to be charged. The Reserve Bank of India has undertaken the following selective credit controls to check speculative and inflationary pressures and extend credit to productive activities. 1. Variation of Margin Requirements on Loans: The “margin” is the difference between the “loan value” and the “market value” of securities offered by borrowers against secured loans. By fixing the margin requirements on secured loans, the central bank does not permit the commercial banks to lend to their customers the full value of the securities offered by them, but only a part of their market value. For example, if the central bank prescribes the margin requirements at 40%, that means that the commercial banks can lend only 60% of the market value of the securities of the customers. If the margin is raised to 50%; the banks can lend only 50% of the market value of the securities to the customers. Thus, by changing the margin requirements, the amount of loan made by the banks can be changed in accordance with the policy of the central government. As a result, the bank credit will be diverted from the field of speculative activities to the other fields of productive investments. If, on the contrary, the central bank lowers down the margin requirements, the amount of bank advances to the customers IBC Academy Publications

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2.

3.

4.

5.

6.

against securities can be automatically increased. Thus, by altering margin requirements from time to time, the central bank keeps on changing the volume of bank loans to the borrowers. Credit Authorization Scheme (CAS): Credit Authorization Scheme is a type of selective credit control introduced by the RBI. Under the scheme, the commercial banks had to obtain Reserve Bank’s authorization before sanctioning any fresh credit of Rs. 1 crore or more to any single party. The limit was later gradually raised to Rs. 6 crores in 1986, in respect of borrowers in private as well as public sector. Under this scheme, the Reserve Bank requires the commercial banks to collect, examine and supply detailed information regarding the borrowing concerns. This regulation has since been dispensed with. Control of Bank Advances: With a view to prevent speculation, Reserve Bank has fixed from time to time maximum limits for some kinds of loans and advances. This regulation has since been dispensed with. Differential Interest Rates: In 1966, the Reserve Bank announced the policy of “Selective Liberalization of Credit.” According to this policy, the Reserve Bank encouraged credit to defense industries, export industries and food grains for procurement by government agencies. The Reserve Bank agreed to provide refinance at the bank rate in respect of advances to the above industries. At the same time, it made credit dearer for other purposes. Credit Squeeze Policy: Since 1973, the Reserve Bank has adopted a “Credit squeeze policy” or dear money policy as an antiinflationary measure. This policy aims at curbing overall loanable resources of banks and also enhancing the cost or credit of borrowers from banks. Moral Suasion: This method involves advice, request and persuasion with the commercial banks to co-operate with the central bank in implementing its credit policies. The Reserve Bank has also been using moral suasion as a selective credit control measure from 1956. It has been sending periodic letters to the commercial banks to use restraint over their credit policies in general and in respect of certain commodities and unsecured loans in particular. The need for moral suasion has increased considerably after the nationalization of 20 PSU Banks.

MONETARY POLICY OF RESERVE BANK OF INDIA Monetary policy, generally refers to those policy measures of the central bank which are adopted to control and regulate the volume of currency and credit in a country. Broadly speaking, by monetary policy is meant the IBC Academy Publications

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policy pursued by the central bank of a country for administering and controlling country’s money supply including currency and demand deposits and managing the foreign exchange rates:

RESERVE BANK OF INDIA & MONETARY CONTROLS The main objective of monetary policy pursued by the Reserve Bank of India is that of ‘controlled monetary expansion.’ Controlled monetary expansion implies two things: (a) Expansion in the supply of money, and (b) Restraint on the secondary expansion of credit. (a) Expansion in the Supply of Money In a developing country like India, money supply has to be expanded sufficiently to match the growth of real national income. Although, it is difficult to say what relation the rate of increase in money supply should bear to the rate of growth in national income, more generally, the rate of increase in money supply should be somewhat higher than the projected rate of growth of real national income for two reasons. (i) As incomes grow the demand for money as one of the components of savings tends to increase. (ii) Increase in money supply is also necessitated by gradual reduction of non-monetized sector of the economy. In India, the rate of increase in money supply has been far in excess of the rate of growth in real national income. It has resulted, to a large extent, in the creation of consistent inflationary pressures in the economy. (b) Restraint on the Secondary Expansion of Credit Government budgetary deficits for financing a part of the investment outlays constitute an important source of monetary expansion in India. It is, therefore essential to restrain the secondary expansion of credit. While exercising restraints, care should be taken that the legitimate requirements of agriculture, industry and trade are not adversely affected and credit is channelized into the vital sectors of the economy, specially the priority sectors. In order to achieve the twin goals, it is essential to formulate a monetary policy which may regulate the flow of credit to desired sectors. The Reserve Bank has at its disposal both quantitative (traditional) and qualitative (selective) methods to control credit. In the past, the Reserve Bank has employed bank rate, open market operations, variable reserves ratio and selective credit controls as the instruments to restrain the secondary expansion of credit. IBC Academy Publications

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RBI AND INFLATION (in Nutshell) INFLATION In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time. Inflation has the following adverse effects on the economy: INFLATION AND PURCHASING PRODUCTS PURCHASING POWER: The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all being equal, inflation decreases the amount of goods or services anyone be able to purchase. This will result in the debt conditions, lesser purchase of goods and services (due to higher prices) and will directly hurt the economy. INFLATION AND DEBT : Price inflation is a debtor's best friend and a creditor's worst enemy. If a creditor gave Rs. 10,000 to a debtor in 2010 for a period of three years, and after two years inflation occurred, as a affect the value of that 10,000 becomes equivalent to 8,000 (a loss in the value of Rs. 2,000), The effect of inflation on debtors is positive because debtors can pay their debts with money that is less valuable. Other negative impacts Black-marketing: Anticipating inflation, many profiteers start collecting/ hoarding essential commodities, such as onions and kerosene for releasing these later when the inflation strikes, in order to make big bucks in no time. The common man has to pay more than a hefty amount for these regular commodities. Unemployment: Inflation comes along with a gift package of unemployment; companies with limited resources will start to fire people on the name of cost cutting and also the new recruitments will not happen resulting in rise in unemployment. Different stages of Inflation 1.

CREEPING INFLATION: Creeping or mild inflation is when prices rise 3% a year or less. IBC Academy Publications

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2.

3.

4.

WALKING INFLATION: This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. GALLOPING INFLATION: When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country. HYPERINFLATION: Hyperinflation is when the prices skyrocket; the currency becomes a piece of trash. Zimbabwe experienced similar conditions in the previous years.

Calculation of Inflation In India inflation is calculated by the help of CPI (Consumer Price Index), previously it was calculated by WPI (Wholesale Price Index), CPI as a scale was adopted by RBI, due the recommendations of Urijit Patel committee.

RBI and MONETARY POLICY (in Nutshell) 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 main objectives of monetary policy in India are: 1. Maintaining price stability. 2. Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth. 3. Financial stability. There are several direct and indirect instruments that are used in the formulation and implementation of monetary policy. Monetary policy consists of two tools - (i) DIRECT TOOLS and (ii) INDIRECT TOOLS. DIRECT TOOLS These tools are the special powers of RBI through which it can direct and control the amount of flow of money in the market, these consists of SLR (statutory liquidity ratio) and CRR (Cash reserve ratio), lets understand them individually.  CRR- CRR is 4% of NDTL (Net Demand and Time Liability), this the amount of money banks park with RBI in the form of cash.(must for banks)  SLR- SLR is 18.75% of NDTL, this is the amount that the banks have to maintain in the form of gold or govt. securities before lending to the public. NOTE- NDTL is the sum of all the demand (current account and savings account sum in bank) and time (fixed deposits or recurring IBC Academy Publications

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deposits etc. which are to be paid on maturation), these are assets for us but a liability (debt) for the banks.  REFINANCE FACILITIES Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks. INDIRECT TOOLS / OMO (OPEN MARKET OPERATIONS) An open market operation (also known as OMO) is an activity by a Central bank to buy or sell government bonds on the open market. These tools indirectly help in controlling inflation, which are: LAF (LIQUIDITY ADJUSTMENT FACILITY) 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. These contain Repo rate and Reverse Repo rates.  REPO RATE (Repurchase Agreements): This is the rate at which the banks borrow the money from RBI to meet their sudden demands, these are done with the help of repurchase agreements (these are Govt. securities, which has a date on it claiming to be re-bought at some certain date). How RBI controls inflation: RBI increase Repo rate in the conditions of high inflations and banks are not encouraged to borrow money from RBI to release them in to the market resulting in lesser flow of money causing inflation to decrease. RBI decreases the REPO rate when the inflation is under control. Current REPO rate stands at 5.40% of NDTL.  REVERSE REPO This is the opposite of the repo rate and is the rate at which banks park their excess money with RBI which in turn gives the govt. securities under repurchase agreement. Banks do this because their money is in safe hands and they get a healthy rate of interest against the park amount. Current Reverse Repo rate is at 5.15% of NDTL (-0.25% of REPO rate)  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. When banks borrow long term funds from RBI. They’ve to pay this much interest rate to RBI. Current Bank Rate is at 5.65% of NDTL (+1% of Repo rate)  MSF (Marginal Standing Facility) The difference between Repo and MSF is that there is a minimum amount of Rs 1 crore to be borrowed by banks. And this facility is only for Scheduled Commercial Banks (SCBs). This is done to balance the daily mismatches of banks. IBC Academy Publications

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Current MSF is at 5.65 % of NDTL (+1 % of Repo rate) .  

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 mobilised cash is held in a separate government account with the Reserve Bank.

NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT (NABARD) National Bank for Agriculture and Rural Development (NABARD) was established on the recommendations of Shivaraman Committee, by an act of Parliament on 12 July, 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premier agencies to provide credit in rural areas. NABARD perform dual functions – (a) The function of the Reserve Bank as an apex institution, and (b) The function of Agricultural Refinance and Development Corporation as a refinance institution. The major objectives of NABARD are: 1. To give financial assistance for increasing the agricultural production. 2. To supply the long-term needs of the rural areas. 3. To supply loans by way of refinance. 4. To help small industries, cottage industries and also artisans. 5. To achieve overall rural development. The authorized capital of NABARD is Rs. 500 crores and the paid up capital is Rs. 100 crores. The paid-up capital is contributed by the Central Government and the Reserve Bank in equal proportions. NABARD does not provide credit directly to the farmers. It provides refinance credit to the state co-operative banks, regional rural banks and other financial institutions as may be approved by the Reserve Bank. It is a single integrated agency for meeting the credit needs of all types of agricultural and rural development activities. IBC Academy Publications

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Functions 1.

2.

3.

4.

5.

6.

7.

Apex Institution for Rural Finance: NABARD performs all the functions of RBI and it directs the policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It, thus acts as an apex bank in the country for supporting and promoting agriculture and rural development. Refinance Institution: It acts as an Apex refinancing agency for the institutions providing production and investment credit for promoting various developmental activities in rural areas. It provides refinance facilities to state co-operative banks, regional rural banks, commercial banks and other financial institutions approved by the Reserve Bank of India. Credit Functions: NABARD is empowered to give short-term, mediumterm and long-term loans in a composite form. It looks after the credit requirements of all types of agricultural and rural development activities. (a) It provides short-term, medium-term and long-term credits to state co-operative banks, land development banks, regional rural banks and other financial institutions approved by the Reserve Bank of India. (b) It grants long-term loans, upto 20 years, to state governments to enable them to subscribe to the share capital of co-operative credit societies. (c) It provides medium-term loans to state co-operative banks and regional rural banks for agricultural and rural development. (d) It gives long-term loans to any institution approved by the Central Government. Contribution of Share Capital: NABARD contributes to the share capital of any institution concerned with agriculture and rural development. Investment in Securities: NABARD can invest in securities of any institution concerned with agriculture and rural development. For promoting innovative investments, NABARD has started “Venture capital fund.” Conversion and Rescheduling Facilities: NABARD provides refinance to eligible institutions for conversion and rescheduling of loans, under conditions of drought, famine or other natural calamities, military operations etc. Financial help to Non-agricultural Sector: NABARD renders financial help to the non-agricultural sector with the aim of promoting integrated rural development. IBC Academy Publications

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Co-ordination of Activities: NABARD co-ordinates the activities of central and state governments, planning commission and other institutions concerned with the development of small-scale industries, village and cottage industries, rural crafts and industries in the decentralised sector. 9. Regulatory Function: NABARD has the responsibility to inspect regional rural banks, and central and state co-operative banks. 10. Maintenance of Research and Development Fund: NABARD maintains research and development fund: (a) to promote research in agriculture and rural development, and (b) to formulate programmes to suit the requirements of different areas, and to cover special activities. 11. Training Programmes: NABARD has to provide comprehensive training programmes to its own staff as well as to the staff of state cooperative banks, regional rural banks etc. The training is to be meant for upgrading the technical skill and competence of the staff. 12. Evaluation of Projects: NABARD undertakes monitoring and evaluation of refinanced projects. It is responsible for the development, policy, planning operational matters, co-ordination, monitoring, training, consultancy etc., relating to rural credit. 8.

Micro-finance and role of NABARD For a better reach of microfinance program, a continuous check of the status, progress, trends, qualitative and quantitative performance comprehensively is required. Thus, the Reserve Bank of India and NABARD has laid out certain guidelines in FY06-07 for the commercial banks, Regional Rural Banks and Cooperative Banks to provide the data to RBI and NABARD about the progress of the microfinance program. The Banks also provides data regarding loans given by banks to the microfinance institutions.

SECURITIES & EXCHANGE BOARD OF INDIA (SEBI) SEBI was formed by the Government of India in 1992 under SEBI Act, 1992. Controller of Capital Issues was the regulatory authority before SEBI came into existence; it derived authority from the Capital Issues (Control) Act, 1947. Initially, SEBI was a non-statutory body, however in 1995, it was given additional statutory power by an amendment to the Securities and Exchange Board of India Act, 1992. In April, 1998 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India. The SEBI is managed by six members, i.e. by the chairman who is nominated by central government & two members, i.e. officers of central IBC Academy Publications

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ministry, one member from the RBI & the remaining two are nominated by the central government. SEBI is headquartered in Mumbai, and has its Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. SEBI acts as the Regulator of Capital markets in India. As a Regulator, SEBI is required to monitor the businesses conducted in Stock Exchanges, supervise the workings of Stock Brokers and Financial Institutions, ShareTransfer Agents, Merchant Bankers, Underwriters etc. in order to prohibit unethical and undesirable trade practices in the Security markets, detrimental to the interest of common Investors. Formation of SEBI is largely considered as a fall out of one of the positive impacts of infamous “Securities Scam of 1990-91” of which the Chief Architect was Mr. Harshad Mehta and others. Therefore, one of the vital functions includes protection of interests of the investors in the Capital markets as well as to promote the development of the Capital markets. Capital market is regulated by the Capital Markets Division of the Department of Economic Affairs, Ministry of Finance, Govt. of India. The Division has over-all responsibility for orderly growth and development of the Securities market and the protection of the interest of common Investors. Functions SEBI is the Apex body and act as Regulator and Development institution for the Capital market. It has semi-executive, semi-legislative and semi-judicial functions for the three different players in the capital markets viz. (i) the investors, (ii) the market intermediaries and (iii) the issuers of securities. SEBI drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. There is a Securities Appellate Tribunal which is a three-member tribunal and is presently headed by a former Chief Justice of a High court. A second appeal lies directly to the Supreme Court. SEBI has also been instrumental in taking quick and effective steps in light of the global meltdown and the Satyam fiasco. It had increased the extent and quantity of disclosures to be made by Indian corporate promoters. SEBI has recently increased the application limit for retail investors to Rs 2 lacs, from Rs 1 lac earlier. Statutory Powers 1. 2.

Approve by−laws of stock exchanges. Require the stock exchange to amend their by−laws. IBC Academy Publications

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3. 4. 5. 6. 7. 8. 9.

Inspect the books of accounts and call for periodical returns from recognized stock exchanges. Inspect the books of accounts of the financial intermediaries. Compel certain companies to list their shares in one or more stock exchanges. Levy fees and other charges on the intermediaries for performing its functions. Grant license to any person for the purpose of dealing in certain areas. Delegate powers exercisable by it. Prosecute and judge directly the violation of certain provisions of the companies Act.

INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA) Insurance Regulatory and Development Authority (IRDA), with its headquarters at Hyderabad, is an autonomous apex statutory body which regulates and develops the insurance industry in India. It was constituted by a Parliament of India act called Insurance Regulatory and Development Authority Act, 1999. The IRDA Act, 1999 was passed as per the major recommendation of the Malhotra Committee report (1994) which recommended establishment of an independent regulatory authority for insurance sector in India. Later, It was incorporated as a statutory body in April, 2000. The IRDA Act, 1999 also allows private players to enter the insurance sector in India besides a maximum foreign equity of 26 per cent in a private insurance company having operations in India. Objectives & Mission of IRDA IRDA serves as an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith. 1. To protect the interest of and secure fair treatment to policyholders; 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy;

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3.

4.

5.

6. 7.

To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates; To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery; To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players; To take action where such standards are inadequate or ineffectively enforced; To bring about optimum amount of self-regulation in day-to-day working of the industry consistent with the requirements of prudential regulation.

Duties & Functions The duties, powers and functions of IRDA as laid down in section 14 of IRDA Act, 1999 are as follows:  to issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;  protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;  specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents  specifying the code of conduct for surveyors and loss assessors;  promoting efficiency in the conduct of insurance business;  promoting and regulating professional organizations connected with the insurance and re-insurance business;  calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business;  control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);

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      

specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; regulating investment of funds by insurance companies; adjudication of disputes between insurers and intermediaries or insurance intermediaries; supervising the functioning of the Tariff Advisory Committee; specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f); specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and exercising such other powers as may be prescribed.

GLOBAL DEVELOPMENT INSTITUTIONS NEW DEVELOPMENT BANK (NDB) of BRICS Nations The 6th BRICS summit, a grouping of major emerging economies which includes Brazil, Russia, India, China and South Africa was hosted at the host city is Fortaleza, Brazil. Leaders of the BRICS member nations agreed to create a multilateral New Development Bank (NDB) for infrastructure needs. New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a proposed multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing World Bank and International Monetary Fund.  The Bank is setup to foster greater financial and development cooperation among the five emerging markets and is aimed at funding infrastructure projects in developing nations.  It would be headquartered in Shanghai, China and the first chief executive will be from India. K V Kamath, former Non-Executive Chairman of ICICI Bank, is the chief of the New Development Bank of BRICS countries  The five countries will set up a $100 bn pool of currency reserves to help countries forestall short-term liquidity pressures.  China, the region’s largest economy, will contribute $41 bn to the CRA. Russia, India, Brazil will contribute $18 bn each, while South Africa will contribute $5 bn.  India will preside over its operations for the first five years, followed by Brazil and then Russia. It is scheduled to start lending in 2016. IBC Academy Publications

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 

The bank will begin with $50 bn divided equally between its five founder members. Another $50 bn will come from new members. New areas of cooperation to be explored - Mutual recognition of Higher Education Degrees and Diplomas; - Labor & Employment, Social Security, Social Inclusion Public Policies; - Foreign Policy Planning Dialogue; - Insurance and reinsurance; - Seminar of Experts on E-commerce.

GLOBAL PEERS 1. INTERNATIONAL MONETARY FUND (IMF) The IMF was conceived in July 1944 when representatives of 45 countries met in Bretton Woods, USA to establish a framework for International economic cooperation. The IMF's stated goal is to assist in the reconstruction of the world's international payment system post–World War II. Its mandate to oversee the international monetary system and promote financial stability among its member’s countries. Countries contribute funds to a pool through a quota system from which countries with payment imbalances temporarily can borrow money and other resources. Through this fund, and other activities such as surveillance of its members' economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries. The IMF is mandated to oversee the international monetary and financial system and monitor the economic and financial policies of its 188 member countries. This activity is known as surveillance and facilitates international co-operation. IMF typically analyses the appropriateness of each member country’s economic and financial policies for achieving orderly economic growth, and assesses the consequences of these policies for other countries and for the global economy. Headquarter – Washington DC, US Member Countries – 188 Employees – 2,300

2. WORLD BANK The World Bank is a United Nations international financial institution that provides loans to developing countries for capital programs. The World Bank's goal is reduction of poverty. The World Bank was created at the 1944 Bretton Woods Conference, along with three other institutions, including the International Monetary Fund (IMF). IBC Academy Publications

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The International Bank for Reconstruction and Development (IBRD) has 188 member countries, while the International Development Association (IDA) has 172 members. Each member state of IBRD should be also a member of the International Monetary Fund (IMF) and only members of IBRD are allowed to join other institutions within the Bank (such as IDA). The President of the Bank has a term of five years who traditionally been always an American, because it is one of the largest shareholders of the bank. It seeks to promote economic development projects of the world’s poorer countries thorugh long term financing. Goals and Objectives: 1. Eradicate Extreme Poverty and Hunger 2. Achieve Universal Primary Education 3. Promote Gender Equality 4. Reduce Child Mortality 5. Improve Maternal Health 6. Combat HIV/AIDS, Malaria, and Other Diseases 7. Ensure Environmental Sustainability 8. Develop a Global Partnership for Development Headquarter – Washington DC, USA Member countries – 188 Employees – 7,000

3. ASIAN DEVELOPMENT BANK (ADB) The Asian Development Bank (ADB), headquartered in Manila, Philippines is a regional development bank established on 22 August, 1966 to facilitate economic development of countries in Asia. The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East). From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 from outside Asia. Japan holds the largest proportions of shares at 15.67%. The United States holds 15.56%, China holds 6.47%, India holds 6.36%, and Australia holds 5.81%. The ADB serve Japan's economic interests because its loans are largely to Indonesia, Thailand, Malaysia, South Korea and the Philippines, the countries with which Japan had crucial trading ties; these nations accounted for 78.48% of the total ADB loans. IBC Academy Publications

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The President of the Bank has a term of five years who traditionally been always a Japanese, because Japan is one of the largest shareholders of the bank. ADB provides loans for developing member countries in 5 core areas: infrastructure, environment, regional cooperation and integration, finance sector development, education. Headquarter – Manila, Philippines Member Countries – 67 Employees – 3,062

ECONOMICS: GLOSSARY OF TERMS UNION BUDGET Under Article 112 of the constitution, a statement of estimated receipts and expenditure, called the ‘Annual Financial Statement’, has to be placed before Parliament for each financial year. This Statement is the main budget document. It is an estimate of the Government’s revenue and expenditure at the end of a fiscal year, which runs from April 1 to March 31. A Union Budget is the most comprehensive report of the Government’s finances, in which revenues from all sources and outlays to all activities are consolidated. The budget also contains estimates of the Government’s accounts for the next fiscal, called budgeted estimates. CAPITAL BUDGET The capital budget consists of capital receipts and payments. Capital receipts are Government loans raised from the public, Government borrowings from the Reserve Bank and treasury bills, divestment of equity holding in public sector enterprises, loans received from foreign Governments and bodies, securities against small savings, State provident funds, and special deposits. CAPITAL PAYMENTS refer to capital expenditures on construction of capital projects and acquisition of assets like land, buildings machinery and equipment. It also includes investments in shares, and loans and advances granted by the Central Government to State Governments, Government companies, corporations and other parties. REVENUE BUDGET consists of revenue receipts of the Government and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies. IBC Academy Publications

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The non-tax revenue sources include interest on loans, dividend on investments etc. REVENUE EXPENDITURE is the expenditure incurred on the day-to-day running of the Government and its various departments, and for services that it provides. It also includes interest on its borrowings, subsidies and grants given to State Governments and other parties. This expenditure does not result in the creation of assets. It shows the shortfall of the Government’s current receipts over current expenditure. If the capital expenditure and capital receipts are taken into account too, there will be a gap between the receipts and expenditure in a year. This gap constitutes the overall budgetary deficit, and it is covered by issuing 91-day Treasury Bills, mostly held by the Reserve Bank. REVENUE SURPLUS is the excess of revenue receipts over revenue expenditure. FISCAL DEFICIT This is the gap between the Government’s total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the Government to completely meet its expenditure. The gap is bridged through additional borrowing from the Reserve Bank of India, issuing Government securities etc. Fiscal deficit is one of the major contributors to inflation. PRIMARY DEFICIT is the fiscal deficit minus interest payments. It tells how much of the Government’s borrowings are going towards meeting expenses other than interest payments. FINANCE BILL The Government proposals for the levy of new taxes, alterations in the present tax structure, or continuance of the current tax structure are placed before the Parliament in this bill. The bill contains amendments proposed to direct and indirect taxes. DIRECT TAXES are levied on the incomes of individuals and corporates. For example, income tax, corporate tax etc. INDIRECT TAXES are paid by consumers when they buy goods and services. These include excise duty, customs duty etc. CENTRAL PLAN OUTLAY It refers to the allocation of monetary resources among the different sectors in the economy and the ministries of the Government. PUBLIC ACCOUNT The Government acts like a banker for transactions relating to provident funds, small savings collection etc. The funds that the Government thus receives from its operations are kept in the public account, from which the related disbursements are made. AD-VALOREM DUTIES These are the duties determined as a certain percentage of the price of products. IBC Academy Publications

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BALANCE OF PAYMENTS is the difference between the demand for, and supply of, a country’s currency on the FOREX market. BUDGET ESTIMATES It is an estimate of fiscal and revenue deficits for the year. The term is associated with the estimates of the Centre’s spending during the financial year and the income received through taxes. CAPITAL RECEIPTS Loans raised by the Centre from the market. Government borrowings from the Reserve Bank and other parties, sale of Treasury Bills, and loans received from foreign governments form a part of capital receipt. Other items that also fall under this category include recovery of loans granted by the Centre to State Governments and proceeds from disinvestments of Government stake in public sector undertakings. CONSOLIDATED FUND Under this, the Government pools all its funds together. It includes all Government revenues, loans raised, and recoveries of loans granted. All expenditure of the Government is incurred from the consolidated fund and no amount can be withdrawn from the fund without authorization of the Parliament. CONTINGENT FUND This is a fund used for meeting emergencies where the Government cannot wait for an authorisation of the Parliament. The Government subsequently obtains Parliamentary approval for the expenditure. The amount spent from the contingency fund is returned to the fund later. STAGFLATION This is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation. It can also be defined as inflation and a decline in gross domestic product (GDP). Stagflation means a simultaneous increase in prices and stagnation of economic growth. DEFLATION In this case, there is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Deflation is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements. MONETARY POLICY This comprises actions taken by the central bank to regulate the level of money or liquidity in the economy, or change the interest rates.

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CHAPTER - 4

INDIAN CURRENCY & RELATED POLICIES IN INDIA

₹ INDIAN CURRENCY The first "rupee" is believed to have been introduced by Sher Shah Suri (1486–1545), based on a ratio of 40 copper pieces (paisa) per rupee. Historically, the rupee (derived from the Sanskrit word raupya, meaning "silver") was a silver coin. In the nineteenth century, when the strongest economies in the world were on the gold standard, discovery of large quantities of silver resulted in a decline in the value of silver relative to gold, devaluing India's standard currency. This event was known as "the fall of the rupee". The Indian rupee replaced the Danish Indian rupee in 1845, the French Indian rupee in 1954 and the Portuguese Indian escudo in 1961. Following the independence of British India in 1947 and the accession of the princely states to the new Union, the Indian rupee replaced all the currencies of the previously autonomous states (although the Hyderabadi rupee was not demonetized until 1959).

HISTORY OF CURRENCY SYSTEM IN INDIA Pre-Decimal Issues (1950-57): In 1950s, the first coins were introduced in the currency of 1 paisa, ½, 1 and 2 annas, ¼, ½ and 1 rupee note denominations.

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Decimal Issues (1957 onwards): The first Decimal system of issue of currency was introduced in 1957 which comprised of units of 1, 2, 5, 10, 25, and 50 paisa (called naya paisa) and One Rupee. While 1 paisa was made of bronze, 2, 5 and 10 paisa were made of cupro-nickel and 25, 50 paisa and 1 Rupee were made of nickel. In 1964, the term “naya paisa” was removed and these were called simply “paisa”. Further, coins of denomination 1, 2, 5 and 10 paisa were made in aluminum. Pre-Independence: In 1938, the Reserve Bank of India started printing and issue of notes in the denomination of 2, 5, 10, 50, 100, 1000 and 10000 rupees, while Government of India continued issue of 1 Rupee notes. Post-Independence: The Government of India introduced 20 and 50 rupee notes and also issued new designs in Bank notes. In 1987, 500-rupee note was introduced followed by 1000-rupee note in year 2000. One and Tworupee notes were discontinued in 1995. Under section 22 of the Reserve Bank of India Act, it has the sole right to issue bank notes of all denominations and these are legal tender in India. All affairs of the Bank relating to issue of Bank notes are conducted through its Issues Department. The responsibility of the RBI includes not only issue and withdrawal of currency notes, but also its circulation, and to exchange Bank notes and coins of one denomination into other denominations to the public. In September 2009, the Reserve Bank of India decided to introduce polymer banknotes on a trial basis. Initially, 100 crore (1 billion) pieces of polymer 10 notes were introduced. According to Reserve Bank officials, the polymer notes have an average lifespan of five years (four times that of paper banknotes) and it will be difficult to counterfeit; they will also be cleaner than paper notes. The Mahatma Gandhi series of banknotes are issued by the Reserve Bank of India as legal tender in 1996. The series is so named because the obverse of each note features a portrait of Mahatma Gandhi. The RBI introduced the series with 10 and 500 bank notes at present, bank notes in denominations from 5 to 1,000 are issued. The printing of 5 notes (which had stopped earlier) resumed in 2009. As of January 2012, the new Indian rupee sign has been incorporated into banknotes in denominations of 10, 100, 500 and 1,000. Printing of Currency notes: Currency notes are printed at the Currency Note Press in Nasik, the Bank Note Press in Dewas, the Bharatiya Note Mudra Nigam (P) Presses at Salboni and Mysore and at the Watermark Paper Manufacturing Mill in Hoshangabad.

METHOD OF ISSUING CURRENCY In order to regulate the flow and availability of currency notes in the economy, which may create inflationary pressure, the Central Banks across IBC Academy Publications

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the globe adopt a number of methods for issue of notes in the system. These are broadly summerised, as follows: a. Simple Deposit System In this method, the entire value of currency notes issued by the Central Bank of the country is backed by the monatery gold or silver reserve or reserves of both metals in physical form. In such case, the paper money is, truly, a representative Paper money. b. Fixed Fiduciary System In this method, the Regulator is authorised to issue only a fixed amount of currency notes against securities without holding any commensurate reserves held in precious metals. Additional printing of currency notes, however shall be required to be covered fully by precious metals. This part of currency notes is called Fiduciary Issue. The objective of this system is to maintain the convertibility of paper money into metal. The Fiduciary limit is fixed after giving due consideration to the monetary requirements and it can be increased or decreased by making an amendment in the law by the Government. c. Maximum Fiduciary System In this method, the Regulatory Authority fixes the maximum limit or ceiling upto which they are allowed to issue currency notes either with or without the reserves of precious metals. Printing of currency notes in excess of the ceiling fixed cannot be breached subsequently. The maximum limit is fixed after giving due consideration to the existing and future monetary requirements and thus, the Central bank is not empowered to print notes beyond the stipulated ceiling. d. Proportional Reserve System In this method, issue of paper currency notes is backed by a certain stipulated proportions in the form of precious metals – gold and silver and the remaining is backed by the reserves of domestic Government securities. This system is based on Banking Principle of issuing notes. The proportion of precious metal reserves to back paper notes is fixed and the rest of the notes are backed by the approved securities. The proportion of precious metal reserves to back paper notes usually varies from 25% to 40% and rest of the reserves, says 75% to 60% comprise of approved Government Securities. This method became popular after World War I and the USA and France adopted it. India also adopted this method in 1927 on the recommendations of Hilton Young Commission. Later, this method was replaced by Minimum Reserve method in 1957. IBC Academy Publications

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e. Percentage Reserve System This is an improved version of Proportional Reserve System. In this method, a certain percentage of the total currency notes issued is kept in the form of gold reserves and a certain percentage in the form of foreign exchange, foreign securities and deposits with Foreign Banks. This method was adopted during World war II, when due to inadequate availability of precious metals - gold or silver, with many countries they kept a part of the proportional reserve in the form of foreign exchange, foreign securities etc. India adopted this system during World War II when RBI was authorized to keep 60% of the reserves against currency note issued, in the form of Sterling securities and the rest 40% in the form of the precious metals. f.

Minimum Reserve System

In this method, a minimum amount of reserves for precious metals is fixed. Central bank is authorized to issue any amount of paper currency notes on the basis of the minimum gold reserves. This system has been adopted and is in vogue in India since 1957. Reserve Bank of India is stipulated to hold a minimum Reserves of Rs. 200 crores, out of which Gold reserves holdings must not fall below an amount of Rs. 115 crores and the remaining reserve of Rs. 85 crores shall be held in the form of foreign currencies.

INDIAN RUPEE SIGN (₹) The Indian rupee sign (sign: ₹) is the currency symbol for Indian rupee, the official currency of India. The symbol is designed by Mr. Udaya Kumar, an Architect from Tamilnadu, by using the Devanagari letter र ‘Ra’ and Roman capital letter ‘R’. It was officially accepted by the Government of India on 15 July, 2010, following its selection through an "open" competition among Indian residents. The design is based on the Devanagari letter "र" (ra) with a double horizontal line at the top. It also resembles the Latin capital letter "R", especially R rotunda (Ꝛ). Before its adoption, the most commonly used symbols for the rupee were Rs, Re or INR.

EXCHANGE RATE SYSTEM Indian Rupee was historically pegged to the Pound Sterling of UK. Earlier, during the British regime and till the late sixties, most of India’s trade transactions were dominated to Pound Sterling. Under Bretton Woods system, as a member of IMF, India declared its par value of rupee in terms IBC Academy Publications

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of gold. The corresponding rupee – sterling rate was fixed or pegged at 1 GBP = 18 Rupees. When Bretton Woods system was phased out in 1971, the Indian rupee was de-linked with Pound Sterling and it was pegged with US Dollar and the corresponding rupee – dollar rate was pegged at 1 USD = 7.50 Rupees. The US Dollar and rupee pegging was used to arrive at the rupee – sterling parity. After Smithsonian Agreement in December, 1971, the Indian rupee was de-linked from US $ and again linked to Pound Sterling. With a view to not to depend on one single currency, in September 1975, Rupee was delinked from Pound Sterling and was instead linked or pegged to a basket of currencies. The currencies and their relative weightages were kept as secret. With effect from January, 1984, the Pound sterling rate schedule was abolished. The interest element which was hitherto in-built in the exchange rate, was also de-linked and Interest was to be recovered from the customers separately. This system improved transparency in the system of quoting exchange rate and also improved compliance with the International practices. The Liquidity crunch faced in 1990 and 1991 on foreign exchange resources in India impressed upon the Reserve bank of India to introduce a new system of Exchange rates, known as Liberalized Exchange Rate Management System (LERMS). The objective of LERMS was to make balance of payment sustainable on an on-going basis by allowing market forces to play a greater role in determining the exchange rate of rupee. Under LERMS, rupee become convertible for all approved external transactions.

CONVERTIBILITY OF RUPEE Convertibility means the system where any amount of Rupee can get converted into another approved currencies, without any legal complications or any questions asked about the purpose for which the foreign exchange is proposed to be used. Non-convertibility is defined with reference to transactions where foreign exchange cannot be legally purchased or transacted (eg. for import) or transactions which are controlled and approved on a case to case basis (like regulated imports etc.). Convertibility is a two-step process – i.e. on current account and capital account. Capital account convertibility means the freedom in making payment or transfer of currency for current international transactions such as buying of foreign make goods and services, travel, trade services, tourism, education etc. but restriction remains on the purchase of capital assets abroad. The freedom in making payment or transfer of currency for buying capital assets abroad, such as immovable properties are given. IBC Academy Publications

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Tarapore Committee was set up by the Reserve Bank of India to suggest measures for Convertibility of Rupee. Full convertibility may also be known as Floating Rupee meaning removal of all controls on the cross-border movement of capital, out of India to anywhere else or vice versa. Officially, Indian rupee has a market-determined exchange rate. But, RBI trades actively in the USD/INR currency market to impact effective exchange rates. Thus, the currency regime in place for the Indian rupee with respect to the US dollar is a de facto controlled exchange rate. This is called a "managed float". RBI also exercises a system of capital controls in addition to intervention (through active trading) in currency markets.

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The Indian rupee symbol ' ' (officially adopted in 2010) is derived from the Devanagari consonant "र" (ra) and the Latin letter "R". The first series of coins with the rupee symbol was launched on 8 July, 2011. The parallel lines at the top (with white space between them) are said to make an allusion to the tri-colour Indian flag and also depict an equality sign that symbolises the nation's desire to reduce economic disparity. It was designed by Udaya Kumar Dharmalingam, at the Industrial Design Centre at the Indian Institute of Technology, Bombay. Each banknote has its amount written in 17 languages. On the obverse, the denomination is written in English and Hindi. On the reverse is a language panel which displays the denomination of the note in 15 official languages of India. The Bhutanese Ngultrum is pegged at par with the Indian Rupee; both currencies are accepted in Bhutan. The Nepalese rupee is pegged at 0.625 to an Indian Rupee; the Indian rupee is accepted in Nepal, except 500 and 1000 banknotes, which are not legal tender in Nepal. Zimbabwe has recently added Indian Rupee as a legal tender in their country. The promissory clause printed on the banknotes i.e., "I promise to pay the bearer the sum of Rupees …” is a statement which means that the banknote is a legal tender for the specified amount. The obligation on the part of the Bank is to exchange a banknote with bank notes of lower value or other coins which are legal tender under the Indian Coinage Act, 2011, of an equivalent amount. The highest denomination note ever printed by the Reserve Bank of India was the Rs.10,000 note in 1938 and again in 1954. These notes were demonetized in 1946 and again in 1978. Currency Notes are printed at four printing presses located at Nashik, Dewas, Mysore and Salboni. Coins are minted at the four mints at Mumbai, Noida, Kolkata and Hyderabad. IBC Academy Publications

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PARTIAL CONVERTIBILITY The Government of India introduced a system of Partial Convertibility of Rupee (PCR) on 29th February, 1992. This was envisaged to give boost to the exports and also to achieve efficient import substitution. Government liberalized the flow of foreign exchange to include items such as travel abroad, education abroad, engaging foreign consultants, buying consumer goods and services, which were earlier prohibited. For an economy in transition from a controlled to a market driven one, international capital movements can be highly disruptive and destabilizing. Therefore, it is considered essential that capital flows be regulated under a separate controlled regime during the initial movement towards convertibility. Partial Convertibility of Rupee (PCR) was introduced to combine the advantage of relatively suitable managed float and Balance of Payment. To give an effect to the Partial Convertibility of Rupee, Reserve Bank of India introduced Liberalized Exchange Rate Management System (LERMS) w.e.f. 1st March, 1992.

CURRENCY CHEST In order to facilitate storage and circulation of currency notes and coins, RBI authorizes selective branches of Commercial Banks to establish Currency Chests at its branches. These Currency Chests act as repository of Currency Notes and coins, stored therein on behalf of Reserve Bank of India. These Currency chest branches are required to distribute notes and coins to other bank branches operating in their geographical vicinity. At present, there are 4,422 currency chests branches in India. Some branches are also authorized to stock small coins and called Small Coin Depots.

SOME FACTS ABOUT THE INDIAN CURRENCY Reserve Bank of India manages currency in India and it derives power conferred to it by RBI Act, 1934. The Government of India, based on the advices of RBI decides on the various denomination of currency notes to be printed and how much to be printed. RBI also co-ordinates with the Government in regard to the designing of a currency note and the coins, besides the security feature to be built into it. Reserve Bank of India estimates the quantities of currency notes likely to be needed in each denomination etc. and places an indent to the Note Printing Presses, through Government of India.

SOILED AND MUTILATED NOTES Currency Notes and coins returned from circulation are deposited at the IBC Academy Publications

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offices of RBI where these are sorted into: (a) Issuable notes (good condition) and (b) Non-Issuable notes (means dirty, torn and limp). The segregated Issuable good notes are re-issued for circulation whereas, non-issuable notes are shredded and destroyed. The bad coins are sent to mint for melting. Soiled and Non-issuable condition notes can be tendered by the public also, directly to the counters of RBI for exchange.

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The main security features of current banknotes are: Watermark - White side panel of notes has Mahatma Gandhi watermark. Security thread - All notes have a silver security band with inscriptions (visible when held against light) of Bharat in Hindi and "RBI" in English. Latent image - On notes of denominations of 20 and upwards, a vertical band on the right side of the Mahatma Gandhi’s portrait contains a latent image showing the respective denominational value numerally (visible only when the note is held horizontally at eye level). Micro-lettering - Numeral denominational value is visible under magnifying glass between security thread and latent image. Intaglio - On notes with denominations of 10 and upwards the portrait of Mahatma Gandhi, the Reserve Bank seal, guarantee and promise clause, Ashoka Pillar Emblem on the left and the RBI Governor's signature are printed in intaglio (raised print). Identification mark - On the left of the watermark window, different shapes are printed for various denominations ( 20: vertical rectangle, 50: square, 100: triangle, 500: circle, 1,000: diamond). This also helps the visually-impaired to identify the denomination. Fluorescence - Number panels glow under ultraviolet light. Optically-variable ink - Notes of 500 and 1,000 denominations have their numerals printed in optically-variable ink. The number appears green when the note is held flat, but changes to blue when viewed at an angle. See-through register - Floral designs printed on the front and the back of the note coincide and perfectly overlap each other when viewed against light. EURion constellation - A pattern of symbols found on the banknote helps software detect the presence of a banknote in a digital image, preventing its reproduction with devices such as color photocopiers.

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CHAPTER - 5

REPORTS – FINANCIAL & BANKING SECTORS REFORMS IN INDIA

FINANCIAL & BANKING SECTORS REFORMS India has experienced over a decade of financial sector reforms. These measures, initiated in early 1990s, had significant impact on Indian economy and acts as a tool for much needed liberalization of financial sector reforms in the country. The visible impact of these reform measures are summarized as: a. Removal of financial repression existed earlier in the system; b. Transformation of Banks/Financial Institutions into a more efficient, productive and profitable players; c. Better price discovery on lending products mainly determined by market forces and helps Banks into efficient deployment of scarce resources; d. Providing functional and operational autonomy to the Banks; e. Prepared the financial sector for increased competition from International players; f. Opening up of the Financial sector to competition from External markets in a calibrated manner;

CHAKRAVARTHY REPORT ON THE WORKING OF THE MONETARY SYSTEM (1985) The committee to review the working of the monetary system headed by S. Chakravarthy submitted its report to the RBI in April, 1985. In its terms of reference this committee was required to provide a review of the monetary system and recommend measures for making monetary policy more effective. IBC Academy Publications

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The committee dealt particularly with the objectives of monetary policy; coordination between monetary policy and fiscal policy; regulation of money supply; maintenance of price stability; interest rate policy and utilisation of credit. Its main recommendations are as follows: (a) The committee stressed the need to pursue price stability as the primary objective of the monetary policy. However, it suggested that this objective should not come in conflict with the other socioeconomic goals embodied in the five year plans. The committee pointed out that the major factor that contributed to colossal increase in the money supply had been the RBI’s credit to the government. The committee thus recommended that an appropriate framework for the regulation of the RBI’s credit to the government should be evolved. (b) The official concept of budgetary deficit did not allow in the past to clearly know the monetary impact of fiscal operations. The committee, therefore, suggested a change in the definition of budgetary deficit. The budgetary deficit of the Central Government was measured in terms of an increase in treasury bills. In the opinion of the committee, this overstated the extent of the monetary impact of fiscal operations because no distinction was made between the absorption of treasury bills and the increase in the holdings of treasury bills by the RBI. (c) The committee was of the view that banks should have greater freedom in determining their lending rates. This would prevent unnecessary use of credit which presently is possible due to relatively low rates. Further, the committee strongly felt that concessional interest rates as a redistributive device should be used in a very selective manner. (d) The committee did not favour continuance of cash credit as the predominant form of bank credit. In its opinion, certain measures should be undertaken to encourage loans and bills finance forms of bank credit. It also stressed the importance of credit system in the area of priority sector lending. This would enable adequate and timely flow of credit to the priority sectors. (e) The committee was of the view that the money market in India should be restructured. In the restructured monetary system the treasury bills market, the call money market, the commercial bills market and the inter-corporate funds market should play an important role in the allocation of short term resources. The committee also recommended that the RBI should adopt all the measures which are necessary to develop an efficient money market in this country. IBC Academy Publications

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The major recommendations of the Chakravarthy Committee were accepted and have been implemented. The committee had stressed the need for developing aggregate monetary targets to ensure orderly monetary growth. Keeping in view the recommendations of the committee the yields on longterm government securities have been increased and the maturities have been reduced. Moreover, now treasury bills of 364-days maturity are being issued by the RBI. These short-term instruments with flexible rates would enable banks to manage their liquidity better and help in evolving an active secondary market in short term instruments.

THE NARASIMHAM COMMITTEE REPORT (1991) The Government of India set up a nine-member committee under the chairmanship of M. Narasimham, a former Governor of the Reserve Bank of India, to examine all aspects relating to the structure, organization, functions and procedures of the financial system. This committee on the financial system submitted its report in November, 1991. Recommendations of the Committee Narasimham Committee made a number of recommendations to improve the productivity, efficiency and profitability of the banking sector. The main recommendations of the committee are: 1. Structural Re-organization of the Banking Structure: To bring about greater efficiency in banking operations, a substantial reduction in the number of public sector banks through mergers and acquisitions. According to the committee, the broad pattern should consist of: (a) 3 or 4 large banks (including the State Bank of India) which could became international in character. (b) 8 to 10 national banks with a network of branches throughout the country engaged in general or universal banking. (c) Local banks whose operations are mostly confined to a specific region; and (d) Rural banks including Regional Rural Banks mainly engaged in financing agriculture and allied activities in rural areas. 2. Licensing of Branches: The present system of licensing of branches should be discontinued. Banks should have the freedom to open branches purely on profitability considerations. 3. Freedom to Foreign Banks to open Offices: The Government should allow foreign banks to open offices in India either as branches or as subsidiaries. Foreign banks and Indian banks should be permitted to IBC Academy Publications

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set up joint ventures in regard to merchant and investment banking, leasing and other forms of financial services. 4. Removal of the Duality of Control of Banks: The present system of dual control over the banking system between Reserve Bank and the Banking Division of the Ministry of Finance should end immediately. Reserve Bank of India should be the primary agency for the regulations of the banking system. 5. Setting-up of Assets Reconstruction Fund: The Committee recommended the setting up of the “Assets Reconstruction Fund” to take over from the nationalized banks and financial institutions, a portion of their bad and doubtful debts at a discount. All bad and doubtful debts of the banks were to be transferred in a phased manner to ensure smooth and effective functioning of the Assets Reconstruction Fund. 6. Special Tribunals for Recovery of Loans: Banks, at present, face many difficulties in recovering the loans advanced by them. Therefore, the committee recommended that special tribunals should be set up for recovering loans granted by banks. 7. Directed Credit Programmes: The committee recommended that the system of directed credit programme should be gradually phased out. The concept of priority sector should be redefined to include only the weakest section of the rural community. The directed credit programme for the priority sector should be fixed at 10 per cent of the aggregate bank credit. The committee argued that the system of directed credit should be temporary and not a permanent one. 8. Statutory Liquidity Ratio (SLR): The statutory liquidity ratio should be gradually reduced from the present 38.5 per cent to 25 per cent over the next five years. 9. Cash Reserve Ratio (CRR): The CRR should be progressively reduced from the present high level of 15 per cent to 3 to 5 per cent. 10. De-regulation of Interest Rates: The committee recommended decontrol of regulations on interest rates on lending and deposit rates of banks and financial institutions. 11. Capital Adequacy: The committee proposed that banks should achieve 8 per cent capital adequacy ratio as recommended by Basle Committee by March 1996. 12. Banks in the Private Sector: The Reserve Bank of India should permit the setting up of new banks in the private sector, provided they satisfy all the conditions and norms prescribed by the Reserve Bank. Further, there should be no difference in treatment between public sector banks and private sector banks. IBC Academy Publications

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13. Raising Capital through the Capital Market: Profitable banks and banks with good reputation should be permitted to raise capital from the public through the capital market. Regarding other banks, the government should subscribe to their capital or give a loan which should be treated as a subordinate debt, to meet their capital requirements. 14. Proper Classification of Assets: The committee recommended that the assets of bank should be classified into 4 categories: (a) standard (b) sub-standard (c) doubtful, and (d) loss assets. Full disclosures of assets and liabilities should be made in the balance-sheets of banks and financial institutions as per the International Accounting Standards reflecting the real state of affairs. 15. Free and Autonomous Banks: The committee recommended that the public sector banks should be free and autonomous. 16. Liberalization of Capital Market: The committee recommended liberalization of the capital market. The office of the “Controller of Capital Issues” should be abolished. There should be no need to get prior permission from any agency to issue capital. The capital market should be opened for foreign portfolio investments. The recommendations of the Narasimham Committee (1991) were revolutionary in many respects. Most of the recommendations have been accepted by the government and implemented during the 8th Five year plan.

THE GOIPORIA COMMITTEE REPORT (1991) In September, 1990, the Reserve Bank of India set up a committee under the chairmanship of Sri M.N. Goiporia to examine the problem of customer service in banks and suggest measures to improve the situation. Banking in India has made a remarkable progress in its growth and expansion, as well as business. But the quality of customer service has deteriorated day-by-day. To meet the new challenges in the changing environment of liberalized financial system. Indian banks have to be modernized, become more efficient and competitive. The banking sector has to face stiff competition from mutual funds started by various financial institutions and schemes launched by the Unit Trust of India. The saving instruments of non-banking financial institutions and various small saving schemes of government are more attractive from the investing public point of view. As a result, the annual growth rate in deposits remained almost stagnant for several years. Recommendations of the Committee The committee submitted its report on 6th December, 1991. Main recommendations of the committee are as follows: IBC Academy Publications

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| Reports – Financial & Banking Sector Reforms in India (a) Extension of banking hours for all transactions, except cash. (b) Change in the commencement of working hour for bank staff to facilitate timely opening of bank counters. (c) Instant credit of outstation cheques upto Rs. 5,000 as against Rs. 2,500, at present. (d) Enhancement of interest rate on saving account. (e) Introduction of tax benefits against bank deposits. (f) Full use of discretionary powers vested in the bank staff at all levels. (g) Expeditious dispatch of documents lodged for collection. (h) Extension of teller’s duties. (i) Modernization of banks. (j) Opening of specialization branches for different customer groups. (k) Introduction of a new instrument in the form of bank order.

(l) Introduction of restricted holidays in banks. Most of the recommendations were accepted by the Reserve Bank of India, and are being implemented.

NARASIMHAM COMMITTEE REPORT (1998) The Finance Ministry of the Government of India set up “Banking Sector Reforms Committee” under the chairmanship of Mr. M. Narsimham in 1998. This committee submitted its report in April, 1998 to the Government of India. Important findings and recommendations of the Narasimham committee (1998) are: 1. Need for a Stronger Banking System: The Narasimham Committee has made out a strong case for a stronger banking system in the country. For this purpose, the committee has recommended the merger of strong banks which will have a “multiplier effect” on industry. The committee has also supported that two or three large strong banks be given international or global character. 2. Experiment with the Concept of Narrow Banking: The committee has suggested the adoption of the concept of “narrow banking” to rehabilitate weak banks. 3. Small, Local Banks: The committee has suggested the setting up of small, local banks, which would be confined to states or cluster of districts in order to serve local trade, small industry and agriculture. 4. Capital Adequacy Ratio: The committee has suggested higher capital adequacy requirements for banks. It has also suggested the setting up IBC Academy Publications

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5.

of an “Asset Reconstruction Fund” to take over the bad debts of the banks. Review and Update Banking Laws: The Narasimham Committee (1998) has suggested the urgent need to review and amend the provisions of Reserve Bank of India Act, Banking Regulation Act, State Bank of India Act and Bank Nationalisation Act so as to bring them in line with the current needs of the banking industry.

KAPOOR COMMITTEE REPORT ON CO-OPERATIVE BANKING REFORMS (1999) The Government of India constituted a committee, in April, 1999, under the Chairmanship of Mr. Jagdish Kapoor, to suggest remedial measures for functioning of the co-operative sector reforms with key task as follows. The report was submitted in August, 2000. i. To review the functioning of the cooperative credit structure and suggest measures which would make them member- driven professional business enterprises. ii. To study aspects relating to the costs, spreads and effectiveness at various tiers of cooperative credit structure and make suitable recommendations for their rationalization and improvement. iii. To study the financial performance of the cooperative bodies and make recommendations for improving their financial health so that they can become efficient and cost effective instruments for delivery of rural credit. iv. To review the existing supervisory and regulatory mechanism for cooperative credit institutions and suggest measures for strengthening the arrangements. Major Recommendations of the committee are as follows: a. Resource Base: The Cooperative banks have limited resources and committee felt the urgent need to strengthen their resource base, i.e capital structure. The Banks should ensure compliance to applicable Capital adequacy norms of RBI. b. Regulatory Control: The committee felt need for reduction of Government control on Cooperative Banks and allowing them freedom in policy making, making them “member driven”. It is also recommended that dual control on them, i.e. of RBI and NABARD should be removed and only RBI should exercise control and regulatory supervision. c. Business Diversification: Co-operative Banks have limited business focus which needed to be diversified into a whole gamut of banking products such as Consumer and Housing Loans, Distribution of IBC Academy Publications

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| Reports – Financial & Banking Sector Reforms in India Insurance policies and Mutual Fund products, financing of Services etc. which could be more profitable to the Banks. Technology Upgradation: The committee felt need for immediate technological upgradation and embracing contemporary technology to provide efficient services to its customers. Professional Manpower: The committee felt need for improvement of manpower quality in the Cooperative sector by recruitment of high-educated and professional manpower at all levels. The Cooperative banks should be made to work like a professional organization on sound managerial system. These banks should adopt transparent and objective policies for recruitment of staff. De-Layering of Cooperative Banks: The committee felt that the existing structure of three-tier organization, viz. – (1) Primary (2) Central level and (3) State Co-operative Credit structure is appropriate for bigger states only. Measures should be taken by the Government to strengthen the Cooperatives by voluntary amalgamation/ merger, depending upon the economies of scale. Recoveries: The Committee recommended that the existing provisions of the existing Debt Recovery Tribunal (DRT) may be made applicable to Cooperative banks where loan size is over Rs. 1 lac and above to ensure speedy recoveries. Audit and Inspection mechanism: The Committee felt need for the Cooperative banks to strengthen their internal controls and checks, Inspection/Audit systems, even by engaging the services of External Chartered Accountants.

d.

e.

f.

g.

h.

Subsequent Developments   

Lending & Borrowing rates of Cooperative banks have been freed or de-regulated to a great extent. Licensing of new Urban Cooperative banks is liberalized. Cooperative banks are allowed to diversify its activities such as lending to Leasing & Hire Purchase allowed.

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CHAPTER - 6

GOVERNMENT SPONSORED SCHEMES

1. SWARNAJAYANTI GRAM SWAROZGAR YOJANA (SGSY) Swarnajayanti Gram Swarojgar Yojana (SGSY) is a “vikas” initiative launched by the Government of India to provide sustainable income to poorest of the poor people living in rural & urban areas of the country. The scheme was launched on April 1, 1999 by merging and restructuring the following existing schemes: (a) Integrated Rural Development Programme (IRDP) (b) Training of Rural Youth for Self-Employment (TRYSEM) (c) Development of Women and Children in Rural Areas (DWCRA) (d) Supply of Improved Toolkits to Rural Artisans (SITRA) (e) Ganga Kalyan Yojana (GKY) (f) Million Wells Scheme (MWS) SGSY (Swarnajayanti Gram Swarojgar Yojana) aims to provide selfemployment to villagers through the establishment of self-help groups. Activity clusters are established based on the aptitude and skill of the people which are nurtured to their maximum potential. Funds are provided by NGOs, banks and financial institutions. The rural poor such as those with land, landless labour, educated unemployed, rural artisans and disabled are all covered under the scheme. SGSY was launched as an integrated programme for self-employment of the rural poor with effect from April 1, 1999. The scheme is funded by the Centre and the States in the ratio of 75 : 25 and will be implemented by IBC Academy Publications

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commercial banks, regional rural banks and cooperative banks. Other financial institutions, Panchayat Raj institutions, district rural development agencies (DRDAs), Non-Government Organisations (NGOs), technical institutions in the district, are also involved in the process of planning, implementation and monitoring of the scheme. The scheme aims at assisting poor families (Swarozgaris) and establishing a large number of micro enterprises in the rural areas. The list of below poverty line (BPL) households, identified through the BPL census, duly approved by gram sabha, will form the basis for the identification of families for assistance under SGSY. The assisted poor families, known as Swarozgaris, can be either individuals or groups and would be selected from the BPL families by a three member team consisting of block development officer (BDO), banker and Sarpanch. SGSY will focus on the vulnerable sections of the rural poor. Accordingly, the SC/ST will account for at least 50 percent, Women 40 percent, and the disabled 3 percent of those assisted.

Self-Help Groups (SHGs) under SGSY The SHGs created may have a varying number of members based on the terrain and physical abilities of the members. The SHGs are usually created by selecting individuals called as 'Swarozgaris' from the Below Poverty-line (BPL) list provided by the Gram Sabha. The SHGs are divided into various blocks and each of these blocks concentrated on 4-5 key activities. The SGSY is mainly run through government-run DRDAs with support from local private institutions, banks and Panchayati Raj institutions. The assistance (loan-cum-subsidy) may be extended to individuals in a group or to all members in the group for taking up income generation activities. Group activities will be given preference and progressively, the majority of the funding will be for Self-Help groups. Half of the groups formed at the block level should be exclusively women groups. Activity Clusters, Key Activities SHGs are aided, supported and trained by NGOs, CBOs, individuals, banks and self-help promoting institutions. Government-run District Level Development Agencies (DRDA) and the respective State governments also provided training and financial aid. The programme focuses on establishing microenterprises in rural areas. Skill Upgradation/Training The SGSY seeks to lay emphasis on skill development through welldesigned training courses. Those, who have been sanctioned loans, are to be assessed and given necessary training. The design, duration of training and the training curriculum is tailored to meet the needs of the identified IBC Academy Publications

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Key Activities. However, the total expenditure on Basic Orientation and Skill Development Training shall not exceed Rs.5,000 per trainee. Definitions 'BPL Family' under the guidelines are treated as a unit for the purpose of giving income generating assets. The 'Family' comprise of members of a household and united by ties of marriage, blood and adoption. However, the moment a parent/son/daughter/brother/ sister is no longer dependent and has a separate household, he will no longer be a member of the same BPL family. 'Wilful Defaulter' is defined as 'one who is capable of repaying the loan, but has been defaulting intentionally and not repaying the loan deliberately and ‘willfully'. As such, the willful defaulters should not be financed under SGSY until the outstanding loans are repaid. While the group may be financed excluding such defaulters. Lending Regulations The loans under the scheme shall be a composite loan comprising both a term loan and working capital. The loan component and the admissible subsidy together would be equal to total project cost. Disbursements up to Rs. 10,000 under industry, service and business (ISB) sector may be made in cash. Disposal of Loan Applications: Loan applications should be disposed of within the prescribed time limit of fifteen days and at any rate, not later than one month. Group Loans: Ideally, under the group loan, the entire group should take up a single activity, but if necessary, the group could also take up multiple activities under the group loan. In either case, the loan will be sanctioned in the name of the group and the group stands as the guarantor to the bank, for prompt repayment of loan. The group is entitled to a subsidy of 50 percent of the project cost, subject to per capita subsidy of Rs.10,000 or Rs.1.25 lakh, whichever is less. Multiple Doses of Credit: Emphasis is laid on multiple doses of assistance. This would mean assisting a Swarozgari over a period of time with a second and subsequent dose(s) of credit, enabling him/her to cross the poverty line, as also access higher amounts of credit. Subsidy entitlement for all doses taken together should not exceed the limit prescribed for that category. Interest Rates: Loans under the scheme will carry interest, as per the directives issued by the Reserve Bank of India from time to time. However, the rates of interest to be charged on group loans under IBC Academy Publications

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SGSY may be linked to per capita size of the loans, so as to mitigate the burden on the BPL beneficiaries. Insurance Cover: Insurance cover is available for assets/livestock bought out of the loan. Swarozgaris are covered under the group insurance scheme. Insurance coverage of the SGSY Swarozgaris: The maximum age of Swarozgaris at the time of sanction has to be kept at sixty years of age. The insurance coverage, however, would be for five years or till the loan is repaid, whichever is earlier, irrespective of the age of Swarozgaris at the time of sanction of loan. Subsidy: Subsidy under SGSY will be uniform at 30 percent of the project cost, subject to a maximum of Rs 7,500. In respect of SC/STs it shall be 50 percent of the project cost, subject to a maximum of Rs.10,000. The group is entitled to subsidy of 50 percent of the project cost subject to a per capita subsidy of Rs. 10,000 or Rs. 1.25 lakh, whichever is less. There will be no monetary limit on subsidy for irrigation projects. Subsidy under SGSY will be back ended. Banks should not charge interest on the subsidy potion of the loan amount. Security Norms: For individual loans up to Rs.50,000 and group loans up to Rs. 5 lakh, the assets created out of the bank loan would be hypothecated to the bank as a primary security. In case where movable assets are not created, as in land based activities such as dug well, minor irrigation, etc., mortgage of land may be obtained. Where mortgage of land is not possible, third party guarantee may be obtained at the discretion of the bank. For all individual loans exceeding Rs. 50,000 and group loans exceeding Rs.5 lakh, in addition to the primary security such as hypothecation/ mortgage of land or third-party guarantee as the case may be, suitable margin money/other collateral security in the form of an insurance policy; marketable security/ deeds of other property, etc., may be obtained at the discretion of the bank. The upper ceiling of Rs. 5 lakh is irrespective of the size of the group or pro-rata per capita loan to the group. While deciding the limit for collateral security, the total project cost (bank loan plus Government subsidy) should be taken into consideration by banks. Post-Credit Follow Up/Recovery: Loan pass books in regional languages may be issued to the Swarozgaris. Prompt recovery of loans is necessary to ensure the success of the programme. Banks may engage the services of NGOs or individuals (other than government servants) as monitoring-cumrecovery facilitators, on a commission basis. IBC Academy Publications

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Refinance of SGSY Loans: Banks are eligible for refinance from NABARD for the loans disbursed under SGSY as per their guidelines.

2. SWARNA JAYANTI SHAHARI ROZGAR YOJANA (SJSRY) Swarna Jayanti Shahari Rozgar Yojana (SJSRY) was launched on 01.12.1997 after subsuming the earlier three schemes for urban poverty alleviation, namely (a) Nehru Rozgar Yojana (NRY), (b) Urban Basic Services for the Poor (UBSP), and (c) Prime Minister's Integrated Urban Poverty Eradication Programme (PMIUPEP). The key objective of the Scheme is to provide gainful employment to the urban unemployed or under-employed through the setting up of selfemployment ventures or provision of wage employment. Objectives of SJSRY (a)

(b)

(c)

Addressing urban poverty alleviation through gainful employment to the urban unemployed or underemployed poor by encouraging them to set up self-employment ventures (individual or group), with support for their sustainability; or undertake wage employment; Supporting skill development and training programmes to enable the urban poor have access to employment opportunities opened up by the market or undertake self-employment; and Empowering the community to tackle the issues of urban poverty through suitable self-managed community structures like Neighborhood Groups (NHGs), Neighborhood Committees (NHC), Community Development Society (CDS), etc.

Components of SJSRY SJSRY will have five major components, namely (i) Urban Self Employment Programme (USEP) (ii) Urban Women Self-help Programme (UWSP) (iii) Skill Training for Employment Promotion amongst Urban Poor (STEP-UP) (iv) Urban Wage Employment Programme (UWEP) (v) Urban Community Development Network (UCDN) To accord special focus on the issues of urban poverty amongst Scheduled Castes (SCs) and Scheduled Tribes (STs), a special component programme IBC Academy Publications

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of SJSRY, called the Urban Programme for Poverty reduction amongst SCs & STs (UPPS), will be carved out of USEP and STEP-UP. Funding Pattern and Financial Procedures (a) (b)

(c)

(d)

(e)

(f)

(g)

Funding under SJSRY to be shared between Centre and States in ratio of 75 : 25. For Special Category States, viz. (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu & Kashmir, Himachal Pradesh and Uttarakhand), this ratio will, however be 90:10 between the Centre and States. The Central share under SJSRY will be tentatively allocated between the States/ UTs in relation to the incidence of urban poverty (number of urban poor) estimated by the Planning Commission from time to time. Release of funds to the States/ UTs will be made for SJSRY as a whole, without segregating into components, thereby giving flexibility to them in utilizing funds. Central funds will be released to the States/ UTs only after they fulfill the prescribed criteria regarding submission of Utilization Certificates (UCs) as well as release of matching State share for the past releases. State/ UT-wise annual physical targets under the Scheme will be fixed on the basis of the all India targets decided by the Ministry of Housing & Urban Poverty Alleviation. State/ UT - wise progress will be monitored against these targets and therefore the States/ UTs ought to prioritize the flow of funds to different components of the Scheme so that the annual targets are achieved. The release of Central share to the States/ UTs will be done in instalments, spread over the whole year.

3. URBAN SELF-EMPLOYMENT PROGRAMME (USEP) This Component will be having two sub-components: (i) Assistance to individual urban poor beneficiaries for setting up gainful self-employment ventures [Loan & Subsidy] (ii) Technology/ marketing/ infrastructure/ knowledge & other support provided to the urban poor in setting up their enterprises as well as marketing their products [Technology, Marketing & Other Support]. Urban Self Employment Programme (Loan & Subsidy) This component of SJSRY focuses on providing assistance to individual urban poor beneficiaries for setting up gainful self-employment ventures IBC Academy Publications

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micro-enterprises. The programme will be applicable to all cities and towns. Within each town, it will be implemented by selecting whole clusters of the poor segments so as to bring in efficiencies in the administration and the delivery mechanisms and also make the impact visible. Target Groups USEP will target the urban population below poverty line, as defined by the Planning Commission from time to time. It will lay special focus on women, persons belonging to Scheduled Castes (SC)/ Scheduled Tribes (ST), differently-abled persons and such other categories as may be indicated by the Government from time to time. The percentage of women beneficiaries under USEP shall not be less than 30%. 15% of the physical and financial targets under the Urban Self Employment Programme at the national level shall be earmarked for the minority communities. SCs and STs must be benefited at least to the extent of the proportion of their strength in the city/ town population below poverty line (BPL). A special provision of 3% reservation in the total number of beneficiaries should be made for the differently-abled under USEP. Educational Qualification No minimum or maximum educational qualification is prescribed for selection of beneficiaries under USEP. Beneficiary Identification A house-to-house survey for identification of genuine beneficiaries, with focus on slums and low-income settlements, will need to be conducted. Community structures, like Neighbourhood Groups, Neighbourhood Committees and Community Development Societies shall be involved in the task of identification of beneficiaries under the guidance of the City/ Town Urban Poverty Alleviation Cell (UPA Cell). Assistance of NGOs / other identified bodies can also be secured for this purpose. Cluster Approach Identifiably, clusters should be taken for support under SJSRY and efforts should be to ensure that all adults in the cluster are provided with benefits of skill development, self-employment or wage employment so that no urban poor household is left with an adult without means of earning income. Each town/urban local body has to develop a compendium of such activities/ projects keeping in view marketability, cost, economic viability etc. To avoid duplication with the ongoing Prime Minister's Employment Generation Programme (PMEGP), this component of SJSRY is to be IBC Academy Publications

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confined to Below Poverty Line (BPL) beneficiaries with emphasis on those given a higher priority on the basis of noneconomic criteria. Beneficiaries should declare that they have not availed similar benefits under any other self-employment scheme. The list of beneficiaries is to be shared with PMEGP to rule out duplication of coverage. Coverage For the purpose of self-employment, focus will be on 3 sectors, i.e. Production (Micro-industry), Services and Business. (i)

On Micro-industry (Manufacturing) side, a group of people (hub) will be encouraged for setting up of enterprises centered around and supported by Micro Business Centers (MBC), established following cluster approach. Space may be provided by MBCs in the form of working sheds or micro-entrepreneurs may work from their homes. (ii) In relation to Services sector, Urban Local Bodies will provide Seva/Suvidha Kendras (for every 50,000 population at least one Kendra) with suitable logistics and space. Workers will register themselves with the Kendras, which could act as focal points for the servicing trades and facilitate jobs / assignments to the registered skilled workers on demand from the clients. The emphasis will be on quality skills and the rates will be decided in advance / fixed for home visits. (iii) In Business Sector, i.e. shop-based enterprises, kiosks/ spaces will be leased out by the ULBs to urban poor for setting up shops. Vendors' markets will be promoted. Mobile vending outlets, running on motorized scooters will be encouraged with suitable technological interventions. Beneficiaries can also run their ventures from their own houses / shops. (iv) Opportunities in the transport sector, viz. running of scooter rickshaws, motorized cycle rickshaws for ferrying people / goods will be explored. Group ownership / Occupational Credit Groups concept in this sector will also be encouraged. (v) Micro-business Centers can be planned to cover Services and Business sectors, apart from Micro-industry. For businesses they can help with project preparation, permissions from planning and regulatory agencies, maintenance of accounts, advertisement, packaging, branding, deciding maximum retail price, marketing, etc. The details of financing pattern under USEP are as follows:

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Maximum allowable unit project cost

Rs.200,000

Maximum allowable subsidy

25% of the Project Cost subject to a maximum of Rs.50,000

Beneficiary contribution

5% of the project cost as margin money

Collateral

No Collateral required

A Micro-Business center under the scheme can be provided a financial support upto Rs. 80 lakhs per MBC, which include one-time capital grant of Rs. 60 lakhs and Rs. 20 lakhs for running cost. Efforts should be made to make these MBCs self-sustainable in the due course.

4. URBAN WOMEN SELF-HELP PROGRAMME (UWSP) This scheme is distinguished by the special incentive extended to urban poor women who decide to set up self-employment ventures in a group as opposed to individual effort. Groups of urban poor women may take up an economic activity suited to their skill, training, aptitude, and local conditions. Besides generation of income, this group strategy will strive to empower the urban poor women by making them independent as also providing a facilitating atmosphere for self-employment. This Component will be having two sub-components: (i) Assistance to groups of urban poor women for setting up gainful self-employment ventures - UWSP (Loan & Subsidy) (ii) Revolving Funds for Self-Help Groups (SHGs)/Thrift & Credit Societies (T&CSs) formed by the urban poor women - UWSP (Revolving Fund). Urban Women Self-Help Programme (Loans & subsidy) To be eligible for subsidy under this scheme, the UWSP group should consist of at least 5 urban poor women. Before starting an incomegenerating activity the group members must get to know each other well, understand the group strategy, and also recognize the strength and the potential of each member of the group. The group will select an organizer from amongst the members. As far as possible, activities should be selected out of an identified shelf of projects for the area concerned maintained by the town Urban Poverty Alleviation Cell. In addition, every effort will be made to encourage the group to set itself up as a Self-Help Group or Thrift & Credit Society, mobilizing savings and credit. For setting up group enterprises, the UWSP group shall be entitled to a subsidy of Rs.300,000 or 35% of the cost of project or Rs.60,000 per Member of the Group, whichever is less. The remaining amount will be mobilized as Bank Loan and Margin Money. IBC Academy Publications

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Urban Women Self-Help Programme (Revolving Fund) Where the UWSP group sets itself up as a Self-Help Group (SHG)/ Thrift & Credit Society (T&CS), mobilizing savings and credit in addition to its other entrepreneurial activities, the SHG / T&CS shall also be entitled to a lump sum grant of Rs.25,000 as Revolving Fund at the rate of Rs.2000 maximum per member. This Revolving Fund shall be available to a simple Self-Help Group/ Thrift & Credit Society also, even if the society is not engaged in any project activity or enterprise under UWSP. This fund is meant for the use of the SHG/ T&CS for purposes such as: (i) Purchases of raw materials and marketing; (ii) Infrastructure support for income generation and other group activities; (iii) One-time expense on child care activity. Recurring expenses like salary for staff etc. will not be permissible; (iv) Expenses not exceeding Rs.500 to meet travel costs of group members for visit to banks, town UPA Cell etc.; (v) Where an individual member of a Thrift & Credit Society / SelfHelp Group saves at least Rs.500 in a fixed deposit for 12 months with the society, she will be entitled to a subsidy of Rs.30 to be paid on her behalf towards a health / life / accident / any other insurance scheme for herself. Moreover, in cases where the member saves at least Rs.750 in a fixed deposit in 12 months, she will be entitled to a subsidy of Rs.60, at the rate of Rs.30 for the member herself and either Rs.30 for her husband towards health /life /accident / any other insurance or Rs.30 for any minor girl child in her family for health / accident insurance. This expense may also be debited to the revolving fund; and (vi) Any other expense allowed by the State / ULB as being necessary in the society or group's interest based on guidelines. A Self-Help Group/ Thrift and Credit Society under UWSP shall be entitled for payment of revolving fund not earlier than one year after its formation. Self-Help Group/Thrift & Credit Society - Bank linkage will be accorded priority under SJSRY. SHG/T&CS to be encouraged to avail bank credit, on the basis of their performance for their requirements.

5. SKILL TRAINING FOR EMPLOYMENT PROMOTION AMONGST URBAN POOR (STEP-UP) Like USEP, STEP-UP will target the urban population below poverty line, as defined by the Planning Commission from time to time. The percentage of women beneficiaries under STEP-UP shall not be less than 30%. SCs and STs must be benefited at least to the extent of the proportion of their IBC Academy Publications

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strength in the city/ town population below poverty line (BPL). A special provision of 3% reservation should be made for the differently-abled, under this programme. 15% of the physical and financial targets under the Skill Training for Employment Promotion amongst Urban Poor (STEP-UP) at the national level shall be earmarked for the minority communities. STEP-UP intends to provide training to the urban poor in a variety of service, business and manufacturing activities as well as in local skills and local crafts so that they can set up self-employment ventures or secure salaried employment with enhanced remuneration. Training should also be imparted in vital components of the service sector like the construction trade and allied services such as carpentry, plumbing, electrical and also in manufacturing low-cost building materials based on improved or costeffective technology using local materials. Skill Training may be linked to Accreditation, Certification and preferably be taken on Public-Private-Partnership (PPP) mode with the involvement of reputed institutions like IITs, NITs, Industry Associations, reputed Engineering Colleges, Management Institutes, Foundations and other reputed agencies. The average unit cost allowed for training will not exceed Rs.10,000 per trainee, including material cost, trainers' fees, tool kit cost, other miscellaneous expenses to be incurred by the training institution and the monthly stipend, to be paid to the trainee.

6. URBAN WAGE EMPLOYMENT PROGRAMME (UWEP) This programme seeks to provide wage employment to beneficiaries living below the poverty line within the jurisdiction of urban local bodies by utilizing their labour for construction of socially and economically useful public assets. These assets may be Community Centers, Storm water Drains, Roads, Night Shelters, Kitchen Sheds in Primary Schools under Midday Meal Scheme and other community requirements like Parks, Solid Waste Management facilities, as decided by the community structures themselves. The Urban Wage Employment Programme (UWEP) will be applicable only to towns/ cities with population upto 5 Lakhs, as per the 1991 Census. UWEP will provide opportunities for wage-employment, especially for the unskilled and semi-skilled migrants / residents by creation of community assets. Special emphasis will be on the construction of community assets in low-income neighbourhoods with a strong involvement and participation of local communities. The material : labour ratio for works under this programme shall be maintained at 60:40. However, States/ UTs can relax this material : labour ratio up to 10% (either way), wherever absolutely necessary. The prevailing IBC Academy Publications

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minimum wage rate, as notified from time to time for each area, shall be paid to beneficiaries under this programme.

7. URBAN COMMUNITY DEVELOPMENT NETWORK (UCDN) Community Structures, Community Development & Empowerment SJSRY shall rest on the foundation of community development and empowerment. The Scheme shall rely on establishing and nurturing community organizations and structures that facilitate sustained urban poverty alleviation. Community organizations, like Neighbourhood Groups (NHGs), Neighbourhood Committees (NHCs), and Community Development Societies (CDSs) shall be set up in the target areas. The CDSs will be the focal points for purposes of identification of beneficiaries, preparation of loan and subsidy applications, monitoring of recovery, and generally providing whatever other support is necessary for the programmes. The CDSs will also identify viable projects suitable for the area. Promotion of women self-help groups will be an important activity pursued by CDSs. The Community Organizer (CO) will be the main link between the urban poor community (represented through the CDS) and the implementation machinery i.e. Urban Poverty Alleviation Cell at the ULB level. At District level, a District Urban Development Agency, i.e. DUDA or a district level agency/mechanism may function to coordinate the scheme and undertake capacity building activities for all ULBs within the District. DUDA/district level agency will also undertake coordination with Banks for effective implementation of self-employment programmes under SJSRY. Bank officers should be associated in the implementation process from the stage of beneficiary/ trade selection itself, so that there may not be any problem in sanctioning of loans for microenterprises of the urban poor or their groups. At the District level, District Level Banker's Committee comprising of District officials and Bankers may closely monitor the scheme. In order to eliminate overlaps between PMEGP and SJSRY, DUDA/ district level agency will closely associate with the activities of the District Industries Centre (DIC), the implementing body for PMEGP and UPA Cells in ULBs, the implementing agencies for SJSRY.

8. PRIME MINISTER'S EMPLOYMENT GENERATION PROGRAMME (PMEGP) Government of India has approved the introduction of a new credit linked subsidy programme called Prime Minister’s Employment Generation Programme (PMEGP) by merging the two schemes that were in operation IBC Academy Publications

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till March, 2008 namely Prime Minister’s Rojgar Yojana (PMRY), and Rural Employment Generation Programme (REGP) for generation of employment opportunities through establishment of micro enterprises in rural as well as urban areas. PMEGP, a central sector scheme is administered by Ministry of Micro, Small and Medium Enterprises (MoM-SME). Scheme is implemented by Khadi and Village Industries Commission (KVIC). At the State level, the Scheme will be implemented through State KVIC Directorates, State Khadi and Village Industries Boards (KVIBs) and District Industries Centers (DICs) and banks. The Government subsidy under the Scheme will be routed by KVIC through the identified Banks for eventual distribution to the beneficiaries/ entrepreneurs in their Bank accounts. Objectives (i)

(ii)

(iii)

(iv)

To generate employment opportunities in rural as well as urban areas of the country through setting up of new self-employment ventures/ projects/ micro enterprises. To bring together widely dispersed traditional artisans/ rural and urban unemployed youth and give them self-employment opportunities to the extent possible, at their place. To provide continuous and sustainable employment to a large segment of traditional and prospective artisans and rural and urban unemployed youth in the country, so as to help arrest migration of rural youth to urban areas. To increase the wage earning capacity of artisans and contribute to increase in the growth rate of rural and urban employment.

Benefits     

The maximum cost of the project/unit admissible under manufacturing sector is Rs.25 lakh and under business/service sector is Rs.10 lakh. Per capita investment should not exceed Rs.1.00 lakh in plain areas and Rs.1.50 lakhs in Hilly areas. Assistance under this scheme is available only for new units. Own contribution 5% to 10% of project cost. General category beneficiaries can avail of margin money subsidy of 25 % of the project cost in rural areas and 15% in urban areas. For beneficiaries belonging to special categories viz., scheduled caste/scheduled tribe/ women, margin money subsidy is 35% in rural areas and 25% in urban areas.

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Quantum and Nature of Financial Assistance: Levels of funding under PMEGP Categories of beneficiaries Beneficiary’s Rate of Subsidy contribution under PMEGP (of project cost) (of project cost) Area (location of project/ unit) Urban Rural General Category 10% 15% 25% Special (including SC/ST/OBC/ 5% 25% 35% Minorities / Women, Ex-servicemen, Physically handicapped, NER, Hill and Border areas etc. Note: (1) Max. cost of the project/unit admissible under manufacturing sector is Rs. 25 lakh. (2) Max. cost of the project/unit admissible under business/service sector is Rs.10 lakh. (3) The balance amount of the total project cost will be provided by Banks as term loan Eligibility Conditions of Beneficiaries (i) (ii)

Any individual, above 18 years of age. There will be no income ceiling for assistance for setting up projects under PMEGP. (iii) For setting up of project costing above Rs.10 lakh in the manufacturing sector and above Rs.5 lakh in the business/service sector, the beneficiaries should possess at least VIII standard pass educational qualification. (iv) Assistance under the Scheme is available only for new projects sanctioned specifically under the PMEGP. (v) Self Help Groups (including those belonging to BPL provided that they have not availed benefits under any other Scheme) are also eligible for assistance under PMEGP. (vi) Institutions registered under Societies Registration Act,1860; (vii) Production Co-operative Societies, and (viii) Charitable Trusts. Existing Units (under PMRY, REGP or other scheme of Government of India or State Government) and the units that have already availed Government Subsidy under any other scheme of Government of India or State Government are not eligible. IBC Academy Publications

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Other eligibility conditions (i)

Project cost will include Capital Expenditure and one cycle of Working Capital. Projects without Capital Expenditure are not eligible for financing under the Scheme. Projects costing more than Rs.5 lakh, which do not require working capital, need clearance from the Regional Office or Controller of the Bank’s Branch and the claims are required to be submitted with such certified copy of approval from Regional Office or Controller, as the case may be. (ii) Cost of the land should not be included in the Project cost. Cost of the ready built as well as long lease or rental Work shed/Workshop can be included in the project cost subject to restricting such cost of ready built as well as long lease or rental work shed/workshop to be included in the project cost calculated for a maximum period of 3 years only. (iii) PMEGP is applicable to all new viable micro enterprises, including Village Industries projects except activities indicated in the negative list of Village Industries. Existing/old units are not eligible Identification of beneficiaries The identification of beneficiaries will be done at the district level by a Task Force consisting of representatives from KVIC/State KVIB and State DICs and Banks. The Task force would be headed by the District Magistrate / Deputy Commissioner / Collector concerned and the Bankers should be involved right from the beginning. Implementing Agencies 

  

The Scheme will be implemented by Khadi and Village Industries Commission (KVIC), Mumbai, a statutory body created by the Khadi and Village Industries Commission Act, 1956, the single nodal agency at the national level. At State level, the scheme will be implemented through State Directorates of KVIC, State Khadi & Village Industries Boards (KVIBs) and District Industries Centers in rural areas. In urban areas, the Scheme will be implemented by the State District Industries Centers (DICs) only. KVIC will coordinate with State KVIBs/State DICs and monitor performance in rural and urban areas. KVIC and DICs will also involve NSIC, Udyami Mitras empanelled under Rajiv Gandhi Udyami Mitra Yojana (RGUMY), Panchayati Raj Institutions and other NGOs of repute in identification of beneficiaries under PMEGP. IBC Academy Publications

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Bank Finance  







The Bank shall sanction 90% of the project cost in case of General Category and 95% in case of special category of the beneficiary/ institution; Bank shall finance Capital Expenditure in the form of Term Loan and Working Capital in the form of cash credit. Project can also be financed by the Bank in the form of Composite Loan consisting of Capital Expenditure and Working Capital. The amount of Bank Credit ranges from 60 -75% of the total project cost after deducting 15-35% of margin money (subsidy) and owner’s contribution of 10% from beneficiaries belonging to general category and 5% from beneficiaries belonging to special categories. While Banks will claim Margin Money (subsidy) on the basis of projections of Capital Expenditure in the project report and sanction thereof, Margin Money (subsidy) on the actual availment of Capital Expenditure only will be retained and excess, if any, will be refunded to KVIC, immediately after the project is ready for commencement of production. Rate of interest and repayment schedule - Normal rate of interest shall be charged. Repayment schedule may range between 3 to 7 years after an initial moratorium as may be prescribed by the concerned bank/financial institution.

9. VILLAGE INDUSTRY Any Village Industry including Coir based projects (except those mentioned in the negative list) located in the rural area which produces any goods or renders any service with or without the use of power and in which the fixed capital investment per head of a full-time artisan or worker i.e. Capital Expenditure on workshop/ work-shed, machinery and furniture divided by full time employment created by the project does not exceed Rs. 1 lakh in plain areas and Rs.1.50 lakh in hilly areas. Rural Area (i) (ii)

Any area classified as Village as per the revenue record of the State/Union Territory, irrespective of population. It will also include any area even if classified as town, provided its population does not exceed 20,000 persons.

Modalities of the operation of the Scheme (i)

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(ii)

media by KVIC, KVIBs and DICs at periodical intervals depending on the target allotted to that particular district. (a) Sponsoring of project by any agency is not mandatory. The beneficiary can directly approach Bank/Financial Institution along with his/her project proposal or it can be sponsored by KVIC/ KVIBs /DIC/ Panchayat Karyalayas etc. However, the applications received directly by the Banks will be referred to the Task Force for its consideration. (b) A Task Force, consisting of the 8 members, will be set up to scrutinize the applications received by it. (c) The Task Force will scrutinize the applications and based on the experience, technical qualification, skill, viability of the project etc., the task force will shortlist the applications and call for an interview of the applicants separately for rural and urban areas to assess their knowledge about the proposed project, aptitude, interest, skill and entrepreneurship abilities, market available, sincerity to repay and make the proposed project success. The release of funds to the implementing agencies will be in the following manner:(a) Government will provide funds under PMEGP to the nodal implementing agency, i.e. KVIC which will in turn, (within a period of 15 days of receipt of the money from the Government), place the margin money (subsidy) funds with the implementing Banks at the State level in their respective accounts in accordance with the targets allocated to each implementing agency. (b) First installment of the loan will be released to the beneficiary only after completion of EDP training of at least 2 weeks organized by KVIC/ KVIBs/ DICs or any recognized institutions. (c) The beneficiary will deposit owner’s contribution with the bank before the bank releases first installment of Bank Finance. (d) Projects sanctioned will be declared ineligible for Margin Money (subsidy) assistance if the EDP training is not completed. (e) In case the Bank’s advance goes “bad” before the three year period, due to reasons beyond the control of the beneficiary, the Margin Money (subsidy) will be adjusted by the Bank to liquidate the loan liability of the borrower either in part or full. IBC Academy Publications

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(f)

(g)

Margin Money (subsidy) will be “one-time assistance”, from Government. For any enhancement of credit limit or for expansion/ modernization of the project, margin money (subsidy) assistance is not available. Projects financed jointly i.e. financed from two different sources (Banks/Financial institutions), are not eligible for Margin Money (subsidy) assistance.

10. ATAL PENSION YOJANA (APY) Atal Pension Yojana (earlier known as Swavalamban Yojana) is a government-backed pension scheme in India targeted at the unorganised sector. In this scheme, all subscribing workers below the age of 40 are eligible for pension of up to Rs. 5,000 per month on attainment of 60 years of age. In Atal Pension Yojana, for every contribution made to the pension fund, the Central Government also co-contribute 50% of the total contribution or Rs.1,000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years. The national Aadhaar ID number is the primary "know your customer" document for identification of beneficiaries, spouses, and nominees to avoid entitlement-related disputes in the long-term. For proof of address, an individual may submit a copy of their ration card or bank passbook. The features of the scheme are as follows: Target group: Indian Citizens especially those in the unorganized sector are eligible to enroll as members in the scheme. Existing PF/ EPF/ PPF/ Govt. pensioners/Tax Payers can also become members of the scheme. The purpose of the scheme is to encourage citizens to save for their retirement. Eligibility: 18 to 40 years. The accounts can be opened through bank branch where SB account is maintained. Contribution: Subscriber joining at 18 years of age are required to contribute Rs. 42 and Rs. 210 on monthly basis to get a fixed monthly pension of Rs. 1,000 and Rs. 5,000 respectively. The monthly contribution is payable by auto debit facility from the subscribers SB account. The minimum period of contribution by the subscriber would be 20 years. Government Contribution: Government co-contribution is 50% of the total contribution amount or Rs. 1,000 per annum, whichever is lower, for a period of 5 years. However, the Govt. co-contribution is not available for those already covered by the existing PF/pension schemes. Benefits: Minimum monthly pension between Rs. 1,000 and Rs. 5,000 to the Subscriber/ spouse with return of corpus to the nominees after 60 years of age. IBC Academy Publications

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Voluntary Exit: Exit before 60 years of age is generally not permitted but in case a subscriber chooses to exit, he shall only be refunded the contributions made along with the net actual interest earned thereon after deducting the account maintenance charges etc. Death: If the subscriber dies before the age of 60 years, the spouse will be given an option to continue contribution for the remaining vesting period. Spouse of the subscriber shall be entitled to receive the same pension amount as that of the subscriber until death of the spouse. Other features: Existing Swavalamban beneficiaries (18-40 years) can be migrated to APY automatically unless they opt out. Government cocontribution is available for 5 years, i.e., from 2015-16 to 2019-20 for the Subscribers who join the scheme during the period from 1st June 2015 to 31st March, 2016. Administration of the Scheme: Pension Fund Regulatory and Development Authority (PFRDA) through NPS architecture. Documentation: Application Form, Self-declaration & Authorization for auto debit.

11. SUKANYA SAMRIDDHI YOJANA Government of India introduced the Sukanya Samriddhi Yojana (scheme) in the month of March, 2015 with an objective to ensure a bright future for girl children in India. It facilitate them proper education and carefree marriage expenses. It offers a small deposit investment for the girl children with higher interest rate compared to the current bank interest rates. At present, the interest rate payable is 9.20% p.a. The account can be opened and operated by the natural or legal guardian of a girl child up to 10 years of age and beyond 10 year the girl child may operate her own account, if she chooses to. The minimum deposit required is Rs. 1,000 per annum or multiples of Rs. 100 thereafter and the maximum amount that can be deposited in this account is Rs. 1.50 lakh per annum. The tenor of the scheme is 21 years from the date of opening of the account. However, operations in the account shall not be permitted once she gets married. To meet the financial needs of the account holder for the purpose of higher education and marriage, withdrawal up to 50% of the balance at the credit, at the end of the preceding financial year shall be allowed as withdrawal provided the account holder attains the age of 18 years.

12. ENTREPRENEURSHIP DEVELOPMENT PROGRAMME (EDP) The objective of EDP is to provide orientation and awareness pertaining to various managerial and operational functions like finance, production, marketing, enterprise management, banking formalities, bookkeeping, etc. IBC Academy Publications

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The duration for EDP under REGP was only 3 days, whereas, under PMRY it was 10 days. Two to three weeks period has been provided for EDP under PMEGP which include interaction with successful rural entrepreneur, banks as well as orientation through field visits. The EDP will be conducted through KVIC, KVIB Training Centers as well as Accredited Training Centers run by Central Government, NSIC, the three national level Entrepreneurship Development Institutes (EDIs), i.e., NIESBUD, NIMSME and IIE, and their partner institutions under the administrative control of Ministry of MSME, State Governments, Banks, Rural Development and Self Employment Training Institutes (RUDSETI) reputed NGOs, and other organizations/ institutions, identified by the Government from time to time. Bankers Review Meetings PMEGP is a bank driven scheme and the final sanction of project and release of loan is done at the level of concerned Bank. KVIC, KVIBs and DICs shall interact regularly with the higher officials of Bankers at District/ State/National level to ensure that the bottle necks, if any, in implementation, are resolved, Negative List of Activities The following list of activities will not be permitted under PMEGP for setting up of micro enterprises/ projects /units. (a) Any industry/business connected with Meat (slaughtered), i.e. processing, canning and/or serving items made of it as food, production/ manufacturing or sale of intoxicant items, like Beedi/ Pan/ Cigar/ Cigarette etc., Hotel/ Dhaba or sales outlet serving liquor, preparation/ producing tobacco as raw materials, toddy for sale. (b) Any industry/business connected with cultivation of crops/ plantation like Tea, Coffee, Rubber etc. sericulture (Cocoon rearing), Horticulture, Floriculture, Animal Husbandry like Pisciculture, Piggery, Poultry, Harvester machines etc. (c) Manufacturing of Polythene carry bags of less than 20 microns thickness and manufacture of carry bags or containers made of recycled plastic for storing, carrying, dispensing or packaging of food stuff and any other item which causes environmental problems. (d) Industries such as processing of Pashmina Wool and such other products like hand-spinning and hand-weaving, taking advantage of Khadi Programme in purview of Certification Rules and availing sales rebate. IBC Academy Publications

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(e)

Rural Transport (Except Auto Rickshaw in Andaman & Nicobar Islands, House Boat, Shikara & Tourist Boats in J&K and Cycle Rickshaw).

Rehabilitation of Sick Units: Sick units under PMEGP will be linked with RBI’s Guidelines for rehabilitation of SSI industrial units.

13. SCHEME OF LIBERATION AND REHABILITATION OF SCAVENGERS (SLRS) Scheme of Liberation and Rehabilitation of Scavengers (SLRs) (Sponsored by RSCDCC) is implemented by all PSU Bank and is aimed primarily at scheduled castes communities and is in consonance with the guidelines issued by the Reserve Bank of India. The Government of India has launched on 22 March, 1992, a National scheme for the rehabilitation of scavengers and their dependents (SLRS). The object of the scheme is to liberate and rehabilitate scavengers and their dependents from their existing hereditary and obnoxious occupation of manually removing night soil and filth and to provide for and engage them in alternative and dignified occupation within a period of 5 years. A scavenger is one who is partially or wholly engaged in the obnoxious and inhuman occupation of manually removing night soil and filth. The dependent of a scavenger is one who is a member of his/her family or is dependent on him/her irrespective of the fact whether he is partially or wholly engaged in the said occupation. The scheme cover primarily all scavengers belonging to the scheduled caste community and other communities engaged in servicing specifically dry latrines, to eliminate the practice of manual scavenging. Persons engaged in cleaning occupations, other than dry latrines, are not eligible for assistance. Eligibility norms • • •

All scavengers belonging to SC community and other communities Minimum age limit is above 18 years. May be considered for assistance under the scheme even he /she has been assisted earlier under any subsidy linked scheme. • Defaulter applicant will not be eligible. • Scheme covers urban, semi urban, rural area An applicant may be eligible, even if he/she had been assisted earlier under any subsidy-linked scheme if the applicant is otherwise eligible. However, an existing defaulter applicant will not be eligible for assistance. A member of family being a defaulter need not be a bar for considering the application of another member of the family for assistance. IBC Academy Publications

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Salient Features 1.

For the purpose of training in various trades, age limit is 18 to 50 years. 2. Scheme would cover scavengers in urban areas, semi-urban areas, rural areas, any other town or area including cantonment boards, colonies set up by public sector undertakings, etc., where manual scavenging prevails. 3. The unit for assistance under the scheme is not the family but each scavenger and each dependent of the scavengers. 4. No minimum qualification is prescribed for providing training to scavengers. 5. Loans granted by banks to the scavengers under the scheme are eligible for a classification under priority sector and loans up to Rs.6,500 under the DRI scheme. Funding 1.

The scheme provides for funding of projects costing up to Rs. 50,000 per beneficiary and also for margin money to the extent of 15% of the project cost at 4% of interest. 2. For projects costing Rs. 50,000, the break up would be – (a) Subsidy - Rs.10,000, (b) Margin money from State Scheduled Caste Development Corporations (SCDC) - Rs.7,500, and (c) Loan from the banks- Rs.32,500. Subsidy would be 50% of the project cost with a ceiling of Rs. 10,000. 3. Loans up to Rs.6,500 are treated as loans under DRI Scheme and concessional rate of interest at 4 percent is extended notwithstanding the fact that the project cost may exceed Rs.6,500. Where the loan sanctioned/disbursed is more than Rs. 6,500 such loans will attract a rate of interest according to the RBI directive on interest. Security: Hypothecation of assets created out of the loan/subsidy in favour of the banks. The SCDC allows having a 2nd/pari-passu charge over the assets to cover their margin money. Repayment: The repayment of loans will be in monthly/quarterly instalments within 3 to 7 years, inclusive of the grace period not exceeding six months. Other Aspects: The banks should not insist on a deposit amount in the fixed deposit, from the beneficiary. All loan applications up to a credit limit of Rs.25,000 should be disposed of within a fortnight and those for over Rs. 25,000 within 8-9 weeks.

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CHAPTER - 7

FINANCIAL PRODUCTS & SERVICES

1. CREDIT CARDS The system of issuing credit cards originated in the U.S.A, where it has been very popular of payment mechanism. Several banks in India are issuing credit cards to retail customers as well as these are also issued in the name of individuals/designated executives to be charged to the company’s account or to their personal account. The credit card is an electronic mode of payment mechanism which enables its holder to spend and pay anywhere, anytime without the hassle of carrying money. The Credit card is a post-paid card, where the holder is required to pay the amount spent on the card on purchases, in a stipulated time frame after the purchase bill is sent by the Card Issuing Bank. Banks allow credit to the Card holder upto a pre-approved limit to which a holder can make purchases or draws cash from Establishments/ATMs, at a charge. VISA, Mastercard and American Express are the most popular and large Card Issuing Companies with whom various Banks enter into an alliance to issue and manage credit card business. Advantages of Credit Cards Credit card holders enjoy certain privileges and advantages. They are: 1. Credit cards enable purchase of goods and services on credit in establishments which accept them. They enjoy credit facility without paying interest for about four to six weeks. 2. Credit card is more convenient and safer than carrying cash or cheque book. 3. Credit card is a safer and convenient method of payment. IBC Academy Publications

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4. 5.

A credit card holder is recognized as a man of sound financial standing. The Card issuing bank or company will debit the credit card holder or customer’s account once in month after receiving details about purchases.

Limitations/Drawbacks of Credit Cards 1.

2. 3.

Credit cards have limited acceptability in large cities and it cannot be generally used for making purchases in all business establishments across the country. Issuing Bank usually put an expenses limit on the credit card. Credit card system encourages frivolous expenditure and thus tends to increase indebtedness among the card holders. For example, indebtedness has increased tremendously on account of the credit card system in the U.S.A.

2. DEBIT CARDS A Debit card is a plastic card that provides the cardholder electronic access to bank account(s) at a Bank and it has a stored value with which a payment is made, while most relay a message to the cardholder's bank to withdraw funds from a designated account in favor of the payee's bank account. Debit card is an alternative payment method to cash when making purchases. In some cases, the primary account number is assigned exclusively for use on the Internet and there is no physical card. Usage of debit cards has become widespread and their volume has overtaken or replaced cheques and cash transactions significantly. VISA and Mastercard are the most popular and large Card Issuing Companies with whom various Banks enter into an alliance to issue and manage Debit card business. Unlike credit and charge cards, payments using a debit card are immediately transferred from the cardholder's designated bank account, instead of them paying the money back at a later date. Debit cards usually also allow for instant withdrawal of cash, acting doubly as an ATM card for withdrawing cash. Merchants may also offer cashback facilities to customers, where a customer can withdraw cash along with their purchase. How does it operates A customer opens an operative account with a Bank which issues a Debit card with a Personalized Identification Number (PIN). At the time of making purchases, he enters his PIN on the Merchant PIN Pad, after swiping his Debit Card. When the Card is slurped through the Electronic Terminal, it dials the acquiring bank system – either a VISA. Mastercard or RuPay establishment, which validates the PIN as well as verify the balances IBC Academy Publications

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in the customer account from the Issuing Bank and decides to accept or reject the transaction. The customer can never overspend as the system rejects a transaction exceeding the balances available in his account. Similarly, the Bank also does not face default as the amount spent and approved is debited instantly from the customer’s account. There are three ways that debit card transactions are processed:  Online Debit System: Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction may be additionally secured with the personal identification number (PIN) authentication system; some online cards require such authentication for every transaction, essentially becoming enhanced automatic teller machine (ATM) cards.  Offline Debit System: Offline debit cards have the logos of major credit cards (Visa or MasterCard) or major debit cards which are used at the point of sale (PoS) like a credit card (with payer's signature). This type of debit card may be subject to a daily usage limit. Transactions conducted with offline debit cards require 2–3 days to be reflected on users’ account balances.  Electronic Purse Card System: Smart-card-based electronic purse systems (in which value is stored on the card chip, not in an externally recorded account, so that machines accepting the card need no network connectivity) are in use throughout Europe since the mid-1990s

PREPAID DEBIT CARDS Prepaid debit cards, also called reloadable debit cards, appeal to a variety of users. The primary market for prepaid cards are unbanked people, an umbrella term used to describe diverse groups of individuals, typically with poor credit ratings- who do not use banks or credit unions for their financial transactions. Advantages of debit cards    

A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a debit card, allowing him/her to make plastic transactions. For most transactions, a check card can be used to avoid check writing altogether. Like credit cards, debit cards are accepted by merchants with less identification and scrutiny than personal checks. Unlike a credit card, a debit card may be used to obtain cash from an ATM or a PIN-based transaction, at no extra charge. IBC Academy Publications

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Disadvantages of debit cards  

Banks charges over-limit fees or insufficient funds fees, based upon pre-authorizations, and even attempted but refused transactions by the merchant. Theft of the users PIN using skimming devices can be accomplished much easier with a PIN input than with a signaturebased credit transaction.

3. SMART CARD A smart card, chip card, or integrated circuit card (ICC) is any pocket-sized plastic card with embedded integrated circuits or chip. Smart cards can provide identification, authentication, data storage and application processing. A smart card, combines credit card and debit card properties. The contact pad on the card enables electronic access to the chip. The international payment brands MasterCard, Visa, etc. agreed in 1993 to work together to develop the specifications for smart cards, as either a debit or a credit card. Banks are adding chips or ICs to their magnetic strip cards, in order to enhance security and add enhanced features and services to their Debit or Credit cards, these are called Smart Cards. The chip in the Smart Cards store a significantly large amount of data and personal information, customer preferences etc., and thus make the Cards very secure. More reliable and also can perform many functions. Two-factor authentication (also known as 2FA) is a type of multi-factor authentication method of confirming users' identities by using a combination of two different factors. Having the physical card is the first factor, and knowing the appropriate PIN is the second factor. In the context of online accounts, the first factor tends to be your login credentials, which serve as a “knowledge-based” factor like your debit card’s PIN. Another method of two-factor authentication involves the use of a thirdparty app (like Google Authenticator, Duo etc.) and linking it to any account you wish to secure. Instead of receiving your one-time use codes through SMS, the codes are sent to your device through this app. ONE-TIME PASSWORD (OTPs) is the latest tool used by Banks to fight against cyber fraud. Instead of relying on traditional memorized passwords, OTPs are requested by consumers each time they want to perform transactions using the online or mobile banking interface. When the request is received the password is sent to the consumer’s phone via SMS. The password is expired, once it has been used or once its scheduled life-cycle has expired. IBC Academy Publications

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4. CREDIT CARD COMPANIES

a.

MasterCard and Visa

Mastercard Inc. (MasterCard) and Visa Inc. (Visa) are American multinational financial services corporations, Credit card companies whose principal business is to process payments between the banks of merchants and the card issuing banks globally. They facilitates electronic funds transfers throughout the world, through most commonly known MasterCard and Visa-branded credit cards, gift cards, and debit cards. Visa is the world's second-largest card payment organization (debit and credit cards combined). China’s UnionPay is the largest credit card company in the world, largely due to the huge size its domestic market. Credit card companies, like Visa and MasterCard do not actually issue individual credit cards directly but, banks, credit unions, and even retailers issue branded cards. The issuing banks and financial institutions usually sets the credit card’s terms and conditions, including interest rates, fees, rewards, and other features. When a credit card holder pays their bill, the financial institution receives the payment, not the credit card company. Visa, MasterCard, and other credit card companies, such as American Express Co. (AXP) make money by charging merchants and businesses a fee for accepting their card as a method of payment. These firms do not consider themselves financial companies. Instead, Visa refers to itself as a payments technology company, and MasterCard prefers to be called a technology company in the global payments industry.

b. RuPay is an Indian domestic card scheme conceived and launched by the National Payments Corporation of India (NPCI). RuPay facilitates electronic payment at all Indian banks and financial institutions. It was created to fulfill the Reserve Bank of India’s desire to have a domestic, open loop, and multilateral system of payments in India. RuPay facilitates electronic payment at all Indian banks and financial institutions, and competes with MasterCard and Visa in India. The RuPay scheme was launched on 26 March, 2012. On 8 May 2014, RuPay has been dedicated to India by President of India, Pranab Mukherjee. India launched its own payment gateway ‘RuPay’, equivalent of Visa and Mastercard. The IndiaPay scheme was conceived by the National Payments Corporation of India as an alternative to the MasterCard and Visa card schemes, and to consolidate and integrate various payment systems in India. It was renamed to RuPay to avoid naming conflicts with other financial institutions using the same name. The RuPay card was IBC Academy Publications

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launched on 26th March, 2012. NPCI entered into a strategic partnership with Discover Financial Services (DFS) for RuPay Card, enabling the international acceptance of RuPay Global Cards on Discover’s global payment network outside of India. It provides accidental insurance cover upto Rs.1 lakh without any charge to the customer. To avail this benefit, the card must be used at least once in 90 days. Acceptance The RuPay platform — developed by National Payments Corporation of India (NPCI) — is being used by certain banks like ICICI, State Bank of India, Punjab National Bank, among others, for clearing and settlement. Singapore is the first country to promote India's digital payment network RuPay card overseas by becoming its first international partner. RuPay cards was later introduced in Bhutan in August, 2019.Maidives, UAE and Bahrain are other markets which shall also accept RuPay cards. RuPay, which works on three channels — ATMs, Point of Sales (POS) and online sales, is the seventh such payment gateway in the world. A variant of pre-paid RuPay card would shortly be launched by IRCTC, which will help in booking railway tickets. These cards can be used in all the ATMs of NPCI network and POS terminals & e-com transactions (Internet) enabled for RuPay acquiring. The various types of RuPay cards are as under: Card Type

Meant for

RuPay Kisan

Farmers availing Agriculture production loans (Crop Loans)

RuPay Aadhaar

Beneficiaries of Electronic Benefit Transfer (EBT) scheme

RuPay

Debit Beneficiaries under Financial Inclusion schemes

RuPay EMV NPCI has rolled out its chip card for high security transactions using EMV (Europay, MasterCard and Visa) chip technology, which is a global standard for debit and credit cards. RuPay chip cards have an embedded microprocessor circuit containing information about the card holder and because transactions are PIN-based rather than signature-based. RuPay for Farmers RuPay also provides a unified "Kisan Card", issued by banks under Kisan Credit Card, enabling farmers to transact business on ATMs and PoS terminals. Kotak Mahindra Bank in partnership with RuPay rolled out an IBC Academy Publications

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initiative for financial inclusion, where the dairy farmers across 75 cooperative societies of AMUL get their payments directly into their account on the same day of sale of milk.

5. AUTOMATED TELLER MACHINE (ATM) or CASH DISPENSERS (CD) An automated teller machine or automatic teller machine (ATM), also known as an automated banking machine (ABM) in Canada, and a Cashpoint (a trademark of Lloyds TSB), cash machine or sometimes a hole in the wall in British English, is a computerized tele-communications device that provides the clients of a Bank with access to financial transactions in a public space without the need for a cashier, clerk or bank teller. ATM is an electronic device, which acts as an independent banker without any human intervention. ATM provides round the clock service throughout the year to the customers. Besides dispensing cash, ATMs offer various add-on services, such as:  Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees, taxes, etc.)  Printing bank statements  Updating passbooks  Adding pre-paid cell phone / mobile phone credit/ Recharge  Payment of Direct Taxes, Mobile There are two types of ATM installations: on- and off-site/premises.  On-premise ATMs are typically more advanced, multi-function machines that complement a bank branch's capabilities, and are thus more expensive.  Off-premise machines are deployed by Banks and Independent Sales Organizations (ISOs) where there is a simple need for cash, so they are generally cheaper single function devices. Cash Dispensers (CD) are the customized machines meant only for limited features including dispenser of cash to customers. ATM/Debit Card is a payment card used to withdraw cash from ATM, purchase of goods and payment for services automatically debiting to the card holder’s bank account instantly, to the extent the credit balance exists. The card holder can draw cash using the PIN from ATM up to the balance available in his account subject to daily caps prescribed by the Bank. Banks are offering other value added services, such as funds transfer facility through ATMs at free of cost. Under this, ATM/Debit Card holders can transfer funds Inter/Intra Bank using the card number of the beneficiary. There is no requirement for registration of beneficiary and the IBC Academy Publications

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amount can be transferred instantly to any card number. As per RBI guidelines, Card to Card transfer limit is fixed as Rs. 5,000 per transaction and Rs. 25,000 per month. For the benefit of persons of disabilities, RBI has made it mandatory for banks to have talking ATMs with Braille Keypads at all new ATMs installed from 1st July 2014. Charges: RBI has issued guidelines to all banks not to levy service charges on ATM transactions of Savings Bank Cardholders. Other Bank Cardholders are allowed to withdraw cash on any ATM upto Rs.10,000 per transaction. However, RBI has reduced the number of free transactions per month at non-home bank ATM to three (3) w.e.f. 1st November 2014 in six metros viz., Mumbai, Kolkata, Chennai, Bangalore and Hyderabad whereas, Five transactions per month are allowed free for Savings account holders in all other locations. Any transaction beyond the said stipulation (3 or 5) attracts charges @Rs.20 per transaction (inclusive of service tax). With regard to transactions on home bank ATMs, the banks are given discretion to levy charges. The number of free transactions shall be inclusive of all types of transactions, financial or non-financial. However, it is not applicable to Basic Savings Bank Deposit accounts (Small/No Frill) and they continue to avail five free transactions. Further, RBI has allowed the banks to levy charges to their own customers for more than five transactions at their own ATMs also. A cash dispenser is an electronic machine which is meant for limited role and it allows customers to take out money from their bank account using the ATM/Debit card.

a. White Label ATMs White Label ATM (Automated Teller Machines) are owned and operated by Non-Bank entities. From such White Label ATM customer from any bank will be able to withdraw money, but will need to pay a transaction fee for the services. These white label automated teller machines (ATMs) will not display logo of any particular bank and are likely to be located in nontraditional places. These are purely managed by third party service providers and have their label. Cash handling, management and logistics are provided by third party. Debit cards of all banks can be operated through these machines. However, service provider levy charges which are to be either borne by the Bank or the customer. The role of the concerned bank is only limited to provide account information and back end money transfers to the third parties managing these ATM machines. This initiative will enable the excluded segments to avail ATM services, as at present, majority ATMs are confined to Urban/Metro areas only. Traditionally, Automated Teller Machines (ATMs) have respective bank’s IBC Academy Publications

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logo. So just by looking, one can say this is SBI’s ATM, this is ICICI’s ATM and so on. White label ATM does not have any Bank logo, hence is White label ATMs. Some facts:  Any non-bank entity with a minimum net worth of Rs.100 crore, can apply for white label ATMs. (Not just NBFC, any non-bank entity can apply.)  In Late 80s: first ATM in India opened;  In 2012: RBI issues guideline for White label ATMs;  In 2013: RBI gives license/permission to open White label ATMs;  The first company to get RBI’s permission to open White label ATMs is Tata Communications Payment Solutions Limited. They started their chain under brandname “Indicash”.  Other White label ATM provider companies are Muthoot Finance, SREI Infra., Vakrangee Software, Prizm Payments, AGS. More than 15 companies are given such permission by RBI.

b. Brown Label ATM ‘Brown label' ATM are those Automated Teller Machines where hardware and the lease of the ATM machine is owned by a service provider, but cash management and connectivity to banking networks is provided by a sponsor bank, whose brand is used on the ATM. In this case, Banks only handle part of the process that is cash handling and back-end server connectivity. The ATM machine is owned by the third party service provider along with the physical infrastructure. This type ATM is called as “Brown Label ATM” and acts as intermediate between Banks owned ATM and White Label ATM. Complaint Resolution: The revised guidelines has led to increased volume on ATM Network leading to deficiency in service on account of technology issues and the resolution is taking undue long time, which is causing concern to the customers and regulators. In the above backdrop, RBI issued the following directives to all banks:  ATM failed transactions are to be resolved within a max. period of 7 working days from the date of receipt of customer complaint.  In case of delay, the bank shall pay compensation of Rs.100 per day, to the aggrieved customer and shall be credited to the customer’s account automatically on the same day when the bank affords the credit for the failed ATM transaction.  The customer is also entitled to receive such compensation for delay, only if a claim is lodged with the issuing bank within 30 days of the date of the transaction. IBC Academy Publications

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As per recent guidelines, the Banks are advised to issue debit cards with photographs with a view to reducing the instances of misuse of lost/ stolen cards. Further, banks are asked to ensure full security of the cards and any loss incurred by the cardholder on account of breach of security or the failure of the security mechanism would be borne by the banks. ATM is most cost effective since the investment and operational cost are low when compared to traditional Branch Banking. Interoperable Cash Deposit Machines: As part of NPCI initiatives, now Cash Deposit Machines (CDM) / Bulk Note Acceptors (BNA) are linked to the National Financial Switch (NFS) and become interoperable. A customer of Indian Banking Industry can have access to any CDM/BNA to deposit money across the country. Truly, like withdrawal from any ATM (irrespective of the customer Bank), now cash also can be deposited in any Bank machine up to a specified limit without any charges. This is leading to “Any Where Banking” by extending round-the-clock banking services to the customers in letter and spirit.  Initially, RBI did not permit White label ATMs, and Banks wanted to reduce the operational cost, so they came up Brown Label ATM (outsourcing) system.  So in a way, the evolution of ATM is like : (Bank’s own ATM) => (Brown Label) => (white label)

ATM RULES: WHAT YOU NEED TO KNOW Banks had sought restrictions on free ATM use, citing "growing cost of ATM deployment and maintenance" and interchange fee. Effective November, 2014, frequent use of bank ATMs will cost more. Reserve Bank of India has reduced free transactions in other bank ATMs to three per month in six metropolitan cities, viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad. ATM users can withdraw a max. of 10,000 per transaction a day. At other locations, the present facility of five free transactions for savings bank account customers remain unchanged. However, RBI has allowed the banks to offer more than three free transactions at other bank ATMs, if they desire so. Exemptions: The new ATM transaction rules will, however, not apply to small/no frill/ basic savings bank deposit account holders who will continue to enjoy five free transactions. Own Bank ATMs: Banks are allowed to charge customers beyond five transactions (inclusive of financial and non-financial transactions) per month at own ATMs. Charges: Banks are allowed to fix their own charges for ATM transactions beyond the mandated free ones. However, the RBI has capped the maximum charge to Rs. 20 per transaction (plus service tax, if any). IBC Academy Publications

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DISTINGUISH BROWN LABEL VS WHITE LABEL ATM Brown Label ATM Banks outsourced the ATM operations to a third party service provider.

White label ATM ATMs are owned and operated by non-bank entities, but are not a ‘outsourcing- contract’ from a particular bank.

The private company owns & operates the ATM machine, pays office rent. They negotiate with the landlord, electricity company, telecom company and so on. The bank (which has outsourced this work) provides cash for that ATM.

Same as in Brown Label ATM.

ATM has logo of that bank (which has outsourced this work). No such compulsion.

RBI not involved directly. These outsourcing companies have contractual obligation with their respective banks.

Sponsor bank provides the cash. No. White label ATM does not have such logo, not even of the sponsor bank. They have to compulsory open a few ATMs in (tier-3 to tier-6) towns. RBI directly involved, because these white label Companies separately get license/ permission from RBI to run business.

6. KISSAN CREDIT CARD Kisan Credit Card is a pioneering credit delivery innovation for providing adequate and timely credit to farmers under single window. NABARD formulated a Model scheme (On the recommendations of R V Gupta Committee) for issue of Kissan Credit Cards to farmers, on the basis of their land holdings, for uniform adoption by banks, so that the farmers may use them to readily purchase agricultural inputs such as seeds, fertilizers, pesticides, etc. and also draw cash for their production needs It is a flexible and simplified procedure, adopting whole farm approach, including short-term, medium-term and long-term credit needs of borrowers for agriculture and allied activities and a reasonable component for consumption need. Under the scheme, beneficiaries are issued with a credit card and a pass book or a credit card cum pass book incorporating the name, address, particulars of land holding, borrowing limit, validity period, a passport size photograph of holder etc., which serves both as an identity card and facilitate recording of transactions on an ongoing basis. IBC Academy Publications

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Benefits of KCC (a) It follows a simplified procedure for credit to farmers, a large number of whom are illiterate or poorly educated; (b) There is no need to apply for loan every year as KCC provides the farmers with a credit facility on ongoing basis or revolving credits; (c) This allows the farmers to buy seeds, fertilizers and other inputs as per his needs; (d) Repayment is allowed after harvest period and thus farmer finds it easier to settle the loan by selling his produce; (e) There is a flexibility of drawal of funds from any branch even when he has gone to town for purchase of agricultural inputs Eligibility (i) (ii) (iii)

Farmers - Individuals/Joint borrowers (owner cultivators) Tenant Farmers, Oral Lessees & Share Croppers SHGs or Joint Liability Groups of Farmers including tenant farmers, share croppers etc.

7. PAYMENT BANKS On 23 September 2013, Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by Nachiket Mor, was formed by the RBI. On 7 January 2014, the committee submitted its final report. Among its various recommendations, it recommended the formation of a new category of bank called Payments Bank. Payments banks is a new model of banks conceptualised by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to Rs.100,000 per customer and may be increased further. These banks cannot issue loans and credit cards. Both current account and savings accounts can be operated by such banks. Payments banks can issue services like ATM cards, debit cards, net-banking and mobile-banking. Bharti Airtel set up India's first live payments bank. On 27 November, RBI released the final guidelines for payment banks. Out of 41 applicants received, on 19 August 2015, the Reserve Bank of India gave “in-principle” licences to 11 entities to launch payments banks: 1. Aditya Birla Nuvo 2. Airtel M Commerce Services 3. Cholamandalam Distribution Services 4. Department of Posts 5. FINO PayTech 6. National Securities Depository IBC Academy Publications

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7. Reliance Industries 8. Dilip Shanghvi, Sun Pharmaceuticals 9. Vijay Shekhar Sharma – PayTM 10. Tech Mahindra 11. Vodafone – M-Pesa The “in-principle” license is valid for 18 months within which the entities must fulfill the requirements. They are not allowed to engage in banking activities within the period. The RBI will consider grant full licenses under Section 22 of the Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled.

Regulations Capital requirement 1.

The Payment Bank to have a minimum capital of Rs.100 crore. For the first five years, the stake of the promoter should be 40% minimum. Foreign share-holding will be allowed in these banks as per the prevailing FDI rules as applicable for private banks in India. The voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10%, which can be raised to 26% by RBI. Any acquisition of more than 5% will require approval of the RBI. The majority of the bank’s board of director should consist of independent directors, appointed according to RBI guidelines. The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).

2.

3. 4.

Scope and Limitations of the Payment Bank 1. 2. 3. 4. 5.

6. 7.

The bank should be fully networked from the beginning. The bank can accept utility bills. The bank can issue ATM/debit cards, however, cannot issue credit cards. It cannot form subsidiaries to undertake non-banking activities. Initially, the deposits will be capped at Rs.1,00,000 per customer, but it may be raised by the RBI based on the performance of the bank. The bank cannot undertake lending activities. It will be required to invest minimum 75% of its “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled IBC Academy Publications

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commercial banks for operational purposes and liquidity management. 8. 25% of its branches must be in the unbanked rural area. 9. Bank must use the term “payments bank” in its to differentiate it from other types of bank. 10. The banks will be licensed as payments banks under Section 22 of the Banking Regulation Act, 1949 and will be registered as public limited company under the Companies Act, 2013.

8. ELECTRONIC BANKING or E-BANKING Electronic Banking or simply called E-Banking is virtual Banking or on-line Banking, where the customer is not required to visit a Bank branch to transact a host of banking functions. The popular electronic mode of Banking is covered under E-Banking are: 1. Smart Card 6. Debit card 2. Credit card 7. Electronic Fund Transfer 3. Automated Teller Machine 8. Mobile Banking 4. Internet Banking 9. Telephone Banking 5. Cheque Truncation Payment System A customer may perform the following functions, which are only illustrative in nature, through e-Banking: 1. Transfer funds from one account to another of the same person or third party accounts. 2. Use Credit/Debit/Smart card to buy products and services on-line. They can also pay their credit card bill on-line through their Bank account. 3. A customer can purchase Train ticket, Airlines ticket for travel, buy movie tickets re-charge its pre-paid mobile services or pay a host of utility bills on-line. 4. The customer can buy a host of products or services on-line buy using Credit/Debit/Smart cards. 5. The customer may also pay its Income Tax, Service Tax and other regulatory payments on-line.

9. INTERNET BANKING or NET-BANKING Internet banking (or On-line banking or Net Banking) allows customers of a Bank to conduct financial transactions on a secure website operated by it, without visiting the Bank Branch. To access a financial institution’s online banking facility, a customer having personal Internet access must register with the institution for the service, and set up some password for IBC Academy Publications

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customer verification. The password for online banking is normally not the same as for telephone banking. Banks routinely allocate customer Identification numbers (Customer ID), whether or not customers intend to access their online banking facility. Customer IDs are normally not the same as account numbers, because a number of accounts of a customer with the Bank are linked to the one customer ID. To access online banking, the customer would go to the Bank’s website, and enter the online banking facility using the customer ID and password. Some Banks have set up additional security steps for access, but there is no consistency to the approach adopted. The common features fall broadly into several categories:  A bank customer can perform some non-transactional tasks through online banking, including – o viewing account balances and recent transactions o downloading bank statements, for example in PDF format o viewing images of paid cheques o ordering cheque books  Bank customers can transact banking tasks through online banking, including – o Funds transfers between the customer’s linked accounts o Paying third parties, including bill payments and telegraphic/wire transfers o Investment – purchase or sale o Loan applications and transactions, such as repayments of enrollments  Financial Institution administration  Management of multiple users having varying levels of authority  Transaction approval process Security: Safety of a customer’s financial information is very important, without which, online banking could not operate. Banks/Financial institutions have set up various security processes to reduce the risk of unauthorized online access to a customer’s records, but there is no consistency to the various approaches adopted.

PAYMENT SERVICES 10. ELECTRONIC FUNDS TRANSFER (EFT) Electronic funds transfer (EFT) is the electronic exchange or transfer of money from one account to another, either within a single Bank/Financial Institution or across multiple institutions, through computer-based systems. IBC Academy Publications

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Reserve Bank of India (RBI) has introduced RTGS (Real Time Gross Settlement) and NEFT (National Electronic Funds Transfer) services, an Inter-Bank payment gateway, whereby all Banks in India are linked through an electronic payment network for transfer of funds amongst the Banks in a most secure environment. Funds transfer from a customer account of a bank to another bank takes a few minutes and the customer would get funds into his account mostly on the same day of remittance across the country. The settlement of accounts between the Banks is also carried out electronically on a real-time basis. Due to introduction of EFT, the historical mode of cash transfer and funds remittances, such as writing of a cheque, purchase of a bank Demand Draft, Telegraphic Transfer have reduced significantly. Besides, the cost of fund transfer to the customers has also reduced.

a. NATIONAL ELECTRONIC FUNDS TRANSFER SYSTEM (NEFT) National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme of Reserve Bank. Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even 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/ remitters to initiate funds transfer transactions even without having a bank account. The transactions under this system may be made for amounts inclusive of paisa component when there is no upper value limit for putting through an individual NEFT transaction. The system facilitates an efficient, secure, economical, reliable and expeditious system of funds transfer and clearing in the banking sector, as settlements of fund transfers in NEFT system is done on half-hourly basis. The NEFT system also relieves the stress on the existing paper based funds transfer and clearing system. The remitting branch prepares a structured financial messaging solution (SFMS) message and sends it to its service centre for NEFT. The RBI at the clearing centre sorts the transactions bank-wise and prepares the accounting entries of net debit or credit for passing on to the banks participating in the system. IBC Academy Publications

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IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is an 11-digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches.

b. REAL TIME GROSS SETTLEMENT SYSTEM (RTGS) Real-time gross settlement systems are specialist funds transfer systems where the transfer of funds takes place from one bank to another on a "real time" and on a "gross" basis. Settlement in "real time" means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. "Gross settlement" means the transaction is settled on one-to-one basis without bundling or netting with any other transaction. "Settlement" means that once processed, payments are final and irrevocable. RTGS systems are typically used for high-value transactions that require and receive immediate clearing. RTGS system does not require any physical exchange of money; the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank A's account by the amount in question and increasing the balance of Bank B's account by the same amount. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Not only does it allow transfer of funds, it also reduces the credit risk. Both customers and banks can transfer monies the same day in various cycles, as compared to cheques, which are cleared a day or two later.

11. CHEQUE TRUNCATION SYSTEM (CTS) Cheque truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point by the presenting bank to the paying bank branch. Instead, an electronic image of the cheque is transmitted to the paying branch through the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across bank branches, other than in exceptional circumstances for clearing purposes. Further, domestic instruments, where both presenting and drawee banks are the same, are not allowed in the CTS process. To facilitate the transformation to an image-based processing scenario, RBI directed all banks to issue cheques in conformity with CTSIBC Academy Publications

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2010 standard with uniform features in terms of size, paper quality and fields for MICR band, signature and date format. CTS is implemented at all the MICR centres with the introduction of Grid-Based Cheque Truncation clearing. Under this, all cheques drawn on bank branches falling within the grid jurisdiction are treated and cleared as local cheques. Cheque collection charges including speed clearing charges should not be levied, if the collecting bank and the paying bank are located within the jurisdiction of the same CTS grid even though they are located in different cities. CTS effectively eliminate the associated cost of movement of the physical cheques, reduce the time required for their collection and bring elegance to the entire activity of cheque processing. In addition to operational efficiency, CTS offers many benefits to banks and customers, including human resource rationalisation, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc.

12. DIGITAL WALLET A digital wallet is an electronic device that allows an individual to make electronic commerce transactions. This can include purchasing items online with a computer or using a smartphone to purchase something at a store. Increasingly, digital wallets are being made not just for basic financial transactions but to also authenticate the holder's credentials. For example, a digital-wallet could potentially verify the age of the buyer to the store while purchasing alcohol. "Digital wallet" is not a singular technology but comprise of three major components: (a) the system (the electronic infrastructure); (b) the application software that operates on top and (c) the device (the individual portion). An individual’s bank account can also be linked to the digital wallet. They might also have their driver’s license, health card, and other ID documents stored on the phone. The credentials can be passed to a merchant’s terminal wirelessly via near field communication (NFC). It is being speculated that soon these smartphone “digital wallets” will replace physical wallets to a great extent. A digital wallet has both a software and information component. The software provides security and encryption for the personal information and for the actual transaction. Typically, digital wallets are stored on the client side and are easily self-maintained and fully compatible with most ecommerce Web sites. A server-side digital wallet, also known as a thin wallet, is one that an organization creates for and about you and maintains on its servers. Server-side digital wallets are gaining popularity among major retailers due IBC Academy Publications

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to the security, efficiency, and added utility it provides to the end-user, which increases their satisfaction of their overall purchase.

13. BHIM A new digital application (Mobile app) “Bharat Interface for Money (BHIM)” is launched on 30th December, 2016 by Prime Minister of India. It acts as aggregator for all UPI based offerings of banks across the country. Till now, each bank has come out with its own mobile banking application on UPI platform being operated by NPCI. It is built by NPCI and expected to evolve as the common UPI application to facilitate faster and smoother digital payments.

14. MOBILE BANKING Mobile banking (also known as M-Banking, mbanking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA). The earliest mobile banking services were offered over SMS, a service known as SMS banking. Most services in the categories are transaction-based. The non-transaction based services of an informational nature are however essential for conducting transactions – for instance, balance inquiries might be needed before committing a money remittance. Mobile banking business models Models of branchless banking can be classified into three broad categories: a. Bank-focused model The bank-focused model emerges when a traditional bank uses nontraditional low-cost delivery channels to provide banking services to its existing customers. Examples range from use of automatic teller machines (ATMs) to internet banking or mobile phone banking to provide certain limited banking services to banks’ customers. b. Bank-led model The bank-led model offers a distinct alternative to conventional branchbased banking in that customer conducts financial transactions at a whole range of retail agents (or through mobile phone) instead of at bank branches or through bank employees. This model promises the potential to substantially increase the financial services outreach by using a different delivery channel (retailers/ mobile phones), a different trade partner (telco/chain store) having experience and target market distinct from traditional banks, and may be significantly cheaper than the bank-based alternatives. IBC Academy Publications

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c. Non-bank-led model The non-bank-led model is where a bank has a limited role in the day-today account management. Typically its role in this model is limited to safekeeping of funds. Account management functions are conducted by a nonbank (e.g. telco) who has direct contact with individual customers. In India, Reserve Bank of India (RBI) has adopted Bank-led model, in which mobile banking services is promoted through Business Correspondents.

VARIOUS MOBILE BANKING SERVICES Account information 1.

5.

Mini-statements and checking of account history Alerts on account activity or passing of set thresholds Monitoring of term deposits

7.

Access to loan statements

3.

9. Access to card statements 11. Mutual funds/ equity statements 13. Status on cheque, stoppayment on cheque

2.

Ordering cheque books

4.

Balance checking in the account

6.

Due date of payment (functionality for stop, change and deleting of payments) 8. PIN provision, Change of PIN and reminder over the Internet 10. Blocking of (lost, stolen) cards 12. Insurance policy management

Payments, deposits, withdrawals, and transfers 1. 3. 5. 7.

Domestic and international fund transfers Micro-payment handling Mobile currency recharging Commercial payment processing

2.

Bill payment processing

4. 6. 8.

Peer to Peer payments Withdrawal at banking agent Deposit at banking agent

Investments 1.

Portfolio management services

2.

Real-time stock quotes

3.

Personalized alerts and notifications on security prices

15. IMPS (INTER-BANK MOBILE PAYMENT SERVICE) IMPS offer an instant, 24X7, interbank electronic fund transfer service through mobile phones. There are two types of IMPS services: IBC Academy Publications

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A person-to-person (P2P) service, and A person-to-merchant (P2M) service While the P2P service was launched about more than a year ago, P2M service was made available only recently. To start a P2P or P2M service 1.

2.

A customer is required to register his mobile number with his Bank, who shall allocate a seven-digit Mobile Money Identifier, or MMID number. This number is used to identify client’s bank and is linked to his account number. The combination of mobile number and MMID is unique for particular account, while the customer has option to link the same mobile number with multiple accounts in the same bank, and get separate MMID for each account. Bank allocates a Mobile Banking PIN, or M-PIN, which is a password to be used during transactions for authentication and security. One can download mobile banking application or use the SMS facility provided by the bank to make a payment.

To send or receive funds for P2P Transactions In order to send money, initiate an IMPS transaction using the mobile app or SMS. One needs to enter the beneficiary's mobile number and MMID, amount and M-PIN for initiating a transaction. He will receive a confirmation SMS for the transaction. To receive money, one is required to share his mobile number and MMID with the sender. The sender then initiates the above-mentioned steps and he gets an SMS confirmation for the money received. CASH LIMIT Most banks cap the daily limit via IMPS app at Rs 50,000 per day. SBI limits transfers to Rs 1,000 per day through the SMS mode.

16. UNIFIED PAYMENTS INTERFACE (UPI) Unified Payments Interface (UPI) is an instant real-time payment system developed by National Payments Corporation of India facilitating interbank transactions. The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform. UPI is built over Immediate Payment Service (IMPS) for transferring funds and as a digital payment system, it is available 24 x 7 and across public holidays. Unlike traditional mobile wallets, which take a specified amount of money from user and store it in its own accounts, UPI withdraws and deposits funds directly from the bank account whenever a transaction is requested. It uses Virtual Payment Address (a unique ID provided by the bank), Account Number with IFS Code, Mobile Number with MMID (Mobile Money Identifier), Aadhaar Number, or a one-time use Virtual ID. An MPIN IBC Academy Publications

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(Mobile banking Personal Identification number) is required to confirm each payment. The transaction charges to be levied in UPI are left up to the banks as policy matter of individual banks thus a varied opinion exists among the bankers about imposing such charges.

17. BHARAT BILL PAYMENT SYSTEM (BBPS) Bharat Bill Payment System (BBPS) is an integrated bill payment system in India offering interoperable and accessible bill payment service to customers through a network of agents, enabling multiple payment modes, and providing instant confirmation of payment transaction. Guidelines for implementation of this system were issued on November 28, 2014.

18. POINT-OF-SALE (POS) TERMINALS Point of sale (POS) denote a Terminal or Merchant site at a store where the customer makes purchases to buy merchandise and makes payment using a Debit or Credit Card or a Smart Card. The card requires to be swiped at an Electronic terminal (known as Point of Sale or POS) kept at a merchant establishment. When the card is swiped, the data embedded in the card is transmitted through a dial-up or a lease line to the Bank’s host Computer. The data is electronically validated and gets authorized and concluded if these are found in order. The Point of sale (POS) Terminal is an integrated PC based electronic device with a monitor (CRT), POS Keyboard, Data display Monitor, Magnetic Swipe Reader and an electronic cash drawer, all bundled together into one device. In general terminology, Point of sale (POS) Terminal refers to the hardware and software used for check outs. Point of sale (POS) Terminal is the payment gateway of the merchant acquirer. The Merchant Establishments are required to hold an operative account with the acquirer Bank to avail of this service. As the POS Terminal enables the merchant to acquire business on Debit/Credit cards and add substantial value to its business, they do not mind paying the transaction charges, normally ranging between 1% to 2.50% to these acquirer Banks for the facility. Generally, the merchants absorb the charges levied and do not pass on the transaction charges to their customers, unless the profit margin on the sold items are very thin. The acquisition of such POS Terminal business for a bank is called Merchant Acquisition business and is one of the key “non-interest bearing” ancillary business for them.

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CHAPTER - 8

DEFINING BANK & CUSTOMER RELATIONSHIP

INTRODUCTION Banking industry occupies an important place in a nation’s economy. A bank is an indispensable institution in a modern society. One cannot think of the development of any nation without the active assistance rendered by these financial institutions. The modern business and the entrepreneur cannot carry on the commercial activities without the different methods of financing done by the banks. The relationship between the customer and the banker is vital. The relationship starts right from the moment an account is opened and it comes to an end on closure of the account. The relationship stands established as soon as the agreement or contract is entered into. The nature of the relationship depends upon the state of the customer’s account.

BANKER AND CUSTOMER Definition: ‘Banker’ refers to a person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honouring cheques drawn upon them, to the extent of the amounts available in their accounts. 1. Sheldon H.P.: “The function of receiving money from its customers and repaying it by honouring their cheques as and when required is the function above all other functions which distinguishes a banking business from any other kind of business.” IBC Academy Publications

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2. Sir John Paget: “No person or body corporate or otherwise can be a banker who does not take deposit accounts, take current accounts, issue and pay cheques and collect cheques crossed and uncrossed for his customers.” 3. Dr. H.L. Hart: “A banker or bank is a person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts available on their current accounts.” Under Section 5(1) (b and c) of the Banking Regulation Act 1949, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Banking company means any company which transacts the business of banking in India.” From the definitions given, if any person or institution fulfils the following conditions, it will satisfy the definition of a banker or a banking company. (a) Accepting of deposits from the public, repayable on demand or otherwise. The deposits may be of different types, current, savings, fixed etc. (b) Such deposits must be withdrawable by cheques, drafts, order or otherwise. (c) Any money accepted as deposits must be for the purpose of lending or investment. (d) Performance of banking business as the main business. According to Section 6 of the Act, a banker, apart from the usual services, may also engage in any one or more of the following forms of business namely: 1. The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security. 2. The drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, drafts, bills of lading, railway receipts, warrants, debenture, certificates, scrips, and other instruments. 3. The granting and issue of letters of credit, traveller’s cheques and circular notes. 4. The buying, selling and dealing in bullion and specie. 5. The buying and selling of foreign exchange including foreign bank notes. 6. Acquiring, holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, bonds, securities and investments of all kinds. IBC Academy Publications

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7. 8. 9. 10. 11. 12. 13.

14. 15.

16. 17. 18.

19. 20.

Acting as agents for any government or local authority. The purchasing and selling of bonds, scrips and other forms of securities on behalf of constituents or others. Contracting for public and private loans and negotiating and issuing the same. The receiving of all kinds of bonds, scrips or valuable on deposits or for safe custody or otherwise. The providing of safe deposit vaults. The collecting and transmitting of money and securities. The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of state, municipal or other loans or of shares stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue. Carrying on and transacting every kind of guarantee and indemnity business. Managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims. Undertaking and executing trusts. Undertaking the administration of estates as executor, trustee or otherwise. The acquisition, construction, maintenance and alternation of any building or works necessary or convenient for the purposes of the company. Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company. Any other form of business which the Central Government may, by notification in the official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

MEANING AND DEFINITION OF A CUSTOMER The term ‘customer’ of a bank is not defined by law. In the ordinary language, a person who has an account in a bank is considered its customer. According to an old view, in order to constitute a customer of a bank, two conditions are to be fulfilled. (a) There must be some recognizable course or habit of dealing between the customer and the banker. (b) The transactions must be in the form of regular banking business. IBC Academy Publications

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Further, for a person to be a customer of a bank, he should have some sort of account with the bank. The initial transaction in opening an account would not constitute the relation of banker and customer; there should be some kind of continuity. The concept of duration does not hold good any longer. At present to constitute a customer, duration is not essential. Thus, in order to constitute a person as a customer, he must satisfy the following conditions: 1. He must have an account with the bank – i.e., saving bank account, current deposit account, or fixed deposit account. 2. The transactions between the banker and the customer should be of banking nature i.e., a person who approaches the banker for operating Safe Deposit Locker or purchasing travellers cheques only is not a customer of the bank since such transactions do not come under the orbit of banking transactions. 3. Frequency of transactions is not quite necessary though anticipated. Thus, customers of a bank may be of classified as: Existing Customers – Those who maintain an operative Bank account with the Bank for some time. Former Customers – Those who had a banking relationship with the bank some time earlier but now have discontinued relationship. They are no longer a Bank Customer. Potential/ Prospective Customers – Those who are willing or intend to establish a banking relationship and/or open an account with a bank. Even if the Customer has deposited their Account Opening Form and the bank has accepted it, they would no longer be treated as bank customer, till the time an account is opened in their names with the bank. Those who does not maintain an account with a bank and only buy or avail of services such, encashing a cheque, buying a Demand draft, etc. are not a customer of the Bank. Therefore, it an essential pre-requisite that a bank customer must have an operative Bank account opened in his/their names with the bank.

SPECIAL TYPES OF CUSTOMERS Special types of customers are those who are distinguished from other types of ordinary customers by some special features. They are to be dealt with carefully while operating and opening the accounts, as some other person who may wish to represent them may have limitation in their powers which may expose bank to risks. 1. MINORS: Under the Indian law, a minor is a person who has not completed 18 years of age. The period of minority is extended to 21 years IBC Academy Publications

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in case of guardian is appointed by a Court of law. According to Indian Contract Act, a minor is recognised as a highly incompetent party to enter into legal contracts and any contract entered into with a minor is not only invalid but voidable at the option of the minor. a. A bank can open a Savings bank account in the name of a minor, but not open a current account. Savings Bank account can be opened in individual name of the minor and/or joint names with his/her Guardian. RBI has since allowed opening of Minors account with mother as a Guardian, even if the father is alive. b. Banks may have two separate versions of accounts for minors – (i) one for those below 10 years and (ii) another for those between the ages of 10 years and 18 years. When you open an account in the name of a child who has not yet turned 10, it has to be operated jointly with the parent or guardian. Whereas those opened for a minor between 10 years and 18 years of age can be operated by the child. c. Real Date of Birth of the Minor should be recorded while open a bank account. Bank should always obtain Birth Certificate or School record (as permissible per law) as a proof of the date of Birth of the Minor. d. Accounts of Illiterate Minors should be opened always jointly with Guardian. e. Cheque book to a Minor account should be issued only after him/her attaining age of 16 or more. f. A minor is not competent to enter into a contract and it is not enforceable on him/her. Thus, bank should ensure that their accounts are not overdrawn. g. In the event of death of a Minor, the Guardian becomes beneficiary of the monies held in the account. h.

i.

In case of death of the Guardian before the Minor attains majority, the Bank shall either pay the money to the Minor or open a new account along with a Guardian as appointed by the Court. Internet usage: The child may be allowed access for Internet usage, albeit with strings attached. While applying for the account, banks get the mandate from the parent or the guardian to issue a login ID and password to the child to carry out permissible banking transactions. All indemnities are therefore deemed to have been made by the parent or the guardian. Bank, however may not provide a transaction password to transfer funds from minor accounts. IBC Academy Publications

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2. LUNATICS: A lunatic or an insane person is one who, on account of mental derangement, is incapable of understanding his interests and thereby, arriving at rational judgement. Since a lunatic does not understand what is right and what is wrong, it is quite likely that the weakness of a lunatic may be exploited to their disadvantage. The Indian Contract Act recognises that a lunatic is incompetent to enter into any contract and any such contract, if entered into, is not only invalid but voidable at the option of the lunatic. Bankers should not open an account in the name of a person of unsound mind. On coming to know of a customer’s insanity, the banker should stop all operations on the account and await a court order appointing a receiver. It would be dangerous to rely on hearsay information. The bank should take sufficient care to verify the information and should not stop the account, unless it is fully satisfied about the correctness of the information. In case a person suffers from a temporary mental disorder, the banker must obtain a certificate from two medical officers regarding his mental soundness at the time of operation on the account. 3. DRUNKARDS: A drunkard is a person who on account of consumption of alcoholic drinks, gets himself intoxicated and loses the mental balance and hence, is incapable of forming rational judgment. A lawful contract with such a person is invalid. A banker has to be very careful in dealing with such customers, though it may have no objection to open an account. In case of encashment request of his cheque especially when he is drunk, the banker should not make payment in that condition for the customer may afterwards argue that the banker has not made payment at all. It is however, safer that the banker insist upon such a customer getting a witness (who is not drunk) to countersign before making any payment against the cheque. 4. MARRIED WOMEN: An account may be opened by the bank in the name of a married woman as she is competent to enter into a valid contract. She has the power to draw cheques and give valid discharge. At the time of opening an account in the name of a married woman, it is though, advisable to obtain the name and occupation of her husband and name of her employer, if any, and record the same to enable detection if the account is misused by the husband for crediting therein cheques drawn in favour of her employer. In case of an unmarried lady, the occupation of her father and name and address of her employer, if any, may be obtained and noted in the account opening form. If a lady customer requests the bankers to change the name of her account opened in her maiden name to her married name, the banker may do so after obtaining a written request from her. A fresh specimen signature has also to be obtained for records. IBC Academy Publications

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In case of a Debt granted to a married women, her husband shall not be liable to repay excepting in the following cases 1. If the Loan is availed with the consent or authority of her husband; 2. If the loan is taken for the supply of necessities of life, and the husband defaults in providing the same to her. Excepting the above instances, the bank shall arrange recovery of debt from her or from her personal assets/properties. 5. PARDANASHIN WOMEN: A Pardanashin women cover herself and observes complete seclusion as per the customs of her community. She does not deal with the people other than her own family. As the identity of the person is difficult to established, the banker generally refuse to open an account. While opening an account of a pardanashin lady, the bank obtains her signature on the account opening form duly attested by a responsible person known to the bank. Similarly, it is desirable to have the cash withdrawals also similarly attested by a responsible person. The law assumes that any contract and financial dealing made by the Pardanashin women may not be out of her free will and may be that the contract details are not properly understood by her. 6. INSOLVENTS: When a person is unable to pay his debts in full, his property in certain circumstances is taken possession of by the official receiver or official assignee, under orders of the court. The court receiver realises the debtor’s property and distributes the proceeds amongst his creditors. Such a proceeding is called ‘insolvency’ and the debtor is known as an ‘insolvent’. If an account holder becomes insolvent, his authority to the bank to pay cheques drawn by him is revoked and the balance in the account vests in the official receiver or official assignee. 7. ILLITERATE PERSONS: A person is said to be illiterate when he does not know to read and write. No current account should be opened in the name of an illiterate person. However, a savings bank account may be opened in the name of such a person. On the account opening form the bank should obtain (a) his latest photograph, (b) his thumb mark in the presence of two persons, known to the bank and the depositor, (c) one or two proper identification marks on his body to be noted for identification purposes. The person who identifies the drawer must be known to the bank and he should preferably not be a bank’s staff. Cheque book shall not be given to a Illiterate customer. In case of cash withdrawal from the account, the account holder should be permitted only if he comes at the bank and with proper identification every time.

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TYPES OF CUSTOMERS ACCORDING TO THEIR CONSTITUTION 1. JOINT STOCK COMPANY: A joint stock company has been defined as an artificial person, invisible, intangible and existing only in contemplation of law. It has separate legal existence and it has a perpetual succession. The banker must satisfy himself about the following, while opening an account in the name of a company: (a) Memorandum of Association (MoA) is the main document of the company, which embodies its constitution and gives details, especially regarding objects and capital of the company. (b) Articles of Association contain the rules and regulations of the company regarding its internal management. It contains in detail all matters which are concerned with the conduct of day-to-day business of the company. (c) Certificate of Incorporation This document signifies that the company can commence its business activities as soon as it gets this certificate. (d) Certificate to Commence Business: Only for public companies, the banker insists upon this document for verification. (e) Application Form and Copy of the Board’s Resolution: A copy of the prescribed application form duly completed in all respects and signed by the company’s authorised officers shall be submitted along with a copy of the resolution passed at the meeting of the board regarding opening of company’s account. The resolution copy should be signed by the company’s Chairman and Secretary. In addition, a copy of the specimen signatures of the officers empowered to operate the bank account has to be furnished. 2. CLUBS, ASSOCIATIONS & EDUCATIONAL INSTITUTIONS Clubs, Associations and Educational Institutions are non-trading institutions interested in serving noble causes of education, sports etc. The banker should observe the following precautions in dealing with them: (a) Incorporation: A sports club, an association or an educational institution must be registered or incorporated according to the Indian Companies Act, 1956, or the Co-operative Societies Acts. Failing which, it will not have any legal existence. (b) Rules and by-laws of the Organisation: A registered association or organisation is governed by the provisions of the Act under which it has been registered. It may have its own Constitution, Charter or Memorandum of Association and rules and by-laws, etc. to carry on its activities. IBC Academy Publications

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(c) A Copy of Resolution of Managing Committee: A copy of the resolution must be obtained by the bank. For opening a bank account, the managing committee of the organisation must pass a resolution detailing,  appointing the bank concerned as the banker.  mentioning the name/names of the person or persons, who are authorized to operate the account.  giving any other directions for the operation of the said account. (d) An Application Form: An application form duly completed in all respects along with specimen signatures of the office bearers of the institution is quite essential for operation of the account. (e) A Written Mandate: It is an important document which contains specific instructions given to the banker regarding operations, over-drawing etc. 3. PARTNERSHIP FIRM: A partnership is not regarded as an entity separate from the partners. The Indian Partnership Act, 1932, defines partnership as the “relation between persons (two or more than two persons) who have agreed to share the profits of the business, carried on by all or any of them acting for all.” Partnership is formed on account of agreement between the partners and with the sole intention of running a lawful business, earning and sharing profits in a particular ratio. Further, the business is carried on either by all the partners or some partners acting for all. The partners carry joint and several liabilities and the partnership does not possess any legal entity. A banker should take the following precautions while opening an account of a partnership firm: (a) Application Form: A prescribed application form, duly completed in all respects along with specimen signatures of the partners of firm. (b) Partnership Deed: The banker should, obtain and examine the partnership deed, which is the charter of the firm, and acquaint himself with the same. (c) A Mandate: A mandate giving specific instructions to the banker regarding operations, over-drawing etc., which the banker must follow meticulously. (d) Transfer of Funds: The banker has to be very careful to see that the funds belonging to the firm should not be credited to the personal or private accounts of the partners. (e) Sanctioning of Overdraft: The banker has to check up the partnership deed and examine the borrowing powers of the partners empowered to borrow. IBC Academy Publications

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(f) In case of death of a Partner of a firm, the partnership firm stand dissolves unless any contract to the contrary existed and submitted to bank. The account operations in such account must be stopped forthwith as the estate of the deceased would not be liable for the acts and deeds of the firm thereafter. 4. JOINT ACCOUNTS: When two or more persons open an account jointly, it is called a joint account. The banker should take the following precautions in opening and dealing with a joint account: (a) The application for opening a joint account must be signed by all the persons intending to open a joint account as per the mandate furnished. (b) The full name of the account must be given in all the documents furnished, even if the account is to be operated by one or a few of the joint account holders. (c) Banker must stop operation and seek instructions, as soon as a notice of death, insolvency, insanity etc., of any one account holder is received. In case of a debt due from the deceased, it can be set off/recovered to the extent of amount owed by the deceased in a joint account. (d) The joint account holder, who is authorised to operate the joint account, he himself alone cannot appoint an agent or attorney to operate the account, but it shall be appointed with the consent of all the joint account holders only. (e) If all the persons are operating the account, then banker must see that any cheque drawn on him is duly signed by all. (f) Banker must stop making payments as soon as letter of revocation is obtained. 5. JOINT HINDU FAMILY: Joint Hindu family or Hindu Undivided Family (HUF) comprises of all male members descended from a common ancestor. They may be sons, grand-sons and great grand-sons, their wives and unmarried daughters. “A joint, Hindu family is a family which consists of more than one male member, possesses ancestral property and carries on family business.” Joint Hindu family is a legal institution. It is managed and represented in its dealings and transactions with others by the Karta who is the head of the family. Other members of the family do not have this right to manage unless a particular member is given certain rights and responsibilities with common consent of the Karta. The banker shall have to exercise greater care in dealing with this account. (a) Bank must get complete information about the joint Hindu family including the names of major and minor co-parceners and get a declaration from the Karta to this effect, along with specimen signatures and signatures of all co-parceners. IBC Academy Publications

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(b) The account should be opened either in the personal name of the Karta or in the name of the family business. (c) The documents should be signed by the Karta and major coparceners. (d) The account should be operated upon only by the Karta and the authorised major co-parceners. (e) While making advances, the bank should ascertain the purpose of loan and whether the loan is really needed by the joint Hindu family for business. Risk : HUF is governed by the “Mithakshara law” whereby all the members of the family acquire a right in the property by birth, even from the date of conception in the womb. There always exists a danger of a member who was not born at the time of extending loan to repudiate the same leading to legal complications. 6. TRUSTEES According to the Indian Trusts Act, 1882, “a trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.” As such, a trustee is a person in whom the author or settlor reposes confidence and entrusts the management of his property for the benefit of a person or an organisation who is called beneficiary. A trust is usually formed by means of document called the “Trust Deed.” While opening a Trust account, the banker should take the following precautions: (a) The bank should thoroughly examine the trust deed appointing the applicants as the trustees. A trust deed states the powers and functions of trustees. (b) In case of two or more trustees, clear instructions to operate the account be obtained as individual Trustee has no power. (c) In case of death or retirement of one or more trustees, banker must see the provision of the trust deed. (d) The banker should not allow the transfer of funds from trust account to the personal account of trustee. (e) The insolvency of a trustee does not affect the trust property and the creditors of the trustee cannot recover their claims from trust property. (f) A copy of the resolution passed in the meeting of trustees open the account should be obtained.

THE BANKER-CUSTOMER RELATIONSHIP The relationship between the banker and the customer arises out of the contract mutually entered in between them. A contract that exists IBC Academy Publications

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between a bank and its customer is a loan contract. This is because if the customers account is in credit, the bank owes him that money and vice versa, if the account is overdrawn. This contractual relationship between banker and customer is regulated by the rules contained in the Negotiable Instruments Act, 1881 and the Indian Contract Act, 1872. This relationship is of two types: A. General relationship, and B. Special relationship. A. General relationship: The general relationship between banker and customer can be classified into two types, 1. Primary Relationship: Primary relationship is in the form of a ‘Debtor’ which arises out of a contract between the banker and customer. Thus, the fundamental relationship is that of “Debtor and Creditor.”

RELATION OF DEBTOR AND CREDITOR The relationship between a banker and his customer is that of a debtor and a creditor. When a customer deposit money in his Bank accounts, the Debtor and Creditor relationship is established with the bank. As long as the customer’s account shows a credit balance, the banker would be a debtor and in case the customer’s account shows a debit balance, the banker would be creditor. Bank is entitled to utilize the money deposited by the customer, in any manner for regular banking purposes, as long as it is capable of repaying the amount together with interest agreed upon by it. The Bank is not required to inform the customer or update him on how it proposes to utilize or is deploying the money deposited by him. As a customer, they expect the bank to ensure keeping the money safe and return it to him on raising a demand, within the banking business hours. 1. The Creditor must Demand Payment: In case of banker and customer relationship, though the banker is a debtor, he is not expected to approach the creditor for settlement of dues. Here, the relationship is different and has a special feature, namely, demand is necessary from the customer. 2. Proper Place and Time of Demand: The demand by the creditor must be made at the proper place and in proper time. It means that the customer should present the cheque for payment at that place of the bank where the customer’s account is maintained. It is essential that the customers should demand payment on a working day i.e., not on a holiday or a day which is closed for public and it must be presented during business hours of the Bank. 3. Demand Must be Made in Proper Form: The demand made by the customer must be in the prescribed form as required by the bank. IBC Academy Publications

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RELATION OF CREDITOR & DEBTOR When the bank grants Loan or a credit facility, its relationship with the customer reverses into a Creditor and Debtor. In this case, Bank becomes a Creditor and the customer a Debtor. The customer executes a set of Loan documentation and offer securities to the bank for the loan facility granted. 2. Secondary relationship: These are other types of relationship. Sometime, the banker discharges agency functions like collection of bills, cheques etc., acts as a bailee by keeping valuables in safe custody and acts as trustee by administering the property for the benefit of defined beneficiary. Here the relationship is not that of ‘Debtor and Creditor’. (a) Banker as Agent: A banker acts as an agent of his customer and performs a number of agency functions for the convenience of his customers. These are as follows: 1. Purchasing or selling of securities. 2. Collection of income 3. Making periodical payments as instructed by his customers. 4. Collecting interest and dividend on securities lodged by his customers. 5. Receiving safe custody valuables and securities lodged by his customers. 6. Collecting cheques, hundies, drafts of the customers. In this case, the banker and customer relationship is, as ‘Agent’ and ‘Principal’. (b) Banker as Trustee: The customer may request the banker to keep his valuables in safe vaults or one may deposit some amount and can request the bank to manage that fund for a specific purpose, which the bank does, or in case of corporate debentures, the bank can become trustee for debenture holders or the bank collects the cheques, hundies of the customers in the capacity of trustee. (c) Banker as Bailee: Section 2 of the Indian Contract Act defines that bailment, as the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the direction of the person delivering them. As a bailee, the banker should protect the valuables in his custody with reasonable care. If the customer suffered any loss due to the negligence of the banker in protecting the valuables, banker is liable to pay such loss. If any loss is incurred due to the situation beyond the control of the banker, it is not liable for penalty. IBC Academy Publications

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RIGHTS OF A BANK As there exists a contractual relationship between a Bank and customer, Bank has therefore, certain rights and obligations for the customer and the vice versa. Following are the rights enjoyed by the banker with regard to the customer’s account: 1. Right of Lien: A lien may be defined as the right to retain property belonging to a debtor until he has discharged a debt due to the retainer of the property. In case, lien is exercised by a trader on his customer’s goods, he has no right to use the goods or any right to sell them. All that he can do is to retain the goods until the obligations are cleared. Once the obligations are cleared by the customer, it is an obligation on the part of the trader to return back his goods immediately. The bank, as a Creditor, has right to maintain the security of the debtor but not to sell it. Bank cannot exercise the right of lien on goods held for safe custody, goods held in the capacity of a Trustee or an Agent of the customer or left in the Bank by mistake of the customer. There are two kinds of lien: (a) Particular lien, and (b) General lien. (a) Particular Lien: A particular lien confers a right to retain the goods in respect of a specific debt relating to a particular loan transaction. In case of a particular loan facility, the customer has offered a specific security, the bank enjoys Particular lien on the security offered. This lien is also called as Ordinary Lien. (b) General Lien: A Bank enjoys a right of General Lien against its borrower. A general lien confers a right to retain goods not only in respect of debts relating to a particular transaction but also in respect of any general balance arising out of the general dealings between the two parties. This is a statutory right of a Bank and is available even in absence of an explicit agreement, but it does not confer the right to pledge. Banker’s lien is a general lien. 2. Right of Set-off: The right of set-off is a statutory right which enables a debtor to take into account a debt owed to him by a creditor, before the latter could recover the debt due to him from the debtor. In other words, the mutual claims of debtor and creditor are adjusted together and only the remainder amount is payable by the debtor. A bank, like other debtors, possesses this right of set-off which enables him to combine two accounts in the name of the same customer and to adjust the debit balance in one account with the credit balance in the other. This right of set-off can be exercised by the banker only if there is no agreement - express or implied, contrary to this right and after a notice is served on the customer intimating the latter about the former’s intention to exercise the right of set-off. However, as an abundant precaution, the bank takes a letter of set-off from the customer authorizing them to IBC Academy Publications

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exercise the right of set-off without giving any prior notice. Secondly, this right is applicable in respect of dues which have fallen due or are becoming due, i.e. those which are certain and not contingent. This right is not applicable to contingent debts which are not become due for repayment. The Right of Set-off empowers Bank to combine all the credits and debits balances of all accounts of a customer with the bank to arrive at the net sum payable by him. Conditions under which the Right of Set off cannot be exercised (a) If the accounts are not in the same right. (b) The right of set off cannot be extended to a future contingent debt e.g., a bill which will mature in future. (c) If the amounts of debts are uncertain. (d) Trust account in which personal account of the customer cannot be combined. (e) The account balance of an individual cannot be set-off against a joint account balance in which he is one of the account holders. 3. Right to Appropriation: Whenever the customer deposits a sum into his account in the bank, it is his duty to inform the bank to which account they are to be credited (provided the customer has more than one account at the same bank). Once the customer gives specific directions regarding appropriation, the banker has no right to alter them. It is his bounden duty to carry out the instructions of the customer. This right of appropriation is to be exercised by the customer at the time of depositing funds and not later. In case the customer is silent or fails to give instructions, the banker has every right to appropriate in his own way and apply it towards payment of any Debt. 4. Right to Charge Interest, commission, & other charges: As a creditor, a banker has the implied right to charge interest on the advances granted to the customer, recover charges for the services rendered such as Processing charges for the Loan granted, charges for nonutilisation of advances, commission, exchange, incidental charges etc. depending on the terms and conditions of advances granted and mutually agreed as per agreement. 5. Right not to Produce Books of Accounts: According to the provisions of the Bankers Book Evidence Act, the banker need not produce the original books of accounts as evidence in the cases in which the banker is not a party. He can issue only an attested copy of the required portion of the account which can be utilized as evidence before the court. When the court is not satisfied with the certified copy, the court can summon the original books. But when a banker is a party to the suit, the court can force the banker to produce the original records in support of his claim. IBC Academy Publications

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6. Right under Garnishee Order: The term “Garnishee” is derived from the Latin word “garnire” which means “to warn.” This order warns the holder of money of judgment debtor, not to make any payment out of it till the court directs. Thus, garnishee order is a direction given by the court to a third party who is due to the judgment debtor not to make any payment till it gives a verdict regarding the paid money. This order is issued at the request of the judgment creditor. The Garnishee order is issued in two parts: (a) Order-Nisi: It is an interim order issued by a court on a specific banker ordering him, not to release any funds belonging to a particular customer (judgement debtor) until further orders are issued. (b) Order-Absolute: This is an order of the court issued to a banker after completion of the hearing of the parties concerned and through this order, the court specifies how much amount is to be kept separate. The banker has to follow these orders after looking at the position of the customer’s account. In the following circumstances the Garnishee order would not be applicable: (a) Where the account of the judgment debtor is a joint account holder with another person; (b) Where the identity of the judgment debtor is doubtful; (c) Where the account of judgment debtor is held by him in the capacity of a trustee; (d) Where the judgment debtor has previously made an official assignment of his balance in favour of a third party and the banker is informed about it in writing; (e) Where the account of the judgement debtor reveals a debit balance. 7. Right to Close Accounts: Bank also enjoys the right to close his customer’s account and discontinue operations. This process terminates the relationship between bank and customer. This is done only in situations where the continuation of relationship seems unprofitable or undesirable to the Bank.

KNOW YOUR CUSTOMER (KYC) GUIDELINES Banks follow a definite customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature. These ‘Know Your Customer’ guidelines have been stipulated as per the Recommendations of the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism IBC Academy Publications

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(CFT). These standards have become the international benchmark for framing Anti-Money Laundering and combating financing of terrorism policies by the regulators. For the purpose of KYC policy, a ‘Customer’ may be defined as:  a person or entity that maintains an account and/or has a banking relationship;  one on whose behalf the account is maintained (i.e. the beneficial owner);  beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, C As, Solicitors etc. as permitted under the law, and  any person /entity connected with a financial transaction which can pose significant reputational or other risks to the bank, such as, a wire transfer or high value demand draft as a single transaction.

CUSTOMER ACCEPTANCE POLICY (CAP) Banks should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. i. No account is opened in anonymous or fictitious/ benami name(s); ii. Risk parameters are clearly defined in terms of the nature of business activity, location of customer, mode of payments, business turnover, social and financial status etc. for risk categorization into low, medium and high risk. iii. Documentation and other information to be collected in respect of different categories of customers may depend on perceived risk and keeping in mind the requirements of PML Act, 2002 and guidelines issued by the Reserve Bank; iv. Not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures, i.e. bank is unable to verify the identity and/or obtain documents required as per risk categorization, due to noncooperation of the customer or non-reliability of the data/ information furnished to the bank. v. Circumstances, in which a customer is permitted to act on behalf of another person/entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate-holder or where an account may be opened by an intermediary in the fiduciary capacity; and IBC Academy Publications

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vi.

Necessary checks before opening a new account to ensure that the identity of the customer does not match with any person with known criminal background or a banned entity, such as a terrorist or a terrorist organizations etc. Banks are required to prepare a profile for each new customer based on the risk categorization, which include information on customer’s identity, social/financial status, nature of business activity, information about his clients’ business and their location etc.

OBLIGATIONS OF A BANK Such obligations are as under: 1. Obligation to Honour the Customer’s Cheques Section 31 of the Negotiable Instruments Act, 1881, imposes a statutory obligation upon the banker to honour the cheques of his customer drawn against his current account so long as his balance is sufficient, provided the cheques are presented within a reasonable time after their ostensible date of issue. (a) Sufficient Balance: There must be sufficient funds in the account of the drawer. (b) Application of the Funds: The funds must be properly applied for payment of customer’s cheque. Funds maintained for a specific purpose or trust funds or assigned to other person cannot be applied for honouring the cheques. (c) Duly Required to Pay: The banker is bound to honour the cheques only when he is duly required to pay. This means that the cheque is complete and in order, must have been presented before the banker at the proper time, say within a period of three months from the date of issue. (d) There should not be any legal restriction to pass the cheque for payment say in case of Garnishee order, restriction is imposed in the account. Consequences of Wrongful Dishonour of Cheque The banker will be held responsible for wrongful dishonour of a cheque because of loss or damage to the customer. The phrase “Loss or damage” in Section 31 of Negotiable Instruments Act, 1881 includes (a) The monetary loss suffered by the customer, and (b) The loss of credit or reputation in the market. Thus, the banker is liable to compensate the drawer not only for the actual monetary loss suffered by him, but also for the loss of his reputation, as a result of dishonour of a cheque. In case the customer is a trader, the loss would be substantial however, if the customer is a non-trader, the banker would be liable only for normal damages. IBC Academy Publications

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2. Obligation to Maintain Secrecy of Customer’s Account In every profession, there are certain things to be maintained absolutely in secret. The banker has an implied obligation to maintain secrecy of the customer’s account. He should not disclose matters relating to the customer’s financial position as it may adversely affect the customer’s credit and business. This obligation continues even after the account of the customer is closed. However, only in the following circumstances, disclosure on the accounts of a customer is justified: (a) To Satisfy Statutory Requirements: Under Income Tax Act, the banker is required to give out information regarding his customers to the Income Tax Department. Similarly, whenever the court needs any information regarding the customers, the banker is required to give the information. As per the Banking Regulation Act, banks are required to furnish information regarding their customers to the RBI. (b) To Protect Public Interest: The Banks are required to give out information regarding their customers in the public interest, in case, if there is national emergency and the disclosure is considered essential. (c) In case of proof of Treason or a Sovereign call: When the Government calls upon the bank to give information regarding a particular customer and when the bank feels that a particular customer has committed an offence. (d) Disclosure at the will of Customer: The bank can disclose the affairs of customer’s account when the customer gives his consent to disclose the accounts. 3. Obligation to Receive Cheques and Other Instruments for Collection Basically, the business of banking comprises acceptance of money on deposit account and payment of cheques. It also includes collection of cheques. 4. Obligation to comply with Standing Instructions The banker has an obligation to adhere to the Standing instructions or order for making periodic payments on behalf of the customer, such as Loan installments with the Bank, payment to Club subscriptions etc. 5. Obligation to keep a Proper record of Transactions in the Customer Account The banker has an implied obligation to maintain a proper and accurate record of the customer’s account. It should also provide the details or extract of the transactions of the customer account at periodic intervals on demand. IBC Academy Publications

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OBLIGATIONS OF CUSTOMERS OF THE BANK Customers are under the obligations to fulfill certain duties while dealing with banks. Some of these obligations are as under: (a) Not to draw cheques without maintaining sufficient balance. (b) To draw cheques in such a manner so as to avoid any change or alternation. (c) To pay reasonable charges for services rendered. (d) To make a demand on the banker for repayment of deposits.

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The documentation required under Customer Acceptance Policy (CAP), as stipulated by RBI are, as follows: Customer Identification Procedure Features Accounts of individuals • Legal name and any other names used • Correct permanent address

Accounts of companies • Name of the company • Principal place of business • Mailing address of the company • Telephone/Fax Number

Accounts of Partnership firms • Legal name • Address • Names of all partners and their addresses • Telephone numbers of the firm and partners

Documents (i) Passport (ii) PAN card (iii) Voter’s Identity Card (iv) Driving license, (v) Identity card (subject to the bank’s satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and Proof of residence of the customer to the satisfaction of bank :(i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi)Letter from employer (subject to satisfaction of the bank) (any one document which provides customer information to the satisfaction of the bank will suffice) (i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill (i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses

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(v) Telephone bill in the name of firm/partners Accounts of trusts & Foundations • Names of trustees, settlers, beneficiaries and signatories • Names and addresses of the founder, the Managers/Directors and the beneficiaries • Telephone/fax numbers

(i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf (iii) Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders/ managers/ directors and their addresses (iv) Resolution of the managing body of the foundation/association (v) Telephone bill

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CHAPTER - 9

BANK ACCOUNTS & NEGOTIABLE INSTRUMENTS

INTRODUCTION The most important function of a bank is to accept deposits from the public. Customers deposit their savings for safety and earning interest. A bank provides facilities to open various types of accounts keeping in mind the needs of its customers. Generally, the bank accounts are classified into three categories: (a) Saving deposit accounts, (b) Current accounts, and (c) Fixed deposit accounts.

TYPES OF ACCOUNTS 1. Savings Bank Account: Savings deposit account is meant for small businessmen and individuals who wish to save a little, out of their current incomes and also to earn some interest on their savings. A savings account can be opened with as a small sum of Rs. 500 and a minimum balance of Rs. 500 is to be maintained in the account if cheque book facility is not required. However, savings account with cheque book facility requires maintaining of a minimum balance of Rs. 1,000. Usually, Banks stipulates restrictions on the maximum amount that can be deposited in this account and also on the withdrawals from this account. The bank may not permit more than one or two free withdrawals during a week or say a max. of 50 withdrawals in a year and would levy service charges for subsequent withdrawals. IBC Academy Publications

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Premium Savings Bank Account - Foreign Banks and Private Sector Banks have introduced Premium Savings Bank Account with features like free remittances, unlimited transactions, no service charges for Bank services, door-step banking facility at a stipulation of keeping a higher average cash balances of Rs. 25,000 to as high as Rs. 100,000. Savings account holders are allowed to deposit cheques, drafts, dividend warrants, etc., which stand in their name only. However, the banks do not accept cheques or instruments payable to third party for deposit in the savings bank account. Banks allow interest on deposits maintained in savings accounts according to the rates prescribed by the Reserve Bank of India. 2. Current Account: A Current Account or Demand Deposit Account is a running and active account which may be opened with a bank by a businessman or an organisation by making an initial deposit of Rs. 1,000 in rural areas and Rs. 5,000 in urban areas. This account may also be operated upon any number of times during a working day. This account never becomes time barred, because no interest is paid for credit balance in this account. Dormant Account: Savings and Current account not operated for a continuous period of more than 2 years by customer (excluding system generated transactions like credit interest/debit interest) is treated as a Dormant Account. Savings and Current account not operated for more than 12 months, the account will be classified as "Inactive". No further transaction is allowed by the Bank, unless the customer approaches the bank and fulfills KYC norms as stipulated by RBI.

OPENING AND OPERATING BANK ACCOUNTS Banks prefer to obtain references/introduction from an existing account holder and a respectable party, preferably those of a current accountholder. By accepting deposits on a current account, the banker undertakes to honour his customer’s cheques so long as there is enough money to the credit of the customer. In case of current account, there is no limit on the amount or number of withdrawals. Under Section 129 of the Negotiable Instruments Act, 1881, the banker may have to suffer loss, if it pays a forged cheque contrary to the instructions given by the customer. Benefits of Current Accounts (a) Businessmen have to receive and make a large number of payments every day. It is difficult to handle cash. The cheque facility removes this difficulty. (b) There are no restrictions on the number of cheques or on the amount to be drawn at a time by one cheque. IBC Academy Publications

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(c) Overdraft facilities are allowed by the banks to the current account holders. 3. Fixed Deposit Account: Money deposited in this account is accepted for a fixed period, say one, two or five years. The money so deposited cannot be withdrawn before the expiry of the fixed period. The rate of interest on this account is relatively higher and the longer the period, the higher is the rate of interest. Fixed deposits are also called “time deposits” or “time liabilities.” These deposits usually constitute more than half or upto 70% of the total bank deposits. The characteristics of fixed deposits are: (a) Suitability: Fixed deposits are usually chosen by people who have surplus money and do not require it for some time. Banks deploy these for long terms at attractive rates of interest. (b) Rate of Interest: The rate of interest and other terms and conditions on which the banks accept fixed deposits are now not regulated by the Reserve Bank of India and Banks are free to offer rates of interests as per the internal approvals received from their Board. Banks can use fixed deposits for the purpose of lending or investments. So they pay higher rate of interest on fixed deposits. (c) Restrictions on Withdrawals: The depositor is not given a cheque book for withdrawal of Fixed Deposits. At the request of the customer, the banker may credit the amount of interest or the principal to his saving or current account. (d) Payment before Due Date: Banks also permit encashment of a fixed deposit even before the due date, if the depositor so desires. But the interest agreed upon on such deposit shall be reduced accordingly as per Bank rules. (e) Advances against Fixed Deposits: The banker may also grant a loan to the depositor on the security of the fixed deposit receipt. Banks are now free to determine the interest rate chargeable on loan advances of over Rs. 2 lakhs. 4. Recurring Deposit Account: Under this account, the depositor is required to deposit a fixed amount of money every month for specific period of time, say 12 months, 24 months, or 60 months. After the completion of the specified period, the customer gets back all his deposits along with the cumulative interest accrued thereon. Recurring deposit account offers the following advantages: (a) It provides a good way for small investors to save in small amounts. (b) People having low income may open a recurring deposit account with a commitment to deposit as low as Rs. 100 every month.

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(c) The recurring deposit account can be opened for any period ranging from 12 months to 120 months. (d) Standing instructions to transfer monthly installments from the savings account of the depositor are carried out without any charge. (e) Loan can be taken up to 90% of the deposits, if the depositor needs money.

OPENING OF DEPOSIT ACCOUNTS Fixed deposit account can be opened either by depositing cash or cheque. The depositor has to fill in an “Application Form” requiring the bank to accept the specified sum of money on deposit account. The application form contains the particulars of the customer, the amount proposed to be deposited, the terms of deposit etc. 1. Application Form: The applicant should fill in the prescribed form for opening of an account available in the concerned bank. Banks keep different forms for individuals, joint Hindu families, partnership firm, companies, etc. 2. Getting Introduction: The banks follow the practice of opening the account only when the applicant is properly introduced by an existing customer of the bank. Sometimes, reference is given by the depositor and the bank may seek the opinion of the referees regarding the integrity and financial stability of the applicant. Upon fully satisfying on the identity and standing of the applicant, it will open an account. The idea behind proper introduction is that (a) it is required mandatorily under RBI stipulations for KYC guidelines and (b) the bank should know its customers adequately and ensure that undesirable persons do not open accounts which may lead to unlawful activities. If the introduction is not taken properly, the banker will invite many risks such as: (a) The bank cannot avail itself of the statutory protection given to the collecting bank by Sec. 131 of the Negoliable Instruments Act. A collecting bank will incur no liability if it has acted in good faith and without negligence. The bank will remain liable to the true owners of the cheques, drafts etc., if such instruments are stolen by the customer whose identity cannot be established and process are collected by the bank and withdrawn by the former. (b) If overdraft is created by mistake in the account of a customer who is not properly introduced, the bank will not be able to realise the money because the identity of the customer cannot be established. (c) Undesirable customers may cause annoyance to the public by cheating them. Such a man might defraud the public by issuing IBC Academy Publications

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cheques on his account without having adequate balance. (d) If the bank receives deposits from an undischarged insolvent without proper introduction, it will run the risk of attachment of these deposits by the court declaring him insolvent. 3. Specimen Signature: The applicant is required to give his specimen signature on a card meant for this purpose. This will help to protect the bank against forgery because whenever the cheque is presented at the counter of the bank. 4. Minimum Cash balances: Before opening the account, the customer must deposit the minimum initial deposit in cash as per the stipulations and the rules framed by the Bank. 5. Issue of Pass Book: A pass book is issued by the bank to the customer after the account has been opened and an account number has been allocated. The pass book contains the record of transactions between the bank and the customer. A fixed deposit receipt is then issued to the depositor by the bank. The fixed deposit receipt is an acknowledgement of the receipt of the particular amount of money from the person or party named therein.

FACILITY OF NOMINATION The Banking Laws (Amendment) Act, 1983, inserted a new Part III-B in the Banking Regulation Act, 1949 to give effect to the recommendations of the Banking Commission and provide for the facility of nomination by depositors in banks, as follows: (a) A depositor may nominate a person to whom, in the event of the death of the depositor, the amount to his credit may be paid by the banking company. (b) In case of a joint account, all the depositors together may nominate a person to whom, in the event of death of all the joint depositors, the amount of their credit may be paid by the banking company. Thus, the nominee’s right to receive deposit money arises only after the death of all the depositors. There cannot be more than one nominee in respect of a joint account. (c) Nomination facility is available to all types of deposit accounts, including the accounts opened for credit of pension. (d) Nomination can be made in favour of individuals only. (e) In the case of a deposit made in the name of a minor, the nomination shall be made by a person lawfully entitled to act on behalf of the minor. (f) The nominee can be a minor. The depositor may, while making the nomination, appoint another person (not a minor), to receive IBC Academy Publications

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the deposit amount on behalf of the nominee in the event of death of the depositor, or as the case may be. (g) In case if Safe Deposit Lockers is in joint names without survivorship benefit, nomination can be made in favour of more than one person. A minor is not accepted as a nominee in case of safe deposit lockers. (h) In case of death of a sole depositor/all the joint depositors, the name of the nominee can be substituted at his written request in the deposit account/ receipts including overdue deposits.

INSURANCE OF BANK DEPOSITS The Bank Deposit Insurance means giving a guarantee to depositors that their deposits will be returned, if the bank fails. The need for such a guarantee has arisen after the failure of several banks on account of inadequate capital, unsound banking practices etc. In India, the necessity of Deposit Insurance was felt after the failure of Palai Central Bank, a Scheduled Bank of South India.

DEPOSIT INSURANCE & CREDIT GUARANTEE CORPORATION (DICGC) The Deposit Insurance Corporation Act was passed by the Parliament in 1961 which set up the ‘Deposit Insurance Corporation’ with effect from January 1, 1962. It took over the undertaking of the Credit Guarantee Corporation of India Ltd. Later, by the integration of two organizations, the Corporation was renamed as the Deposit Insurance and Credit Guarantee Corporation (DICGC). DICGC has an authorized and Paid-up Capital of capital of Rs. 50 crores. The management is vested with Board of Directors of which a Deputy Governor of RBI is the Chairman. The Head Office of the Corporation is at Mumbai and has 4 branch offices at New Delhi, Kolkata, Chennai and Nagpur. Objectives : DICGC has twin objectives of giving insurance to small depositors in banks and five credit guarantee schemes (four for small borrowers and one for small-scale industries) for the priority sector advances granted by participating banks and financial institutions. Deposit Insurance: DICGC provide covers by Deposit Insurance Scheme to depositors of all commercial banks including Foreign Banks operating in India, RRBs, Co-operative Banks and the cover extends to all types of public customer deposits such as Savings Bank account, Current account, Fixed Deposits and Recurring Deposit accounts etc. Initially, under the provisions of Section 16(1) of the DICGC Act, the insurance cover available to the Depositors of a bank “in the same right and in similar capacity” at all the Bank branches of a bank put together, IBC Academy Publications

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was Rs. 1,500 only. Later, this cover was raised to Rs. 100,000 w.e.f. 1st May, 1993.

NEGOTIABLE INSTRUMENTS Negotiable Instruments are instruments used for making payments either for personal reasons or in a business transaction and these are freely transferable from one person to another. It is a document guaranteeing the payment of a specific amount of money, either on demand or at a given time. As per Section 13 of the Negotiable Instrument Act, 1881, a negotiable instrument means a Promissory Note, Bills of Exchange or cheque payable either to order or to bearer. There are, thus, only three types of negotiable instruments, viz. Promissory Notes, Bills of Exchange and Cheque, (including Demand Draft). The Negotiable instrument works like money and it may be transferred from one to another. Features: 1. This is a written document. This is negotiable in nature, means (a) Transferable from one person to another merely by Delivery in case of a “bearer instrument”, and (b) Transferable by endorsement and delivery in case of a “Order instrument”. 2. This does not include “consideration” and it is presumed that the negotiable instrument is drawn for a valuable consideration. 3. No prior notice is warranted before transferring the instrument by a Holder. 4. The Holder of a Negotiable Instrument can sue upon it in his/her own name as a “bonafide Holder for value”. 5. The title to a Negotiable Instrument does not get affected adversely in case of any defect to the title of the Transferor. a. Following instruments are Negotiable Instruments: - Bills of Exchange, Bank Note, Bank Draft, Circular Note, Promissory Notes, Cheques, Exchequer Bill, Dividend Warrant, Share Warrant, Bearer Debenture b. Following instruments are Semi-Negotiable instruments: - Bill of Lading, Letter of Credit and -Instruments evidencing Title of Goods in Transit – viz. Carriers’ Receipt, Docks’ Warrant, Railway Receipt, Wharfinger Certificate. Semi-Negotiable Instruments are also those which can be transferred by endorsement and Delivery, however, these do not give the Transferee a title better than that of the Transferor. Therefore, Negotiable Instruments Act does not apply on these. c. Following Instruments are not a Negotiable Instrument : IBC Academy Publications

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Postal Order, Money Order, Deposit Receipt, Share Certificates

TYPES OF NEGOTIABLE INSTRUMENT BILLS OF EXCHANGE A bill of exchange or “Draft” is a written, unconditional order by the Drawer to the Drawee to pay money to, or the order of, the Payee. Therefore, essentially, a Bill of Exchange is an order made by one person to another to pay money to a third person. Features:  A Bill of Exchange must be in writing, duly signed by its Drawer, accepted by its Drawer and properly stamped as per Indian Stamp Act.  It should contain an order to pay.  The order or instructions must be unconditional. Words like “Please pay”, “Pay B only” and “oblige” should not be used.  The order or instructions must be to pay money and the money alone.  The parties to the transaction as well as the sum payable must be certain. Parties to a Bills of Exchange There are three parties involved in a Bills of Exchange – the Drawer, who writes the instrument, the Drawee – on whom the order for making the payment is made, and the Payee - someone who is the bonafide receiver of the payment. However on many occasions, the Drawer may draw bill of exchange on his own name, mentioning – “To pay to us or order “and thus there would be only two parties involved in the transaction.  Time or Usance Bill – A Bill of exchange containing a definite time period for payment – such as pay after 30 days, 90 days etc. of presentation.  Demand or Sight Bill - A Bill of Exchange payable on demand against its presentation for payment – these would contain words like, pay on demand, pay at sight, pay on presentation.

PROMISSORY NOTE A Promissory Note is a written, unconditional undertaking, duly signed by the Drawer (the Maker) to pay a specified sum, to the Payee or to the order of a certain specified person. This is not a Bank note or currency instrument. IBC Academy Publications

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For example - Ramesh (Borrower) has taken a Loan of Rs. 1000/- from Manish (Lender) and the Lender wishes to reduce the terms of loan and repayment on a document. Thus, the document would contain fact of the deal as - (a) Ramesh (Borrower) would repay the Loan amount –Rs. 1,000/to (b) Manish (Lender) or to the Bearer on demand (c) after a specified period , say 90 days, and (d) including an interest as specified rate of interest say 10% p.a. or free of interest. This document once written, signed by the Borrower and duly stamped and handed over to the Lender is called a Promissory Note. The above Negotiable instrument can either be presented for repayment by the Lender or he may give it to someone else who may collect the sum on his behalf or become a holder for value. Thus, the Lender can transfer his rights & claims under the Promissory Note by endorsement and delivery to someone else. The other person may also further transfer his rights & claims under the Promissory Note by endorsement and delivery to a third person or so on.

Distinguish Between a Promissory Note and a Bill of Exchange Promissory Note This contains an unconditional Promise to pay. There are two parties involved in a Promissory Note transaction. It is drawn by the Debtor. Acceptance to a Promissory Note is not required. The liability of the Maker/Drawer is primary and absolute.

Bill of Exchange A Bill of Exchange contains an unconditional order to pay. A Bill of Exchange transaction would have three parties involved – The Drawer, the Drawee and the Payee. It is drawn by the Creditor. Acceptance is a must in case of Bill of Exchange. The liability of the Maker/Drawer is secondary and conditional upon nonpayment by the Drawee.

PARTIES TO A PROMISSORY NOTE 1. 2. 3. 4.

The Drawer or Maker: The person who writes the note and promises to pay the amount as specified in the Note. The Payee: The person who is the Beneficiary of the Note – one to whom the amount is payable. The Endorser: The Beneficiary of the Note who endorses and transfers his rights & claims in someone else’s favour. The Endorsee: The person in whose favour the Note is negotiated by transfer and endorsement. IBC Academy Publications

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Features 

   

A Promissory Note is unconditional commitment made in writing and signed by a Debtor, to make payment to a specified person or to the (his) order or to the bearer, after expiry of a specified period. It is always in writing. A verbal promise to pay the sum is not a Promissory Note. A Promissory Note is drawn for the payment of a specified sum of money. A Promissory Note is drawn for a specified duration, but the consideration for date and place of making the Promissory Note need not be mentioned. A Promissory Note should be stamped adequately, as per the value contained therein.

CHEQUE Under section 6 of the Negotiable Instruments Act, 1881, a cheque is defined as a “bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” A cheque is a bill of exchange drawn on a specified banker and expressed to be payable on demand. It is unconditional order in writing drawn by a customer of a bank, requesting them (the Bank) to pay on presentation (on demand) a specified sum as mentioned therein, to a person named in the instrument or to the bearer or to the order as specified. Features: 1. It contains unconditional order to pay a certain sum of money; 2. It is drawn by the drawer; 3. It is drawn upon a specified banker; 4. It is Payable on demand to a certain person or his order or to the bearer of the instrument. 5. A cheque should be properly dated and It is signed by the maker; Parties to a Cheque Basically, there are three parties to a cheque viz., (1) Drawer (2) Drawee, and (3) Payee. 1. Drawer: A drawer is the person who has an account in the bank and who draws a cheque for making payment. He is the customer or account holder. 2. Drawee: A drawee is the person on whom the cheque is drawn. He is liable to pay the amount. In case of a cheque, the drawee happens IBC Academy Publications

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to be the banker on whom the cheque is drawn, he is also called as the Paying Banker. 3. Payee: A payee is the person to whom the amount stated in the cheque is payable. It may be either drawer himself (self cheques) or only other third party states in the cheque. Types of Cheque: Cheques are of the following types: 1. Order Cheque: A cheque payable to a particular person or his order is called an order cheque. 2. Bearer Cheque: A cheque which is payable to a person whosoever bears, is called bearer cheque. 3. Blank Cheque: A cheque on which the drawer puts his signature and leaves all other columns blank, is called a blank cheque. 4. Stale Cheque: The cheque which is more than six months old, is a stale cheque. 5. Multilated Cheque: If a cheque is torn into two or more pieces, it is termed as mutilated cheque. 6. Post-Dated Cheque: If a cheque bears a date later than the date of issue, it is termed as post-dated cheque. 7. Open Cheque: A cheque which has not been crossed, is called an open cheque. Even if a cheque is crossed and subsequently the drawer has cancelled the crossing at the request of the payee and affixes his full signature with the words “crossing cancelled, pay cash”, it becomes an open cheque. 8. Crossed Cheque: A cheque which carries too parallel transverse lines across the face of the cheque with or without the words “and co”, is said to be crossed. 9. Gift Cheques: Gift cheques are used for offering presentations on occasions like birthday, weddings and such other situations. It is available in various denominations. 10. Traveller’s Cheques: It is an instrument issued by a bank for remittance of money from one place to another.

ALTERATIONS A cheque may be altered by the drawer or by a third party after it is drawn. For example, the date of cheque may be altered or the amount payable may be altered. Alteration may be made genuinely or fraudulently. Alterations may be material or immaterial.

Material Alteration An alteration is regarded as material when it alters materially or substantially the operation of the instrument and liabilities of the parties thereto. IBC Academy Publications

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Examples: (a) Alteration of the date of the instrument. (b) Alteration of the sum payable. (c) Alteration of the place of the payment. (d) Alteration of the name of the payee. (e) Alteration of the crossing marks. (f) Alteration in the rate of interest. Exceptions: Under the Negotiable Instruments Act, 1881, the following do not amount to material alterations: (a) Filling blanks of the instrument. (b) Conversion of blank endorsement into an endorsement in full. (c) Making acceptance conditional. (d) Altering a general crossing into a special crossing. (e) Crossing of an uncrossed cheque. (f) Alteration made with the consent of the parties. Effects of Material Alteration A cheque containing material alteration cannot be regarded as a cheque, at all. A cheque with erasers and alterations is not valid against the banker. Under the Indian laws, such a cheque is void. According to Section 87 of the Negotiable Instruments Act, “any material alteration renders the instrument void against anyone who is a party thereto, and who has not consented to such alteration.” So a banker who finds a cheque materially altered in its contents has to dishonour it, unless it is duly attested by the full signature of the drawer. Such refusal to pay will not amount to wrongful dishonour. If a banker pays a cheque bearing unauthorised alterations, he cannot debit the drawer’s account and is liable to the true owner. In order to prevent incidence of fraud, Reserve Bank of India has issued instructions to Banks to not to honour instruments containing any material alterations or overwritings.

CROSSING OF CHEQUES Crossing first originated in England when cheques were sent from one bank to another. There was the possibility that a cheque might fall in the hands of wrong or unauthorized parties, thereby the original holder was likely to be put to a loss or inconvenience. To avoid this disadvantage, the banks introduced a system of crossing of cheques. Crossing automatically means that a cheque should be presented for payment through a Bank.

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Meaning of Crossing Crossing of cheques means drawing two parallel transverse lines on the left hand top corner of a cheque. Sometimes, it is also done in the centre of the cheque. The Negotiable Instruments Act 1881, recognizes crossing of cheques. A crossing is a direction to the paying banker that the cheques should be paid only to a banker and if the banker is named in the crossing, only to that banker. The holder of the cheque is not allowed to cash it across the counter. Types of Crossing Cheques can be crossed in two ways (1) General Crossing (2) Special Crossing. 1. GENERAL CROSSING: Section 123 of the Negotiable Instruments Act 1881, defines as “Where a cheque bears a cross its face an addition of the words ‘& company’ or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply either with or without the words ‘not negotiable’ that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.” The effect of general crossing is that the cheque must be presented to the paying banker through any other banker and not by the payee himself at the counter. The collecting banker credits the proceeds to the payee’s account or the holder of the cheque. The latter may thereafter withdraw the money. 2. SPECIAL CROSSING: Section 124 of the Negotiable Instruments Act 1881, defines a special crossing as: “Where a cheque bears a cross on its face, an addition of the name of a banker, either with or without the words ‘not negotiable’, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.” Other Types of Crossing Besides the above two types of crossing, in recent years, the following types of crossing have been developed: 1. “Not Negotiable” Crossing: According to Section 123 and 124 of the Negotiable Instruments Act, 1881, a cheque may be crossed either generally or specially with the words “not negotiable.” The impact of these words is given in Section 130 of the said Act. The Section 130 of the said Act states, “A person taking a cheque, crossed generally or specially, bearing in either case the words “not negotiable” shall not have and shall not be capable of giving a better title to the cheque than that what the position from whom he took it had.” Whereas the cheque is crossed with IBC Academy Publications

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the words “not negotiable,” the bank must be careful in paying such cheques. In such a case, the payment must be made only after the bank is satisfied that the person demanding payment is the person entitled to get it in reality. 2. Restrictive Crossing or Account Payee Crossing: Restrictive or Account Payee Crossing means “a direction to the collecting banker that the proceedings of the cheque are to be credited only to the account of payee named, written or mentioned in the cheque. It is to be noted here that the words “Account Payee” are not recognized by the Negotiable Instruments Act, 1881. The words ‘Account Payee Only’ constitute an instruction to the collecting banker that he should collect the amount of the cheque for the benefit of the payees only. 3. Double Crossing: According to Section 127 of the Negotiable Instruments Act, 1881: “Whereas a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereon.” This type of crossing may be used only when the banker in whose favour the cheque is specially crossed does not have any branch at the place where the cheque is to be paid.

Distinguish Between a Cheque and a Bill of Exchange Payable on demand Drawee

Cheque A cheque is always payable on demand.

Acceptance

The cheque is always drawn on a banker. It can be crossed to restrict its negotiability. It is not required.

Days of Grace

It is not required.

Notice of Dishonour Stopping Payment

It is not required.

Crossing

Payment of cheque may be countermanded or stopped by the customer or drawer.

Bill of Exchange A Bill of Exchange note may be payable either on demand or after a specified period. A Bill of Exchange can be drawn on any one including a Banker. Crossing is not feasible in case of Bill of exchange. Acceptance is must, in case of Bill of exchange. Three days of grace are allowed on bills payable after a certain period of time. Notice of dishonour of a bill is necessary. Payment of a bill of exchange after its acceptance cannot be countermanded or stopped by the drawer.

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BANK DRAFT A Bank Draft is a bill of exchange in which a Bank orders its branch or another Bank specified therein, as the case may be, to repay a specified sum of money to a specified person or to his order. Usually, banks charge a standard rate of service/issue charges on these Drafts.

ENDORSEMENT Endorsement literally means “writing on the back of the instrument.” But under Section 15 of Negotiable Instruments Act, it means “writing of a person’s name on the back of the instrument or on any paper attached to it for the purpose of negotiation.” The person who signs the instrument for the purpose of negotiation is called the “endorser” and the person to whom it is endorsed or transferred is called the “endorsee.” However, mere endorsement is not sufficient unless the instrument is delivered to the endorsee. The endorsement is completed by delivering the signed instrument to the endorsee. Valid Endorsement The following conditions must be fulfilled for a valid endorsement: 1. Endorsement must be on the back or face of the instrument. If no space is left on the instrument, it may be on a separate paper (allonge) attached to it. 2. It should be made in ink. An endorsement in pencil or rubber stamp is invalid. 3. It must be made by the marker or holder of the instrument. 4. It must be signed by the endorser. 5. It must be completed by delivery of the instrument. 6. It must be an endorsement of the entire bill. A partial endorsement does not operate as a valid endorsement. KINDS OF ENDORSEMENT 1.

2.

Blank endorsement or General Endorsement - An endorsement is said to be blank if the endorser signs his name only on the face or back of the instrument. Special endorsement or Full endorsement - If the endorser adds direction to pay the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be Special or Full endorsement. A blank endorsement can be easily converted into a special endorsement by any holder of negotiable instrument. Example: (a) “Pay to x or order”, (b) Pay to the order of x. IBC Academy Publications

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Partial endorsement - If an instrument is endorsed for a part of its amount, it is called partial endorsement. Similarly, if an instrument is endorsed to two or more endorsees separately and not jointly, the endorsement becomes partial. Example: The holder of a promissory for Rs. 1,000 writes on it - pay B Rs. 500 and endorses the note. The endorsement is invalid for the purpose of negotiation. Restrictive endorsement - An endorsement when prohibits or restricts the further negotiability of the instrument. It merely gives the holder of the instrument the right to receive the amount on the instrument for a specific purpose. It does not give power to him to transfer his rights in endorsement to anyone else. “Pay X only” or “pay X for my use” are examples of restrictive types of endorsement. Conditional endorsement or Qualified Endorsement – An endorsement where the endorser limits or negatives his liability by putting some condition in the instrument is called a conditional endorsement. Unlike the restrictive endorsement, it does not affect the negotiability of the instrument nor does it invalidate the instrument.

3.

4.

5.

HUNDI The word “Hundi” originated from Sanskrit word “Hund” meaning collection of Tax. In India, “Hundies” are used as a financial instrument from ancient times in trade and credit transactions. In the earlier days, these Hundis served as Travellers’ Cheques for Traders. They were also used as credit instruments for borrowing and as bills of exchange for trade transactions. Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Being a part of an informal system, hundis now have no legal status and were not covered under the Negotiable Instruments Act, 1881. They were mostly used as cheques by indigenous bankers. Types of Hundis 1.

Sahyog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a third merchant. In this case the merchant on whom the hundi is drawn is of some 'credit worthiness' in the market. A sahyog hundi passes from one hand to another till it reaches the final recipient, who after reasonable enquiries presents it to the drawee for acceptance of the payment. Sahyog means co-operation in Hindi. IBC Academy Publications

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Darshani Hundi: This is a hundi payable on sight. It must be presented for payment within a reasonable time after its receipt by the holder. Thus, it is similar to a demand bill. 3. Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is similar to a time bill. 4. Nam-jog hundi - is payable only to the person whose name is mentioned on the Hundi. Such a hundi cannot be endorsed in favour of any other person and is akin to a bill on which a restrictive endorsement has been made. 5. Furman-jog Hundi - These can be paid either to the person whose name is mentioned in the hundi or to a person so ordered by him. Such a hundi is similar to a cheque payable on order and no endorsement is required on such a hundi. 6. Dhani-jog Hundi - when the hundi is payable to the holder or bearer, it is known as a dhani jog hundi. It is similar to an instrument payable to bearer. 7. Jokhim Hundi - normally a hundi is unconditional but a jokhim hundi is conditional in the sense that the drawer promises to pay the amount of the hundi only on the satisfaction of a certain condition. Such a hundi is not negotiable, and the prevalence of such hundis is very rare these days because banks and insurance companies refuse to accept such hundis. 8. Jawabi Hundi - If money is transferred from one place to another through the hundi and the person receiving the payment on is to give an acknowledgement for same, then such a hundi is known as, a Jawabi Hundi. 9. Khaka Hundi - a hundi which has already been paid is known as a Khaka Hundi. 10. Khoti Hundi - In case there is any kind of defect in the hundi or in case the hundi has been forged, then such a hundi is known as a khoti hundi. 2.

CLAYTON’S RULE In case a customer having a single bank account where he deposits and withdraws money from it frequently, the order in which the credit entry will set off the debit money is the chronological order, as decided in the famous Clayton’s Case. Clayton’s Case (Devaynes V. Noble: 1816) A firm of banker knows as Devaynes, Deives, Noble & Co., had five partners. Devaynes, the senior partner, died and the surviving partners, IBC Academy Publications

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carried on the business of banking under the same name. The executors of the deceased partner objected to the continuance of the name of Devaynes in the firm’s name. After a year, the firm became bankrupt and various classes of creditors of the firm placed their claims against the estate of Devaynes, the deceased partner. At the time of death of Devaynes, Clayton’s balance was $1,713. During the next few days he withdrew several times and thus the balance was reduced to $453. Thereafter, surviving partners paid more than $1,713 to him and subsequently his deposits with the firm largely exceeded the amounts withdrawn by him. Thus his credit balance at the time of bankruptcy of the firm was larger than the amount which was due to him at the time of death of Devaynes. Clayton claimed that the amount of $453 was due to him from the estate of the deceased partner. His contention was that the withdrawals from the account after the death of the partner were paid out of the deposits made in the same period and thus the credit balance standing at the time of the partner’s death was recoverable from the deceased partner’s assets. These arguments were not accepted by the Court and Clayton’s claim was rejected. The court opined that “This is the case of a banking account where all the sums paid in form one balanced fund, the parts of which have no longer any district existence…… In such a case there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side.” Thus the first item on the debit side will be the item to be discharged or reduced by a subsequent item on the credit side. The credit entries in the account adjust or set off the debit entries in the chronological order. The rule derived from the Clayton’s case is of great practical significance to the bankers. In case of death, retirement or insolvency of a partner of a firm, then the existing debt due from the firm is adjusted or set off by subsequent credit made in the deceased, retired or insolvent partner and may ultimately suffer the loss if the debt cannot be recovered from the remaining partners. Therefore, to avoid the operation of the rule given in the Clayton’s case, the bank closes the old account of the firm and opens a new open in the name of the reconstituted firm. Thus the liability of the deceased, retired or insolvent partner, as the case may be, at the time of his death, retirement or insolvency is determined and he may be held liable for the same. Subsequent deposits made by surviving/solvent partners will not be applicable to discharge the same. IBC Academy Publications

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HOLDER AND HOLDER IN DUE COURSE HOLDER According to Section 8 of the Negotiable Instruments Act, a holder means “any person entitled in his own name to the possession of the negotiable instrument and to recover or receive the amount due thereon from the parties liable thereto.” A holder must, therefore, have the possession of the instrument legally and also the right to recover money in his own name. Thus, a person who is in possession of the instrument may or may not be a holder. For example, a finder of a lost instrument or a thief cannot be a holder. Similarly, a beneficiary or an agent in possession of an instrument will not be a holder. But legal representatives of deceased holder or official assignee or official receiver would be treated as holders of the instruments. It is only the holder alone, who can give a valid discharge for the instrument.

HOLDER IN DUE COURSE A holder in due course is known as “bonafide holder for value without notice.” A holder in due course is a person who acquires a promissory note, bill or cheque in good faith for value. Section 9 of the Negotiable Instruments Act defines a holder in due course as “any person who for consideration became the possessor of a negotiable instrument if payable to bearer; or the payee or an endorsee, if payable to order, before the amount mentioned in it becomes payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.” Thus, a holder in due course must satisfy the following conditions: (a) He must have obtained the instrument for valuable consideration or value. Consideration must not be void or illegal. (b) He must be a holder of the instrument before the date of its maturity. (c) He must have become a holder of the instrument in good faith. (d) He must have taken the instrument complete and regular on the face of it. It is thus obvious that every holder is not a holder in due course. A holder of a negotiable instrument will not be a holder in due course, if he has obtained the instrument by gift, for unlawful means or consideration, obtained the instrument after its maturity.

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CHAPTER - 10

LENDING PRODUCTS & RISK MANAGEMENT

INTRODUCTION Lending is one of the primary functions of a bank. The deposits mobilized by the bank are deployed profitably to its customers by way of loans, advances, cash credit and overdraft. Interest received on such loans and advances is the main source of its income pool. The banks make a major contribution to the economic development of the country by granting loans to the industrial and agricultural sectors. The banks make loans and advances out of deposits, received from their customers. As such, the bank owes a greater responsibility to its depositors. Hence, the Bank, as a custodian of public deposits, should be extremely careful while granting loans.

GENERAL RULES OF SOUND LENDING A banker should use his wisdom and judgment and must be extra careful while granting loans. The sound lending requires a Banker to take the following precautions: 1. Safety: The most important golden rule for granting loans is the safety of funds. The main reason for this is that the very existence of the bank is dependent upon the loans granted by him. In case the bank does not get back the loans granted by it, it might fail. A bank, therefore, cannot and must not sacrifice the safety of its funds for the sake of a higher rate of interest. IBC Academy Publications

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2.

3.

4.

5.

6.

7.

8.

Liquidity: The second golden rule of granting loan is liquidity, means the possibility of converting loans into cash without much loss of time and money. Needless to say, that the funds with the bank which it lends are payable on demand or short notice. As such, a Bank cannot afford to block its funds for a long term period and cause mismatch of resources. Hence, the bank should lend with a judicious mix of short-term loans and advances, like working capital and restrict its lending to long-term basis. Profitability: Profitability or return on deployment is another important consideration for Lending. The bank should lend judiciously to earn highest returns, so that it may pay a reasonable rate of interest to its customers on their deposits, reasonably good salaries to its employees and a good return to its shareholders. However, a bank should not sacrifice either safety or liquidity to earn a high rate of interest. Diversification: ‘One should not put all his eggs in one basket’ is an old proverb which very clearly explains this principle. A bank should not invest all its funds in one industry. In case that industry fails, the banker will not be able to recover his loans and it may also fail. According to the principle of diversification and risk management policies, the bank should diversify its investments in different industries and should give loans to different borrowers in one industry. Security: A banker should generally grant secured loans only. In case, the borrower fails to return the loan, the banker may recover his loan after realising the security. In case of unsecured loans, the chances of bad debts will be very high. Margin Money: In case of secured loans, the bank should carefully examine and value the security. There should be sufficient margin between the amount of loan and the value of the security. If adequate margin is not maintained, the loan might become unsecured, in case the borrower fails to pay the interest and return the loan. National Interest: Banks were nationalized in India to have social control over them. As such, they are required to invest a certain percentage of loans and advances in priority sectors viz., agriculture, small scale and tiny sector, and export-oriented industries etc. Again, the Reserve Bank also gives directives in this respect to the scheduled banks from time to time. The banks are under obligations to comply with those directives. Creditworthiness of the Borrower: Last but not the least, the bank should carefully examine the creditworthiness of the borrower, viz. honesty, integrity, creditworthiness and capacity of IBC Academy Publications

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the borrower to repay the loan. In case the Bank fails to verify the bonafides of the borrower, the loans and advances might become unrecoverable and turn bad debts for the bank. The above are thus the basic principles of sound lending observed by commercial banks.

LOANS AND ADVANCES Banks lend for working capital requirements in the form of: 1. Loans 2. Cash credit 3. Overdraft 4. Purchase and discounting of bills of exchange 1. Loans: This is the oldest and very popular form of lending by the banks. Loans are given for a specific purpose and for a fixed period. The customer can withdraw the entire amount of loan in a single or a few installments. As such, interest is payable on the entire loan amount. In case, customer needs the funds again, he has to make a fresh application for a new loan or renewal of the existing one. Ordinarily, the loan is repayable in installments spread over 12 months’ upto 60 months or more. When the interest amount is added back with the Principal Loan dues in order to arrive at and to offer a uniform monthly installment payable across the tenor of the Loan, the repayment method is called Equated Monthly Installment (EMI). 2. Cash Credit: Cash credit is the most popular method of lending by the banks in India. It accounts for more than two third of total bank credit. Under cash credit system, a limit, called the credit limit is specified by the bank. A borrower is entitled to borrow up to that limit. It is granted against the security of tangible assets or guarantee. The borrower can withdraw money, any number of times upto that limit during the validity of the bank credit. He can also deposit any amount of surplus funds with him from time to time. He is charged interest on the actual amount withdrawn and for the period such amount is drawn. Merits of Cash Credit A. Flexibility - The greatest advantage of cash credit method is that it is flexible. A customer can withdraw and deposit money any number of times. B. Economical - The scheme is economical. A borrower has to pay interest only on the amount borrowed and that too for the period the amount is actually withdrawn. Unlike a loan, he is not required to pay interest on the entire amounts of the loan. IBC Academy Publications

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3. Overdraft: One of the main advantages of maintaining a current account is that, its holder can avail of the facility of Overdraft, means they can overdraw the Current account to the Overdraft limit fixed by Bank. An overdraft facility is granted to a customer on a written request. Sometimes, it may be implied where a customer overdraws his account and the bank honours his cheques. The bank should obtain a written request from the customer. He should also settle the terms and conditions and the rate of interest chargeable. It is usual to obtain a promissory note from the customer to cover the overdraft. 4. Purchase and Discounting of Bills of Exchange: The bank provides the customers with the facility of purchasing and discounting their bills receivable. The bank permits the customer to discount his bills receivable and have the value of the bills credited to his account. The bank charges discounting charges on the face value of the bills. It waits till the maturity of the bill and presents it on the due date to the drawee for payment. After collection, the proceeds of the bill are appropriated towards the loan and interest due by the customer. If the bill is discounted, the amount will be recovered earlier from the customer.

DISTINCTION BETWEEN LOAN AND CASH CREDIT A. Amount: In case of loan, a fixed amount is sanctioned, whereas in case of cash credit a limit is fixed. B. Withdrawal: The entire amount of loan is credited to the customer’s account. In case of cash credit, the customer can withdraw the amount upto the limit when he needs. C. Interest: In case of loan, interest is payable on the entire loan, whereas in case of cash credit, interest is payable only on the amount actually withdrawn and for the period the amount is withdrawn. D. Repayment: Ordinarily a loan is repayable in installments spread over a medium to long term period. On the other hand, cash credit is granted for a fixed period of one year and the borrower may repay any surplus amount from time to time.

DISTINCTION BETWEEN CASH CREDIT & OVERDRAFT Ordinarily, in practice no significant distinction between cash credit and overdraft as the purpose and nature is almost the same. They however differ on the following points: A. Period: The main difference between cash credit and overdraft is that the former is granted comparatively, for a longer period, whereas overdraft is a temporary facility. IBC Academy Publications

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B.

C.

Opening Separate Account: For granting cash credit it is necessary to open a new account. Whereas, no new account is necessary for overdraft. Overdraft facility is granted to a current account holder only. Form of Security: Cash credit is ordinarily granted on the security of goods by way of pledge or hypothecation. Overdraft is granted on the personal security of the borrower or financial securities viz., shares, bonds etc.

TYPES OF LOANS AND ADVANCES Loans and advances are of different types. These can mainly be classified on the following basis: A. On the Basis of Purpose (a) Commercial Loans: This loan is taken to meet short-term requirement of capital e.g., working capital. (b) Consumer Loan: This loan is taken to finance household goods like fridge, T.V., scooter etc. (c) Agricultural Loan: Such a loan is taken by the farmers to meet their short term requirements like buying seeds, fertilisers, insecticides etc. B. On the Basis of Time (a) Short Term Loan: Such a loan is taken for a period of less than one year. For example, to meet working capital requirements. (b) Medium Term Loan: Such a loan is taken for a period ranging from 1 year to 3 years. For example, to purchase equipments for professionals or furniture etc. (c) Long Term Loan: Such a loan is taken to meet long-term requirements from 3 year to 20 years or more. For example, loans to purchase land, building, plant and machinery etc. However, banks provide long-term loans to a very limited extent only. C. On the Basis of Security (a) Secured Loan: Such a loan is granted on the security of tangible assets, Sec. 5 (a) of the Banking Regulation Act, 1949, defines a ‘secured loan or advance’ made against the security of assets, the market value of which is not at any time less than the amount of such loan or advance. (b) Unsecured Loans: Such a loan is granted without any security. According to Sec. 5 (a) of BR Act, an unsecured loan or advance means it is not so secured. IBC Academy Publications

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LETTER OF CREDIT A Letter of Credit has been defined by the International Chamber of Commerce as “an arrangement, however, named or described whereby a bank (the issuing bank) acting at the request and as per the instructions of a customer (the applicant), is to make payment to or the order of a third party (the beneficiary) or is to pay, accept or negotiate Bills of Exchange (Drafts) drawn by the beneficiary or authorise such payments to be made or such drafts to be paid, accepted or negotiated by another bank, against stipulated documents and compliance with stipulated terms and conditions.” From the above definition of Letter of Credit, it is clear that there are following parties to a Letter of Credit. 1. The Buyer: The buyer, who is the importer, applies to the bank for the opening of a Letter of Credit. 2. The Beneficiary: The seller, who is the exporter, is the beneficiary of the Letter of Credit. 3. The Issuing Bank: The bank which issues the Letter of Credit at the request of the buyer is the issuing bank. 4. The Notifying Bank: The notifying bank is the correspondent bank situated in the same place as that of the seller, which advises the credit to the beneficiary. 5. The Negotiating Bank: It is the bank which negotiates the Bills or Drafts under the Letter of Credit. 6. The Confirming Bank: It is the bank the seller insists that the credit must be confirmed by it. 7. The Paying Bank: The paying bank is the bank on which the bill or draft is drawn. It can be the confirming bank, the issuing bank or the notifying bank. Commercial letters of credit (LC) are issued to facilitate domestic well as International trade and commerce. A seller or exporter may be reluctant to send goods to the importer because he wants to minimize the risk of nonpayment. Similarly, the buyer or importer is also reluctant to send the payment in advance to the exporter. He may have concern that the seller or exporter may not send the goods even after receiving payment in advance. The bank comes to the rescue of both the parties. The documents of goods are sent through the bank with the instructions that the bank should deliver the documents, viz., Bill of Lading or Freight Bill to the importer against payment or acceptance of the bill. The importer can get the delivery of the goods by surrendering the bill of lading to the shipping company and the exporter will get the payment from the bank. However, in the above case, a risk is involved. The buyer or importer may not pay or accept the bill. The seller or exporter will have to spend unnecessary IBC Academy Publications

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money in getting the goods back. Such risks can be avoided if a letter of credit is opened by the importer. A letter of credit issued by the importer’s bank guarantees the seller or exporter that the bank will pay or accept the bill accompanying the documents sent through the bank. The letter of credit specifies, among other things, what goods have to be dispatched and also the date by which the goods must be despatched. The seller or exporter should strictly comply with the terms and conditions of the letter of credit. In case he fails to do so, the bank issuing the letter of credit will not liable to pay or accept the bill drawn by the Seller or exporter. TYPES OF COMMERCIAL LETTERS OF CREDIT 1.

2.

3.

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5.

6.

Documentary Letter of Credit: When a clause is inserted in the letter of credit that the document of title to goods viz., bill of lading, insurance policy, invoice etc., must be attached to the bill of exchange drawn under the letter of credit. It is called a documentary letter of credit. Clean Letter of Credit: If no such clause (as in documentary letter of credit) is inserted in the letter of credit, it is called a clean letter of credit. The documents of title in that case are sent directly to the importer. In a clean letter of credit there is greater risk for the banker. Revolving Letter of Credit: In case of revolving letter of credit, the banker specifies the total amount upto which the bills drawn may remain outstanding at a time. Once the bills upto the LC amount is negotiated and accepted for payment by the opener of LC, the LC gets reinstated again upto the LC value. The beneficiary may, once again, negotiate documents under the LC. Revocable Letter of Credit: Unless specified otherwise, a letter of credit will be deemed revocable (Art. 1 Uniform Custom and Practice). In case of revocable letter of credit, the issuing banker resumes the right to cancel or modify the credit at any time without notice. Therefore, such a letter of credit is hardly of any use. Irrevocable Letter of Credit: Such a letter cannot be modified or cancelled without the consent of the applicant and the beneficiary. As per Article 3 of Uniform Custom and Practice, the issuing banker will be liable in case of irrevocable letter of credit if the exporter strictly complies with the terms and conditions of the letter of credit. Confirmed Letter of Credit: When the banker issuing the letter of credit requests the advising bank in the exporter’s country to signify his confirmation to an irrevocable credit and the advising bank accepts the request, it is called irrevocable and confirmed IBC Academy Publications

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7.

8.

9.

10.

11.

12.

13.

letter of credit. The advising banker is called confirming banker. He cannot cancel or modify his undertaking without the consent of the parties concerned. Unconfirmed Letter of Credit: In case the issuing banker does not ask the advising banker to confirm the letter of credit, it remains unconfirmed letter of credit. With Recourse Letter of Credit: You might recall that a bill of exchange may be drawn with recourse to the drawer. If such a bill is drawn under a letter of credit, it is called ‘with recourse letter of credit’. In case of such a bill, if the drawee does not honour the bill, the banker as a holder can recover the payment of the bill from the drawer. Without Recourse Letter of Credit: If an exporter wants to avoid his liability (as in the case of with recourse letter of credit) he can ask the importer to open a ‘letter of credit without recourse to the drawer’. If the importer fails to honour the bill, the issuing banker cannot hold the drawer liable. He can hold only the drawee liable in such a case. The banker may realise the amount by selling the goods if the documents of title have not been given to the importer. Transferable Letter of Credit: Where the goods are exported through middle-men, the exporter may ask the importer to open a transferable letter of credit. Under a transferable letter of credit, the beneficiary will be able to transfer his right to draw a bill to a third party. Non-transferable Letter of Credit: Every letter of credit, unless stated otherwise is non-transferable. Hence the beneficiary cannot transfer such a letter of credit to a third party. Back to Back Letter of Credit: A beneficiary of a nontransferable letter of credit may request the bank to open a new letter of credit in favour of some third party on the security of letter of credit issued in his favour, it is called “back to back letter of credit”. Red Clause Letter of Credit: If the exporter wants financial assistance in advance against his export for purchase of materials, packing etc., he can ask the importer to arrange a “Packing Credit”. This packing credit is made available through the letter of credit by inserting a clause in red ink. Such a clause is called Red Clause. The negotiating banker can advance specified money to the exporter. Such accommodation is of temporary nature and is adjusted at the time of final payment.

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UNIFORM CUSTOMS & PRACTICE FOR DOCUMENTARY CREDITS (UCPDC) Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in domestic as well as international trade finance. This practice has been standardized by the ICC (International Chamber of Commerce) initially by publishing the UCP in 1933. The latest revision was approved by the Banking Commission of the ICC, called the UCP600, formally commenced on 1 July 2007. The Uniform Customs and Practice for Documentary Credits (UCPDC) is a set of rules on the issuance and use of letters of credit.

GUARANTEES Guarantee is an important method of securing banker’s advances to the customer. It is the personal security of the third party which commands the confidence of the banker. In case, the customer is unable to provide the security of tangible asset or the value of such security which is not sufficient to cover the loan amount, the banker may ask the customer to provide a ‘guarantee’ for the repayment of the amount. Definition Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as “a contract to perform the promise or discharge the liability of a third person in case of his default.” According to the Indian law, guarantee may be either oral or written. But according to English law, a guarantee is defined as a “Promise made by one person to another to be collaterally answerable for the debt, default or miscarriage of a third person and must be evidenced in writing.” Three parties are involved in this contract of guarantee. They are as follows: (a) Applicant: The principal debtor-person at whose request the guarantee is executed. (b) The Beneficiary: Person to whom the guarantee is being given and who can enforce in case of default. (c) The Guarantor: The person who undertakes to (surety) discharge the obligations of the applicant against his default. Thus, the guarantee is a collateral contract, consequential to a main contract between the applicant and beneficiary. Types of Guarantees 1. Specific or Ordinary Guarantee: Specific or Ordinary Guarantee means a guarantee for the transaction between the debtor and the creditor. Where the advancing money is made against the security of IBC Academy Publications

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Specific Guarantee, the money should be lent by the banker on a separate loan account. In such case, the liability of the surety extends only to a single transaction. a. Financial Guarantee: It means, “to guarantee the customer’s (applicant’s) financial worth, creditworthiness and his capacity to take up financial risks.” b. Performance Guarantee: It means, “to guarantee the obligations relating to the technical, managerial, administrative experience and capacity of the customer (applicant).” However, the liabilities under both these types of bank guarantee are reduced to monetary terms. Bank is not going to be asked to perform the contract in case of default by the applicant of a performance guarantee; because what is guaranteed is not the performance but the financial loss arising out of non-performance of the commitment made by the applicant. 2. Continuing Guarantee: According to Section 129 of the Indian Contract Act, 1872, “a continuing guarantee is that which extends to a series of transactions” and that this guarantee is not confined to single transaction. Under this, the amount of the fluctuating balance on a cash-credit or an overdraft account may be covered by the continuing guarantee. But ‘the payment by installments within a stated time is not known as continuing guarantee’.

VARIOUS MARKET SEGMENTS IN BANKING The various key market segments in Banking according to the customer orientation and their requirements for products are as follows:

a. RETAIL BANKING Retail banking is, broadly speaking, dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current/savings accounts on the liabilities side; and personal loans, housing, auto loans, and educational loans on the assets side, are the important products offered by banks. Retail lending offered diversification of lending portfolio with dispersal of credit risk to low-ticket loan accounts to a large number of retail consumers helping Banks to diversify their portfolio risk. Banks took this opportunity to cater to the multiple banking requirements of the individuals by segmenting the individuals as a separate business market and called it by the name of 'Retail Banking'. Related Ancillary Services 

Credit cards, Debit cards and Depository services. IBC Academy Publications

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Today's retail banking sector is characterised by three basic features: 1. Multiple products (deposits, credit cards, insurance, investments and securities). 2. Multiple channels of distribution (call center, branch, Internet/ Mobile and kiosk); and 3. Multiple customer groups (consumer, small business, and corporate). Retail Deposit Products •

• • • •

Savings Bank Account  Premium Savings Bank Account  Zero Balance Account for salaried class people  No Frills Account for the common man Recurring Deposit Account Current Account Term or Fixed Deposit Account Senior Citizen Deposit Accounts, etc.

Retail Loan Products  

       

Trade related advances to individuals- for setting up business, retail trade etc. Home Loans to resident Indians: for purchase of land and construction of residential house/ purchase of ready built house/for repairs and renovation of an existing house. Home Loans to Non-Resident Indians Consumer Loans - for purchase of white goods and durables Personal loans - for purchase of jewels, for meeting domestic consumption etc. Auto Loans - for purchase of new/used four-wheelers and twowheelers Educational Loans - for pursuing higher education both in India and abroad Crop loans to agricultural farmers Credit Cards Gold Loan

Retail Services   

Safe Deposit Lockers Depository Services Bancassurance Products etc. IBC Academy Publications

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Retail lending has been growing to as high as 21.50% of the aggregate advances portfolio and it has proved to be a major driver for profit for the banks. It is reported that the overall impairment of the retail loan portfolio worked out much less than the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least gross asset impairment.

b. WHOLESALE BANKING Wholesale Banking implies provision of banking business with business and industrial firms - mostly corporates and trading houses, including multinationals, domestic business houses and prime public sector companies. Banks have been doing such businesses traditionally and usually called as Commercial Banking and Corporate Banking. With competition from multinational banks, in servicing this segment of customers, banks are vying with each other in providing a wide array of commercial, transactional and electronic banking products. Banks achieve this through innovative product development and a well-integrated approach to relationship management.

Products The products are broadly classified into four major groups, viz., Fund-based Services, Non-Fund Based Services, Value-Added Services and Internet Banking Services. 1. Fund-based Services (a) (b) (c) (d) (e) (f)

Term Lending Short Term Finance Working Capital finance Bill Discounting Structured Finance Export Credit

2. Non-fund-based Services (a) (b) (c)

Bank Guarantees Letter of Credit Collection of Bills and Documents

3. Value-added Services (a) (b) (c) (d)

Cash Management Services Vendor Financing Corporate Salary Accounts Forex Desk IBC Academy Publications

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(e) (f) (g) (h) (i) (j) (k) (l)

Derivatives Desk Tax Collection Channel Financing Real Time Gross Settlement Syndication Services Money Market Desk Employees Trusts Bankers to Right/Public Issue

4. Internet Banking Services (a) (b) (c) (d)

Payment Gateway Services Supply Chain Management corporate Internet banking Supply chain partners

Bank offering Products/services to other banks: Banks offer products to other peer smaller banks in areas like clearing submembership, DD/cheques payable at par, RTGS-Sub-membership, Cheque Collection, Funds Transfer, ATM tie-ups, etc. Bank offering Products/services to other Financial Institutions: Banks also cater to the Financial Institutions by offering products like Cash Management Services and to Mutual Funds by offering products, viz. Collection Services, Payment Services, Custodial Services and Funds Transfer. Banks also offer Stock Brokers services like Clearing Settlement Bankers on Equity and Derivatives Segment, Professional Clearing Member of NSE Derivatives, Bank Guarantees etc.

c. INTERNATIONAL BANKING International banking is a type of banking that has presence across the international borders. International Banking services cater to the trade engaged in cross-border transactions. Banks have been traditionally offering various services to the international business firms. Every country sell certain goods and services (export) out of their surplus production to other countries. Similarly, each country need to buy (import) certain goods and services from other countries in order to bridge the demand and supply in its economy. Further, in a liberalized and free trade economy, the government and people of one country may invest capital and labour in another country and may earn income in the form of profits, dividends, interest, royalty, etc. Foreign exchange market is the place where each country/people can pay for their requirements and receive their entitlements in their own home currency. Banks are amongst the active members of the foreign exchange IBC Academy Publications

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market and they provide specialized services to their customers called International banking services. These services can be broadly grouped into the following: For Exporters: 1. Export Packing Credit: Banks provide finance in the form of Export Packing Credit (EPC) both in rupees as well as in foreign currencies to assist the exporters to facilitate manufacturing or packing the goods for export from India. 2. Export Bill Negotiation: Banks negotiate export bills drawn under Letter of Credit (LC), if the documents are drawn strictly in terms with the LC conditions and payment of the bills to the exporter is made even before the bills are realized from the importers. 3. Export Bill Purchase and Discounting: Even when the exports are not covered under Letter of Credit, Banks allow credit limits and pay the value of the invoice, immediately on shipment to the exporter, at a discount. The export documents are presented and the proceeds credited to the advance account on realization. 4. Export Bill Collection Services: Export documents are sent in collection by the exporter through his banker for payment by the overseas buyer on their presentation/due dates. Such payments received against the delivery of documents by the buyer's bank are remitted to the collecting bank and proceeds credited to his account after deducting commission and other charges, if any. 5. Bank Guarantees: Banks also issue Guarantees in foreign currency on behalf of exporters for approved purposes as defined under FEMA, subject to availability of credit limits or against cash margins, as decided by the bank. 6. Rupee Advance against Export Bills: When an exporter expects the currency of his invoicing to appreciate further and does not want to surrender the export value of forex, before the due date, banks offer rupee advance against export bills up to the due date of the receivables, subject to limit availability and RBI rules. 7. Export LC Advising: With a correspondent banking relationship with the leading banks across the globe, Letter of Credit is advised through Banks. 8. Export LC Confirmation: When the exporter have little confidence in the credit standing of an LC opening bank or if the political climate or credit risk of the buyer's country is not satisfactory, banks offer LC confirmation services. 9. Suppliers Credit: This facility enables Indian exporters to extend term credit to importers (overseas) of eligible goods at the postshipment stage. IBC Academy Publications

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10. Forfaiting: A financial transaction involving the purchase of receivables from exporters by a forfaiter. The forfeiter takes on all the risks associated with the receivables but earns a margin. Forfaiting financing used by exporters enables them to receive cash immediately by selling their medium-term receivables. For Importers: 1. Import Bill Collection Services: Documentary Collections are a common and useful method of payment for goods imported from overseas suppliers. However, these require careful and accurate scrutiny to bills of exchange, stamping requirements on bill of exchange, bills of lading and other documents. Banks handle the Import collection documents meticulously and help the importers to remit the import value. 2. Direct Import Bills: FEMA guidelines allow importers to receive import documents directly from the overseas supplier, subject to certain conditions and banks help importers to settle payments against the direct imports. 3. Advance Payment towards Imports: Whenever any advance payment to an overseas supplier is required to be made, banks provide advisory services and also assist in faster remittance to the suppliers. 4. Import Letters of Credit: Banks issue Import Letters of Credit on behalf of importers. 5. Buyer's and Supplier's Credit: Banks offer a wide range of offshore financing options to importers to meet their working capital requirements. Banks also arrange for financing import requirements of importers by way of Suppliers' credit and Buyers' credit. 6. Bank Guarantees: Banks issue Bank Guarantees in foreign currency on behalf of Importers for all approved purposes as defined under FEMA, against cash margin or under regular limits, as per bank credit risk assessments. Remittance Services 1. EEFC Account Services: Banks provide facilities to maintain an Exchange Earners Foreign Currency a/c (EEFC a/c) in all permitted currencies. 2. Receipt of Foreign Inward Remittances Services: Banks receive from abroad and credit them to the Indian beneficiary’s accounts. 3. Payment Services to Abroad (Outward Remittances): Banks as Authorised Dealers in Foreign Exchange provide remittance facilities in foreign currency to any country for any permitted purpose up to the limits permitted by RBI. IBC Academy Publications

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REVERSE MORTGAGE The scheme of reverse mortgage was introduced in India for the benefit of senior citizens owning a house but not having adequate income to meet their needs. The scheme is more or less reverse of the regular Home loan. When one buys a house through a home loan, every EMI it pays towards servicing the loan increases its equity in the house. Once loan is paid in full, his/her equity in the house becomes 100 per cent. However, in the case of reverse mortgage, one actually pledges house with the bank, and its equity decreases with every loan disbursal that the bank makes. In case of a home loan, one takes a lump sum loan and repays it in installments in future. Under the reverse mortgage scheme, one gets installments and the loan is repayable in lump sum in future. Eligibility Norm Any person, above of the age of 60 years (co-applicant-wife age 55 years) and owns a house with no outstanding loan against the property. The period of reverse mortgage loan shall be 20 years or till "the residual life time of the borrower". Importance for Senior Citizens Reverse mortgage is a blessing for the elderly as it allows them to generate good income from their homes after retirement. The most important aspect of this scheme is that they can still continue to live in the same house till the end of their life. Senior citizens with no regular income sources or who do not have children can avail of loan facility. Settlement Process Interestingly, a reverse mortgage loan becomes due only when the last surviving borrower/co-borrower dies, or when the borrower chooses to sell the house during his life. The bank first gives an option to the next of kin to settle the loan along with accumulated interest, without sale of property. If the kin is unable to settle the loan, the bank then opts to recover the same from the sale proceeds of the property.

d. UNIVERSAL BANKING Universal banking refers to a Super Financial Hub for marketing of a host of financial products sold by the private /public/government bodies under one roof. Universal banks offer financial products such as, banking, mutual funds, insurance, capital market related products including share broking, commodity broking, investment products, like sale of gold/ bullion, government/ corporate bonds, providing advisory services and Merchant Banking Activities, etc. Banking products include all types of deposit IBC Academy Publications

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(liability) products and also loan (asset) products like short, medium and long-term loans (project finance). The insurance products would cover both life and non-life insurance products including health insurance products. Universal banking enable banks to cross-sell their products to a larger base of clientele which help them earn both fee-based and non-fee based income. The customer also gets equally benefited as they save a lot of time and travel and helps them in getting speedy delivery of the products at one place. In the Indian Banking scenario, the first major step towards universal banking started in the year 2000 with the Government of India, notifying changes in the Banking Regulation Act allowing banks to venture into the insurance business, either with riskparticipation or without risk-participation as corporate distribution agents of insurance companies. Later, with the opening up of the insurance sector to private investments, Banks have either started their own insurance companies or entered into a strategic alliance with the insurance companies under bancassurance for distribution of insurance products with their wide branch network of delivery channels. Mutual funds have also tied-up with commercial banks to market their products. Banks are selling the products of different mutual funds under mutual suitable tie-up arrangements.

RISK MANAGEMENT IN BANKS In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Thus, the need for an efficient risk management framework is paramount in order to factor in internal and external risks. Indian Banks have been making great advancements in terms of technology, quality, quantity as well as stability such that they have started to expand and diversify at a rapid pace. However, such expansion brings these banks into the context of risk especially at the onset of increasing Globalization and Liberalization. Risks play a major part in the earnings of a bank and other financial institutions. Higher the risk, higher is the return. Hence, it is most essential to maintain parity between risk and return. Management of Financial risk incorporating a set systematic and professional method especially those defined by the Basel II norms are an essential requirement of banks. The more risk averse a bank is, the safer is their Capital base. IBC Academy Publications

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TYPES OF RISKS The Reserve Bank of India guidelines issued in October, 1999 has identified and categorized the majority of risk into three major categories, viz.:  Credit Risk  Market Risk  Operational Risk These risks can be fundamentally sub-divided in primarily two types:  Financial risks would involve all those aspects which deal mainly with financial aspects of the bank. These can be further sub-divided into Credit Risk and Market Risk. Both Credit and Market Risk may be further subdivided.  Non-Financial risks would entail risk faced by the bank in its regular workings, i.e. Operational Risk, Strategic Risk, Funding Risk, Political Risk, and Legal Risk.

CREDIT RISK Credit risk refers to the risk that a borrower will default on any type of debt by failing to make its payments obligation. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:  A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan.  A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company.  A business or consumer does not pay a trade invoice when due.  A business does not pay an employee's earned wages when due.  A business or government bond issuer does not make a payment on a coupon or principal payment when due.  An insolvent insurance company does not pay a policy obligation.  An insolvent bank would not repay/redeem funds to a depositor. To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

TYPES OF CREDIT RISK Credit risk can be classified in the following types: IBC Academy Publications

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





Credit default risk - The risk of loss arising from a debtor being unlikely to pay its loan obligations in full or the debtor is more than 90 days past due on any material credit obligation; default risk may impact all credit-sensitive transactions, including loans, securities and derivatives. Concentration risk - The risk associated with any single borrower or group of borrowers with the potential to produce large enough losses to threaten a bank's core operations. It may arise in the form of single borrower concentration or industry concentration. Country risk - The risk of loss arising from a sovereign state freezing foreign currency payments (transfer/conversion risk) or when it defaults on its obligations (sovereign risk).

Assessing credit risk Significant resources and sophisticated programs are used to analyze and manage risk. Banks and Financial Institutions run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in-house programs to advice on avoiding, reducing and transferring risk. They also use third party provided market intelligence, such as companies like CRISIL, CARE, Standard & Poor's, Moody's, Fitch Ratings, and Dun and Bradstreet etc., for a fee. IBC Academy Publications

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Most banks employ their own models (credit scorecards) to rank potential and existing customers according to risks associated, and then apply appropriate strategies. With products, such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property. Credit scoring models also form part of the framework used by banks or lending institutions grant credit to borrowers. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions set out.

SOVEREIGN RISK Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. Many countries have faced sovereign risk in the period of global recession. The existence of such risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly, one should consider the sovereign risk quality of the country and then consider the firm's credit quality. Five variables that affect probability of sovereign debt rescheduling are:  Debt service ratio  Import ratio  Investment ratio  Variance of export revenue  Domestic money supply growth

COUNTERPARTY RISK A counterparty risk, also known as a default risk, is a risk the counterparty will not pay what it is obligated to do on a bond, credit derivative, trade credit insurance or payment protection insurance contract, or other trade or transaction when it is supposed to. Financial institutions may hedge or take out credit insurance of some sort with a counterparty, which may find themselves unable to pay when required to do so, either due to temporary liquidity issues or longer term systemic reasons. Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g., the bailout of insurer AIG. IBC Academy Publications

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Mitigating credit risk Lenders mitigate credit risk using several methods: 











Risk-based pricing: This entails that Lenders generally charge a higher interest rate to borrowers who are more likely to default. Lenders consider factors relating to the loan, such as purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread). Covenants: Lenders may write stipulations on the borrower, called covenants, into loan agreements, which stipulates, o Periodically report its financial condition to Bank, o Refrain from paying dividends, repurchasing shares, borrowing further, or other specific actions that may negatively affect its financial position, o Repay the loan in full, at the lender's request, in certain events, such as changes in the borrower's debt-to-equity ratio or interest coverage ratio. Credit insurance and credit derivatives: Lenders may hedge their credit risk by purchasing credit insurance or credit derivatives. These contracts transfer the risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the Credit default swap (CDS). Tightening: Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 days to net 15 days and/or reducing the value of products given on credit. Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a high degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk by diversifying the borrower pool. Deposit insurance: Many governments establish deposit insurance to guarantee bank deposits. Such protection discourages consumers from withdrawing money when a bank is becoming insolvent, to avoid a bank run, and encourages consumers to hold their savings in the banking system instead of keeping in cash.

LIQUIDITY RISK Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss or make the required profit. IBC Academy Publications

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Types of liquidity risk Market liquidity – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk. This can be accounted for by:  Widening bid/offer spread  Making explicit liquidity reserves  Lengthening holding period for VaR calculations Funding liquidity – Risk that:  liabilities cannot be met when they fall due  liabilities can only be met at an uneconomic price  liabilities can be name-specific or systemic Causes of liquidity risk Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade for that asset. Liquidity risk is very different from a drop of price to zero. In case of a drop of an asset's price to zero, the market is saying that the asset is worthless. However, if one party cannot find another party interested in trading the asset, this can potentially be only a problem of the market participants with finding each other. This is why liquidity risk is usually found to be higher in emerging markets or low-volume markets. Liquidity risk is a financial risk arisen due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. Liquidity risk also tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too will default. Here, liquidity risk is compounding credit risk. Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. Certain techniques of assetliability management can be applied to assessing liquidity risk. A simple test for liquidity risk is to look at future net cash flows on a day-by-day basis. IBC Academy Publications

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If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. A general approach using scenario analysis might entail the following high-level steps:  Construct multiple scenarios for market movements and defaults over a given period of time.  Assess day-to-day cash flows under each scenario. Regulators are primarily concerned about systemic and implications of liquidity risk.

Measures of liquidity risk: Liquidity gap The liquidity gap is the net liquid assets of a firm i.e. - the excess value of the firm's liquid assets over its volatile liabilities. A company with a negative liquidity gap should focus on their cash balances and possible unexpected changes in their values.  

 

Market depth is the amount of an asset that can be bought and sold at various bid-ask spreads. Slippage is related to the concept of market depth. A trader needs to consider the effect of executing a large order on the market and to adjust the bid-ask spread accordingly. They calculate the liquidity cost as the difference of the execution price and the initial execution price. Immediacy refers to the time needed to successfully trade a certain amount of an asset at a prescribed cost. Resilience: The fourth dimension of liquidity is the speed with which prices return to former levels after a large transaction. Unlike the other measures resilience can only be determined over a period of time.

MARKET RISK Market risk is the risk of losses in positions arising from movements in market prices. Some market risks include:  Equity risk, the risk that stock or stock indexes (e.g. NIFTY-30 stocks etc.) prices and/or their implied volatility will change.  Interest rate risk, the risk that interest rates (e.g. Libor, Euribor, etc.) and/or their implied volatility will change.  Currency risk, the risk that foreign exchange rates (e.g. EUR/USD, EUR/GBP, etc.) and/or their implied volatility will change.  Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil, etc.) and/or their implied volatility will change. IBC Academy Publications

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OPERATIONAL RISK Basel Committee defines Operational risk as: "The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." However, the Basel Committee recognizes that operational risk is a term that has a variety of meanings and therefore, for internal purposes, banks are permitted to adopt their own definitions of operational risk, provided that the minimum elements in the Committee's definition are included. Exclusions The Basel II definition of operational risk excludes, for example, strategic risk - the risk of a loss arising from a poor strategic business decision. Other risk terms are seen as potential consequences of operational risks. For example, reputational risk (damage to an organization through loss of its reputation) can arise as a consequence of operational failures - as well as from other events. Basel II event categories The following event types with some examples for each category: 1. Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of positions, bribery. 2. External Fraud - theft of information, hacking damage, thirdparty theft and forgery. 3. Employment Practices and Workplace Safety discrimination, workers compensation, employee health and safety. 4. Clients, Products, & Business Practice - market manipulation, anti-trust, improper trade, product defects, fiduciary breaches, account churning. 5. Damage to Physical Assets - natural disasters, terrorism, vandalism. 6. Business Disruption & Systems Failures - utility disruptions, software failures, hardware failures. 7. Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets. Difficulties By contrast it is relatively difficult to identify or assess levels of operational risk and its many sources. Historically organizations have accepted operational risk as an unavoidable cost of doing business. IBC Academy Publications

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Methods of operational risk management The Operational Risk Management framework includes identification, measurement, monitoring, reporting, control and mitigation frameworks for Operational Risk. Basel II have prescribed various soundness standards for Operational Risk Management for Banks and Financial Institutions. To complement these standards, Basel II has given guidance to 3 broad methods of Capital calculation for Operational Risk:  Basic Indicator Approach - based on annual revenue of the Financial Institution  Standardized Approach - based on annual revenue of each of the broad business lines of the Financial Institution  Advanced Measurement Approaches - based on the internally developed risk measurement framework of the bank adhering to the standards prescribed (methods include IMA, LDA, Scenario-based, Scorecard etc.)

BASEL ACCORD BASEL I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by Group of Ten (G-10) countries in 1992. Basel I is now widely viewed as outmoded. Therefore, a more comprehensive set of guidelines, known as Basel II were implemented. Subsequently, new updates under Basel III, were developed in response to the financial crisis. Background The Basel Committee was formed in response to the messy liquidation of a Cologne-based bank (Herstatt Bank) in 1974. In June 1974, a number of banks had released Deutsche Mark (German currency) to the Herstatt Bank in exchange for dollar payments deliverable in New York. On account of differences in the time zones, there was a lag in the dollar payment to the counterparty banks, and during this gap, and before the dollar payments could be effected in New York, the Herstatt Bank was liquidated by German regulators. This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements (BIS) located in Basel, Switzerland. Basel I, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for say home country sovereign debt), IBC Academy Publications

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ten, twenty, fifty, and up to one hundred percent (this category has, mostly corporate debt). Banks with international presence are required to hold capital equal to 8% of the risk-weighted assets.

BASEL II Basel II is the second of the Basel Accords, (now superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Basel II, initially published in June, 2004 was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Basel II attempted to accomplish this by setting up risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Objective 1. 2.

Ensuring that capital allocation is more risk sensitive; Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution; 3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques; 4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. Basel II uses a "three pillars" concept – (1) The First pillar - minimum capital requirements (addressing risk), (2) The Second pillar - supervisory review, and (3) The Third pillar - market discipline. Note: The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first - Basel II pillar, only one risk - credit risk, was dealt with and market risk was an afterthought; operational risk was not dealt with, at all.

The First pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational IBC Academy Publications

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risk, and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely Standardized approach, Foundation IRB approach, and Advanced IRB approach. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches – Basic indicator approach or BIA, Standardized approach or STA, and the Internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). For market risk measurement, the preferred approach is VaR (value at risk).

The Second pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. It is the Internal Capital Adequacy Assessment Process (ICAAP) that is the result of Pillar II of Basel II accords.

The Third pillar This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. The aim of Pillar-3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes, and the capital adequacy of the institution. It must be consistent with how the senior management, including the board, assess and manage the risks of the institution. When market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures, they are better able to distinguish Banks, so that they can reward those that manage their risks prudently and penalise those that do not. These disclosures are required to be made at least twice a year.

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BASEL II AND THE GLOBAL FINANCIAL CRISIS The role of Basel II, both before and after the global financial crisis, has been discussed widely. While some argue that the crisis demonstrated weaknesses in the framework, others have criticized it for actually increasing the effect of the crisis. In response to the financial crisis, the Basel Committee on Banking Supervision published revised global standards, popularly known as Basel III. The Committee claimed that the new standards would lead to a better quality of capital, increased coverage of risk for capital market activities and better liquidity standards among other benefits. In India, Reserve Bank of India has implemented the Basel II standardized norms on 31 March, 2009 and is moving to internal ratings in credit and AMA (Advanced Measurement Approach) norms for operational risks in banks.

BASEL III In order to strengthen the resilience of the banking sector to potential future shocks, together with ensuring adequate liquidity in the banking system, the Basel Committee on Banking Supervision (BCBS) issued the Basel III proposals. The final set of Basel III rules were issued on December 16, 2010. The Basel III rules on capital consist of measures on improving the quality, consistency and transparency of capital, enhancing risk coverage, introducing a supplementary leverage ratio, reducing procyclicality and promoting counter-cyclical buffers, and dealing systemic risk and inter-connectedness. The Basel III rules on liquidity consist of a measure of short-term liquidity coverage ratio aimed at building liquidity buffers to meet stress situations and a measure of long-term net stable funding ratio aimed at promoting longer term structural funding. Basel Committee has stipulated a phased implementation of the Basel III framework between January 1, 2013 and January 1, 2019. Banks are required to maintain a Minimum Total Capital (MTC) of 9% against 8% (international) prescribed by the Basel Committee of Total Riskweighted assets.  of the above, Common Equity Tier 1 (CET 1) capital to be at least 5.5% of RWAs;  In addition to the Minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are to maintain a Capital Conservation Buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital.  Banks under Basel II are required to maintain Tier 1 capital of 6%, which has been raised to 7% under Basel III.

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CHAPTER - 11

NON PERFORMING ASSETS

Whenever, a borrower commits breach of agreement in respect of schedule of repayment of the loans – either for the Principal dues or with the interest, this result in 'Overdues' in the Loan Account. Once the Loan account becomes an overdue i.e. the borrower has defaulted in repayment of loan amount/interest, as per the dates specified in the Agreement, then the Banker necessarily has to adopt measures for recovery of overdue amounts.

NPA (NON-PERFORMING ASSET) The assets of the banks which don’t perform (i.e. – do not bring any return) are Non-Performing Assets (NPA) or bad loans. A Non-performing asset (NPA) is a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. Once the borrower has failed to make interest or principle payments for more than 90 days, the loan is considered to be a non-performing asset. An asset including a leased asset, becomes an NPA when it ceases to generate income for the bank. An NPA is a loan or an advance where; (a) Interest and/or instalment of principal remain overdue for a period of more than 91 days in respect of a term loan, (b) The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), (c) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, (d) Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance given for “agricultural purposes”, IBC Academy Publications

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(e)

an instalment of the principal or the interest thereon remains overdue for one crop season for long duration crops for “agricultural purposes”, (f) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. (g) Non-submission of Stock Statements for 3 continuous Quarters in case of Cash Credit Facility. (h) No active transactions in the account (Cash Credit/ Over Draft/ EPC/ PCFC) for more than 90 days, and (i) For derivatives, overdue receivables representing positive markto-market value of a contract, remain unpaid for a period of 90 days from the specified due date for payment. Banks should classify an account as an NPA only if the interest charged during any quarter is not serviced fully within ninety-one days from the end of the quarter. 'Out of Order' Status An account is treated as 'out of order', if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases, where the outstanding balance in the operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for ninety-one days, as on the date of balance sheet or the sum of credit transactions are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank. Ever greening A term used for re-scheduling of a loan without assessing the viability of the activity for the purpose of avoiding an account becoming NPA. This shall be discouraged by Banks to reflect the correct health of the loan accounts.

CLASSIFICATION OF ACCOUNTS Banks are required to classify non-performing assets further into the following three categories, based on the period for which the asset has remained non-performing and the realisability of the dues, as under: 1. Sub-standard assets: an account which has been classified as NPA for a period not exceeding 12 months. 2. Doubtful Assets: an account which has remained NPA for a period exceeding12 months. IBC Academy Publications

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Loss assets: an account where loss due to likely non-recovery or doubtful realisability has been identified by the bank’s auditor or central bank inspectors. But the Loan amount has not been written off, wholly or partly. If the borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account (SMA)”.  If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as follows: - 15% of outstanding amount in case of secured loans - 25% of outstanding amount in case of unsecured loans  If sub-standard asset remains so for a period of 12 more months; it would be termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows: Up to one year:  25% of outstanding amount in case of Secured loans;  100% of outstanding amount in case of unsecured loans 1-3 years:  40% of outstanding amount in case of Secured loans;  100% of outstanding amount in case of unsecured loans More than 3 years:  100% of outstanding amount in case of secured loans;  100% of outstanding amount in case of unsecured loans  If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal / external audit and it would be called loss asset. An NPA can be declared Loss Asset, only if it has been identified to be so by internal or external auditors.  All those assets which cannot be recovered are called as Loss Assets. 4. Standard Asset, the fourth category, is one which does not exhibit any problems as stated above, excepting the normal risk attached to the business. 3.

Reasons for Occurrence of NPAs NPAs result from what are termed “Bad Loans” or defaults. Default, as coined in the financial terms, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons: IBC Academy Publications

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   

Usual banking operations /Bad lending practices A banking crisis Overhang component (due to environmental reasons, business cycle, etc.) Incremental component (due to internal bank management, like credit policy, terms of credit, etc.)

The Problems caused by NPAs NPAs not only reflect badly in a bank’s account books, but also impact adversely the national economy. Following are some of the repercussions of NPAs:  When bank do not get loan repayment or interest payments, liquidity problems may ensue.  Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses  Bank shareholders are adversely affected.  Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments. Result of NPAs on an organization 1. 2. 3. 4.

They decrease profitability. They reduce capital assets and lending limits. They increase loan loss reserves. They bring unwanted attention from government regulators.

DISTINGUISHING GROSS NPA AND NET NPA The NPA may be Gross NPA or Net NPA. Gross NPA is the amount which is outstanding in the books, regardless of any interest recorded and debited. Net NPA is Gross NPA less interest debited to borrowal account and not recovered or recognized as income. RBI has prescribed a formula for deciding the Gross NPA and Net NPA. Net NPA = Gross NPA – (Provisions held towards NPAs + Balances held in Interest Suspense A/c + part-payments received in suit filed accounts and kept in Sundry Suspense + Claims received from ECGC/CGC and kept in Sundry Suspense a/c) IBC Academy Publications

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Potential NPA (PNPA) are those accounts showing overdues and irregularities persist beyond 30 days. These are also known as Border line Performing Assets. Date of NPA: It is the date on which overdues or the irregularities cross 90 days or the date on which the account comes under Income Recognition norms. Reversal of Income: If an account turns NPA for first time during the year, the unrealized interest that was taken to P&L account on accrual basis pertaining to the current year as well as pertaining to the preceding year, if any, shall also be reversed. This will apply to Government guaranteed accounts also.

PROVISIONING COVERAGE RATIO Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses. From a macro-prudential perspective, banks should build up provisioning and capital buffers in the good times, i.e. when profits are good, which can be used for absorbing losses in a downturn. This will enhance soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that total provisioning coverage ratio, including floating provisions, is not below 70%. Majority of the banks had achieved PCR of 70 percent and had represented to RBI whether the prescribed PCR is required to be maintained on an ongoing basis. RBI has examined the matter and banks were advised that: (a) the PCR of 70 percent may be with reference to the gross NPA position in banks as on September 30, 2010; (b) the surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as “countercyclical provisioning buffer”, computation of which may be undertaken as per the format given in Annex - 3; and (c) this buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system-wide downturn, with the prior approval of RBI. The PCR of the bank should be disclosed in the Notes to Accounts to the Balance Sheet.

CURRENT STATUS OF NPAS IN BANKING SECTOR Net non-performing assets (NPAs) of banks had gone up 51% in FY13 to Rs.92,825 crores. As per a recent CRISIL report, the gross NPAs of banks are slated to increase from 3.3% in March 2013 to 4% by March, 2014. IBC Academy Publications

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The banking sector's asset quality further deteriorated, with gross nonperforming asset (GNPA) ratio growing to 4.45% as on March 2015, as compared to 4.10% in March 2014, as per the Reserve Bank of India (RBI) reports.

WILFUL DEFAULTER A "wilful default" would be deemed to have occurred if, (a) The unit has defaulted in meeting its payment/ repayment obligations though it has the capacity to honour the said obligations. (b) The unit has defaulted in meeting its payment / repayment obligations and it has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (c) The unit has defaulted in meeting its payment / repayment obligations and has siphoned off the funds so that the funds have not been utilised for the specific/ approved purposes for which finance was availed of. (d) The unit has defaulted in meeting its payment / repayment obligations and has also disposed off or removed the movable fixed or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender. Reporting Process 1. Though there is no minimum amount to declare a borrower as wilful defaulter. However, for reporting purposes, RBI has set certain limits. (a) All cases of wilful default with outstanding of Rs. 25 lakh & above are required to be reported to RBI on a quarterly basis. (b) All cases of wilful default (suit filed accounts) with outstanding of Rs 25 lakh & above are required to be reported to CIBIL. Banks also submit the suit-filed accounts with outstanding of of Rs. 1 Crore and above to CIBIL i.e. the cases not categorized as willful defaults. 2. Both the above lists are also sent to SEBI so as to prevent access to the capital markets by the wilful defaulters. Penal measures Once declared as a wilful defaulter, the banks/FIs are required to take following actions: (a) No additional facilities should be granted by any bank/ FI to the wilful defaulters. (b) The promoters of companies where banks/FIs have identified siphoning/ diversion of funds, misrepresentation, falsification of IBC Academy Publications

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accounts and fraudulent transactions are to be debarred from raising loans from banks, Financial Institutions etc. for floating new companies for a period of next 5 years. (c) The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary. (d) Wherever possible, the banks and FIs to explore a change of management of the willfully defaulting companies.

Recovery measures available to banks for recovery of NPAs 1. DEBT RECOVERY TRIBUNALS (DRT) Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB &FI Act) was enacted based on the Tiwari Committee Report, which was drafted after the formation of the Narasimham Committee-I, in 1992. The Committee recommended setting up a quasi-judicial body to deal with recovery of loans by Banks for the main reason that the Civil courts were too over-burdened with other type of recovery claims due to which banks’ claims failed to get any importance and resulted in long ‘periods of litigation with no immediate effects or recoveries coming through. The DRTs main object and role was to recover outstanding loans due to banks and financial institutions. The Tribunal’s power is limited to try and settle cases for recovery of loans and amounts from NPAs as classified by the banks under the RBI guidelines. The Tribunal has all the power of a district Court and tried all pending cases with the District court under the Act which constituted it, viz. the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB&FI). The Tribunal also has a Recovery officer who helps in executing the recovery Certificates as passed by the Presiding Officers. Under DRT Act, all debts owed to banks and FIs in excess of Rs.10 lakhs are covered and the jurisdiction of civil courts on debts over these cases, henceforth cease to exist. The civil courts were directed to hand over all such cases to Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs), constituted under the Act. There are 33 DRTs and 5 DRATs functioning in the country.

2. DEBT RESTRUCTURING Debt Restructuring involves the process whereby organizations – both private and public, facing financial duress are allowed to renegotiate their IBC Academy Publications

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financial loans and debts schemes with financial companies, so that they have better structure to pay the debts. This is aimed at providing liquidity and rehabilitation in the operations of the company. It is seen that during any financial or economical meltdown, companies who have a highly leveraged balance sheet, are normally the first to start the default in the payment of interest and principal or both. Such a situation normally arises as the companies lose cash from operations and may be running negative cash flow balances. Ultimately, to avoid the risk of the whole debt being termed as bad, financial companies, allow such companies to renegotiate the loan terms and conditions. Ways of achieving Financial Restructuring The most likely manner in which restructuring is implemented is enumerated as follows: · MORATORIUM PERIOD – Period for payment of interest and principal repayment or both. This gives the company crucial time period to get back to its feet. · TIME PERIOD - Extension for time period for payment of the loan. · INTEREST RATE - Reduction of the interest rate. · DEBT-EQUITY SWAP - Conversion of debt into equity, either wholly or partly. · INTRODUCTION OF CAPITAL - Infusion of capital from the promoters which is then backed by further loans by financial companies so that the operations of the company can be brought back to its ideal state. Way forward for Indian Banking and Financial Institutions It is a win-win situation for both the debt-laden company and financial lender as both are able to salvage their investments from the financial instability they might be facing.

3. SARFAESI ACT, 2002 SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest created in respect of Financial Assets to enable realization of such assets. The SARFAESI Act provides for enforcement of security interests by a secured creditor without the intervention of a court or tribunal. If any borrower fails to discharge his liability in repayment of any secured debt within 60 days of notice from the date of notice by the secured creditor, the secured creditor is conferred with powers under the SARFAESI Act to IBC Academy Publications

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(a) take possession of the secured assets of the borrower, including transfer by way of lease, assignment or sale, for realizing the secured assets; (b) takeover of the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured assets; (c) appoint any person to manage the secured assets in possession, which is taken by the Bank/FIs; The Government of India has prescribed Security Interest (Enforcement) Rules, 2002 pursuant to the powers conferred on it under the SARFAESI Act. The foregoing enforcement measures must be exercised by a Bank/FI, a secured creditor in accordance with the Enforcement Rules and RBI guidelines.

4. LOK ADALAT Lok Adalat is a system of alternative dispute resolution developed in India. It roughly means "People's Court". India has had a long history of resolving disputes through the mediation of village elders. The system of Lok Adalats is based on the principles of the “Panch Parmeshwar” of Gram Panchayats which was also proposed by Mahatma Gandhi. The first Lok Adalat was held in 1985 in Delhi, where over 150 cases were solved in a day. The idea of Lok Adalat was mainly advocated by Justice P.N. Bhagwati, the former Chief Justice of India. Lok Adalat is a non-adversarial system, whereby mock courts (called Lok Adalats) are held by the State Authority, District Authority, Supreme Court Legal Services Committee, High Court Legal Services Committee, or Taluk Legal Services Committee. These are usually presided over by retired judges, social activists, or other members of the legal profession. Lok Adalats deal with a host of issues, such as Civil Cases relating to Bank dues, Matrimonial Disputes, Land Disputes, Partition/ Property Disputes, Labour Disputes etc. Small value loans of borrowers is resolved amicably and expeditiously in Lok Adalats. The focus in Lok Adalats is on compromise. When no compromise is reached, the matter goes back to the court. However, if a compromise is reached, an award is made and is binding on the parties. The disputing parties plead their case themselves in Lok Adalats. No advocate or pleader is allowed, even witnesses are not examined. No court fees is levied. Speedy justice is given to the people of all classes of society. Award has same effect as of a Civil Court decree. It was the LEGAL SERVICES AUTHORITY ACT 1987, which gave statutory status to Lok Adalat.

5. INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC) The enactment of the Insolvency and Bankruptcy Code, 2016 in May 2016 was a watershed development and it has far-reaching implications for the IBC Academy Publications

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banking sector in India. The fulcrum of a robust and resilient banking sector is a comprehensive bankruptcy regime. It enables a sound debtorcreditor relationship by protecting the rights of both, by promoting predictability and by ensuring efficient resolution of indebtedness. The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 11 May, 2016. The IBC Code received the assent of the President of India on 28 May, 2016. The bankruptcy code is a one-stop solution for resolving insolvencies which, earlier was a long drawn process and did not offer an economically viable arrangement. A strong insolvency framework where the cost and the time incurred is minimized in attaining liquidation has been long overdue in India. Salient Features of Insolvency & Bankruptcy Code, 2016 1. Under the provisions of the IBC Code, insolvency resolution can be triggered at the first instance of default and the process of insolvency resolution to be completed within the stipulated time limit. The institutional infrastructure rests on four pillars, namely: i. The first pillar of institutional infrastructure is a class of regulated persons – the ‘Insolvency Professionals’. They assist in the completion of insolvency resolution, liquidation and bankruptcy proceedings and are governed by ‘Insolvency Professional Agencies’, who will develop professional standards and code of ethics as first level regulators. ii. The second pillar of institutional infrastructure are ‘Information Utilities’, which would collect, collate, authenticate and disseminate financial information. They would maintain electronic databases on lenders and terms of lending, thereby eliminating delays and disputes when a default actually takes place. iii. The third pillar of the institutional infrastructure is adjudication. The NCLT is the forum where cases relating to insolvency of corporate persons will be heard, while DRTs are the forum for insolvency proceedings related to individuals and partnership firms. These institutions, along with their Appellate bodies, viz., the National Company Law Appellate Tribunal (NCLAT) and the Debt Recovery Appellate Tribunal (DRAT), respectively, will seek to achieve smooth functioning of the bankruptcy process. iv. The fourth pillar is the regulator, viz., ‘The Insolvency and Bankruptcy Board of India’. This body has regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities. IBC Academy Publications

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2.

3.

4.

6.

For individuals, the Code provides for two distinct processes, namely, “Fresh Start” and “Insolvency Resolution”, and lays down the eligibility criteria for these processes. The Code also establishes a fund (the Insolvency and Bankruptcy Fund of India) for the purposes of insolvency resolution, liquidation and bankruptcy of persons. A default-based test for entry into the insolvency resolution process permits quick intervention when the corporate debtor shows early signs of financial distress. On the distribution of proceeds from the sale of assets, the first priority is accorded to the costs of insolvency resolution and liquidation, followed by the secured debt together with workmen’s dues for the preceding 24 months. Central and State Governments’ dues are ranked lower in priority. The code proposes a paradigm shift from the existing ‘debtor in possession’ to a ‘creditor in control’ regime. Priority accorded to secured creditors is advantageous for entities such as banks. When a firm defaults on its debt, control shifts from the shareholders/ promoters to a Committee of Creditors to evaluate proposals from various players about resuscitating the company or taking it into liquidation. This is a complete departure from the experience under the Sick Industrial Companies Act under which delays led to erosion in the value of the firm. In order to further strengthen the insolvency resolution process, the Government has notified The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 on November 23, 2017. The Ordinance provides for prohibition of certain persons from submitting a resolution plan and specifies certain additional requirements for submission and consideration of the resolution plan before its approval by the committee of creditors.

ARC (ASSET RECONSTRUCTION COMPANY) IN INDIA The Narasimham Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. The huge quantum of NPAs continued to hound the banking sector. It impinged severely on banks performance and their profitability. The Report envisaged creation of an "Asset Recovery Fund" to buy out and take the NPAs off the lender's books at a discount. Asset Reconstruction Company (Securitization Company / Reconstruction Company) is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as a Non-Banking Financial Company under RBI Act, 1934. IBC Academy Publications

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RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI. ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by means of: (a) isolating Non Performing Loans (NPLs) from Financial System (FS) (b) freeing the Banks to focus on their core activities, and (c) Facilitating development of market for distressed assets. Functions of ARC ARC performs the following functions: i. Acquisition of financial assets (as defined u/s 2(L) of SARFAESI Act, 2002) ii. Change or takeover of Management/ Sale or Lease of Business of the Borrower iii. Rescheduling of Debts iv. Enforcement of Security Interest (as per section 13(4) of SARFAESI Act, 2002) v. Settlement of dues payable by the borrower How Does ARC works ARC functions more or less like a Mutual Fund. It transfers the acquired assets to one or more trusts (set up u/s 7 (1) and 7 (2) of SRFAESI Act, 2002) at the price, at which the financial assets were acquired from the originator Banks/ FIs. The trusts issues Security Receipts to Qualified Institutional Buyers, as defined under SARFAESI Act, 2002. The trusteeship of such trusts vest with ARC and it gets only management fee from the trusts. Any upside or downside between the acquired price and the realized price will be shared with the beneficiary of the trusts, Banks/FIs and ARC.

ARCIL (Asset Reconstruction Company (India) Limited) Asset Reconstruction Company (India) Limited (Arcil), incorporated as a public limited company in 2002, is India's first and largest asset reconstruction company, to commence business of resolution of NonPerforming Assets (NPAs) upon acquisition from Indian banks and financial institutions. It is sponsored by prominent banks and financial institutions namely State Bank of India (SBI), IDBI Bank Limited (IDBI), ICICI Bank Limited (ICICI) and Punjab National Bank (PNB). ARCIL has its registered office at Mumbai. ARCIL, through its division 'Arms', has acquired huge portfolio from more than 65 banks and financial institutions since inception. IBC Academy Publications

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CHAPTER - 12

FINANCIAL MARKETS - RATING AGENCIES IN INDIA

DETERMINING CREDITWORTHINESS OF A BORROWER A banker has to be very careful while granting loans. There is a greater risk in unsecured loans. Even in the case of secured loans, the banker should carefully examine the creditworthiness of the borrower.

CREDIT RATING AND CREDIT REPORTING A credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government, but not the individual consumers. The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default. The credit rating determined by credit ratings agencies, represents their evaluation of qualitative and quantitative information for a company or government. Whereas, the evaluation of individuals' credit worthiness is known as credit reporting and done by credit bureaus, or consumer credit reporting agencies, which issue credit scores. Credit Rating Agencies (CRA) are organizations which determine the rate of different type of loans and debts and also fix and assigns the level of quality of companies who issue these debts in the form of loan, debt, bonds and debentures. A Rate is given after analysis of many things, like ability to pay back the loan, credit-worthiness, measurements of relative credit risk etc. IBC Academy Publications

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Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. A poor rating reflect an opinion on a company or government having a high risk of default, based on the agency's analysis of the entity's history and long term economic prospects. How do a company gets high score from Rating Agency? 1. providing high return on investment 2. low risk of bad debts 3. stability of income 4. liquidity of fund If any company is able to fulfill above requirements to his investors, it may able to get the highest credit score in rating. Rating agencies act as a Google search engine for the credit rating agencies. They fix the credit rating scores for borrower companies. Good companies are assigned zero risk at A or AAA credit score, then B with medium and low risk companies, C is low risk companies. Many rating agencies use BBB for medium risk. These are small code for providing score and it is very important for investor to check these rating score before investing their hard earned money in these good or bad schemes. Shortcomings of Rating Agencies 1. It may be highly dangerous for small investors when rating agencies do not act honestly, as it may lead to huge losses on bad investments which solely depended on Credit rating. 2. Rating Agencies may develop cozy relationship with company management, so partiality or undue influence is possible and cannot be completely ruled out. 3. As the ratings assigned are analyzed and created by human beings, so it may involve possible errors of judgments.

CREDIT RATING AGENCIES OPERATING IN INDIA 1. CRISIL LIMITED Credit Rating Information Services of India Limited (CRISIL) established in 1987 as the first credit bureau, is a global analytical company providing ratings, research, and risk and policy advisory services. CRISIL’s majority shareholder is Standard & Poor's, a division of McGraw-Hill Financial and provider of financial market intelligence. CRISIL’s businesses can be divided into three broad categories Ratings, Research and Advisory. IBC Academy Publications

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In India, CRISIL Research is an independent and integrated research house and provides growth forecasts, profitability analysis, emerging trends, expected investments, industry structure and regulatory frameworks. CRISIL Risk Solutions (CRS), the other division of CRIS, provides a range of risk management tools, analytics and solutions to financial institutions, banks, and corporates, in India, and across the world.

2. FITCH RATINGS INDIA PRIVATE LTD. Fitch Ratings, a Fitch, USA Group company is among the top credit rating agencies in India and it was incorporated in 1913. Fitch Ratings provides financial information services in more than 30 countries and has over 2000 employees working at 50+ offices worldwide.

3. ICRA LIMITED ICRA limited is a joint venture between Moody’s Investors and various financial services companies and it belongs to ICRA group. ICRA has four subsidiaries, viz.- ICRA Management Consulting Services Ltd, ICRA Techno Analytics Ltd, ICRA Online Ltd, PT. ICRA Indonesia and ICRA Lanka Ltd. ICRA Limited (ICRA) having its Headquarters at Gurgaon, is an Indian independent investment information and credit rating agency. It was established in 1991, and was originally named Investment Information and Credit Rating Agency of India Limited (IICRA India). It is second largest Indian rating company in term of customer base. It was a joint-venture between Moody's and various Indian commercial banks and financial services companies. The company changed its name to ICRA Limited, and went public on 13 April, 1997. It is listing on the Bombay Stock Exchange and the National Stock Exchange. ICRA’s credit ratings are symbolic representations of its current opinion on the relative credit risks associated with the rated debt obligations/issues. These ratings are assigned on an Indian (that is, national or local) credit rating scale for Rupee (local currency) denominated debt obligations.

4. CREDIT ANALYSIS & RESEARCH LTD. (CARE) CARE Ratings is the third-largest among the credit rating agencies in India as far as Indian Origin Company is concerned. CARE’s rating businesses can be divided into various segments like for banks, IPO grading and sub-sovereigns. Company’s shareholders, includes leading domestic banks and financial institutions in India. It was established in 1993 and its corporate office is located at Mumbai. IBC Academy Publications

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5. BRICKWORK RATINGS INDIA PRIVATE LIMITED Brickwork Ratings was established in 2007 by Sangeeta Kulkarni, as a credit rating firm. The company is registered with SEBI, RBI & NSIC and operates in wide range of areas such as NCD, Bank Loan, Commercial paper, MSME ratings. It is among the leading credit rating companies in India and now expanded to over forty cities in India. The company has its corporate office located at Bengaluru. Brickwork has been recognized by the National Small Industries Corporation of India, Ministry of Micro, Small and Medium Enterprises,Government of India. Brickwork is registered with Ministry of New and Renewable Energy (MNRE) to offer green ratings.

6. SME RATING AGENCY OF INDIA LTD. (SMERA) SMERA Ratings Ltd, founded in year 2005, is a Mumbai based company which has now expanded to 13 more locations. The agency was founded in 2005 by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Limited (D&B) and several leading Govt., Public, Private and MNC banks in the country. Since 2005 SMERA rated over 25,000 MSMEs pan-India. SMERA Ratings Ltd (SMERA), is a rating agency exclusively set up for micro, small and medium enterprises (MSME) in India. It provides ratings for MSME units to raise bank loans at competitive interest rates. However, its registration with Securities Exchange Board of India (SEBI) as a Credit Rating Agency and accreditation by Reserve Bank of India in September 2012 as an external credit assessment institution (ECAI) to rate bank loan ratings under Basel II guidelines has paved way for SMERA to rate/grade various instruments such as: IPO, NCDs, Commercial Papers, Bonds, Fixed Deposits etc.

7. ONICRA CREDIT RATING AGENCY Onicra Credit Rating Agency is a Credit and Performance Rating company based in Gurgaon and founded in 1993. Onicra is among the top 10 credit rating agencies in India offering smart and innovative solutions like risk assessment, analytical solutions and ratings to MSMEs, corporate and individuals.

CREDIT BUREAU (Information Agencies) operating in India A credit bureau is a data collection agency that gathers account information from various creditors and provides that information to a consumer reporting agency. It is not the same as a credit rating agency. Credit information such as a person’s previous loan performance is a IBC Academy Publications

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powerful tool to predict his or her future behavior. This helps lenders assess credit worthiness, their ability to pay back a loan, and can affect the interest rate and other terms of a loan. Interest rates are not the same for everyone, but instead can be based on risk-based pricing, a form of price discrimination based on the different expected risks of different borrowers, as set out in their credit rating. At the same time, consumers also benefit from a good credit information system because it reduces the effect of credit monopoly from banks and provides incentives for the borrowers to repay their loans on time.

1. HIGH MARK CREDIT INFORMATION COMPANY LIMITED High Mark Credit Information Company Limited, founded in year 2005, is a recognized credit rating company in India. It is a joint venture between State Bank of India, Citi Bank, Punjab National Bank, SIDBI, Edelweiss and Shriram City. It provides bureau services, analytic solutions and risk management to banks and financial institutions operating in Micro-finance, Retail consumer finance, MSME, Rural & Cooperative Sectors. It has data base of individuals belonging to 3-tier and 4-tier cities/towns in India. It keeps a record of loan repayment history on credit facilities extended to an individual across the board. The service helps lenders to analyse the risk profile of individuals before extending credit and helps keep non-performing loans in check.

2. EQUIFAX CREDIT INFORMATION SERVICES PRIVATE LIMITED Equifax Credit Information Services Private Limited (ECIS) is one of four credit bureaus in operation in India, and is headquartered in Mumbai. It is a joint venture between Equifax Inc., USA and six leading financial institutions in India, namely Bank of India, Bank of Baroda, Union Bank of India, Sundaram Finance, Kotak Mahindra Prime and Religare Securities. Equifax is an independent entity licensed by the Reserve Bank of India (RBI) and registered under the Credit Information Companies Act, 2005, to provide its members with credit information products and related services. It has banks, NBFCs and other financial institutions as its members. Member institutions are required to provide data regarding every customer’s credit-related activity. It collates this data on individual consumers and businesses and it provides credit information services amongst other credit-related services to lenders, borrowers, businesses and consumers. IBC Academy Publications

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Equifax maintains records of all credit-related activity of individuals and companies including all transactions on loans and credit cards. This extensive data present with the credit bureau enables lenders to make informed decisions while evaluating prospective lenders for loans in India. The company also provides alert services to the member Banks. Any customer making default to a Bank and if it applies elsewhere for opening a new account or availing of a loan, the alert would inform about it to all member banks.

3. EXPERIAN CREDIT INFORMATION COMPNY (INDIA) PRIVATE LIMITED Experian Credit Information Company (India) Private Limited is a leading global credit bureaus with presence in 37 countries. It has large operation in India, and it assumes position of the second largest bureau, after CIBIL being the market leaders. It is a joint venture between Experian of Dublin, Ireland with seven leading financial institutions in India, namely Union Bank of India, Punjab National Bank, Federal Bank, Indian Bank, Axis Bank, Sundaram Finance, and Magma Fin Corp. Experian is the leading global information services company, providing data and analytical tools to clients in more than 80 countries. The company helps businesses to manage credit risk, prevent fraud, target marketing offers and automate decision making. Experian also helps individuals to check their credit report and credit score, and protect against identity theft.

4. CREDIT INFORMATION BUREAU (INDIA) LIMITED (CIBIL) TransUnion-CIBIL Limited is a credit information company operating in India. It maintains credit files on over 600 million individuals and 32 million businesses. TransUnion is one of four credit bureaus operating in India and is part of TransUnion, an American multinational group. TransUnion-CIBIL aggregates consumer borrowing and payment information for the purpose of assessing loan risk and pricing credit (setting the interest rate). It has partnered with Chicago-based TransUnion. Functions of CIBIL CIBIL is a composite credit bureau, which caters to both commercial and consumer segments. The Consumer Credit Bureau covers credit availed by individuals while the Commercial Credit Bureau covers credit availed by non-individuals such as partnership firms, proprietary concerns, private and public limited companies, etc. IBC Academy Publications

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CIBIL has two focus areas:  A Consumer Bureau that deals with consumer credit records; and  A Commercial Bureau that deals with the records of companies and institutions. The aim of CIBIL's Commercial Credit Bureau is to minimise instances of concurrent and serial defaults by providing credit information, pertaining to non-individual borrowers, such as public limited companies, private limited companies, partnership firms, proprietorships, etc. CIBIL maintains a central database of information as received from its members. It collates and disseminates this information on demand to members in the form of commercial Credit Information Reports (CIR) to assist them in their loan appraisal process. Share-holding and Ownership CIBIL, India's first credit information bureau was established by leading Indian Banks, SBI and HDFC, with a shareholding of 40 per cent each, while Dun & Bradstreet Information Services India Private Limited (D&B) and Trans Union International Inc. (TU) holding 10 per cent shares each. D&B and TU have also provided the necessary technical and software support to CIBIL. CIBIL is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its members in the form of credit information reports (CIRs). The Reserve Bank of India (RBI), in its 'Annual Monetary and Credit Policy' for the year 2004-05, had stated that in respect of credit bureaus, 'it is desirable that the objective should be to move towards a sufficiently diversified ownership with no single entity owning more than 10 per cent of the paid-up capital in the first stage and 5 per cent later.' Accordingly, SBI and HDFC have divested their equity stake in favour of significant data providers with representation from all the categories of credit grantors. As on 31 December, 2006, HDFC, SBI, ICICI Bank, D&B and TU, hold 10 per cent stake each in CIBIL, whereas Citicorp Finance (India) Ltd., Standard Chartered Bank, HSBC, Punjab National Bank, Bank of India, Central Bank of India, Union Bank of India, Bank of Baroda and Indian Overseas Bank hold 5 per cent stake each, while the remaining 5 per cent is equally held by GE Strategic Investments Ltd. and Sundaram Finance. Credit history and credit Report A credit report is issued by 4 authorized credit bureaus in India, which are CIBIL, Equifax, CRIF High Mark and Experian. CICs collect information from its various members which include loans and credit IBC Academy Publications

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facilities availed from Bank/various banks and institutions, repayment record thereof, current balances of various loan facilities, new credit facilities availed, new inquiries for loans/advances made to various lenders, default position on various loans/advances, credit cards held and the repayment history, legal actions and suit filed record, if any etc. these all put together is called credit history of a consumer. A credit report is a resource for banks and other financial institutions to evaluate an individual or company’s credit worthiness in order to make a lending decision. There are several reasons why the credit report is highly valued:  Offers a single comprehensive report of the customer’s past and current borrowing and repayment history.  Gives potential lenders a detailed idea of the customer’s spending discipline and ability to fulfill debt obligations.  Gives individuals information on their credit strengths and weaknesses and enables them to take focused steps to improve their credit health.  Ensures greater transparency and streamlining in the loan approval process as customers and lenders have access to the same credit information. Customers know the reasons why their loan has been rejected, and lenders can make quicker decisions on who they can lend to, without spending time and money on background checks.

THE BEST RATING AGENCIES IN WORLD FINANCIAL MARKETS 1. MOODY'S INVESTORS SERVICE, referred to as Moody's, is the bond credit rating business of Moody's Corporation. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities and, with Standard & Poor's and Fitch Group, is considered one of the Big Three credit rating agencies. Moody's, founded by John Moody in 1909 has its Headquarters at New York, United States. In 1975, the company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission. Later, Moody's Investors Service became a separate company in 2000; Moody's Corporation was established as a holding company. The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. In Moody's Investors Service's ratings system securities are assigned a rating from AAA to C, with AAA being the highest quality and C the lowest quality. IBC Academy Publications

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Moody's Investors Service rates debt securities in several market segments related to public and commercial securities in the bond market. These include government, municipal and corporate bonds; managed investments such as money market funds, fixed-income funds and hedge funds; financial institutions including banks and non-bank finance companies; and asset classes in structured finance. 2. STANDARD & POOR'S (S&P): Standard & Poor's Financial Services LLC (S&P), incorporated in 1860, it has its head office at New York City, the USA. It is a division of McGraw Hill Financial that publishes financial research and analysis on stocks and bonds. S&P is known for its stock market indices, such as the U.S.-based S&P 500, the Canadian S&P/TSX, and the Australian S&P/ASX 200. In 1941, Poor's Publishing and Standard Statistics merged to become Standard & Poor's Corp. In 1966, the company was acquired by The McGraw-Hill Companies, extending McGraw-Hill into the field of financial information services. As a credit-rating agency (CRA), the company issues credit ratings for the public and private companies’ debt, and other public borrowers such as governments and governmental entities. S&P issues both short-term and long-term credit ratings. The company rates borrowers on a scale from AAA to D. Intermediate ratings by S&P are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). It also publishes a large number of stock market indices, covering every region of the world, market capitalization level and type of investment (e.g., indices for REITs and preferred stocks). 3. FITCH RATINGS INC. is a jointly owned subsidiary of Hearst Corporation and FIMALAC SA. and is part of the Fitch Group. Fitch Ratings has headquarters in New York, USA, as well as in London, UK. The firm was founded by John Knowles Fitch on December 24, 1913 in New York City as the Fitch Publishing Company. It merged with London-based IBCA Limited in December 1997. In 2000, Fitch acquired both Chicago-based Duff & Phelps Credit Rating Co. (April) and Thomson Financial BankWatch. Fitch Ratings is the smallest of the "big three" NRSROs, covering a more limited share of the market than S&P and Moody's, though it has grown with acquisitions and frequently positions itself as a "tie-breaker" when the other two agencies have ratings similar, but not equal, in scale. Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale from 'AAA' to 'D', first introduced in 1924 and later adopted and licensed by S&P.

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CHAPTER - 13

INDIAN FINANCIAL SECTOR & CAPITAL MARKET

A healthy and vibrant financial market is vital for the economic growth and prosperity of its people. This allows buying and selling of financial products and services, commodities besides also discover prices based on demand and supply besides the impact of global economic environment and its dynamics on our economy. The money market concerns trade in money instruments involving borrowing and lending for short periods. It is part of the financial securities market. The other part is capital market, which deals with long-term instruments like equity or shares, debentures and bonds. It provides longterm finance to the government and companies, mostly large and medium ones.

MONEY MARKET Money Market is a short-term credit market, where short-term monetary assets are borrowed and lent. It consists of borrowers and lenders of shortterm funds. The borrowers are generally merchants, traders, brokers, manufacturers, speculators and the Government. The lenders are commercial banks, insurance companies, finance companies and the Central Bank. The money market brings together the lenders and the borrowers. It does not deal in cash or money. It deals in trade bills, promissory notes and government papers or bills, which are drawn for short-periods. IBC Academy Publications

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The Reserve Bank of India describes money market as “the centre for dealings, mainly of a short-term character, in monetary assets, and it meets the short-term requirements of borrowers and provides liquidity or cash to lenders.” A well-organised and developed money market can help a country to achieve economic growth and stability.

MONEY MARKET AND CAPITAL MARKET (a) Money market provides outlets to commercial banks, non-banking financial concerns, business corporations and other investors for their short-term funds. It enables them to use their excess reserves in profitable investment. (b) Money market also provides short-term funds to businessmen, industrialists, traders etc. to meet their day-to-day requirements of working capital. Money market plays a crucial role in financing both internal as well as international trade. (c) Money market provides short-term funds not only to private businessmen but also to government and its agencies. (d) Money market enables businessmen, with temporary surplus funds, to invest them for a short period. (e) Money market serves as a medium through which the Central Bank of the country exercises control on the creation of credit. (f) Money market is also of great help to the government. The functions of the money market are virtually the same in all the countries of the world. But the institutions, instruments and modes of operation are different in different money markets.

COMPOSITION OF THE MONEY MARKET The money market is composed of several financial agencies that deal with different types of short-term credit. 1. Call Money Market It is a market for short-period loans. Banks, Financial Institutions, Insurance companies, Mutual Funds, Bill brokers and dealers in stock exchange require financial accommodation for very short periods; say overnight and/or 2 days’ to 14 days’ period. Financial Institutions, Mutual Funds, Insurance Companies are generally lenders in the Call money market. The banks prefer this kind of investment for two reasons: Firstly, call loans can be treated almost like cash, and secondly, unlike cash, the call loans earn some income, in the form of interest. Participants in the market are free to discover interest rates, depending on market demand and supply of funds. IBC Academy Publications

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Benefits: a. Helps to bridge temporary mismatch of fund requirements. b. To meet Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio ((CRR) requirements with RBI. c. To meet sudden short-fall in the funds position of Banks/Financial Institutions due to withdrawal by a customer and/or meeting other statutory payments. RBI guidelines: a. Banks, on an average basis, should not lend in excess of 25% of their Capital Funds. However, Banks are allowed to lend upto 50% of their Capital base on any day, during a fortnight. b. Banks, on an average basis, should not borrow in excess of 100% of their Capital Funds or 2% of their Aggregate Deposits, whichever is higher. However, Banks are allowed to borrow upto 125% of their Capital on any day, during a fortnight. 2. Collateral Loan Market Loans are offered against collateral securities like stocks and bonds, they are called ‘collateral loans’ and security offered are in the form of mortgage, pledge etc. The market is known as the collateral loan market and it is geographically diversified.

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3. Banker’s Acceptance Market When goods are sold to anyone on credit, the buyer accepts a bill. The banker adds his credit to the bill by accepting it on behalf of his customer, called Banker’s Acceptance, who has purchased the goods. Such bills can be discounted by Banks and other financial players. The Banker’s Acceptance (BA) is a short term financial product, easily traded between Banks at a discount. These BAs are freely tradable in the market and need not be held till maturity by a Bank. There exists a large Secondary market for these BAs. 4. Treasury Bill Market or Discount Market These are money market short-dated bills issued by Government of India, available on discounted prices to the face value. The treasury bills are promissory note of the government to pay a specified sum after a specified period, say 91 days, 6 months, 364 days etc.. The difference between the Maturity value and the issue price provide yield/returns to the Investor Banks. The treasury bills are purchased by the Banks and other investors and when necessary they are discounted in the discount market. Treasury Bills are issued by Government of India to secure its Short term Loans and these are sold by the Reserve Bank of India on its behalf. Major players in the Treasury Bill Market are Banks, RBI, Non-Banking Financial Institutions, Mutual Funds, Insurance companies like - LIC, UTI, GIC etc. Treasury bills issued by Government of India are for the specified periods of 91 days, 6 months, 364 days. 5. Commercial Treasury Bill Market Commercial Bills are self-liquidating, negotiable, short-term instruments which carries low risk of default, which makes it widely acceptable. These instruments have underlying commercial transactions involving sale of goods on credit. Banks generally discount these instruments/bills keeping a certain margin and allow credit to the beneficiary. In case of need, these Bills are traded by re-discounting in the market where large Financial Instructions (LIC, UTI, Banks, GIC etc.) with surplus funds buy them at a discounted value.

THE REPO MARKET Repo is a money market instrument, which helps in collateralised shortterm borrowing and lending through sale/purchase operations by way of a Re-purchase Agreement. Under a repo transaction, securities are sold by their holder to an investor with an agreement to repurchase them at a predetermined rate and date. These transactions are for overnight and/or upto a max. of 30 days. At present, the Repo Rate, as stipulated by RBI, is reduced to 5.40% as at 31st August, 2019. IBC Academy Publications

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Under Reverse repo transaction, securities are purchased with a simultaneous commitment to resell at a predetermined rate and date. At present, the Reverse Repo Rate, as stipulated by RBI, is reduced to 5.15% as at 31st August, 2019. Term Repo is the same as Repo transaction excepting that the tenor of the arrangement is more than 30 days. Initially Repos were allowed in the Central government treasury bills and dated securities created by converting some of the treasury bills. In order to make the repos market an equilibrating force between the money market and the government securities market, the RBI gradually allowed repo transactions in all government securities and treasury bills of all maturities. Lately, State government securities, public sector undertakings’ bonds and private corporate securities have been made eligible for repos to broaden the repos market.

FINANCIAL INSTRUMENTS UNDER MONEY MARKETS a. CALL MONEY Call or Notice money, is the most liquid money market instrument and an amount is borrowed or lent on demand for a very short period, say overnight to upto 14 days. This product helps Banks and Financial institutions to cover/deploy their short-fall/excesses in day-to-day deficits and surplus profitably. Banks, Co-operative banks, Primary Dealers are permitted to participate in the Call Money market to cover their Cash Reserve requirements, if any. There is no collateral security available for the transaction. This is purely an Inter-Bank market product and interest rates solely depend on market forces. Banks and other players maintain their current accounts with RBI to settle their transactions on a daily basis.

b. TREASURY BILLS Government of India issues Treasury bills through RBI for pre-fixed tenors. These are lowest risk money market products for the short term. The variants of Treasury Bills or simply called T-Bills are as below: 1. 14-days T-Bill (matures in 14 days) is auctioned on every Friday and the notified amount is Rs. 100 crores. 2. 91-days T-Bill (matures in 91 days) is auctioned on every Friday and the notified amount is Rs. 100 crores. 3. 182-days T-Bill (matures in 182 days) is auctioned on every Wednesday and the notified amount is Rs. 100 crores. 4. 364-days T-Bill (matures in 364 days) is auctioned on every Wednesday and the notified amount is Rs. 500 crores.

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c. COMMERCIAL BILLS The commercial bill is a bill drawn by one merchant firm on the other. Generally, commercial bills arise out of domestic transactions and are negotiable instruments. The legitimate purpose of a commercial bill is to avail credit on purchases by the buyer, which is generally extended by a financial intermediary who discounts the instrument and pays the sum to the Buyer instantly. These trade bills are called commercial bills when accepted by the Commercial Banks. A Bank discount such commercial Bills for a max. tenor upto 6months. Commercial bills as instruments of credit are useful to both business firms and banks. It is easier for the central bank to regulate bill finance. Keeping in view these considerations, the RBI has made efforts to develop a bill market in this country and popularize the use of bills.

d. CERTIFICATE OF DEPOSIT (CD) A Certificate of Deposit (CD) is a certificate issued by a Bank to depositors on the deposit held at the bank for a specified period. Thus CDs are similar to the traditional term deposits but are negotiable and tradable in the short-term money markets. In 1989, the RBI allowed Banks to accept Certificate of Deposits, as a corrective measure, to de-regulate the cost of Funds for Banks and Financial Institutions and widening the range of money market instruments and to provide investors a greater flexibility in the deployment of their short-term surplus funds. A CD is a short-term, secured, negotiable instrument issued, issued at a discounted value to Face Value, for period ranging from 90 day to upto 1-year period only. The CDs are permitted to be issued by (1) Commercial banks excluding Regional Rural Banks, and (2) select All-India Financial Institutions. Banks are permitted to adopt an internal policy to set up limit for accepting CDs.

e. COMMERCIAL PAPER (CP) The Commercial Paper (CP) is a short-term, unsecured and negotiable instrument of raising funds by corporates, as a promissory note from a bank, Financial Institution. The issuance of CP is not related to any underlying self-liquidating trade. The CPs are generally sold at discounts. Highly rated corporate, which can obtain funds at a cost lower than their prevailing cost of borrowing from banks are particularly interested in issuing CPs. Institutional investors also find CPs as an attractive outlet for their short-term funds. CPs are issues for a minimum period of 30 days and to a max. of upto 364 days. These instruments are freely negotiable by endorsement and delivery. The Vaghul Committee had strongly recommended the introduction of CPs and IBC Academy Publications

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on his recommendations; the CP was introduced in the Indian money market in January, 1990. The CP can be issued by an eligible listed company with (i) Tangible Net Worth not less than Rs. 4 crore (ii) working capital limits from the banking system of not less than Rs. 4 crores, and (iii) account classification as Standard asset.

f. INTER-CORPORATE DEPOSITS (ICD) Inter-Corporate Deposits or ICD is an unsecured loan availed by one Corporate from another against a Promissory Note. A cash surplus Corporate utilizes ICDs to optimize its profitability by placing funds with a low-rated needy Corporate, at mutually agreed pricing terms. Alternatively, a high-rated Corporate may also avail cheap credit facility from the Banking system and lend under ICD to another low-rated Corporate and earn interest arbitrage. ICDs being an unsecured product, risk of default is relatively higher, unless the standing and credit worthiness of a Corporate is very high.

g. PASS-THROUGH CERTIFICATES (PTC) Pass through Certificates are instruments with cash flows derived from the cash flows of another underlying instrument or loan. The issuer of the PTC is a Special Purpose Vehicle (SPV) which only receives money, from a basket of numerous underlying Loan portfolios, running into thousands in number and passes on the holders of the PTCs. This process is known as Securitization. PTCs would usually have a medium tenor of 2- 5 years as stamp duty cost applicable on PTCs makes the shortduration PTCs unattractive and unviable. PTCs are, usually, promissory notes and are tradable freely and do not attract stamp duty on transfers on secondary trades.

h. DATED GOVERNMENT SECURITIES The Central Government as well as State Governments borrows funds by issuing Long-term dated securities. These are considered Sovereign Risks, the lowest risk securities in the economy. Their date of maturity is specified at the time of issue hence, known as Dated Securities. These securities are sold through open auctions conducted by RBI, on behalf of Government. Coupon Rate or Discount rate on these securities is decided based on the responses received by RBI. Most of these Securities are issued at fixed interest rates, though Government of India issue Zero coupon instruments and/or Floating rate instruments, looking to the market risk appetite.

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CAPITAL MARKETS Short-term credit contracts are classified as money market instruments, while long-term debt contracts and equities are regarded as capital market instruments. Though there is a thin line of demarcation between them because, usually the same institutions participate in both the markets, and there is a flow of funds between the two markets. “Capital Market” represents the institutional arrangements for facilitating the borrowing and lending of long-term funds - usually, long-term debt and equity claims, government securities, bonds, mortgages, and other instruments of long-term debts. The market comprise of a number of Individual and Institutional players including Government Agencies engaged in structured trade of long-term securities, either directly or through intermediaries. It consists of a series of channels which mobilizes the savings of the community and it largely comes from Individuals, Corporate, Banks, Insurance companies and various Govt. Agencies with surplus resources.

Money Market Mutual Funds Money Market Mutual Funds (MMMFs) was introduced by the RBI in April, 1992 with an objective to provide an additional short-term avenue for investment to the individual investors, Corporates, FIs etc. As the initial guidelines were not attractive, the scheme did not receive a favourable response. Hence, with a view to making the scheme more flexible, the RBI permitted certain relaxations in November, 1995. The new guidelines allow banks, public financial institutions and also the institutions in the private sector to set up MMMFs. The ceiling of Rs. 50 crores on the size of MMMFs stipulated earlier, has been withdrawn. The prescription of limits on investments in individual instruments by MMMF has been generally deregulated. MMMFs are allowed to issue units to corporate entities, FIs and others. The scheme entails a lock-in period of investments from 46 days to 15 days. The MMMFs were permitted to make investments in rated corporate bonds and debentures with residual maturity of upto one year. Resources mobilized by the MMMFs could be invested exclusively in call/notice money, treasury bills, CDs, CPs, commercial bills and government securities upto one year. The prudential measure stipulates that the exposure of MMMFs to CPs issued by an individual company should not exceed 3 per cent of the resources of the MMMF.

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CLASSIFICATION OF INDIAN CAPITAL MARKET The Indian capital market is divided into the gilt-edged market and the industrial securities market.  The gilt-edged market refers to the market for government and semi-government securities, backed by the RBI. The securities traded in this market are of stable value. They are mostly demanded by banks and other institutions.  The industrial securities market refers to the market for of new capital, i.e. in the form of shares and debentures of old and new companies. This market is further divided into the new issue market and the old market, meaning the stock exchange. The “new issue market” refers to the raising of new capital in the form of shares and debentures. The old capital market deals with securities already issued. The capital market is also classified into primary capital market and secondary capital market or the stock exchange. Functions (a) Mobilization of financial resources for economic growth. (b) Attracting and mobilization of the foreign capital for economic growth at a rapid pace. (c) Enabling mobilization of financial resources for the projects yielding highest yield or to the projects needed to promote balanced economic development.

STRUCTURE OF INDIAN CAPITAL MARKET Broadly, it may be classified into two markets: Securities Market and GiltEdged Market 1. Securities Market: It represents a market for raising capital or longterm resources for the corporate. This is further classified into two segments : a. Primary Market: It represents a market for raising fresh capital resources by the Corporate in the form of equity shares and Debentures, enabling them to either start a new business venture and/or for expansion/diversification of an existing business. This is also called New Issue market. The companies float an Initial Public Offering (for a new company not yet listed) or a Rights Issue (in case of an existing entity listed on Stock Exchange), inviting public and Institutions to subscribe to their Public Issue. b. Secondary Market: There are a number of Stock Exchanges where trading of shares and Debentures takes place regularly. Consequent upon issue of new Public Issue of a company, its shares IBC Academy Publications

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2.

and securities are listed on specified Stock Exchanges for trading. This is called the Secondary Market. Stock Exchanges reflect the health of the economy and it is like a sensitive Barometer showing the trend of industrial growth and performance of national economy. Stock Exchanges regulate the listed companies and also stipulate stringent norms and procedures, mainly with a view to protect the financial interest of investors. They are also empowered to impose fines and penalize the defaulting companies in case of violation of their norms. Listing of various shares and securities on Stock Exchanges enables the shareholders to, (a) discovery of real value of their equity share depending upon the future outlook and market perception about the company. (b) monitor the price movements and protect their investment. Gilt-Edged Market: Gilt-edge means “of the best quality” and the Government Securities are considered the same. Securities issued by Government and Semi-Government Undertakings, backed by Reserve Bank of India are traded in this market. These are considered to be free from default risk and highly liquid (as their buying and selling is not considered a constraint). Reserve Bank of India (RBI) also conducts open market operations in this market for issue of fresh Government Securities which are bought by Banks, FIs, Mutual Funds, Insurance companies etc.

STOCK EXCHANGES In India, there are 23 Stock Exchanges operating – NATIONAL LEVEL EXCHANGES: 1

Bombay Stock Exchange, Mumbai (BSE)

2

National Stock Exchange, Mumbai (NSE)

3

OTC Exchange of India, Mumbai (OTC)

REGIONAL EXCHANGES: 1 Ahmedabad Stock Exchange, Ahmedabad 2 Bengaluru Stock Exchange, Bengaluru 3 Bhubaneswar Stock Exchange, Bhubaneswar 4 Kolkata Stock Exchange, Kolkata

11 Ludhiana Stock Exchange, Ludhiana 12 Madhya Pradesh Stock Exchange, Indore 13 Chennai Stock Exchange, Chennai 14 Magadh Stock Exchange, Patna

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15 Mangalore Stock Exchange, Mangalore 16 Meerut Stock Exchange, Meerut 17 Pune Stock Exchange, Pune 18 Uttar Pradesh Stock Exchange, Kanpur 19 Vadodara Stock Exchange, Vadodara 20 Capital Stock Exchange of Kerala, Thiruvananthapuram

On 9th July, 2007, SEBI has withdrawn its approval to Saurashtra Stock Exchange, Rajkot, due to its Passive working.

BOMBAY STOCK EXCHANGE (BSE) Bombay Stock Exchange (BSE) formerly called The Stock Exchange, Bombay is a stock exchange located on a landmark building - Phiroze Jeejeebhoy Towers at Dalal Street, Mumbai and it is the oldest stock exchange in Asia. The equity market capitalization of the companies listed on the BSE was US$1 trillion as of December 2011, making it the 6th largest stock exchange in Asia and the 14th largest in the world. The BSE has the largest number of listed companies in the world. As of March, 2012 there are over 5,133 listed Indian companies and over 8,196 scrips on the stock exchange, The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India. While both have similar total market capitalization, share volume in NSE is typically two times that of BSE. HISTORY: The Bombay Stock Exchange, the oldest exchange in Asia, traces its history to the 1850s, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE SENSEX in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000, the BSE used this index to open its derivatives market, trading SENSEX futures contracts. The development of SENSEX options along with equity IBC Academy Publications

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derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Historically, an open outcry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. This automated, screen-based trading platform called BSE On-line trading (BOLT) currently has a capacity of 8 million orders per day. BSE has also introduced the world's first centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform. Indices: SENSEX The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE100 Index from October 14, 1996

NATIONAL STOCK EXCHANGE (NSE) The National Stock Exchange (NSE), founded in year 1992, is located at Mumbai. It is the 12th largest stock exchange in the world by market capitalization and the largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.65 trillion and over 1,696 listings as of December 2015. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. NSE is mutually owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2011, the NSE VSAT terminals, 2799 in total, cover more than 2000 cities across India. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%. HISTORY: The National Stock Exchange of India was set up by Government of India on the recommendation of Pherwani Committee in 1991. Promoted by leading Financial Institutions essentially led by IDBI at the behest of the Government of India, it was incorporated in November, 1992. In April, 1993 it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations in IBC Academy Publications

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November, 1994 while operations in the Derivatives segment commenced in June 2000. MARKETS Currently, NSE has the following major segments of the capital market: Equity, Futures and options, Retail debt market, Wholesale debt market, Currency futures, Mutual fund and Stocks lending and borrowing. Indices: NSE NIFTY The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. “S&P CNX Nifty” is owned and managed by India Index Services & Products Ltd. (IISL), a joint venture between NSE and CRISIL, a Rating Agency. NIFTY comprise of well diversifies and most active 50 stocks selected from 21 sectors of the economy. The Indices – NIFTY serves various purposes such as, Benchmarking the Funds portfolio, Index based Funds and Index Derivatives.

OTC EXCHANGE OF INDIA (OTCEI) OTC Exchange of India (OTCEI) also known as Over-the-Counter Exchange of India, based in Mumbai, was incorporated in 1990 under the Companies Act, 1956. It is the first exchange for small companies. OTCEI was the first screen-based nation-wide Stock Exchange in India and its share-holding is owned by host of Financial Institutions, such as UTI, ICICI, IDBI, SBI Capital Markets (SBICAPS),IFCI, GIC and CanBank Financial Services. While most of the other Stock Exchanges, trading take place by gathering in the Exchange and outcry openly for bidding and settlement of a trade, in a traditional way, at OTCEI the entire process of bidding, settlement etc. takes place on a highly advanced, technology driven, screen-based where complete transparency and accuracy of transaction is maintained. It was set up to access high-technology enterprising promoters in raising finance for new product development in a cost effective manner and to provide transparent and efficient trading system to the investors. OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India and others and is a recognized stock exchange under the SCR Act.

COMMODITIES EXCHANGE MULTI COMMODITY EXCHANGE OF INDIA LTD. (MCX) Multi Commodity Exchange of India Ltd (MCX) is an independent commodity exchange was established in year 2003 and is based in IBC Academy Publications

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Mumbai. The turnover of the exchange for the fiscal year 2014-15 was Rs. 51.84 lakh crore, and in terms of contracts traded, it was in 2009 the world's sixth largest commodity exchange. MCX offers futures trading in bullion, ferrous and non-ferrous metals, energy, and a number of agricultural commodities (mentha oil, cardamom, potatoes, palm oil and others). It is regulated by the Forward Markets Commission. MCX is India's No. 1 commodity exchange with 84% market share in 201415. In 2014-15, daily average turnover of MCX is Rs. 20,328.26 crore. MCX has also set up in joint venture the MCX Stock Exchange. Earlier spin-offs from the company include the National Spot Exchange, an electronic spot exchange for bullion and agricultural commodities, and National Bulk Handling Corporation (NBHC) India's largest collateral management company which provides bulk storage & handling of agricultural products. Earlier, MCX was regulated by the Forward Markets Commission (FMC), which got merged with the SEBI on 28 September 2015. Thereafter, MCX is being regulated by the Securities and Exchange Board of India (SEBI). Key shareholders State Bank of India, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, PSU Banks, Kotak Mahindra Bank, HDFC Bank,, SBI Life Insurance Co. Ltd., ICICI ventures, IL & FS, Merrill Lynch, and New York Stock Exchange. Commodities traded  Metal - Aluminium, Aluminium Mini, Copper, Copper Mini, Lead, Lead Mini, Nickel, Nickel Mini, Zinc, Zinc Mini, Brass(futures)  Bullion - Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal (New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000.  Agro Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed, RBD Palmolien, Black Pepper.  Energy - Brent Crude Oil, Crude Oil, Crude Oil Mini, Natural Gas.

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CHAPTER - 14

CO-OPERATIVE BANKS & REGIONAL RURAL BANKS IN INDIA

CO-OPERATIVE BANKS Co-operative banks, another component of the Indian banking organisation, originated in India with the enactment of the Co-operative Credit Societies Act of 1904, which provided for the formation of cooperative credit societies. Under the Act of 1904, a number of cooperative credit societies were started. Owing to the increasing demand of cooperative credit, a new Act was passed in 1912, which provided for the establishment of cooperative central banks by a union of primary credit societies. The Anyonya Co-operative Bank was the first Co-operative Bank in Asia. Co-operative Bank is an institution established on the cooperative basis and dealing in ordinary banking business. Like other banks, the cooperative banks collect funds through shares. They accept deposits and grant loans. They are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities. STRUCTURE OF CO-OPERATIVE BANKS Co-operative banking in India is federal in its structure. It has three sections. At the top of the structure is the State Cooperative Bank which is the apex bank at the state level. At the intermediate level there are the central unions or the Central cooperative banks. There is generally one central cooperative bank for each district. At the base of the pyramid there are the Primary credit societies (PACS) which cover the small towns and IBC Academy Publications

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villages. Each higher level institution is a federation of those below, with membership and loan operations restricted to the affiliated units.

A. PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACS) A co-operative credit society, commonly known as the Primary Agricultural Credit Society (PACS) is an association of persons residing in a particular locality. It can be started with ten or more persons. The members generally belong to a village. The membership is open to all the residents of the locality or village. Hence, people of different status are brought together into the common organisation.

Each member contributes to the share capital of the society. The value of each share is generally nominal so as to enable even the poorest farmers to become a member. The members have unlimited liability, that is, each member is fully responsible for the entire loss of the society, in the event of failure. This means that all the members should know each other fully well. The management is honorary, the only paid member normally being the Secretary - Treasury. Loans are given for short periods, normally for one harvest season, for carrying on agricultural operations, and the rate of interest is quite low, normally at about 6 to 7 per cent. Dividends are not declared and profits are generally used for the welfare and improvement of the village. The village co-operative society was expected to attract deposits from among the well-to-do members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits. Shortfalls of PACS Though the PACS have made remarkable progress, their shortfalls are as under: IBC Academy Publications

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1.

2.

It has failed to adequately fulfill credit needs of the small farmers and tenants. The Banking Commission (1972) observes that PACS neither provided credit for all productive activities of the farmers nor fulfilled their credit needs. A large number of them lacked potential viability.

B. CENTRAL CO-OPERATIVE BANKS The Central Co-operative Banks were established in terms of Co-operative Societies Act, 1912. The central co-operative banks are federations of primary credit societies in a specific area, normally a district/local town. These banks have a few private individuals’ shareholders, who provide both finance and management. Central co-operative banks have three sources of fund viz, (a) their own share capital and reserves, (b) deposits from the public, and (c) loans from the State Co-operative Banks. All members of the Bank constitute General Body, which is managed by the board of Directors elected every year by the General Body, on the basis of “one member-one vote”. The activities of the Bank are managed by trained professional employees recruited by the Management. Functions 1.

2. 3. 4. 5. 6. 7.

They finance the primary credit societies. By furnishing credit to the primary societies, CCBs serve as an important link between these societies at the base level and the money market of the country. They accept deposits from the public. They also provide remittance facilities. They grant credit to their customers on the security of first class gilt-edged securities, gold etc. They act as balancing centers by shifting the excess funds of a surplus primary society to the deficit ones. They keep watch on their debtor primary societies working and progress of recovery of loans. To take up non-credit activities like the supply of seeds, fertilizers and consumer goods necessary to the farmers. To prepare proposals for better utilization of the financial resources of PACS.

Defects of CCBs 1. They violate the principle of co-operation by working on the lines of commercial banks. 2. They do not appoint experts to examine the creditworthiness of the primary societies. Hence, there have been problems of recovery and overdues. IBC Academy Publications

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3. 4. 5. 6.

They combine financing and supervisory work together. As a result, supervisory work has been a failure in many cases. Some CCBs have been utilizing their reserve funds as working capital. This is not a very sound practice. The CCBs charge very high interest rates to meet their high administration costs of small and uneconomic units. Many CCBs are financially and organisationally weak.

C. STATE CO-OPERATIVE BANKS The state co-operative banks, also known as apex banks, form the apex of the co-operative credit structure in each state. The State Co-operative Bank is a federation of Central Co-operative Banks that acts as a watch-dog of the Co-operative Banking structure in the state. They obtain their funds mainly from the general public by way of deposits, loans and advance from the Reserve Bank and their own share capital and reserves. Anywhere between 50-90 per cent of the working capital of the SCBs are contributed by the Reserve Bank. Mac lagan Committee recommended the establishment of these State Cooperative banks in 1915. Each state has an Apex Co-operative Bank which grants Loans and advances to the Central Co-operative Banks, supervises and inspects their functioning. Functions 1. 2. 3.

4. 5. 6. 7.

The SCB acts as a banker to CCBs. A SCB serves as a leader of cooperative movement in a state. They have no power to supervise or control the activities of the affiliated CCBs. In the absence of a district co-operative bank in a state, the SCB may give district financial assistance to the primary credit societies. It co-ordinates the policy of the government with the co-operative principles. It also brings about co-ordination between RBI, money market and co-operative credit societies. It gives a number of subsidies to DCBs for improving co-operative credit societies. It simplifies loan distribution system to enable its member to get loans very easily. It helps the government in framing the schemes for the development of co-operatives in the state.

Defects SCBs also have the same defects of the CCBs. The following are the major defects of SCBs: IBC Academy Publications

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1. 2. 3.

They mix up commercial banking activities with co-operative banking. They have insufficient share capital. They utilize their reserve funds as working capital.

Present Position of Co-operative Banks In the real sense, the co-operative movement was from the year 1912, when the defects of the Co-operative Society Act, 1904 were removed. But the progress has been significant upon the Reserve Bank of India taking keen interest in the growth of the co-operative movement. Importance or Benefits of Co-operative Banks 1. 2.

3. 4.

5. 6.

They have provided cheap credit to farmers. They discouraged unproductive borrowing. They have reduced the importance of money-lenders. More than 60% of the credit needs of agriculturists are now met by cooperative banks. Thus, co-operative banks have protected the rural population from the clutches of money-lenders. Small and marginal farmers are being assisted to increase their income. They have promoted saving and banking habits among the people, especially the rural people. Instead of hoarding money, the rural people tend to deposit their savings in the co-operative or commercial banks. They have undertaken several welfare activities. They have also taken steps to improve the morals, polity and education. They have greatly helped in the introduction of better agricultural methods. Credit is made available for purchasing improved seeds, chemical fertilizers and modern implements cheaply and sells their produce at good prices.

Problems or Weaknesses of Co-operative Banks 1.

2.

3.

Excessive Overdues: The borrowers from the co-operative banks are not repaying the loans promptly and regularly. There are heavy overdues. Lack of will and discipline among the farmers to repay loans is the principal factor responsible for the prevalence of overdues of co-operatives. Inefficient Societies: The co-operative credit societies are managed by people who have no or little knowledge, training or experience of co-operatives. Regional Disparities: Co-operative benefits are not evenly distributed between different states. There is the problem of IBC Academy Publications

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4.

5.

6.

7.

8.

regional disparities in the distribution of co-operative credit. The loans advanced per member vary widely. Benefits to Big Land Owners: Most of the benefits from cooperative have been cornered by the big land owners because of their strong socio-economic position. As a result, small farmers are neglected by co-operative societies. Dependence on Outside Resources: Co-operative societies or banks depend heavily on outside resources. State Governments and NABARD are the main sources of funds to co-operative societies. Political Interference: The co-operative societies are dominated by political parties and politicians, resulting in favouritism and nepotism. Inadequate Coverage: Co-operatives have now covered almost all the rural areas of the country. But the membership is only around 45% of the rural families. The weaker sections of the rural community are still not adequately represented in the membership roll. Dual Control: There is dual control of the co-operatives, on the one side the NABARD and on the other by the State Government under the Co-operative Societies Act. Cooperative societies are treated as part and parcel of the Government has discouraged initiative in management.

REGIONAL RURAL BANKS (RRBs) In spite of the rapid expansion programmes undertaken by the commercial banks in recent years, a large segment of the rural economy was still beyond the reach of the organized commercial banks. To fill this gap it was thought necessary to create a new agency which could combine the advantages of having adequate resources but operating relatively with a lower cost at the village level. Narasimham Committee on rural credit recommended the establishment of Regional Rural Banks (RRB) to meet the banking needs of rural areas. The then Prime Minister, announced on July 1, 1975, the 20-point economic programme of the Government of India, which included liquidation of rural indebtedness, in stages and provides institutional and cheap credit to farmers and artisans in rural India. The Government of India promulgated on September 26, 1975, the Regional Rural Bank Ordinance, to set up regional rural banks in the country; later the Ordinance was replaced by the Regional Rural Banks Act, 1976. The main objective of the regional rural banks is to provide credit and other facilities particularly to the small and marginal farmers, agricultural labourers, IBC Academy Publications

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artisans and small entrepreneurs so as to develop agriculture, trade, commerce, industry and other productive activities in rural areas. Initially, the five RRBs were set up on 2nd October, 1975 which was sponsored by State Bank of India, Syndicate Bank, Punjab National Bank, United Commercial Bank and United Bank of India. The first RRB commenced operation in the name of “Prathama Grameen Bank”. Presently there are 45 RRBs operating in India The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State. RRBs also perform a variety of different functions, such as:  Providing banking facilities to rural and semi-urban areas.  Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.  Providing Para-Banking facilities, like - locker facilities, debit and credit cards, mobile banking, internet banking, UPI etc.  Small financial banks. Objectives 1.

2. 3.

4. 5.

To provide credit and other facilities particularly to the small and marginal farmers, agricultural labourers, artisans, small entrepreneurs and other weaker sections in rural areas. To develop agriculture, trade, commerce, industry and other productive activities in the rural areas. To provide easy, cheap and sufficient credit to the rural poor and backward classes and save them from the clutches of money lenders. To encourage entrepreneurship in rural areas. To increase employment opportunities in rural areas.

Capital Structure At present, the authorized capital of Regional Rural Banks is Rs. 5 crores, and the issued capital is Rs. 1 crore. The shares of regional rural banks are to be treated as “approved securities.” The Regional Rural Banks were owned by the Central Government, the State Government and the Sponsor Bank hold shares in the ratios as: - Central Government – 50%, State Government – 15% and Sponsor Banks – 35% Management Every RRB is established by the “Sponsor Bank”, generally a Public Sector bank. The Steering Committee on RRBs identifies the districts requiring RRBs. Following which, the Central Government sets up RRBs in consultation with the State Government and the Sponsor Bank. IBC Academy Publications

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RRBs are managed by their Board of Directors. The general administration, supervision, management of business affairs of the Bank rests with the 9 members of the Board of Directors. Govt. of India nominates 3 members, the respective State Government nominates 2 members and the Sponsor Bank nominates 3 members. Responsibility of Sponsor Bank The sponsor bank helps and aids the RRBs sponsored by it for (i) subscribe to its share capital (ii) train the manpower (iii) provide managerial and financial assistance for the first 5 years of existence or for the extended period. The Sponsor bank is empowered to supervise and regulate the functioning of the RRBs, to conduct periodic inspections, conduct audits and also suggest suggestive measure for improvements wherever felt in their functioning. Features of Regional Rural Banks 1. 2. 3. 4. 5. 6.

The regional rural bank, like a commercial bank, is a scheduled bank. The RRB is a sponsored bank. It is sponsored by a scheduled commercial bank. It is deemed to be co-operative society for the purposes of Income Tax Act, 1961. The area of operations of the RRB is limited to a specified region relating to one or more districts in the concerned state. RRB charges interest rates as adopted by the co-operative societies in the state. The interest paid by the RRB on its term deposits may be 1% or 2% more than that is paid by the commercial banks.

Functions of Regional Rural Banks 1. 2.

3.

4.

Granting of loans and advances to small and marginal farmers and agricultural labourers, either individually or in groups. Granting of loans and advances to co-operative societies, agricultural processing societies and co-operative farming societies primarily for agricultural purposes or for agricultural operations and other related purposes. Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce and industry or other productive activities within a specified region. Accepting various types of deposits. IBC Academy Publications

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Progress Achieved by Regional Rural Banks 1.

2.

3.

Number of Banks: The first five regional rural banks were started at Moradabad and Gorakhpur in Uttar Pradesh, Bhiwani in Haryana, Jaipur in Rajasthan and Malda in West Bengal. On 31 March 2006, there were 133 RRBs (post-merger) covering 525 districts with a network of 14,494 branches. Currently, RRB's are going through a process of amalgamation and consolidation. 25 RRBs have been amalgamated in January 2013 into 10 RRBs. This counts 67 RRBs till the first week of June 2013. At present there are 45 RRBs, as of April, 2019. Creation of Local Employment Opportunities: Regional rural banks have been taking active steps to create employment for the local people and achieved good success. Integrated Rural Development Programme (IRDP Scheme): Regional rural banks have been taking active part in the Integrated Rural Development Programme. Regional rural banks, thus, have achieved notable progress in expanding branch network and extending credit support to weaker sections in rural areas. They exist as rural banks of the rural people.

Problems faced by RRBs 1.

2.

3.

4.

5.

6.

Existence of Overdues: The most serious problem faced by RRBs is the existence of heavy overdues. Overdues are rising continuously. Losses: Most of the regional rural banks are not economically viable. They have been continuously incurring losses for years together. Limited Channels of Investment: Since the regional rural banks have to lend to small and marginal farmers and other weaker sections of the society, the channels of investment are limited. Therefore, their earning capacity is low. Difficulties in Deposit Mobilization: Regional rural banks have been facing a number of practical difficulties in deposit mobilization. Richer sections of the village society show least interest in depositing their money in these banks because they are not served by these banks. Procedural Rigidities: Regional rural banks follow the procedures of the commercial banks in the matter of deposits and advancing loans. Such procedures are highly complicated and timeconsuming from the villager’s point of view. Hasty Branch Expansion: There is haste and lack of coordination in branch expansion. It has resulted in lopsidedness in branch IBC Academy Publications

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7.

8.

9.

expansion. It has increased infrastructure costs and reduced profitability. High Establishment Costs: The salary structure of regional rural banks has been revised with the result that establishment costs have gone up. and banks are unable to cover the increased costs, since their customers are specified weaker sections enjoying concessional interest on loans and advances. Multi-agency System of Control: Regional rural banks are controlled by many agencies. The present multi-agency control of regional rural banks involves sponsor banks, NABARD, Reserve Bank, State Governments and the central government. This is not conducive to high operational efficiency and viability. Inefficient Staff: As the salary structure of regional rural banks is not attractive when compared to other banks, efficient persons have a tendency to shift to commercial banks to improve their salary and career. Besides, many employees are not willing to work in villages. There is no true local involvement of the bank staff in the villages they serve.

Suggestions for Re-organisation and Improvement Several expert groups have made a number of suggestions necessary to reorganise the structure and improve the working of regional rural banks. The important suggestions are given below: 1. These banks should continue to work as rural banks of the rural poor. 2. The state governments should also take keen interest in the growth of Regional Rural Banks. 3. Participation of local people in the equity share capital of the regional rural banks should be allowed and encouraged. 4. The regional rural banks should be linked with primary Agricultural co-operative societies and Farmer’s service societies. 5. The regional rural banks should be strongly linked with the sponsoring commercial banks and the Reserve Bank of India. 6. A uniform pattern of interest rate structure should be devised for the rural financial agencies. 7. The regional rural banks must strengthen effective credit administration by way of credit appraisal, monitoring the progress of loans and their efficient recovery. 8. The regional rural banks should increase their consumption loans to the villagers and weaker sections. They should be allowed to increase their loans to richer sections of the society. IBC Academy Publications

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9.

The regional rural banks should be permitted to provide full range of banking services, such as, remittance and other agency services, which would help a lot in developing banking habits among the villagers. 10. The present multi-agency system of control of regional rural banks should be replaced by single agency control. 11. As far as possible, natives should be appointed to work in them. The employees should be given suitable training. 12. Effective steps should be taken to prevent the misuse of funds by borrowers and willful defaulters. 13. The image of regional rural banks should be improved. They should not be identified as “Second class” banks or an extension of the urban-oriented commercial banks. They must develop their own identity. Regional rural banks have an important role to play in our rural economy as they have to act as alternative agencies to provide institutional credit in rural areas. They have not been set up to replace co-operative credit societies but supplement them. What the commercial banks have not done in rural areas, regional rural banks are trying to do it now. As such, regional rural banks should be specially assisted to solve their problems and be made real promoters of growth in rural India.

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CHAPTER – 15

INSURANCE COMPANIES IN INDIA

Insurance companies offer protection against unforeseen losses and eventualities caused either nature or man-made. They offer either Life insurance to the public or Non-life Insurance to public and corporate sector whereby Insurance protection to equipments, Vehicles, Buildings, etc. are provided. These companies pool the insurance premium on the Insurance Policies collected from their customers and re-invest the resources into markets for nation building.

HISTORY In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine and/or nation-building activities. Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance Company was started by Mrs. Anita Bhavsar in Kolkata. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. The twentieth century saw many insurance companies starting their business. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premiumIBC Academy Publications

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rate tables and periodical valuations of companies should be certified by an actuary. An actuary is a business professional who deals with the measurement and management of risk and uncertainty. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. The Government of India issued an Ordinance on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973. Till 1990s, LIC had monopoly, when the Insurance sector was re-opened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC) and its four subsidiary companies. With effect from December, 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.

ACTS & REGULATIONS The insurance sector went through a full circle of phases from being unregulated to completely regulated and then currently being partly deregulated. It is governed by a number of acts.  In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business.  The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business.  On January 19, 1956, through the Life Insurance Corporation Act, all 245 insurance companies operating then in the country were merged into one entity, the Life Insurance Corporation of India.  The General Insurance Business Act, 1972 was enacted to nationalize about 100 general insurance companies then and IBC Academy Publications

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 

subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance and United India Insurance, which were headquartered in each of the four metropolitan cities. Until 1999, there were no private insurance companies in India. The government then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies. A minimum capital of US$80 million (Rs.400 crores) is required by legislation to set up an insurance business. Insurance is a subject listed in the concurrent list in the 7th Schedule to the Constitution of India where both centre and states can legislate. The insurance sector has gone through a number of phases by allowing private companies to solicit insurance and also allowing foreign direct investment of upto 26%, the insurance sector has been a booming market. However, the largest life-insurance company in India is still owned by the government.

INSURANCE COMPANIES IN INDIA IRDA has approved registration to 12 private life insurance companies and 9 general insurance companies. If the existing public sector insurance companies are considered then, there are presently 13 insurance companies in the life business and 13 companies functioning under general insurance business. General Insurance Corporation has become the "Indian reinsurer" for underwriting only reinsurance business.

LIST OF INSURANCE COMPANIES IN INDIA A. LIFE INSURERS Public Sector

Private Sector

Life Insurance Corporation of India

Max NewYork Life Insurance Co. Ltd

Private Sector

MetLife Insurance Company Limited Om Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Company Limited TATA AIG Life Insurance Company Limited AMP Sanmar Assurance Company Limited

Allianz Bajaj Life Insurance Company Limited Birla Sun-Life Insurance Company Limited HDFC Standard Life Insurance Co. Limited ICICI Prudential Life Insurance Co. Limited

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Dabur CGU Life Insurance Co. Pvt. Ltd

B. GENERAL INSURERS Public Sector National Insurance Company Limited New India Assurance Company Limited Oriental Insurance Company Limited United India Insurance Company Limited Private Sector Bajaj Allianz General Insurance Co. Limited ICICI Lombard General Insurance Co. Ltd. IFFCO-Tokio General Insurance Co. Ltd.

Reliance General Insurance Co. Ltd Royal Sundaram Alliance Insurance Co. Ltd. TATA AIG General Insurance Co. Ltd Cholamandalam General Insurance Co. Ltd. Export Credit Guarantee Corporation HDFC Chubb General Insurance Co. Ltd. RE-INSURER General Insurance Corporation of India

SOME LIFE INSURANCE COMPANIES 1. LIFE INSURANCE CORPORATION OF INDIA (LIC) The Life Insurance Corporation of India came into existence on July 1, 1956 and the Corporation began to function on September 01, 1956. The Corporation gets a large amount as insurance premium and has been investing in almost all sectors of the economy, viz., public sector, private corporate sector, co-operative sector, joint sector and now it is one of the biggest term lending institutions in the country. The paid-up capital of the Corporation is Rs.5 crores. The Corporation has an accumulated Life Insurance Fund of over Rs. 4,500 crores. The LIC of India plays an important role in the capital market and is the largest institutional investor. Like banks, the LIC is also a captive investor in government bonds. Under the laws, the LIC is required to hold 87.5% of its assets in the form of government and other approved securities and loans to approved authorities for social schemes such as housing, electricity, water supply etc., and remaining 12.5% can be invested in the private sector. The Corporation subscribes to and underwrites the shares, bonds and debentures of several Financial Corporations and Companies and grants term loans. It maintains close contacts with other financial institutions, such as Industrial Development Bank of India, Unit Trust of India, Industrial Finance Corporation of India etc., for its investments. The LIC is a very powerful and dominating factor in the securities market in India. It subscribes to the share capital of companies, both preference and IBC Academy Publications

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equity and also to debentures and bonds. Its share holding extends to a majority of large and medium-sized non-financial companies and is significant in size. There is no doubt, the Corporation acts as a kind of downward stabilizer of the stock market, as the continuous inflow of fresh funds enables it to buy, even when the stock market is weak. About 50% financial assistance is provided by the LIC in the form of rupee loans, about 20% in the underwriting shares (preference and ordinary) and about 25% in underwriting debentures.

2. INDIAFIRST LIFE INSURANCE COMPANY IndiaFirst Life Insurance Company, a life insurance company, is a joint venture between two of India’s public sector banks – Bank of Baroda (44%) and Andhra Bank (30%), and UK’s financial and investment company Legal & General (26%). It was incorporated in November, 2009. It has its headquarters in Mumbai. IndiaFirst Life made more than Rs. 200 crores in turnover in just four and half months since the insurance company became operational. IndiaFirst Life insurance company is headquartered in Mumbai. IndiaFirst is the first life insurance company to be recommended for ISO certification within 7 months of inception. The “Bancassurance” (Bank Insurance Model) using the existing customer base of the promoter banks. It has over 4800 promoter bank branches, in 1,000 cities and towns in India. As of December, 2011, the company has 1,200 plus employees.

3. ING VYSYA LIFE INSURANCE COMPANY LIMITED ING Vysya Life Insurance Company Limited (ING Life Insurance India) is a life insurance company head quartered in Bangalore. ING Vysya Life Insurance recently achieved the significant milestone of completing 10 years of operations in India. The company is a joint venture between Exide Industries and ING Insurance International B.V. ING Life Insurance India is currently present in over 200 cities and serves over 1 million policy holders in India.

TYPES OF LIFE INSURANCE PRODUCTS Life insurance may be divided into two basic classes: temporary and permanent; or the following sub-classes: term, universal, whole life and endowment life insurance. TERM INSURANCE Term assurance provides life insurance coverage for a specified term. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else. IBC Academy Publications

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PERMANENT LIFE INSURANCE Permanent life insurance is life insurance that remains active until the policy matures, unless the owner fails to pay the premium when due. The policy cannot be cancelled by the insurer for any reason except fraudulent application, and any such cancellation must occur within a period of time defined by law (usually two years). The four basic types of permanent insurance are whole life, universal life, limited pay and endowment. ACCIDENTAL DEATH Accidental death is a limited life insurance designed to cover the insured should they pass away due to an accident. Accidents include anything from an injury and upwards, but do not typically cover deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies. RELATED PRODUCTS Riders are modifications to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy owner. A common rider is accidental death (see above). Another common rider is a premium waiver, which waives future premiums if the insured becomes disabled.  Joint life insurance is either a term or permanent policy insuring two or more persons with the proceeds payable on either the first or second death.  Survivorship life is a whole life policy insuring two lives with the proceeds payable on the second (later) death.  Single premium whole life is a policy with only one premium which is payable at the time the policy matures.  Modified whole life is a whole life policy featuring smaller premiums for a specified period of time, after which the premiums increase for the remainder of the policy. GROUP LIFE INSURANCE Group life insurance is term insurance covering a group of people, usually employees of a company/members of a union. Individual proof of insurability is not normally a concern in the underwriting but the size, turnover and financial strength of such group. SENIOR AND PRE-NEED PRODUCTS Insurance companies have, in recent years, developed products to offer to niche markets, most notably targeting the senior market to address needs IBC Academy Publications

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of an ageing population. Many companies offer policies tailored to the needs of senior applicants. These are often low to moderate face value whole life insurance policies. Pre-need (or prepaid) insurance policies are whole life policies that, although available at any age, are usually offered to older applicants. This type of insurance is designed specifically to cover funeral expenses when the insured person dies.

NON-LIFE INSURANCE COMPANIES Re-Insurer: GENERAL INSURANCE CORPORATION OF INDIA (GIC Re) General Insurance Corporation of India (GIC Re) is the sole reinsurance company in the Indian insurance market with over three decades of experience. GIC has its registered office and headquarters in Mumbai. The entire general insurance business in India was nationalised by the Government of India (GOI) through the General Insurance Business (Nationalisation) Act (GIBNA) of 1972. 55 Indian insurance companies and 52 other general insurance operations of other companies were nationalized through the act. On 22 November 1972, General Insurance Corporation of India (GIC) was incorporated, in pursuance of Section 9(1) of GIBNA, under the Companies Act, 1956 as a private company limited. GIC was formed to control and operate the business of general insurance in India. The GOI transferred all the assets and operations of the nationalized general insurance companies to GIC and other public-sector insurance companies. After a process of mergers and consolidation, GIC was re-organized with four fully owned subsidiary companies: National Insurance Company Limited, New India Assurance Company Limited, Oriental Insurance Company Limited and United India Insurance Company Limited. GIC and its subsidiaries had a monopoly on the general insurance business in India until the landmark Insurance Regulatory and Development Authority Act (IRDA Act) of 1999 came into effect on 19 April, 2000. The act along with the subsequent amendments ended the monopoly of GIC and its subsidiaries and liberalized the insurance business in India. In November, 2000, GIC was re-notified as India's Reinsurer, but its supervisory role over its subsidiaries was ended. This was followed by the General Insurance Business (Nationalisation) Amendment Act of 2002. Coming into effect from 21 March, 2003, this amendment ended GIC's role as a holding company of its subsidiaries. The ownership of the subsidiaries was transferred to the Government of India, which in turn divested its stake in the companies through listings on Indian stock exchanges. As a result of these reforms, GIC became the sole Re-Insurer in India, and is now called GIC Re. Indian insurance companies are required by law to cede IBC Academy Publications

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10% of every policy value to GIC Re, subject to certain limitations and exceptions. GIC Re has diversified its operations and is now emerging as an important Re-Insurer in SAARC countries, Southeast Asia, Middle East and Africa. GIC Re has also expanded its international operations through branches in London and Moscow. GIC Re has a rating of A- (Excellent) from A. M. Best for its financial strength.

1. NATIONAL INSURANCE COMPANY LIMITED (NICL) National Insurance Company Limited (NICL), one of the largest and fastest growing general insurance companies in India, is headquartered at Kolkata. It was established in 1906 and after nationalization in 1972, NICL operated as a subsidiary of General Insurance Corporation of India (GIC). NICL was spun off as a distinct company under the General Insurance Business (Nationalisation) Amendment Act in 2002. National Insurance Company Limited was incorporated in 1906 with its registered office in Kolkata. Consequent to passing of the General Insurance Business Nationalisation Act in 1972, 21 Foreign and 11 Indian Companies were amalgamated with it and National became a subsidiary of General Insurance Corporation of India (GIC), which is fully owned by the Government of India. National Insurance Company Ltd (NIC) is one of the leading public sector insurance companies of India, carrying out non-life insurance business. NIC has a network of about 1,000 offices, manned by more than 16,000 skilled personnel, is spread across the country. NIC transacts general insurance business of Fire, Marine and Miscellaneous insurance. The Company offers protection against a wide range of risks to its customers under Banking, Telecom, Aviation, Shipping, Information Technology, Power, Oil & Energy, Healthcare, Tea, Automobile, Education, Environment, Space Research etc. As of 2010, NICL holds a “AAA” rating from Rating agency, CRISIL, a subsidiary of Standard and Poor's Company.

2. THE NEW INDIA ASSURANCE CO. LTD. The New India Assurance Co. Ltd. is the largest General Insurance Company of India on the basis of gross premium collection inclusive of foreign operations. This Company is based in Mumbai. It is one of the five Public Sector insurance companies in India. It was founded by Mr. Dorab Tata in 1919 and it was nationalized in the year 1973. Previously, it was a subsidiary of the General Insurance Corporation (GIC). But as GIC became a reinsurance company, all of its four primary insurance subsidiaries, New India Assurance, United India Insurance, Oriental Insurance and National Insurance got autonomy. New India Assurance has been operating both in India and foreign countries. In the recent past, it has succeeded in forging tie-ups with some of the leading public sector banks in India, such as State Bank of India, IBC Academy Publications

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Central Bank of India, Corporation Bank and United Western Bank to increase its distribution network.

3. THE ORIENTAL INSURANCE COMPANY LTD. The Oriental Insurance Company Ltd. was incorporated at Bombay on 12 September, 1947. The Company was a wholly owned subsidiary of the Oriental Government Security Life Assurance Company Ltd and was formed to carry out General Insurance business. The Company was a subsidiary of Life Insurance Corporation of India from 1956 to 1973, till the General Insurance Business was nationalized. In 2003, shares of the company held by the General Insurance Corporation of India were transferred to Central Government. Oriental Insurance with its Head Office at New Delhi has 23 Regional Offices and nearly 1,000 operating Offices in various cities of the country. The Company has overseas operations in Nepal, Kuwait and Dubai. The Company has a total strength of around 16,000 employees.

4. UNITED INDIA INSURANCE COMPANY LIMITED United India Insurance Company Limited (UIIC) is the leading General Insurance player with the net worth of Rs 5,589 crores, as on 31st March 2015. Its Head Quarters is at Chennai. The company has more than three decades of experience in Non-life Insurance business. It was formed by the merger of 22 companies, consequent to the nationalisation of General Insurance companies in India. United India Insurance Company Limited was incorporated as a Company on 18 February, 1938. General Insurance Business in India was nationalized in 1972. 12 Indian Insurance Companies, 4 co-operative Insurance Societies and Indian operations of 5 Foreign Insurers, besides General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance Company Limited. After nationalization, United India has grown rapidly and now has 18,300 employees at 1340 offices, providing insurance cover to more than 1 crore policy holders. The Company has variety of insurance products to provide insurance cover from bullock carts to satellites.

REGULATORY AUTHORITY INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA) Insurance Regulatory and Development Authority (IRDA) is an autonomous apex statutory body, which regulates and develops the insurance industry in India. It was constituted by a Parliament of India act called Insurance Regulatory and Development Authority Act, 1999. The IBC Academy Publications

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agency has its headquarters now at Hyderabad, Andhra Pradesh, where it shifted from Delhi in year 2001. The IRDA Act, 1999 was passed, as per the major recommendation of the Malhotra Committee report (1994) which recommended establishment of an independent regulatory authority for Insurance sector in India. Later, it was incorporated as a statutory body in April, 2000. The IRDA Act, 1999 also allows private players to enter the insurance sector in India besides a maximum foreign equity of 26 per cent in a private insurance company having operations in India. Objectives & Mission of IRDA IRDA serves as an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry. 1. To protect the interest of and secure fair treatment to policyholders; 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of common man and to provide long term funds for accelerating the growth of the economy; 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates; 4. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery; 5. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players; 6. To take action where such standards are inadequate or ineffectively enforced;

BANCASSURANCE Bancassurance, means selling of insurance products (of a third party) through a bank's established distribution channels. In India, a number of insurers have already tied up with banks and have already flagged off bancassurance through select products. Banks are a major distribution channels for insurers, and insurance sales a significant source of profits for banks. IBC Academy Publications

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Bancassurance primarily rests on the relationship the customer has developed over a period of time with the bank. Pushing risk products through banks is a much more cost-effective affair for an insurance company compared to the agent route, while, for banks, considering the falling interest rates, fee based income comes in at a minimum cost. Advantages of Bancassurance (i)

Bancassurance offers another area of profitability to banks with little or no capital outlay. A small capital outlay, in turn means a high return on equity. (ii) A desire to provide one-stop customer service. A bank, which is able to market insurance products, has a competitive edge over its competitors. It can provide complete financial planning services to its customers under one roof. (iii) Opportunities for sophisticated product offerings and cross-selling of a basket of financial products to their existing customers. (iv) Opportunities for greater customer lifecycle management. (v) Bank aims to increase percentage of non-interest fee income (vi) Cost effective use of premises and existing resources. Models for Bancassurance (a) Strategic Alliance Model Under a tie-up between a bank and an insurance company, the bank only markets the products of the insurance company. Except for marketing the products, no other insurance functions are carried out by the bank. (b) Full Integration Model This model entails a full integration of banking and insurance services. The bank sells the insurance products under its brand acting as a provider of financial solutions matching customer needs. Bank controls sales and insurer service levels including approach to claims. Under such an arrangement the Bank has an additional core activity almost similar to that of an insurance company. (c) Mixed Models Under this Model, the marketing is done by the insurer's staff and the bank is responsible for generating leads only. In other words, the database of the bank is sold to the insurance company. The approach requires very little technical investment. Guidelines for Banks 1.

Scheduled commercial bank permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation. IBC Academy Publications

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(a) (b) (c) (d)

Banks to satisfy the eligibility criteria given below The net worth of the bank should not be less than Rs.500 crore; The CRAR of the bank should not be less than 10 per cent; The level of non-performing assets should be at reasonably low levels; (e) The bank should have earned net profit for the last three consecutive years; (f) The track record of the subsidiaries, if any, of the concerned bank should be satisfactory.

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CHAPTER – 16

MUTUAL FUNDS IN INDIA

MUTUAL FUNDS (MF) A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied to those collective investment vehicles that are regulated and sold to the general public. Mutual funds are in the form of Trust (usually called Asset Management Company) that manages the pool of money collected from various investors for investment in various classes of assets to achieve certain financial goals. Thus, Mutual Fund is a Trust which pools the savings of large number of investors and then reinvests those funds for earning profits and then distributes the dividend among the investors. In return for such services, Asset Management Companies charge a small fees. Every Mutual Fund launches different schemes, each with a specific objective. Investors who share the same objectives invest in that particular Scheme. Each Mutual Fund Scheme is managed by a Fund Manager with the help of his team of professionals (One Fund Manage may be managing more than one scheme also). Organizations Of The Mutual Funds Companies In India The mutual funds in India has 5 constituents:  The Sponsors  The Board of Trustees or the Trust.  The Asset Management Company IBC Academy Publications

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The Custodian The Unit holders

History of Mutual Funds in India The first Indian mutual fund - Unit Trust of India (UTI) was set up by the Government of India in 1963. Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market and sold a range of mutual funds through a network of financial intermediaries.  In 1987, the Government of India permitted public sector banks and the Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) to enter the mutual fund industry.  In 1987, State Bank of India established SBI Mutual Fund, the first such mutual fund.  The LIC established its mutual fund in 1989 and the GIC in 1990.  Canara Bank set up Canbank Mutual Fund shortly after in the same year, followed by funds from Punjab National Bank and Indian Bank in 1989, Bank of India in 1990 and Bank of Baroda in 1992.  in 1993, with the creation of SEBI and better regulation, transparency and liberalization of capital markets (which included the creation of the NSE and the NSDL), the private sector was allowed to enter the mutual fund industry.  Kothari Pioneer Mutual Fund (now merged into Franklin Templeton Investments) was the first private sector mutual fund to be registered in July 1993.  At the end of January 2003, there were 33 mutual funds with assets totaling Rs. 1,21,805 crores. The UTI still led the pack with Rs. 44,541 crores worth of assets.  In February 2003, UTI was faced with financial mismanagement, opaque book-keeping and huge growing liabilities; the Government of India suspended redemptions, guaranteed the assets, unveiled a comprehensive set of reforms and repealed the Unit Trust of India Act 1963.  The UTI was split into two parts. One was called the "Specified Undertaking of the Unit Trust of India" with Rs. 29,835 crores of assets largely belonging to the UTI's Unit 64 fund. The fund was rumoured to own property, commodities and a whole range of unconventional and often undocumented assets. This Specified Undertaking of Unit Trust of India, functioned under an administrator appointed by Government of India, outside of SEBI's purview, until it was eventually liquidated in 2008.  The Government asked the SBI, PNB, BOB and LIC to step in as sponsors of the second part, now called UTI Mutual Fund (in addition to being sponsors of their own mutual funds) under SEBI's regulation. IBC Academy Publications

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As of 30 June 2013, the Indian mutual fund industry manages assets worth approximately Rs.8,47,000 crores.

Where does Mutual Funds usually invest their funds? The Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc., depending on the objectives and terms of scheme floated by MF. Now a days, there are MF which even invest in gold or other asset classes. Regulation and Distribution Unit Trust of India (UTI) was set up by the Reserve Bank of India in 1963 and functioned under its regulatory and administrative control. In 1978, the Industrial Development Bank of India (IDBI) took over regulatory and administrative control of the UTI. The Government of India enacted the Securities and Exchange Board of India Act, 1992 on 4 April 1992 which created the Securities and Exchange Board of India (SEBI). SEBI issued a comprehensive set of regulations in 1993 and revised them again in 1996. These included regulations covering the Indian mutual fund industry. All mutual funds in India today are regulated by SEBI. The Association of Mutual Funds of India (AMFI) is a self-governing association of Indian Mutual Funds that regulates its members' sales, distribution and communication practices. Investors can invest in Indian mutual funds directly or through distributors under codes of practice developed by AMFI.

NET ASSET VALUE (NAV) The investments made by a Mutual Fund are marked to market on daily basis. In other words, we can say that current market value of such investments is calculated on daily basis. NAV is arrived at after deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing by number of units outstanding. Therefore, NAV on a particular day reflects the realizable value that the investor will get for each unit if the scheme is liquidated on that date. This NAV keeps on changing with the changes in the market rates of equity and bond markets. Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give regular and higher returns than a fixed deposits of a bank etc. Various Types of Mutual Funds A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he cannot differentiate between various types of Mutual Funds with fancy names. IBC Academy Publications

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Mutual Funds can be classified into various categories under the following heads: (a) According to type of Investments: While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categorized according to the type of investments are as follows :(a) Equity Funds/ Schemes (b) Debt Funds/ Schemes (also called Income Funds) (c) Diversified Funds/ Schemes (Also called Balanced Funds) (d) GILT Funds/ Schemes (e) Money Market Funds/ Schemes (f) Sector Specific Funds (g) Index Funds (b) According to the time of closure of the Scheme: While launching new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows: 1. Open Ended Schemes 2. Closed Ended Schemes Open ended funds are allowed to issue and redeem units any time during the life of the scheme, but close ended funds cannot issue new units except in case of bonus or rights issue. Therefore, unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase fresh units), but that is not the case for close ended schemes. In other words we can say that new investors can join the scheme by directly applying to the mutual fund at applicable Net Asset Value related prices in case of open ended schemes but not in case of close ended schemes. In case of close ended schemes, new investors can buy the units only from secondary markets. (c) According to Tax Incentive Scheme: Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also: (a) Tax Saving Funds (b) Not Tax Saving Funds / Other Funds

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(d) According to the time of Payout: Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows :(a) Dividend Paying Schemes (b) Reinvestment Schemes The mutual fund schemes come with various combinations of the above categories. Therefore, one can have an Equity Fund which is open ended and is dividend paying plan. Before investing, one must find out what kind of the scheme he/she is being asked to invest. One should choose a scheme as per his risk capacity and the regularity at which one wish to have the dividends from such schemes Difference between a Portfolio Management Scheme and a Mutual Fund In case of Mutual Fund schemes, the funds of large number of investors is pooled to form a common investible corpus and the gains / losses are same for all the investors during that given period of time. On the other hand, in case of Portfolio Management Scheme, the funds of a particular investor remain identifiable and gains and losses for that portfolio are attributable to him only. Each investor's funds are invested in a separate portfolio and there is no pooling of funds. Are MFs safe: Like other investment products, the investments in Mutual funds also carry risk but it is considered better due to the following reasons: (a) Investments are managed by professional finance managers who are in a better position to assess the risk profile of the investments; (b) In case of a small investor, investments are not spread into equity shares of various good companies due to high price of such shares. Mutual Funds are better placed to effectively spread their investments across various sectors and among several products available in the market. This is called risk diversification and can effectively shield the steep slide in the value of investments. These are particularly good for small investors who have limited funds and are not aware of the intricacies of stock markets. For example, if someone want to build a diversified portfolio of 20 shares, he would probably need Rs 2,00,000 to get started (assuming that a minimum investment of Rs 10000 is required per scrip). However, one can invest in some of the diversified Mutual Fund schemes for as low as Rs.10,000.

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Risks associated with Mutual Funds We are aware that investments in stock market are risky as the value of our investments goes up or down with the change in prices of the stocks where we have invested. Therefore, the biggest risk for an investor in Mutual Funds is the market risk. However, different Schemes of Mutual Funds have different risk profile, for example, the Debt Schemes are far less risk than the equity funds. Similarly, Balance Funds are likely to be more risky than Debt Schemes, but less risky than the equity schemes. Difference between Mutual Funds and Hedge Funds Hedge Funds are the investment portfolios, which are aggressively managed and uses advanced investment strategies, such as leveraged, long, short and derivative positions in both domestic and international markets with a goal of generating high returns. In case of Hedged Funds, the number of investors is usually small and minimum investment required is large. Moreover, they are more risky and generally the investor is not allowed to withdraw funds before a fixed tenure.

TOP 10 MUTUAL FUNDS IN INDIA Sl No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Mutual Fund Name ICICI Prudential Equity & Debt Fund Mirae Asset Hybrid Equity Fund Axis Blue chip Fund ICICI Prudential Blue chip Fund L&T Midcap Fund HDFC Mid-Cap Opportunities Fund L&T Emerging Businesses Fund HDFC Small Cap Fund Motilal Oswal Multi-cap 35 Fund Kotak Standard Multi-cap Fund

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IMPORTANT TERMS USED IN MUTUAL FUNDS Adjusted NAV (Total Return) The notional net asset value of a unit assuming reinvestment of distributions made to the investors in any form. This is relevant to calculate the total returns from the fund. Sale Price It is the price you pay when you invest in a scheme and is also called "Offer Price". It may include a sales load. Repurchase Price It is the price at which a Mutual Funds repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load / Front End Load It is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes which do not charge a load at the time of entry are called ‘No Load’ schemes. Repurchase / ‘Back-end’ Load It is a charge collected by a Mutual Funds when it buys back/ Repurchases the units from the unit holders. Assets under management (AUM) is a financial term denoting the market value of all the funds being managed by a financial institution (a mutual fund, hedge fund, private equity firm, venture capital firm, or brokerage house) on behalf of its clients, investors, partners, depositors, etc. Back End Load The difference between the NAV of the units of a scheme and the price at which they are redeemed. The difference is charged by the fund. Beta It shows the sensitivity of the fund movements measured against the benchmark. A beta of more than 1 indicates an aggressive fund and the value of the fund is likely to rise or fall more than the benchmark. A beta of less than 1 implies a defensive fund that will rise or fall less than the benchmark. A beta of 1 indicates that the fund and the benchmark will react identically. Exit Load The fee charged at the time of redemption. It amounts to the difference between the NAV of the units of a scheme and the price at which existing units are redeemed. The fee has to fall within the overall limit laid down by SEBI. Load The fee charged by the fund either at the time the investor buys into the fund (entry load) or when he redeems his units (exit load). Mutual Funds that charge these loads at the time of entry or exit are called load funds. It amounts to the difference between the NAV of the units of a scheme and the price at which new units are allotted on fresh investments or existing units are redeemed. Schemes that do not charge any load and are called "no-load" schemes. IBC Academy Publications

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Front-end Load The service charge collected by the fund from the investor. This is charged through a markup on the NAV for purchase by new investors. The load has to fall within an overall limit laid down by SEBI. Lock in period The period after investment in fresh units during which the investor cannot redeem the units. Management fee / expense fee, within the limits laid down by SEBI, charged by the AMC for managing of the Mutual fund scheme. Money market instruments as defined under the SEBI (MF) regulations, 1996 including commercial paper, treasury bills, GOI securities with an unexpired maturity up to one year, Call money, Certificates of deposit and any other instrument specified by the Reserve Bank of India. Redemption of units / repurchase buying back/cancellation of the units by a fund on an on-going basis or on maturity of a scheme. The investor is paid a consideration linked to the NAV of the scheme. Systematic Investment Plan (SIP) allows an investor to buy units of a mutual fund scheme on a regular basis by means of periodic investments into that scheme in a manner similar to installments paid on purchase of normal goods. The investor is allotted units on a predetermined date specified in the offer document of the scheme and allows the investor to take advantage of the rupee cost averaging methodology. Value investing approach favours buying under-priced stocks that are inexpensive relative to their intrinsic value and that may have the potential to perform well and increase in price in the future. It first seeks individual companies with attractive investment potential, then considers the economic and industry trends affecting those companies. Value managers usually begin their search with fundamental analysis to find out companies whose current prices may fail to reflect their potential longer-term value. Yield curve The relationship between time and yield on securities is called the yield curve. the relationship represents the time value of money showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. Year-to-date (YTD) A time period in a calendar year starting from the 1st of January upto the present date in that calendar year. This term is generally used to calculate returns on an investment from the 1st of January of that year to the present date in that year. Yield to maturity (YTM) The yield earned by a bond if it is held until its maturity date.

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CHAPTER - 17

NON-BANKING FINANCE COMPANIES IN INDIA

Definition A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/ stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution or a company, which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). Non Banking Financial Institutions (NBFI) are a heterogeneous group of Financial Institutions however these are not akin to Commercial banks or Co-operative Banks. These raise funds from public, directly or indirectly, for the purpose of lending to business entities and corporations. IFCI, SFCs, SIDBI, Land Development Banks etc. falls under NBFI category. These entities raise long term funds and also lend for longer durations, say 5-15 years, mainly for capital expenditure purposes.

RBI REGULATIONS FOR A NBFC As per Reserve Bank of India (Amendment Act), 1997, a “Non-Banking Finance Company/Institution (NBFC) means IBC Academy Publications

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a. b.

A financial institution which is a company; A non-banking Institution which has its principal business of – receiving the deposits under any scheme or arrangement or in any other manner or lending in any manner; c. Such other non-banking Institution or class of such institutions as the Bank may, with the previous approval of the central Government specifies. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 of the RBI Act, 1934. A NBFC company incorporated under the Companies Act, 1956 should have a minimum net owned fund of Rs 2 crores. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Housing Finance Companies regulated by National Housing Bank. In terms of RBI regulations, NBFCs are required to comply with the following guidelines, in general, while accepting public deposits: 1. NBFCs cannot accept deposits repayable on demand. 2. NBFCs are allowed to accept/renew deposits from public and Institutions for a minimum period of 12 months and upto a max. period of 60 months only. 3. NBFCs must hold a minimum Investment grade credit rating from an approved Credit Rating Agency. 4. NBFCs are required to comply with RBI guidelines and ceiling stipulated for the acceptance of deposits from time to time. 5. Deposits taken by NBFCs are not covered under insurance coverage of either DICGC or RBI.

TYPES OF NBFCs NBFCs registered with RBI were classified as: (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC) (i) Asset Finance Company (AFC) Any company which is a financial institution carrying on as its principal business of financing of physical assets supporting productive/ economic activity, such as purchase or acquisition of- automobiles, tractors, lathe machines, generator sets, IBC Academy Publications

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earth moving and material handling equipments, moving on own power and general purpose industrial machines etc. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively. Equipment Leasing and Hire-purchase companies fall under this category. (ii) Investment Companies (IC) are basically financial Intermediaries whose principal activity is buying and selling of securities. (iii) Loan Company (LC) are financial Institutions whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding hire purchase and Leasing activities). Besides, there are other functional types of NBFCs, as below: a. Residual Non-Banking Company (RNBC) These companies receive deposits under any scheme or arrangement, in either lump sum or in installment by way of contribution or subscriptions or by sale of units or certificates or in any other manner. These companies usually make long-term investments in physical assets and earn profits by sale of these assets after several years. b. Mutual Benefit Finance Companies (MNFC) These companies are notified by Government of India as a Nidhi Company under section 620A of the Companies Act, 1956. These Nidhi Companies accepts public deposits under its various schemes and lend to its members. c. Miscellaneous Non-Banking Companies (MNBC) These include companies such as Chit Funds which operates as a closed group members-only organization. These are managed, supervised and conducted as a Promoter, Foreman or Agent of any transaction or arrangement by which the company enters into agreements with a specified number of subscribers or members. These subscribers are required to subscribe a specified sum of money over a fixed period of time, during which period every subscriber shall in turn, as determined by the tender or any other manner as per the arrangement approved amongst them, be entitled to the prized sum of money every month. DIFFERENCE BETWEEN NBFCs & BANKS NBFCs are doing functions akin to banks; however there are a few differences: (i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and IBC Academy Publications

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(iii) Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

VENTURE CAPITAL Venture Capital (VC) is the financial capital provider to early-stage, highpotential, high risk growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The venture capital investment helps in the growth of innovative entrepreneurship in India. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. The Venture capital is promoted by technically competent and qualified professionals with a high risk appetite for innovative and commercial viable products or ideas. Venture capital investments are made in the form of equity, quasi-equity or a debt-straight or conditional - structured in a novel and innovative instruments or in an existing form. In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Venture capital is also associated with significantly high job creation, the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. It is also a way in which public and private sectors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical expertise, know-how’s of marketing and business models. Once integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain. The public successes of the venture capital industry in the 1970s and early 1980s’ gave rise to a major proliferation of venture capital investment firms. However, the growth of the industry was hampered by sharply declining returns, certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors impacted returns. IBC Academy Publications

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RECOMMENDATIONS OF SEBI COMMITTEE OF MR. K B CHANDRASEKHAR, 2000 SEBI Committee under the Chairmanship of Mr. K. B. Chandrasekhar made recommendations, in the year 2000, for creation of a pool of Risk Capital of Finance idea based Entrepreneurship with a disproportionate potential reward to cost ratio. Venture Capital companies offer financial support to new entities coming out with new, innovative ideas with absorption of new technologies which may have good commercial success in the market and in turn offer significantly higher rewards to the Investor. Narasimham Committee has also recommended a reduction in Tax on Capital Gains made by the Venture Capital companies. Venture Capital Companies (VC) and Venture Capital Funds (VCF) are stipulated to comply with the following norms:  They should have minimum capital funds of Rs. 10 crores.  Debt to Equity ratio should be at or below 1.5:1.  Investments by Foreign companies is permitted upto 25% of capital funds;  Investments by Non-Resident Indians (NRIs) are allowed upto 74% of capital funds on “non-repatriable basis and upto 40% in case of repatriable basis.  All Venture Capital Funds (VCs) are required to get registration with SEBI and pay the requisite Registration Fee of Rs. 5 lacs.

VARIOUS STAGES OF FUNDING Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to earn interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exit" by selling its shareholdings when the business is sold to another owner. Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in one in four hundred opportunities presented to it, looking for the extremely rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a welldeveloped business model, and an impressive management team. Because investments are illiquid and require the extended timeframe to harvest, venture capitalists are expected to carry out detailed due diligence prior to investment. Venture capitalists also are expected to IBC Academy Publications

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nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations are favourable. Venture capitalists typically assist at four stages in the company's development:  Seed Money: Low level financing needed to prove a new idea, often provided by angel investors. Crowd funding (the practice of funding a project or venture by raising many small amounts of money from a large number of people) is also emerging as an option for seed funding. At the business idea formation stage, the risks associated with the business are quite high. The seed financing is meant to develop the product or an idea and prove its commercial viability.  Start-up: Early stage firms that need funding for expenses associated with marketing and product development. Once the viability of the product or idea is established, further funding is extended for its manufacturing and sales and generates profits.  Ramp up or Beginner’s Finance growth: Upon successful acceptability in the market, the scale of business needs to be enhanced to reach various market segments and create demand.  Finance for Expansion - also called Mezzanine financing - this is expansion money for a newly profitable company and this is meant to diversify or expand business and allow the business to grow and meet the market demand.  Exit of venture capitalist: Also called bridge financing, 4th round is intended to finance the "going public" process. Normally, the Venture Capital companies off-load their investment in the market at a hefty profit. Salient Features 1. 2. 3.

4.

Venture Capital Companies generally finance early-stage, highpotential, high risk growth startup companies. Venture Capital is a high risk business where success rate (for survival of a unit financed) is quite challenging at about 20-30% in India. The Projects normally takes longer time to generate profits and enabling the Venture Capital companies to exit from their investments at a profit. Thus, the gestation period of their investment is generally larger, say between 5 to 7 years period. Though the gestation period being longer, the returns on investments also are very high, in case the assisted venture becomes successful commercially. IBC Academy Publications

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VENTURE CAPITAL COMPANIES IN INDIA Venture Capital entities are set up not only by the High Net worth Individual investors and Angel Investors but also by Private Sector and Public sector Banks and Financial Institutions. According to their parentage or incorporation, these companies may be classified as under : 1. Promoted by Government of India: Various Govt. of India enterprises which are assigned the objective for promotion of knowledge based industries have set up a number of Venture Capital Funds, prominent of them are Technology Development & Investment Corporation of India (TDICI), ICICI, IFCI, IDBI, Risk Capital & Technology Finance Corporation Ltd. (RCTFC) etc. 2. Promoted by State Governments: Several State Governments have also set up Venture capital firms to develop knowledge based industries in their state as per their industrialization policy. For example, Gujarat Industrial Investment Corporation (GIIC) has floated Gujarat Venture Finance Company Limited (GVCFL), Andhra SFC has established Andhra Pradesh Venture Capital Limited (APVCL) and likewise several other states have also incorporated the Venture Capital funds for the limited purpose of promoting industries in their states. 3. Promoted by Banking Sector: Various banks in the Public sector and Private Sector, such as SBICaps and CanFina have also been providing assistance as a Venture capitalist. Credit capital Venture Funds, Grindlays India Development Funds etc. are floated by Foreign Banks. 4. Promoted by Private Sector or Overseas Entities: There are a host of multi-national Venture Capital Funds who possess global expertise and knowledge have also established their Venture Capital Funds in India. The prominent ones are Sequoia Capital India, Nexus India Capital, Inventus Capital Partners, Helion Venture Partners, Kleiner Perkins, Intel capital etc.

MICRO-FINANCE INSTITUTIONS (MFI) Microfinance usually entail the provisions of financial services to microentrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are (1) relationship-based banking for individual entrepreneurs and small businesses; and IBC Academy Publications

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(2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. For some, microfinance is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Many of those who promote microfinance generally believe that such access will help poor people out of poverty. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microfinance is a broad category of services, which also includes microcredit. Microcredit is provision of credit services to poor clients. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Micro credit: As the name suggests, these are small value loans given to the under privileged individuals for undertaking a selfemployed venture to generate income for the sustenance of their family besides generating employment for them. Micro Finance: This represents an economic activity to promote employment and growth through the support of micro-entrepreneurs and small businesses, of the low-income household, by extending various financial services, such as Loans, Savings, money transfer, Insurance services, etc. Significance of Micro-Finance a. b.

This helps low-income families’ protection from Money lenders who may be charging exorbitant rates of interest on monies lent. It encourages banking habits and promotes savings. This provides economic freedom and generates employment in the low-income segment and bring them to main stream progressively.

Challenges Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. IBC Academy Publications

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In addition, most poor people have few assets that can be secured by a bank as collateral. Even if they happen to own land, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers. Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates could be very high. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. While moneylenders are often demonized and accused of usury, their services are convenient and fast, and they can be very flexible when borrowers run into problems. As seen in the State of Andhra Pradesh (India), these systems can fail easily. Some reasons being, lack of use by potential customers, overindebtedness, poor operating procedures, neglect of duties and inadequate regulations. History The modern use of the expression "micro financing" has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of micro financing. Another pioneer in this sector is Akhtar Hameed Khan. The founders of the microcredit movement in the 1970s (such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success elsewhere. Boundaries and Principles Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them, as well as by strengthening the capacity of those institutions. In recent years, there has also been increasing emphasis on expanding the diversity of institutions, since different institutions serve different needs. IBC Academy Publications

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Microfinance experts generally agree that women should be the primary focus of service delivery. Evidence shows that they are less likely to default on their loans than men. The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending—3.1%), while 0.3% of loans were written off (individual lending—0.9%). Because operating margins become tighter the smaller the loans delivered, many MFIs consider the risk of lending to men to be too high.

FINANCIAL NEEDS OF POOR PEOPLE In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Several types of needs (of poor people) are enumerated as:  Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age.  Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.  Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.  Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job, etc. Impact Common areas of impact considered by microfinance organizations operating in developing countries include:  Increase of personal income  Empowerment of women  Improvement in nutrition  Increased education of the borrower’s children  Access to clean water  Increased access to medicine

SELF HELP GROUP A self-help group (SHG) is a village-based financial intermediary usually composed of 10–20 local women. Most self-help groups are located in India, though SHGs can also be found in other countries, especially in South Asia and Southeast Asia. In 1992, RBI and NABARD have launched a Pilot Project and issued guidelines to the Banks for lending to the Self-Help Groups (SHGs). Subsequently, in 1996, financing to Self-help groups were brought under the preview of Priority Sector Lending and Service Area Approach. IBC Academy Publications

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In SHG, the members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of microcredit. Structure SHGs are member-based micro-finance (having its origin in Bangladesh) intermediaries inspired by external technical support, like moneylenders, collectors, on one hand, and formal actors like micro-finance institutions and banks on the other. A Self-Help Group may be registered or unregistered. It typically comprises a group of micro entrepreneurs having homogenous social and economic backgrounds; all voluntarily coming together to save regular small sums of money, mutually agreeing to contribute to a common fund and to meet their emergency needs on the basis of mutual help. They pool their resources to become financially stable, taking loans from the money collected by that group and by making everybody in that group selfemployed. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment. This system eliminates the need for collateral and is closely related to that of solidarity lending, widely used by micro finance institutions.

SHG FEDERATION SHGs have also federated into larger organizations. Typically, about 15 to 50 SHGs make up a Cluster / VO with either one or two representatives from each SHG. Depending on geography, several clusters or VOs come together to form an apex body or an SHG Federation. In Andhra Pradesh, Village Organizations, SHG Clusters and SHG Federations are registered under the Mutually Aided Co-operative Society (MACS) Act 1995. Self-help groups are started by non-profit organizations (NGOs) that generally have broad anti-poverty agendas. Self-help groups are seen as instruments for a variety of goals including empowering women, developing leadership abilities among poor people, increasing school enrolments, and improving nutrition and use of birth control. NABARD's 'SHG Bank Linkage' Program: Many self-help groups, especially in India, under NABARD's SHG-bank-linkage program, borrow from banks once they have accumulated a base of their own capital and have established a track record of regular repayments. Advantages of financing through SHGs: An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. IBC Academy Publications

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FINANCIAL INCLUSION Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. The term "financial inclusion" has gained importance since the early 2000s, and is a result of findings about financial exclusion and its direct correlation to poverty. RBI set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005–06). In the report, RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic "no-frills" banking account. In India, financial inclusion first featured in 2005, when it was introduced by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. Norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs), microfinance institutions, and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries could be used as business facilitators or business correspondents by commercial banks. The bank asked the commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis. As a result of the campaign states or U.T.s like Pondicherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all their districts. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure. Significance of Financial Inclusion: 

Equitable Growth opportunities even for the lowest strata of society.



Helps in eradication of Poverty and making the low income families selfdependent. Penetration of Banking and other financial services at an affordable and easy manner. Promotes savings and thrift besides making available loans at affordable rates of interest. This also helps them to get themselves rid off the Money lenders who charges exorbitant interest rates. Generates employment opportunities and small businesses.

 

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Recent Initiatives taken by the Financial Sector for Financial Inclusion: i. ii. iii. iv.

No-Frill accounts for Low income group customers; Simplified Know Your Customer (KYC) Guidelines to the target segment; Opened up Credit Counseling Centers Introduction of Kisan Credit Card for agriculture finance

GRAMEEN BANK Grameen Bank is a micro-finance organization and community development bank started in Bangladesh that makes small loans (known as microcredit or "grameencredit") to the impoverished without requiring collateral. The system of this bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. A distinctive feature of the bank's credit program is that the overwhelming majority (98%) of its borrowers are women. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, a Fulbright scholar at Vanderbilt University and Professor at University of Chittagong, launched a research project to examine the possibility of designing a credit delivery system to provide banking services targeted to the rural poor. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. The organization and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prize in 2006; and the organization's Lowcost Housing Program won a World Habitat Award in 1998. The Bank today continues to expand across the nation and still provides small loans to the rural poor. By 2006, Grameen Bank branches numbered over 2,100. Its success has inspired similar projects in more than 40 countries around the world. Modus Operandi Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into a repayment problem. There is no form of joint liability, i.e. group members are not obliged to pay on behalf of a defaulting member. However, in practice the group members often contribute the defaulted IBC Academy Publications

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amount with an intention of collecting the money from the defaulted member at a later time. Such behavior is facilitated by Grameen's policy of not extending any further credit to a group in which a member defaults. There is no legal instrument or contract between Grameen Bank and its borrowers, the system works basically on trust. To supplement the lending, Grameen Bank also requires the borrowing members to save very small amounts regularly in a number of funds like emergency fund, group fund etc. These savings help serve as an insurance against contingencies.

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CHAPTER - 18

CURRENT TOPICS & FINANCIAL TERMS

FOREIGN DIRECT INVESTMENT (FDI) The Foreign Direct Investment means “cross border investment made by a resident in one economy in an enterprise in another economy, with the objective of establishing a lasting interest in the investee economy.” Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". Types 1. Horizontal FDI arises when a firm duplicates its home countrybased activities at the same value chain stage in a host country through FDI. 2. Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. IBC Academy Publications

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An Indian company may receive Foreign Direct Investment under the two routes: i. Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/ sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Methods The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:  by incorporating a wholly owned subsidiary or company anywhere  by acquiring shares in an associated enterprise  through a merger or an acquisition of an unrelated enterprise  participating in an equity joint venture with another investor or enterprise[5] Forms of FDI incentives Foreign direct investment incentives may take the following forms:  low corporate tax and individual income tax rates  tax holidays and other types of tax concessions  preferential tariffs  Special economic zones and EPZ – Export Processing Zones  Bonded warehouses  investment financial subsidies  soft loan or loan guarantees  free land or land subsidies  relocation & expatriation  infrastructure subsidies  R&D support  derogation from regulations (usually for very large projects) Importance and barriers to FDI 1.

An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. IBC Academy Publications

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2. 3. 4.

5.

Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country. Foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. The local population may be able to benefit from the employment opportunities created by new businesses.

Why Countries Seek FDI (a) Domestic capital is inadequate for purpose of economic growth; (b) Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development; (c) Foreign capital usually brings it with other scarce productive factors like technical know-how, business expertise and knowledge What are the major benefits of FDI (a) (b) (c) (d)

Improves forex position of the country; Employment generation and increase in production ; Help in capital formation by bringing fresh capital; Helps in transfer of new technologies, management skills, intellectual property (e) Increases competition within the local market and this brings higher efficiencies (f) Helps in increasing exports; (g) Increases tax revenues Disadvantages of FDI (d) Domestic companies fear that they may lose their ownership to overseas company (e) Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business; (f) Large companies of the world try to monopolise and take over the highly profitable sectors; (g) Such foreign companies invest more in machinery and intellectual property than in wages of the local people; IBC Academy Publications

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(h) Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company; As a part of the economic liberalization process. the GoI has opened the retail sector to FDI slowly through a series of steps:  1995 : World Trade Organisation’s (WTO) General Agreement on Trade in Services, which includes both wholesale and retailing services, came into effect  1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route;  2006 : FDI in cash and carry (wholesale) was brought under automatic approval route; Upto 51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series)  2011 : 100% FDI in Single Brand Retail allowed’  2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment in multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]’ The sectors where FDI is NOT allowed in India FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors: i) Atomic Energy ii) Lottery Business iii) Gambling and Betting iv) Business of Chit Fund v) Nidhi Company vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) vii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification viii) Trading in Transferable Development Rights (TDRs). ix) Manufacture of cigars, cheroots and cigarettes, of tobacco or tobacco substitutes. Total Inflows of FDI in India a)

Amount of FDI equity inflows for the financial year 2012-13 (from April 2012 to July 2012) stood at US$ 5.90 billion. IBC Academy Publications

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b) Cumulative amount of FDI (from April 2000 to July 2012) into India stood at US$ 176.76 billion. Top 5 Countries for FDI (Since 2000-2010) Country Mauritius Singapore USA UK Netherlands

Inflows in %age terms 42% 9% 7% 5% 4%

Inflows in absolute Terms (million US dollars) 50,164 11,275 8,914 6,158 4,968

Majority of the foreign direct investment comes through Mauritius as it enjoys several tax advantages, which works well for the international investors. Scope of FDI in India India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Some of the major economic sectors, where India can attract investment – Tele-communications, Apparels, Information Technology, Pharma, Auto parts, Jewelry and Chemicals. Foreign direct investment (FDI) in India however, seems to be petering out with the inflows growth rate recording a five-year low of 3 per cent at USD 44.85 billion in 2017-18. According to the latest DIPP data, FDI in 2017-18 grew by only 3 per cent to USD 44.85 billion.

PUBLIC–PRIVATE PARTNERSHIP A public–private partnership (PPP) is a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3 or P3. PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In select PPP models, the cost of using the service is borne by the users of the service and not by the taxpayer. In other types (the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly/partly by the government. IBC Academy Publications

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There are usually two fundamental drivers for PPPs. Firstly, PPPs are claimed to enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector. Secondly, a PPP is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project and therefore, from the public sector's perspective, a PPP is an "off-balance sheet" method of financing the delivery of new or refurbished public sector assets. Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and bank lender(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services. INDIA: The Government of India defines a P3 as "a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system."

GAAR (GENERAL ANTI-AVOIDANCE RULES) Tax Avoidance is an area of concern across the world. The rules are framed in different countries to minimize such avoidance of tax, known as "General Anti Avoidance Rules" or GAAR. Thus GAAR is a set of general rules enacted so as to check the tax avoidance. News for GAAR has been in prominence as Indian Government has taken initiative to introduce GAAR or General Anti Avoidance Rules with a view to increase tax collections. GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangements, which do not have any commercial substance or consideration other than achieving IBC Academy Publications

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the tax benefit. Whenever revenue authorities question such transactions, there is a conflict with the tax payers. Thus, different countries started making rules so that tax cannot be avoided by such transactions. GAAR IN INDIA (Chronology of GAAR controversy) In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill (popularly known as DTC 2009) on 12th August, 2009 which contained the provisions for GAAR. Later on the revised Discussion Paper was released in June 2010, followed by tabling in the Parliament on 30th August, 2010, a formal Bill to enact the law known as the Direct Taxes Code 2010. The same was to be made applicable w.e.f. 1st April, 2012 but due to negative publicity and pressures from various groups, GAAR was postponed further and is likely to be implemented in 2014. Some of recent developments about GAAR are:(a) 16th March, 2012 : Finance Minister takes a tough stand and the government announced cracked down on tax avoidance from fiscal year 2012-13; (b) 7th May, 2012 : Finance Minister, Pranab Mukherjee forced to revert and agreed to defer GAAR by a year as his announcements spooked oversea investors; (c) 28th June, 2012: Finance Ministry releases first draft on GAAR; There is wide criticism of the provisions. (d) 14th July, 2012: PM, Manmohan Singh, forms review committee under Parthasarathi Shome, for preparing a second draft by 31st August and final guidelines by 30th September, 2012 (e) 1st September, 2012: Shome Committee recommends to defer GAAR by three years. It also recommends some more investor friendly measures (f) 14th January, 2013: GoI partially accepts the recommendations of Shome Committee and has decided to defer the same for 2 years and will now be effective from the year 2016-17 (g) On 27th September, 2013, GoI issued notification by which GAAR would be applicable to only to foreign institutional investors that have not taken the benefit of an agreement under Section 90 or Section 90A of the I-T Act or Double Taxation Avoidance Agreement (DTAA). Thus now i. investments made by foreign investors prior to August, 2010 to not attract GAAR; GAAR provisions that will come into effect from April, 2016 and ii. Apply only to business arrangements with a tax benefit above Rs.3 crores. IBC Academy Publications

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Background for GAAR  



People adopt various methods so that they can reduce their total tax liability. The methods adopted to reduce their tax liability can be broadly put into four categories: "Tax Evasion"; "Tax Avoidance", "Tax Mitigation" and "Tax Planning". The difference between these four methods sometimes becomes blurred owing to the perception of the tax authorities and / or tax payer. GAAR refers to the second category i.e. tax avoidance.

Difference between GAAR and SAAR Anti-Avoidance Rules are broadly divided into two categories namely "General" and "Specific". Thus, legislation dealing with "General" rules are termed as GAAR, whereas legislation dealing with "Specific avoidance are termed as "SAAR". In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused en masse. However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations. We can say SAAR being more specific provides certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities. Basic Criticism of GAAR The basic criticism of GAAR provisions is that it is considered to be too sweeping in nature and there was a fear that Assessing Officers will apply these provisions in a routine manner (or misuse) and harass the general honest tax payer. There is only a fine distinction between Tax Avoidance and Tax Mitigation, as any arrangement to obtain a tax benefit can be considered as an impermissible avoidance arrangement by the assessing officer.

UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UIDAI) The Unique Identification Authority of India (UIDAI) is an agency of the Government of India responsible for implementing the Aadhaar scheme, a unique identification project. UIDAI was established in February 2009, and owns and operates the Unique Identification Number database. IBC Academy Publications

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The Unique Identification Authority of India has been established under the Planning Commission, in January 2009, now NITI Aayog. The agency provides a unique identification number (comprising of 12 Digits) by issuing an Aadhaar Card, to all Indian resident, but not identity cards. It is considered the world's largest national identification number project. UIDAI would be in the Planning Commission for five years, after which a view would be taken as to where the UIDAI would be located within Government. The agency maintains a database of residents containing biometric and other data, and is headed by a chairman, who holds a cabinet rank. The UIDAI is part of the Planning Commission of India. Mr. Nandan Nilekani was appointed as the first Chairman of the authority in June, 2009 and has resigned from the post in March 2014 to contest Lok Sabha election. India’s Unique Identification (Aadhaar Card) was created to “plug loopholes” and help tackle the issue of infiltration of over 1.4 million illegal Bangladeshis into India over the past decade. As of 31 January 2016, over 97 crores Aadhaar numbers have been issued in the project, which covers 76% of the India’s Population of 128 crores approx. Impediments: Supreme Court judgments The Supreme Court of India passed an interim order on 23 September, 2013 that no public services such as LPG can be denied to public due to lack of Aadhaar. The court, later on 24 March 2014, restrained the central government and the Unique Identification Authority of India from sharing data with any third party or agency, whether government or private, without the permission of the card-holder. Application of AADHAR Number The unique ID would also qualify for as a valid ID while availing various government services, like Direct Benefit transfer of subsidy, MGNREGS payments, a domestic LPG connection or subsidized ration or kerosene from PDS or benefits under NSAP or pension schemes, e-sign, digital locker, Universal Account Number (UAN) under EPFO; and for some other services, like a SIM card or opening a bank account. According to the UIDAI, any Aadhaar holder or service provider can verify an Aadhaar number for its genuineness through a user-friendly service of UIDAI called Aadhaar Verification Service (AVS) available on its website. In July 2014, Aadhaar-enabled biometric attendance systems (AEBAS) was introduced in government offices. The system was introduced to check late-arrival and absenteeism of government employees.

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Ministry for External Affairs is considering making Aadhaar a mandatory requirement for passport holders. In 2015, MEA decided to use Aadhar Cards are a basis for Facts Verification of a Passport Applicant. Department of Electronics and Information Technology said that they were considering linking Aadhaar to SIM cards. In November 2014, the Department of Telecom asked all telecom operators to collect Aadhaar Numbers from all new applicants of SIM cards. Employees' Provident Fund Organisation of India (EPFO) began linking provident fund accounts with Aadhaar numbers. Ministry for Women and Child Development proposes that Aadhaar be made mandatory for men to create a profile on matrimonial websites, in order to prevent fake profiles. SECURITY CONCERNS: The AADHAAR number is not recognized as a legal proof of residence due to issues with the data protection. India's Intelligence Bureau claims anyone with an Aadhaar number can introduce others without any documentation to get the identity number, which makes it vulnerable to terrorism and other issues.

AADHAR BILL – 2016 The Aadhaar (Targeted Delivery of Financial and other Subsidies, benefits and services) Act, 2016, a money bill, with an objective to provide legal backing to the Aadhaar unique identification number project, was passed on 11 March, 2016 by the Lok Sabha in India. The Bill intended to provide for targeted delivery of subsidies and services to individuals residing in India by assigning them unique identity numbers, called Aadhaar numbers. The Unique Identification Authority of India (UIDAI) was established by Government of India with an objective to implement Multi-purpose National Identity Card in the country. It is also called as UID or Aadhar Card. It is aimed to eliminate duplicate/fake identities and to put hasslefree, cost effective verification/ authentication system in place thereby to save considerable resources of various User Departments as well as beneficiaries at large. Central/State Governments and Public Sector Banks are acting as Registrars for the project. The Registrar or its agents collect details of Demographic information and Biometric details such as Facial Image (Photo), Finger Prints (10) and iris scan of the applicant to establish individual’s uniqueness. De-duplication exercise ensures that nobody gets more than one number and in case a person already enrolled approaches the registrar, his biometric parameters will be run through the database and if matches his application will be rejected right away. It is a 12-digit identity code and will remain a permanent identifier. Aadhaar number is Indian equivalent to the Social Security Number in the United States of America. IBC Academy Publications

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Unique Identification project was initially conceived by the Planning Commission in the year 2006 as an initiative to provide identification for each resident across the country and primarily as the basis for efficient delivery of welfare services. Shri. Nandan M. Nilekani joined as first Chairman of UIDAI in July 2009. The Council is to advise the UIDAI on Programme, methodology and implementation to ensure co-ordination between Ministries / Departments, stakeholders and partners. The lion portion of the Union Budget has been towards several kinds of subsidies and monetary payments to the economically weaker sections segments of the country. But as these payments trickle down from the centre through long chain of intermediaries to the final beneficiary, a lot of it gets lost on account of corruption, leakages and bribes. The government is now keen to reduce these leakages by crediting subsidies directly into the bank accounts of the beneficiaries through its JAM initiative – Jan Dhan Bank account – Aadhaar Number – Mobile Number. Eligibility: Every resident Indian shall be entitled to obtain an Aadhaar number. A resident is a person who has resided in India for 182 days, in the one year preceding the date of application for enrolment for Aadhaar. Use of Aadhaar number The government may require it to verify the identity of a person receiving a subsidy or a service. If a person does not have an Aadhaar number, government will require them to apply for it, and in the meanwhile, provide an alternative means of identification. Any public or private entity can accept the Aadhaar number as a proof of identity of the Aadhaar number holder, for any purpose. Aadhaar number cannot be a proof of citizenship or domicile. The Aadhaar Bill directly affects the residents in two ways: (1) With the government now having a right to demand for Aadhaar, the Identification Number may soon become essential to avail any subsidy or service from the government. (2) There are concerns that once the citizens share so much information with the government, including sensitive information such as fingerprints, these may be vulnerable to data theft or misuse by the authorities. Cases when information may be revealed (under sec. 33): 

In the interest of national security, a Joint Secretary (Central government) may issue a direction for revealing, (i) Aadhaar number, (ii) biometric information (iris scan, finger print and other biological attributes), (iii) demographic information, and (iv) photograph. Such a decision will be reviewed by an Oversight Committee (comprising of Cabinet Secretary, Secretaries of Legal IBC Academy Publications

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

Affairs and Electronics and Information Technology) and will be valid for six months. On the order of a court, (i) an individual’s Aadhaar number,(ii) photograph, and (iii) demographic information, may be revealed.

Offences and penalties A person may be punished with imprisonment upto three years and minimum fine of Rs. 10 lakh for unauthorised access to the centralized data-base, including revealing any information stored in it. If a requesting entity and an enrolling agency fail to comply with rules, they shall be punished with imprisonment upto one year or a fine upto Rs. 10,000 or Rs. One lakh (in case of a company), or with both. It gives a big push to the government’s financial inclusion agenda and provides strong foundation to deliver better services and improve the operational efficiency of the system.

NATIONAL CITIZENS REGISTER (NPR) In 2010, the Government of India initiated creation of the National Citizens Register (NPR). This register is being prepared at the local, sub-district, district, state and national level. The database will contain thirteen categories of demographic information and three categories of biometric data collected from all residents aged five and above. Collection of this information was initially supposed to take place during the House listing and Housing Census phase of Census 2011 during April 2010 to September 2010. The NPR is made mandatory for every resident in India to register in the NPR as per Section 14A of the Citizenship Act, 1955, as amended in 2004. The collection of biometrics is not accounted for in the statute or rules. The National Register of Citizens (NRC) is a register maintained by the Government of India containing names and relevant information for identification of all genuine Indian citizens. The register was first prepared after the 1951 Census of India and since then it has not been updated till recently. Assam and NRC The North-East Indian state of Assam has become the first state in India where the updation of the NRC is being taken up to include the names of those persons whose names appeared in the NRC, 1951 & still alive and/or of their presently living descendants having permanent residence within the state. The process of updation of state's part of NRC in the state of Assam started in the year 2013, when the Supreme Court of India passed an order for its updation. Since then, the Supreme Court (bench of Chief Justice of India Ranjan Gogoi and Rohintan Fali Nariman) has been IBC Academy Publications

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monitoring it continuously. The entire process is conducted by IAS officer, Mr Prateek Hajela, designated as the State Coordinator of National Registration, Assam and is carried out under the monitoring of the Supreme Court of India. The purpose of NRC update in the state of Assam is to identify Indian citizens from among all the present residents of the state thereby leading to identification of illegal migrants residing in that state, who entered into it after the midnight of 24 March 1971. Current Status: The Final NRC has been published on 31 August, 2019 after completion of all the statutory works as per standard operating procedures. As per the SCNRC, a total of 3,30,27,661 persons applied, out of which 3,11,21,004 persons were found eligible for inclusion of their names in the final NRC leaving out 19,06,657 persons, who were not included and shall have to approach a Foreigners' Tribunal with an appeal against non-inclusion, if they so desire. Assam state Government is required to construct ten more detention camps besides the six already in place, in anticipation of the possible requirement to house large number of illegal foreigners who may be declared as such by the Foreigners' Tribunals. The Government of Assam state has also initiated the process of establishing 400 additional Foreigners' Tribunals, out of which 200 are made functional since beginning of September, 2019. Objectives 

Creation of a National Citizen Register. The National Citizen Register is intended to assist in improving security by checking for illegal migration. Providing services to the residents under government schemes and programmes, checking for identity frauds, and improving planning.

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Difference between UID and NPR   

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Voluntary vs. Mandatory: It is compulsory for all Indian residents to register with the NPR, while registration with the UIDAI is considered voluntary. Number vs. Register: UID will issue a number, while the NPR is the prelude to the National Citizens Register. Thus, it is only a Register. Statute vs. Bill: The enrollment of individuals for the NPR is legally backed by the Citizenship Act, except in relation to the collection of biometrics, while the UID bill was not passed, for the legal backing of the scheme. Authentication vs. Identification: The UID number will serve as an authenticator during transactions. It can be adopted and made IBC Academy Publications

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 

 

mandatory by any platform. The National Resident Card will signify resident status and citizenship. UIDAI vs. RGI: The UIDAI is responsible for enrolling individuals in the UID scheme, and the RGI is responsible for enrolling individuals in the NPR scheme. Door to door canvassing vs. center enrollment: Individuals will have to go to an enrollment center and register for the UID, while the NPR will carry out part of the enrollment of individuals through door to door canvassing. Prior documentation vs. census data: UID will be based off of prior documentation and identification, while NPR will be based off of census information. Online vs. Offline: Authentication of a person’s UID number, the UID will require connectivity, while the NPR can perform offline verification of a person’s card.

LICENSING OF NEW BANKS IN THE PRIVATE SECTOR The guidelines for “Licensing of New Banks in the Private Sector” have since been issued by RBI and the salient features thereof are as follows: (i) Eligible Promoters: Entities/groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned NonOperative Financial Holding Company (NOFHC). (ii) ‘Fit and Proper’ criteria: Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies. (iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter/Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group. (iv) Minimum Voting Equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be Rs. 5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on the stock exchanges within 3 years of the commencement of business by the bank. IBC Academy Publications

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(v)

(vi)

(vii)

(viii)

(ix)

(x)

(xi)

(xii)

Regulatory framework: The bank will be governed by the provisions of the relevant Acts, Statutes, Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI. Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy. Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI. Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank. Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC. Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion. Other conditions for the bank: • The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census) • The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks. • Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond `10 billion for every block of Rs. 5 billion. • Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank. Additional conditions for NBFCs promoting/converting into a bank: Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

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Procedure for obtaining RBI decisions At the first stage, the applications will be screened by RBI and thereafter, the applications will be referred to a High Level Advisory Committee. Based on committee recommendations RBI issues in-principle approvals. The validity of the in-principle approval will be one year. In order to ensure transparency, the names of the applicants will be placed on the Reserve Bank website after the last date of receipt of applications. Under revised norms, RBI has issued licenses to two banks viz., IDFC Ltd., and Bandhan Financial Services and they have commenced operations in the year 2015.

LICENSING OF PAYMENTS BANKS & SMALL FINANCE BANKS In the liberalized financial world, every citizen need to have a bank account to meet their financial needs may be savings, borrowings and remittances. This is more so with the unbanked and under-banked population. However, the fact remains that the transaction costs have become barriers for penetration of banking into rural and unbanked areas. In the above backdrop, Reserve Bank of India has initiated steps to introduce the concept of setting up of “Payments Banks” and “Small Finance Banks”.

PAYMENTS BANKS The primary objective of setting up of Payments Banks will be to further financial inclusion by providing small savings accounts and payments/ remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/ remittance services in a secured technology driven environment. The eligible promoters will include existing non-bank prepaid payment issuers and other entities such as individuals/professionals, NBFCs, Corporate Business Correspondents, Mobile telephone operators and Super market chains. A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payment bank subject to the stake holding complying with Banking Regulation Act. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of at least 5 years in running their businesses. The Payments Bank will be set up as a differentiated bank and shall confine its activities to further the objectives for which it is set up. Therefore, the Payments Bank would be permitted to undertake only certain restricted activities such as:  Acceptance of demand deposits (current and savings bank deposits). Payments Banks will initially be restricted to holding a IBC Academy Publications

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maximum balance of Rs.1 lakh per customer. After the performance of the Payments Bank is gauged by the RBI, the maximum balance ceiling may be raised. However, the payments bank cannot undertake lending activities. As per the recent RBI guidelines, Payment Banks are allowed to accept deposits beyond Rs. 1 lakh with sweep arrangements with other Scheduled Commercial Bank or Small Finance Bank. This arrangement should be activated with prior written consent of the customer. The Payments Banks will provide small savings accounts and payments/ remittance facilities to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users through various channels including Branches, BCs, and ATMs. Cash-out can also be permitted at Point-of-Sale terminal locations as per extant instructions issued under the PSS Act. In the case of walk-in customers, the bank should follow the extant KYC guidelines issued by the RBI. However, these banks are not allowed to issue credit cards. No Pass book will be issued to the customer. However, account information will be provided to the customers through multiple user-friendly modes, viz., SMS, E-mail, Internet Banking etc. They may provide a statement of account in paper form on request on chargeable basis. Opening of physical access points require prior permission from RBI for the initial period of five years. A Payments Bank may choose to become a BC of another bank for credit and other services, which it is not in a position to offer. The Payments Bank cannot set up subsidiaries to undertake nonbanking financial services activities. The other financial and nonfinancial services activities of the promoters, if any, should be kept distinctly ring-fenced and not co-mingled with the banking and financial services business of the Payments Bank. The minimum paid up capital for Payments Bank shall be Rs. 100 crore. The promoter’s minimum initial contribution to the paid-up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding of promoters in the bank, in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of IBC Academy Publications

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business of the bank. Foreign Direct Investors (FDIs) are allowed to invest up to 74 per cent of the paid up capital of the bank. The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. The minimum Tier-I & Tier-II capital should be 7.50% each. The capital adequacy ratio will be computed under simplified Basel-I standards. RBI has mandated that these banks are required to invest a minimum of 75% deposits collected from the public in government securities up to one year maturity. They are allowed to hold a maximum of 25% in current/ fixed deposits with other scheduled commercial banks for operational and liquidity management purposes. These banks are required to maintain CRR and SLR as applicable to the existing commercial banks. The Payments Bank should have a leverage ratio of not less than 3.3 per cent, i.e., its outside liabilities should not exceed 33 times its net-worth/ paid-up capital and reserves.

Licensing to New Players Out of a total of 41 applicants, RBI granted “in-principle” approval to set up Payments Banks to 11 players, viz., Aditya Birla Nuvo Ltd., Airtel M Commerce Services Ltd., Cholamandalam Distribution Services Ltd., Department of Posts, Fino PayTech, Ltd., National Securities Depository Ltd., Reliance Industries Ltd., Shri Dilip Shantilal Shanghvi, Shri Vijay Shekhar Sharma, Tech Mahindra Ltd. and Vodafone m-pesa Ltd. A detailed scrutiny was undertaken by an External Advisory Committee (EAC) as well as Internal Screening Committee (ISC) and furnished the list to the Committee of the Central Board (CCB) of RBI. The CCB evaluated applicants to assess whether there would be unacceptable risk even to the narrower functions of a payments bank. It has selected entities with experience in different sectors and with different capabilities so that different models could be tried. The Payments Banks has plenty of business potential as the command area (rural and semi-urban) is unbanked or under-banked. However, the players need to adopt appropriate cost effective innovative viable business model. Out of 11 in-principle approvals, subsequently 3 applicants, viz., TechMahindra, Cholamandalam Investments & Finance Company and Dilip Shantilal Shangvi have withdrawn from the race. RBI has approved M/s. Aditya Birla Nuvo Ltd., to set up bank with title “Paytm Payments Bank” and the bank commenced operations in January 2017. IBC Academy Publications

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SMALL FINANCE BANKS Majority of residents of rural areas are deprived of basic banking services on account of non-availability of bank branches due to their high cost operations and low volume. To address these issues, RBI permitted private players to set up Local Area Banks (LAB) in the year 1996. At present, four LABs are functioning satisfactorily and playing an important role in the supply of credit to micro and small enterprises, agriculture and banking services in the unbanked and under-banked regions. To strengthen the existing system further, RBI issued fresh guidelines for licensing of Small Finance Banks in the private sector in the month of July 2014. The objective of the Banks will be for furthering financial inclusion by extending basic banking services to underserved and unserved sections of the population and also to extend credit facilities to small business units, small farmers, micro and small industries and other unorganized sector entities in their limited areas of operations through high technology and low cost operations. Resident individuals/professionals with 10 years of experience in banking and finance, Companies and Societies will be eligible as promoters to setup Small Finance Banks. Existing NBFCs, MFIs and LABs can also opt for conversion into Small Finance Banks after complying with all legal and regulatory requirements. Local focus and ability to serve small customers will be a key criterion in licensing Small Finance Banks. RBI would assess the “fit and proper” status of the applicants on the basis of their past record of sound credentials and integrity etc., for at least a period of 5 years. However, the proposals from large public sector entities and industrial and business houses, including NBFCs promoted by them, will not be entertained to setup Small Finance Banks. The area of operations of the Small Finance Banks will normally be restricted to contiguous districts in a homogeneous cluster of States/Union Territories. However, the bank will be allowed to expand its area of operations beyond contiguous districts in one or more States with reasonable geographical proximity. These banks must have at least 25% their branches in unbanked rural areas. The minimum paid-up capital for Small Finance Bank shall be Rs.100 crores. The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank. IBC Academy Publications

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The Small Finance Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. The minimum Tier-I & Tier-II capital should be 7.50% each. The capital adequacy ratio will be computed under simplified Basel-I standards. These banks are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of CRR/SLR and priority sector lending targets. These banks are required to extend 75% of its Adjusted Net Bank Credit to priority sector which include agriculture, micro loans, rural home loans, education loans etc. While Leverage Ratio set at 4.50%, the Liquidity Coverage Ratio (LCR) is as applicable to SCBs. The maximum loan size and investment limit exposure to single/group borrowers/ issuers will be restricted to 15% of its capital funds. At least 50% of its loan portfolio should constitute loans and advances of size up to Rs. 25 lakh in order to extend loans primarily to micro enterprises. Small Finance Banks may, at their discretion, issue passbooks for the deposit accounts in addition to the electronic confirmation of the deposit. These banks should send a statement of accounts once in six months to the registered address free of cost, if passbooks have not been issued. However, account information will be provided to the customers through multiple user friendly modes, viz., SMS, e-mail, Internet Banking etc. They may provide a statement of account in paper form on request on chargeable basis. These banks may engage all permitted entities, including the companies owned by their business partners and own group companies, on an arm’s length basis as Business Correspondents. Licensing of New Players Micro-finance Institutions (MFIs) dominated the second set of differentiated banks announced by RBI recently. Eight out of Ten approved Small Finance Banks belongs to Micro Finance sector. The entities who received “in-principle” approval to set up Small Finance Banks are –  Au Financiers (India) Ltd.  Disha Microfin Private Ltd.  Equitas Holdings Private Ltd. (Ahmedabad),  Equitas Holdings Private Ltd. (Chennai)  ESAF Microfinance & Investments Private Ltd.  Janalakshmi Financial Private Ltd.  RGVN (North East) Micro Finance Ltd. IBC Academy Publications

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 Suryodaya Micro Finance Private Ltd.  Ujjivan Financial Services Private Ltd.  Utkarsh Micro Finance Private Ltd. The entry of MFIs in this segment is a revolutionary step since these entities are well-familiar with the nuances of banking with the poor borrowers. MFIs were so far not allowed to accept deposits and engaged in extending credit after sourcing money from commercial banks. Now, by getting access to banking, these entities can tap public deposits, which will significantly lower their cost of borrowing and enable them bring down their rate of interest on loans from the current 24-26 per cent to a level decided by the market competition, possibly lower double digit figures. Becoming Small Finance Banks will help them significantly lower their borrowing costs, and engage in businesses focused on small and medium enterprises and the lower end of the retail customer base. In the light of rapid developments in the technology, RBI proposes to redefine the “Branch outlet” by including all Extension Counters, Satellite Offices, Ultra Small Branches, Fixed Point Business Correspondent outlets and manned ATMs as Banking Outlet. All Scheduled Commercial Banks are required to open minimum 25 percent of their new outlets in Unbanked Rural Canters (URC). Impact on existing banking players Once these firms enter the banking landscape, logically, the bigger commercial banks will face intensified competition in retail segment especially CASA deposits and small-value loan market. State-run banks, which used to dominate rural areas of the country with their vast reach, will find competition tougher if the new set of banks hit the market with competitive rates of interest to poach customers. Public Sector Banks will have to work harder. Nevertheless, the entry of Small and Payments banks mark the biggest banking revolution India has witnessed after the nationalization of banks. This will create positive disruptions in the country's banking sector, intensifying competition, thus making banking more affordable for the common man. The new set of banks viz., Payments Banks and Small Finance Banks generally operate among low-income segments and not chase the large borrowers. Logically, they have to work out viable models to stay in the competition. This can give a major boost to financial inclusion and creditexpansion to unbanked areas, given that in this case financial inclusion would not be a charity forced by regulation like the existing commercial banks. In this case it would be the mainstay of the business. That's good news for the Indian poor. IBC Academy Publications

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Both Payments Banks and Small Finance Banks are “niche” or “differentiated” banks, with the common objective of furthering financial inclusion. Technology plays a major role in this regard. These Banks definitely unlocks business potential and paves the way to reach the bottom of pyramid, which is a long cherished desire of the nation.

STAND-UP INDIA SCHEME (SUIS) India is one of the promising economies where people have intelligent minds, ideas, concepts and above all much more dedication towards their career compared many countries across the world. With strong financial backup, our nation can definitely achieve a lot more success and is capable of finding respectable place among developed nations. In the above IBC Academy Publications

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backdrop, Prime Minister launched a novel employment scheme titled “Stand up India Scheme (SUIS)“ on 5th April 2016, with the objective to promote entrepreneurship amongst the Schedule Caste/ Schedule Tribe and Women duly providing handholding support to enable them from mere “Job Seekers to Job Creators”. The broad features of the scheme are as under:  Indian Citizens whose age is above 18 years under Scheduled Caste (SC)/ Scheduled Tribe (ST) and Woman.  Loans under the scheme are available for only Green field Projects. The entrepreneur may be engaged in manufacturing, services or the trading sector.  The loan shall be a Composite loan (Term loan and working capital) between Rs.10 lakh and upto Rs.100 lakh.  The Scheme envisages 25% margin money which can be provided in convergence with eligible Central/ State schemes. While such schemes can be drawn upon for availing admissible subsidies or for meeting margin money requirements. In all cases, the borrower shall be required to bring in minimum of 10% of the project cost as own contribution.  Besides primary security, the loan may be secured by collateral security or guarantee of Credit Guarantee Fund Scheme for StandUp India Loans.  (CGFSIL), nodal agency National Credit Guarantee Trustee Company (NCGTC), as decided by the banks.  The interest rate would be applicable rate of the bank for that category (rating category) not to exceed (MCLR+3%+ tenor premium).  The term loan is repayable within 7 years with a maximum moratorium period of 18 months. Other Benefits:  Earlier the start-ups had to struggle hard to get them registered. Now the government launched a mobile app on 1st April 2016 whereby the on-line registration process will take only a day to complete. Also a web portal is launched to give clearances, approvals, etc. The labour law related inspection will not be carried out on the start-ups for the first three years.  The start-ups can now claim up to 80% rebates on patent costs and the government will also be paying the fees of the facilitator that helped the start-up to obtain the patents faster for Intellectual Property Rights (IPRs) by Introducing simplified procedures. IBC Academy Publications

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The eligibility criteria of having a prior experience or turnover experience to open a business has now be removed – without compromising on the quality of the goods produced. Tax exemptions on capital gains can now be claimed by the investors under this scheme. The tax exemption regulation which is applicable for newly formed MSMEs will now be extended to all start-ups for the first 3 years. However, start-ups will be eligible for tax benefits only after obtaining a certificate from the InterMinisterial Board.

MAKE IN INDIA SCHEME India is a country with rich natural resources and abundant skilled manpower. However, the economy is not growing in the desired direction and majority of educated youth are migrating abroad for a livelihood, which is a cause of serious concern. In the above backdrop, The “Make in India” program was launched as part of a wider set of nation building initiatives with focus on to boost the domestic manufacturing industry and employment opportunities in India. The programme is devised to transform India into a global design and manufacturing hub, and is considered as a timely response to a critical situation when India’s growth rate had fallen to its lowest level in a decade. Make in India, a type of Swadeshi movement covering 25 sectors of the economy, was launched by the Government of India on 25 September, 2014 to encourage companies to manufacture their products in India and also increase their investment. As per the current policy, 100% Foreign Direct Investment (FDI) is permitted in all 25 sectors, except for Space industry (74%), defense industry (49%) and Media of India (26%). Japan and India had also announced a US$12 billion "Japan-India Make-in-India Special Finance Facility" fund to push investments. Several states also launched their own Make in India initiatives, such as "Make in Odisha", “Vibrant Gujarat”, "Happening Haryana" and "Magnetic Maharashtra”. Combined with other initiatives by the end of 2017, India rose 42 places on Ease of doing business index, 32 places World Economic Forum's Global Competitiveness Index, and 19 notches in the Logistics Performance Index. The logo for the campaign is an “elegant lion”, inspired by the Ashoka Chakra and designed to represent India's success in all spheres. Make in India is a powerful, galvanizing call to Indian Citizens & Business Leaders, and an invitation to potential Partners & Investors across the Globe. It represents a comprehensive and unprecedented overhaul of outdated processes and policies. Most importantly, it intends a complete change of the Government’s mindset and move towards “Minimum Government & Maximum Governance” philosophy. IBC Academy Publications

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The program aims to inspire confidence in India’s capabilities amongst potential partners within and outside India duly providing a framework for a vast amount of technical information on the following 25 industrial sectors to reach out to huge market via social media. Automobiles Food Processing Renewable Energy Automobile Components IT and BPM Roads and highways Aviation Leather Space Biotechnology Media and Entertainment Textiles and garments Chemicals Mining Thermal Power Construction Oil and Gas Tourism and Hospitality Defence manufacturing Pharmaceuticals Wellness Electrical Machinery Ports Electronic Systems Railways Opening up of key sectors like Railways, Defence, Insurance and Medical Devices has paved the way to attract Foreign Direct Investment inflows. It demonstrated the transformational power of collaborative model “Public Private Partnership (PPP)”, and has become a hallmark of the Make in India program. There is visible momentum, energy and optimism and moving on its way to become the world’s most powerful economy.

START-UP INDIA PROGRAMME Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem that is conducive for the growth of startup businesses, to drive sustainable economic growth and generate large scale employment opportunities. The Government through this initiative aims to empower startups to grow through innovation and design. The action plan of this initiative, is based on the following three pillars: 1. Simplification and Handholding. 2. Funding Support and Incentives. 3. Industry-Academia Partnership and Incubation. Many enterprising people who dream of starting their own business lack the resources to do so and as a result, their ideas, talent and capabilities remain untapped and the country loses out on wealth creation, economic growth and employment. The Prime Minister of India announced the scheme “Start-up India” on 15th August, 2015. It is a revolutionary scheme IBC Academy Publications

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that helps the people who wish to start their own business with required encouragement and support. The objective of the scheme is that “India must become a nation of Job Creators instead of being a nation of Job Seekers”. Eligibility for the Start-up Registration:  The applicant must be a private limited company or a limited liability partnership.  It should be a new firm or not older than five years, and the total turnover of the company should be not exceeding 25 crores.  The firms should have obtained the approval from the Department of Industrial Policy and Promotion (DIPP).  To get approval from DIPP, the firm should be funded by an Incubation fund, Angel Fund or Private Equity Fund.  The firm should have obtained a patron guarantee from the Indian patent and Trademark Office.  It must have a recommendation letter by an incubation.  Capital gain is exempted from income tax under the start-up India campaign.  The firm should work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.  Angel fund, Incubation fund, Accelerators, Private Equity Fund, Angel network must be registered with SEBI (Securities and Exchange Board of India). Start-up India means an entity whether it is a Partnership firm, or Limited Liability Partnership or Private Limited company incorporated or registered in India, not older than 5 years, annual turnover does not exceeding Rs.25 crore in any preceding financial year, and it should work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. One of key challenges faced by Start-ups in India has been access to finance. Often Start-ups, due to lack of collaterals or existing cash flows, fail to justify the loans. The 19-Point Startup India Action Plan envisages several incubation centers, easier patent filing, tax exemptions, ease of setting-up of business, a INR 10,000 Crore corpus fund, and a faster exit mechanism, among others. Key Features of the scheme:  The Government has set up a fund with an initial corpus of Rs. 2,500 crore per annum for the next 4 years.  New-entrants are granted a tax-holiday for three years. IBC Academy Publications

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The Fund is not meant for investing directly into Start-ups, but shall participate in the capital of SEBI registered Venture Funds. Debt funding to Start-ups is also perceived as high-risk area and to encourage Banks and other Lenders to provide Venture Debts to Start-ups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary corpus of Rs. 500 crore per year for the next four years. The action plan initiated by the Government to achieve the desired results is – creating environment to do the business with ease with simplified systems/ procedures and providing fee exemptions as well tax concessions. A start-up ecosystem comprises of entrepreneurs, different kinds of financial support such as debt financing, equity investments, grants, and non-financial support including incubation, acceleration support, mentoring and technical experts.

PRADHAN MANTRI FASAL BHIMA YOJANA (PMFBY) & WEATHER-BASED CROP INSURANCE SCHEME (WBCIS) Agriculture in India is highly susceptible to risks like droughts and floods. It is necessary to protect the farmers from natural calamities and ensure their credit eligibility for the next season. India has been witnessing spate of farmer suicides on account of adverse climatic conditions besides other associated farming risks. Despite of implementing several crop insurance schemes since 1970s, farmers are not getting the desired protection from risks in farming, which need to be addressed on priority. In the above backdrop, GOI introduced a new crop damage insurance scheme titled “PMFBY/WBCIS” during the year 2016-17 starting from Khariff-2016. The scheme aims at supporting sustainable production in agriculture sector by way of:  Support farmers suffering crop loss/damage arising out of unforeseen events.  Stabilizing the income of farmers to ensure their continuance in farming.  Encouraging farmers to adopt innovative & modern agricultural practices, and  Ensuring flow of credit to the agriculture sector and protecting farmers from production risks. Highlights of the scheme 1.

There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%. The premium rates to be paid by farmers are very low and balance premium will be paid by the IBC Academy Publications

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Government to provide full insured amount to the farmers against crop loss on account of natural calamities. There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government. Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This capping has now been removed and farmers will get claim against full sum insured without any reduction. The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments. PMFBY is a replacement scheme of NAIS/ MNAIS, there will be exemption from Service Tax liability of all the services involved in the implementation of the scheme. It is estimated that the new scheme will ensure about 75-80 per cent of subsidy for the farmers in insurance premium.

Farmers to be covered 1. 2.

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All farmers growing notified crops in a notified area during the season who have insurable interest in the crop are eligible. Compulsory coverage: The enrolment under the scheme, subject to possession of insurable interest on the cultivation of the notified crop in the notified area, shall be compulsory for following categories of farmers:  Farmers in the notified area who possess a Crop Loan account/KCC account (called as Loanee Farmers) to whom credit limit is sanctioned/renewed for the notified crop during the crop season. and  Such other farmers whom the Government may decide to include from time to time. Voluntary coverage: Voluntary coverage may be obtained by all farmers not covered above, including Crop KCC/Crop Loan Account holders whose credit limit is not renewed.

Risks covered under the scheme 1.

Yield Losses (standing crops, on notified area basis). Comprehensive risk insurance is provided to cover yield losses due to non-preventable risks, such as Natural Fire and Lightning, Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane, IBC Academy Publications

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Tornado. Risks due to Flood, Inundation and Landslide, Drought, Dry spells, Pests/ Diseases also will be covered. In cases where majority of the insured farmers of a notified area, having intent to sow/plant and incurred expenditure for the purpose, are prevented from sowing/ planting the insured crop due to adverse weather conditions, shall be eligible for indemnity claims upto a maximum of 25 per cent of the sum-insured. In post-harvest losses, coverage will be available up to a maximum period of 14 days from harvesting for those crops which are kept in “cut & spread” condition to dry in the field. For certain localized problems, Loss/damage resulting from occurrence of identified localized risks like hailstorm, landslide, and Inundation affecting isolated farms in the notified area would also be covered.

Unit of Insurance The Scheme shall be implemented on an ‘Area Approach basis’ i.e., Defined Areas for each notified crop for widespread calamities with the assumption that all the insured farmers, in a Unit of Insurance, to be defined as "Notified Area‟ for a crop, face similar risk exposures, incur to a large extent, identical cost of production per hectare, earn comparable farm income per hectare, and experience similar extent of crop loss due to the operation of an insured peril, in the notified area. Defined Area (i.e., unit area of insurance) is Village/Village Panchayat level by whatsoever name these areas may be called for major crops and for other crops it may be a unit of size above the level of Village/Village Panchayat. In due course of time, the Unit of Insurance can be a GeoFenced/Geo-mapped region having homogenous Risk Profile for the notified crop. For Risks of Localised calamities and Post-Harvest losses on account of defined peril, the Unit of Insurance for loss assessment shall be the affected insured field of the individual farmer. Schemes Implementing Agency PMFBY Bajaj Allianz General Insurance Company Limited, and Reliance General Insurance WBCIS SBI General Insurance Company Limited, and Agriculture Insurance Company of India (AIC)

Weather Based Crop Insurance Scheme (WBCIS) Similarly, Government of India has introduced Weather Based Crop Insurance Scheme (WBCIS), which aims to mitigate the hardship of the IBC Academy Publications

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insured farmers against the likelihood of financial loss on account of anticipated crop loss resulting from adverse weather conditions relating to rainfall, temperature, wind, humidity etc. WBCIS uses weather parameters as “proxy” for crop yields in compensating the cultivators for deemed crop losses. Pay-out structures are developed to the extent of losses deemed to have been suffered using the weather triggers. For implementation of this scheme, the States are divided into clusters and Cluster-wise Crops Notified for insurance coverage. Normally, crops like Cotton, Red Chilli, Sweet Lime, Oil Palm etc., are covered under WBCIS. All farmers availing crop loans from financial institutions should be covered compulsorily under this scheme. The definition of farmer includes sharecroppers and tenant farmers growing the notified crops in the notified areas are eligible for insurance coverage. Crop insurance is mandatory for notified crops and insurance premium is to be debited to all eligible crops by the Bank Branches and remit to insurance company. The sum insured by the farmer is not the loan amount but it is the scale of finance per hectare multiplied by the land cultivated by farmer. The non-loanee farmers are required to submit necessary documentary evidence of land records (Record of Right), land possession certificate etc. As per the operational guidelines of the schemes (PMFBY or WBCIS), the districts are divided into clusters and each cluster is allotted to Empanelled General Insurance companies as Implementing Agency (IA). Season 1.

1. PMFBY Kharif Rabi Kharif and Rabi 2. WBCIS

Crops

Maximum charges payable by farmer as %age of sum insured

All food grains and oilseed crops All food grains and oilseed crops Annual commercial & Annual Horticultural crops Cotton, Red chillies, Sweet Lime and Palm Oil etc.

2% of sum insured or Actuarial rate, whichever is less 1.5% of sum insured or Actuarial rate, whichever is less 5% of sum insured or Actuarial rate, whichever is less 5% of sum insured or Actuarial rate, whichever is less

The Actuarial Premium Rate (APR) would be charged under PMFBY/ WBCIS by the Implementing agency (IA). The difference between APR and the insurance charges payable by farmers shall be treated as Rate of Normal premium subsidy, which shall be shared by the Centre and State. Apart from yield loss, the PMFBY covers post-harvest losses also. It also provides farm level assessment for localized calamities including hailstorms, IBC Academy Publications

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unseasonal rains, landslides and inundation. This scheme provides full coverage of insurance. Claims under WBCIS will be settled on the basis of weather data provided by the State Government and not on the basis of Annavari Certificate/ Gazette notification declaring the area as Drought/ Flood/ Cyclone affected etc., by the District Collectors or any other Govt. Official. The scheme has the potential to deal with the vagaries of nature on Indian farming. The premium paid by the farmers is kept low when compared with earlier crop insurance schemes. However, the scheme will increase the financial burden on the government and necessary budget allocations should be made. Losses from nuclear risks, riots, malicious damage, theft, and act of enmity, are all categorized under ‘exclusions’ in the new scheme. Success of any government scheme depends on its sincere implementation. The key problems such as poor land records, flawed land titles, corruption etc. are common challenges any crop insurance scheme in India faces. Hope, the scheme provides the desired financial support to farmers and also to Banks for smooth credit flow to the Agriculture sector which is need of the hour.

MICRO UNITS DEVELOPMENT AND REFINANCE AGENCY (MUDRA SCHEME) MUDRA was registered as a Company in March, 2015 under the Companies Act, 2013 and as a Non-Banking Finance Institution with the RBI in April 2015. MUDRA was launched by the Prime Minister on 8th April 2015. As per NSSO Survey-2013, there are close to 5.77 crore small-scale business units, mostly sole proprietorships, which undertake trading, manufacturing, retail and other small-scale activities. Most individuals, especially those living in rural and interior parts of India, have been excluded from the benefits of formal banking system. Therefore, they never had access to insurance, credit, loans and other financial instruments to help them establish and grow their micro businesses. Majority of them depend on local money lenders at exorbitant interest rates. Capital structure: MUDRA was launched with a corpus of Rs.20,000 crore and a credit guarantee corpus of Rs.3,000 crore. It is now a subsidiary of SIDBI with 100% capital contributed by it. The authorized capital of MUDRA is Rs.1,000 crores and paid-up capital is Rs.750 crore, fully paid by SIDBI. The key objectives of MUDRA are:  Bring stability to the microfinance system through regulation and inclusive participation. IBC Academy Publications

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Extend financial support to Microfinance Institutions (MFI) and agencies that lend money to small businesses, retailers, self-help groups and individuals.  Register all MFIs and introduce a system of performance rating and accreditation. This will help last-mile borrowers of finance to evaluate and approach the MFI that meets their requirement best and whose past record is most satisfactory.  Provide structured guidelines for the borrowers to follow to avoid failure of business or take corrective steps in time. It helps in laying down guidelines or acceptable procedures to be followed by the lenders to recover money in cases of default.  Offer a Credit Guarantee scheme for providing guarantees to loans being offered to micro businesses.  Introduce appropriate technologies to assist in the process of efficient lending, borrowing and monitoring of distributed capital. MUDRA borrowers are classified into three segments, viz.,  the starters “Shishu” – For Loans up to Rs. 50,000),  the mid-stage finance seekers “Kishor” - For Loans above Rs. 50,000 and up to Rs. 5 lakh and  the next level growth seekers “Tarun” - For Loans above Rs. 5 lakh and upto Rs. 10 lakh. Initially, sector-specific schemes to be confined to “Land Transport, Community, Social & Personal Services, Food Product and Textile Product sectors”. Banks shall classify all loans sanctioned upto Rs. 10 lakh for income generating non-farm activities can be classified under Mudra Loans. Those eligible to borrow from MUDRA bank are:  Small manufacturing unit  Shopkeepers  Fruit and vegetable vendors  Artisans All TODs sanctioned in PMJDY accounts up to Rs. 5,000 also can be classified under Mudra and loans sanctioned under “Shishu” are exempted from Unit Inspection and Ledger Folio charges. In the long run, it is proposed to launch new schemes such as Mudra Card, Portfolio Credit Guarantee and Credit Enhancement, to encompass more sectors. Govt. of India envisages building appropriate framework for developing an efficient last-mile credit delivery system to small and micro businesses.

REAL ESTATE INVESTMENT TRUSTS (REITS) Real Estate sector plays an important role in economic development and nation building, as many other sectors such as Steel, Cement, Labour etc., IBC Academy Publications

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are heavily dependent on this sector. Investment in the Real estate, particularly commercial real estate, as an asset class has traditionally been out of reach of an average Indian investor as the entry level investment is huge and prohibitive. “Real Estate investment Trusts or REITs” are mutual fund like institutions that enable investments into the real estate sector by pooling small sums of money from multitude of individual investors for directly investing in real estate properties so as to return a portion of the income (after deducting expenditures) to unit holders of REITs, who pooled in the money. REITS are regulated by the securities market regulator in India- Securities and Exchange Board of India (SEBI). In September 2014, SEBI notified the SEBI (Real Estate Investment trusts) Regulations, 2014 for providing a framework for registration and regulation of REITs in India. Offer of units, listing, investments and distribution:  Value of the assets owned/proposed to be owned by REIT should be atleast Rs 500 crore.  The REITs are permitted to raise funds through an Initial Public Offer (IPO) or Follow-on Public Issue (FPO), QIP, Rights Issue and any other mechanism specified by SEBI.  Minimum issue size for initial offer is Rs 250 crore with a minimum public float of 25%.  Listing of units in a stock exchange is mandatory in India.  The minimum subscription size for units of REIT is Rs 2 lakhs and the trading lot is specified at Rs 1 lakhs so as to allow only reasonably informed investors into this market. Permitted Investments by REIT are:  Atleast 80% in completed and revenue generating properties. A REIT in India is allowed to invest mainly in completed and revenue generating assets, such as shopping malls, office buildings, apartments, hotels, warehouses etc. and other approved investments.  Not more than 20% in developmental properties and other eligible investments. Provided, investment in developmental assets is not more than 10% of the value of REIT assets.  REIT to invest in at least 2 projects with not more than 60% of value of assets invested in one project. Related party transactions are subject to strict scrutiny.  REIT to distribute not less than 90% of the net distributable cash flows, subject to applicable laws, to its investors. IBC Academy Publications

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

Maximum borrowing permitted is 49% of the value of the REIT assets. Further, credit rating and post 25% unit holders approval are mandatory to raise debt.  Full valuation to be carried out atleast once a year and half yearly updation of the same has to be carried out. REIT can invest in commercial real estate assets, either directly or through Special Purpose Vehicle (SPVs) which invests more than 80% of its assets in properties. If REIT is investing through an SPV, REIT has to hold controlling interest with not less than 50% of the equity share capital or interest in SPV. As per SEBI guidelines, REITs are close ended schemes and can only invest in income generating real estate properties, prohibiting investments in vacant land. REIT schemes have to be rated by a credit rating agency and shall not invest more than 15% in a single real estate project. The dividend pay-out depends on cash flow (distributable income) through sale of property or through rental income. As per SEBI ns, it is mandatory for REITs to declare 90% of distributable income, as dividend to the unit holders. Thus, these instruments emerge as new asset class – typically a liquid, dividend paying and asset backed instrument. The investors in REITs enjoy twin benefits of Yield and capital appreciation. The REIT is an investment vehicle that invests in rent-yielding completed real estate properties has the potential to transform the Indian real estate sector. Currently, developers incur huge capital expenditure especially in Commercial Real Estate (CRE), on land, construction, furnishing, etc., which remains locked for long years until the asset generates returns to breakeven. REIT will help attracting long-term financing from domestic as well as foreign sources at low cost. The disclosure norms such as average rents, occupancy levels, tenant profile, renewal profile, etc., have been paving the way to improve the transparency and governance issues and it is a winwin situation to both developers and investors. The existing Dividend Distribution Tax (DDT), Minimum Alternate Tax (MAT) and stamp duty implications need to be resolved to encourage the retail investor participation in this sector. In order to tap interest from foreign investors, amendments to the foreign exchange control regulations is required to enable foreign private equity players who are currently invested in commercial stabilised assets to sponsor/manage the REIT. Listing of REITS would be beneficial to the Indian real estate industry as it provide a viable exit option to stakeholders.

RERA ACT, 2016 (THE REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016) “The Real Estate (Regulation and Development) Act, 2016” is an Act of the Parliament of India which seeks to protect home-buyers as well as help IBC Academy Publications

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boost investments in the real estate industry. The Act establishes “Real Estate Regulatory Authority” (RERA) in each state for regulation of the real estate sector and also acts as an adjudicating body for speedy dispute redressal. The Act came into force on 1 May, 2016 with 59 of 92 sections notified. Remaining provisions came into force on 1 May 2017. The Central and state governments are liable to notify the Rules under the Act within a statutory period of six months.  The Real Estate Act makes it mandatory for all commercial and residential real estate projects where the land is over 500 square metres, or eight apartments, to register with the Real Estate Regulatory Authority (RERA) for launching a project.  For ongoing projects which have not received completion certificate on the date of commencement of the Act, will have to seek registration within 3 months. Application for registration must be either approved or rejected within 30 days of application received.  On successful registration, a registration number will be given, a login id, and password for the applicants to fill up essential details on the website of the RERA.  For failure to register, a penalty of up to 10 percent of the project cost or three years' imprisonment may be imposed.  Real estate agents who facilitate selling or purchase of properties must take prior registration. Such agents will be issued a single registration number for each State or Union Territory, which must be quoted by the agent in every sale facilitated by him. Key Features of the RERA Act: Security 1. Under the RERA act, a minimum of 70% of the buyers’ and investors’ money will be kept in a separate account. This money will then be allotted to the builders only for construction and land related costs 2. Developers and builders cannot ask for more than 10% of the property’s cost as an advance payment before the sale agreement is signed. Transparency 1. Builders are supposed to submit the original documents for all projects they undertake. 2. Builders are not supposed to make any changes to the plans without the consent of the buyer. Fairness 1. RERA has instructed developers to sell properties based on carpet area and not super built up area, while carpet area has been clearly defined in the Act to include usable spaces like kitchen and toilets. IBC Academy Publications

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2. In the event that the project has been delayed, buyers are entitled to get back the entire money invested or they can choose to be invested and receive monthly investment on their money. Quality: The builder must rectify any issue faced by the buyer within 5 years of purchase. This issue must be rectified within 30 days of the complaint. Authorisation: A regulator cannot advertise, sell, build, invest, or book a plot without registering with the regulator. After registration, all the advertisement for investments should bear a unique project wise registration number provided by RERA. As of September 2018, five north-eastern states, Arunachal Pradesh, Mizoram, Meghalaya, Sikkim and Nagaland have not notified the RERA Act and is facing certain constitutional challenges as the land in those states are community owned. West Bengal notified a similar law called the “West Bengal Housing Industry Regulatory Act, 2017”, which came into effect from 1st June, 2018.

GOLD MONETIZATION SCHEME, 2015 Gold Monetization Scheme (GMS), which modifies the earlier ‘Gold Deposit Scheme’ (GDS) and ‘Gold Metal Loan Scheme (GML), is intended to mobilise gold held by households, temples and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce country’s reliance on the import of gold. The Gold Monetization Scheme is aimed at tapping part of an estimated 20,000 tonnes of idle gold worth Rs. 5,40,000 crore lying in family lockers and temples into the banking system. Gold Monetization refers to unlocking the value of gold in terms of rupee. Gold Monetization Scheme (GMS) refers to a process wherein a depositor deposits gold (say jewellery, coin, etc.) with a bank which is then lent by the bank to its borrowers (say jewellery makers), after melting into gold bars. GMS allows the depositors of gold to earn tax-free market determined interest income (denominated in gold but recoverable either in gold or in rupee) from the pure gold they deposit with banks in their “Gold Savings Accounts” and permits the jewellers to obtain their raw material - gold bars created from the melting of the gold deposited with the banks- as loans in their “Metal account”. In addition, Banks/ other dealers would also be able to monetize their gold. Objective of the gold monetization scheme: 1. Mobilize the gold held by households and institutions. 2. Reduce gold imports. 3. Improve liquidity in market. 4. Make customers gold secure and a performing Asset. IBC Academy Publications

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Gold can be submitted in any form (bullion, jewellery etc.) but the amount deposited with the bank is calculated on the basis of the pure gold content of that deposit (after removing the weights of precious stones in jewellery etc.), which is verified through an accredited assayer. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example, if a customer deposits 100 gms. of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms. The customer will have the option of redemption either in cash or in gold, which will have to be exercised in the beginning itself (at the time of making the deposit). How does it works: 1. Household or an institution shall open gold saving account with bank. 2. Gold that customer wants to deposit will be cleaned and checked for purity at Assaying centers. Assaying center will provide receipt to customer. 3. Assaying center informs bank of value to be credited to customer. 4. Gold is than sent to refineries for melting or storage. 5. Banks tells refineries to send gold to jewelers. 6. Refineries send gold to jewelers on receiving bank’s information. Who can invest in GMS: 1. Resident Indians (Individuals, HUF, Trusts including Mutual Funds/ Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) either individually or jointly. 2. Minimum deposit in raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness; No maximum limit. 3. Scheduled Commercial Banks (excluding RRBs) can accept these deposits.

SOVEREIGN GOLD BOND SCHEME, 2015 (SGB) As part of implementation of Budget 2015-16 proposals, Govt. of India introduced “Sovereign Gold Bond Scheme” (SGB) on 5th November, 2015. “Sovereign Gold Bond Scheme” (SGB) are government securities denominated in grams of gold. These are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bonds are issued by RBI on behalf of Government of India. The objective of the scheme is to discourage the investors to buy physical gold duly ensuring reasonable return on their investment. It protects the interest of the investors since they receive the ongoing market price at the time of redemption/ premature redemption. Further it offers a superior IBC Academy Publications

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alternative to holding gold in physical form. The risks and costs of storage are fully eliminated. It is free from issues like making charges and purity in the case of gold in jewellery form. Salient Features for availing Sovereign Gold Bond Scheme 2018-19: 1. The bonds can be issued in the account types - Individual or Joint. 2. The bonds will be issued in the form of Government of India Stock, further they are eligible for conversion into a demat form. 3. The bonds can be used as collateral for availing loans. The holders of the bond shall be entitled to create pledge, hypothecation or lien in favour of scheduled banks. 4. The interest on bonds will be taxable, as per the provisions of the Income Tax Act. 5. The bonds will bear interest at the rate of 2.5 percent (fixed rate) per annum on the nominal value, payable on a half-yearly basis and the last interest payable on maturity along with the principal. 6. The denomination of bonds will be in units of one gram of gold, or in multiples thereof. Minimum investment in the bonds will be one gram with a maximum limit of 4 kg. for individuals, 4 kg. for Hindu Undivided Family and 20 kgs. for Trusts. 7. Payment will be accepted in Indian Rupees through cash up to a maximum of Rs 20,000 or demand drafts or cheque or through internet banking. 8. The bonds will be repayable on the expiration of eight years from the date of issue of the bonds. Pre-mature redemption of the bond is permitted from the 5th year of the date of issue on the interest payment dates. 9. The bonds are transferable, which can be executed by filing an instrument of transfer form. 10. On maturity, the Gold Bonds to be redeemed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, as published by the India Bullion and Jewellers Association Limited. 11. KYC documents such as, Voter ID, Aadhaar Card/ PAN or TAN/ Passport and residential proof required to be obtained. 12. TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws. Banks earn 1% of SGB as fee which is paid by GOI. It is a source for other income to the Banks. As investors will get returns that are linked to gold price, the scheme is expected to reduce the demand for physical gold. IBC Academy Publications

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CHAPTER - 19

HEAD OFFICES OF NATIONALISED BANKS Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Syndicate Bank Union Bank of India United Bank of India Punjab & Sind Bank UCO Bank Vijaya Bank

Headquarters Kolkata Hyderabad Mumbai Mumbai Pune Bangalore Mumbai Mangalore Mumbai Chennai Chennai New Delhi New Delhi Manipal Mumbai Kolkata New Delhi Kolkata Bangalore

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HEAD OFFICES OF INDIAN BANKS IN PRIVATE SECTOR Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Bank Axis Bank Catholic Syrian Bank Ltd. IndusInd Bank Limited ICICI Bank ING Vysya Bank Kotak Mahindra Bank Limited Karnataka Bank Karur Vysya Bank Limited. Tamilnad Mercantile Bank Ltd. The Dhanalakshmi Bank Limited. The Federal Bank Ltd. The HDFC Bank Ltd. The Jammu & Kashmir Bank Ltd. The Nainital Bank Ltd. The Lakshmi Vilas Bank Ltd Yes Bank

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Headquarters Mumbai Thrissur Mumbai Mumbai Bangalore Mumbai Mangalore Karur Tuticorin Thrissur Kochi Mumbai Jammu Nainital Karur Mumbai

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A tradition of trust

For all your needs / Where India Banks

Central to you since 1911 IBC Academy Publications

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The name you can Bank upon

Good people to grow with

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We keep you going

A friend you can bank upon

A new look at life

Chiranjeevi Bhava

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PUNCHLINES OF INSURANCE COMPANIES (1)

Have You Met Life Today – Metropolitan Life Insurance Company or Metlife

(2)

The Power on your side – Allianz Group

(3)

Growing and Protecting your wealth – Prudential Insurance Company

(4) (5) (6) (7)

We know Money – AIG or American International Group Insurance Company Trust thy name is ___ – LIC Jindagi ke Saath Bhi, Jindagi ke Baad Bhi – LIC Be Life Confident – AXA UK

(8)

You are in good hands – Allstate Insurance Company

(9)

Your Partner for life – Max NewYork Life Insurance

(10)

Positively Different – Standard Insurance Company Limited

(11)

Assurance of the leader (Competence) –The New India Assurance Co. Ltd.

PUNCHLINES OF FAMOUS FINANCIAL COMPANIES COMPANIES UNDER FINANCIAL SECTOR (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Bombay Stock Exchange: The Edge Is Efficiency Citigroup Or Citibank: The Citi Never Sleeps ABN Amro Bank: Making More Possible Andhra Bank: Much More To Do, With YOU In Focus Bank Of America: Higher Standards Bank Of Baroda: India's International Bank Bank Of Rajasthan: Dare To Dream Barclays Bank: Fluent In Finance; Its Our Business To Know Your Business Deutsche Bank: A Passion To Perform Franklin Templeton Investments: Gain From Our Perspective HSBC: The World's Local Bank ICICI Bank: Hum Hain Na !!! Kotak Mahindra Bank: Think Investments Think Kotak

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(14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24)

Lehman Brothers: Where Vision Gets Built London Metal Exchange : The World's Center For Non Ferrous Metal Trading Mastercard: There Are Some Things Money Can't Buy For Everything Else There's Mastercard MCX: Trade With Trust Metropolitan Life Insurance Company Or Metlife : Have You Met Life Today Nasdaq : Stock Market For The Digital World New York Stock Exchange (NYSE): The World Puts Its Stock In Us Standard Chartered Bank: Your Right Partner SBI Debit Card: Welcome To A Cashless World Singapore Stock Exchange (SGX) : Tomorrow Market's Today Union Bank Of India: Good People To Bank With

PUNCHLINES OF FAMOUS COMPANIES INDIAN CORPORATE (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Big Bazaar: Is Se Sasta Aur Achcha Kahee Nahee Biocon : The Difference Lies In Our Dna BPCL: Pure For Sure Cipla: Caring For Life Dr Reddy's Laboratories : Life Research Hope Essar Corp: A Positive A++Itude IBP: Pure Bhi Poora Bhi Infosys: Powered By Intellect, Driven By Values; Improve Your Odds With Infosys Predictability Indian Oil: Bringing Energy To Life Jet Airways: The Joy Of Flying Larsen & Toubro: We Make Things Which Make India Proud Its all about imagineering Essar : A possitive attitude Maruti Suzuki : Count on us Dell : Here is yours ONGC: Making Tomorrow Brighter Raymonds: The Complete Man

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(16) (17) (18) (19) (20) (21) (22) (23) (24)

Reid & Taylor: Bond With The Best Reliance Industries Limited: Growth Is Life SAIL: There Is A Little Bit Of Sail In Everyone's Life Sahara India: Emotionally Yours Tata Motors: Even More Car Per Car TCS: Beyond The Obvious Thomas Cook : Don’t Just Book It Thomas Cook It Videocon: The Indian Multinational Wipro: Applying Thought

MEDIA COMPANIES (1) (2) (3) (4) (5) (6) (7) (8) (9)

Business India: The Magazine Of The Corporate World Business Today: For Managing Tomorrow Business World: Play The Game CNBC Television: Profit From It Hindustan Times: The Name India Trusts For News NDTV Profit: New You Can Use The Daily Telegraph: Read A Bestseller Everyday The Economic Times: The Power Of Knowledge The Indian Express: Journalism Of Courage

MULTINATIONAL COMPANIES / BRANDS (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Accenture : High Performance Delivered Adobe: Simplicity At Work Better By Adobe Air Canada: A Breath Of Fresh Air Apple Macintosh: Think Different Arcelor Mittal: Steel Solutions For A Better World Astrazeneca : Life Inspiring Ideas Audi: Vorsprung Durch Technik BMW: The Ultimate Driving Machine Boeing: Forever New Frontiers Bridgestone: Passion For Excellence Bill And Melinda Gates Foundation: Bringing Innovations In Health And Learning To The Global Community IBC Academy Publications

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(12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) (39) (40) (41) (42) (43) (44)

British Airways: The Way To Fly CEAT Tyre: Born Tough Chevrolet Aveo: When Good Is Not Good Enough Comptron And Greaves: Everyday Solutions Amazon.com: Earth's Biggest Bookstore Dunlop: Accelerate Your Soul Ebay: The World's Online Market Place Emirates Air: Keep Discovering Epson: Exceed Your Vision Ernst And Young: Quality In Everything We Do Euronext: Go For Growth Exxon Mobil: Taking On The World’s Toughest Energy Challenges Fiat: Driven By Passion Ford: Built For The Road Ahead Ford Motor: Make Every Day Exciting Gail: Gas And Beyond Glaxo Smithkline: Today's Medicines Finance Tomorrow's Miracles General Motors (GM): Only GM Honda : The Power Of Dreams Hyundai: Drive Your Way IBM: On Demand I Think, Therefore IBM Intel: Intel Inside Jaguar: Born To Perform Lee: The Jeans That Built America Lenovo: We Are Building A New Technology Company Lexus: The Pursuit Of Perfection LG: Life's Good Louis Phillips: The Upper Crest Lufthansa Airlines: There's No Better To Fly Merck : Where Patients Come First Michelin: A Better Way Forward Microsoft: Where Do You Want To Go Mittal Steel: Shaping The Future Of Steel IBC Academy Publications

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(45) (46) (47) (48) (49) (50) (51) (52) (53) (54) (55) (56)

Dell: Easy As Dell Pfizer: Life Is Our Life's Work Phillips: Sense And Simplicity Qantas: The Spirit Of Australia Red Cross: Together We Prepare Samsung: Everyone's Invited Or Its Hard To Imagine Sony: Like No Other Toyota: Touch The Perfection SAP: The Best – Run Businesses Run SAP Virgin Atlantic: Your Never Forget Your First Time Walmart: Always Low Prices Always Windows XP: Do More With Less

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ABBREVIATION: BANKING & FINANCE TERMS

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

ATM AML ANBC ADR AFC ALCO ALM ARCIL AUM BoP BIS BPLR CASA CD CDR CDR CP CAG CAS CBS

21 22 23 24 25 26 27

CCIL CII CIBIL COPRA CRR CRAR DICGC

28

DIRA

Automated Teller machine Anti-Money laundering Adjusted Net Bank Credit American Depository Receipt Asset Finance Company Asset-Liability Committee Asset-Liability Management Asset Reconstruction Company of India Asset Under Management Balance of payment Bank for International Settlements Benchmark Prime Lending Rate Current Account Savings Account (deposits) Certificate of Deposit (a deposit product) Credit-to-Deposit Ratio Corporate Debt Restructuring Commercial Paper ( a lending product) Controller & Auditor General of India Credit Authorization Scheme Core Banking solution ( Centralized Banking Solution) Clearing Corporation of India Ltd. Confederation of Indian Industries Credit Information Bureau of India Ltd. Consumer Protection Act Cash Reserve Ratio Capital To Risk Weighed Asset Ratio Deposit Insurance and Credit Guarantee Corporation of India Differential Interest Rate Scheme IBC Academy Publications

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29 30 31 32 33 34 35 36 37 38 39

DSCR DRI DRT ECB ECGC EEFC EFT FCNR (B) FII FEMA FICCI

49 41 42 43 44 45 46 47 48

FRN GDP GDR GIC G-Sec HFT HTM IBA IBRD

49 50 51 52 53 54

IIBI ICAR HUDCO IFCI IMF IRDA

55 56 57

ISDA IIP IRAC Norms

58 59 60 61 62 63 64

IRDP LAF LIBOR ITRS KVIC KCC KYC

Debt Service Coverage Ratio Differential Rate of interest Scheme Debt Recovery Tribunal External Commercial Borrowings Export Credit & Guarantee Corporation Exchange Earner Foreign Currency Electronic Funds Transfer Foreign Currency Non-Resident (Banks) Foreign institutional Investor Foreign Exchange Management Act Federation of Indian Chambers of Commerce & Industry Floating Rate Note Gross Domestic Product Global Depository Receipt General Insurance Corporation Government Securities Held For Trading (a Security/Bond) Held Till Maturity (a Security/Bond) Indian Banks Association International Bank for Reconstruction and Development Industrial Investment Bank of India Indian Council of Agricultural Research Housing & Urban Development Corporation Industrial Finance Corporation of India International Monetary Fund Insurance Regulatory & Development Authority International Swaps & Derivatives Association Index of industrial Production Income Recognition and Asset Classification Norms Integrated Rural Development Programme Liquidity Adjustment Facility London Inter-Bank Offered Rate International Transaction Reporting System Khadi & Village Industries Corporation Kisan Credit Card Know Your Customer (Guidelines of RBI) IBC Academy Publications

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65 66 67 68 69 70 71 72 73 74 75

LERMS M1 M3 MCA MCX MMMF MFI MICR MIBOR MTM NABARD

76

NASSCOM

77 78 79 80 81 82 83 84 85 86

NAV NPV NBFC NBFI NHB NI Act NDTL NEFT NRE NREGA

87 88 89 90 91 92 93 94 95

NRI OECD OTCEI PACS PAN PD PDC PDO PFCL

Liberalized Exchange Rate Management System Narrow Money Broad Money Ministry of Company Affairs Multi Commodity Exchange of India Money Market Mutual Fund Micro Finance Institution Magnetic Ink Character Recognition Mumbai Inter-Bank Offered Rate Mark-To-Market National Bank for Agriculture and Rural Development National association of Software and Services Companies Net Asset Value Net Present Value Non-Banking Finance Companies Non-Banking Financial Institution National Housing Bank Negotiable Instruments Act Net Demand and Time Liabilities National Electronic Funds Transfer Non-Resident External (Mahatma Gandhi) National Rural Employment Guarantee Act Non Resident Indian Organization for Economic Co-operation Over-The-Counter Exchange of India Primary Agricultural Credit Society Permanent Account Number Probability of Default Post-Dated cheque Primary Debt Office Power Finance Corporation Ltd.

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96

PMEGP

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117

PIO PTC RDBMS REER RFC RIDF RRB RNBC RTGS SCB SDR SFC SGL SEBI SEZ SIDBI SLR SME SRWTO SSI SWIFT

118 119 120

TFCI UCB UCPDC

121 122 123

VaR WPI YTM

Prime Minister Employment Guarantee Programme Person of Indian Origin Pass Through Certificate Relational Database management System Real Effective Exchange Rate Resident Foreign Currency Rural Infrastructure Development Fund Regional Rural Bank Residual Non-Banking Company Rapid Time Gross Settlement Scheduled Commercial Bank Special Drawing Right State Financial Corporation Subsidiary General Ledger (of RBI) Securities & Exchange Board of India Special Economic Zone Small Industries Development Bank of India Statutory Liquidity Ratio Small and Medium Enterprises Small Road & Water Transport Operators Small Scale Industries Society for Worldwide Inter-Bank Funds Transfer Tourism Finance Corporation of India Ltd. Urban Co-operative Bank Uniform Customs and Practices on Documentary Credit (600) Vale at Risk Wholesale Price Index Yeild to Maturity (of Securities/Bonds)

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GLOSSARY OF BANKING TERMINOLOGY

1.

2.

3.

4.

5.

6.

7.

8.

AAA A type of grade that is used to rate a particular bond. It is the highest rated bond that gives maximum returns at the time of maturity. ABO (ACCUMULATED BENEFIT OBLIGATION) is a measure of liability of pension plan of an organization and is calculated when the pension plan is terminated. ACCEPTANCE OR BANKER’S ACCEPTANCE A signed instrument acknowledging the acceptance and approving all the terms & conditions of the agreement. It is widely used in financial dealings, contracts and Agreements. ACCOUNT BALANCE The amount lying in the Bank account(s) at a particular time. Other items shown in the statement of account are Debit balance and Credit Balances. The Net Balance in the account is known as Account Balance. ACCOUNT RECONCILIATION A process which helps in tallying the account transactions and balancing of books of accounts. This process is carried out at a fixed interval; say weekly, monthly, quarterly, half-yearly or yearly at the close of financial year. ACCOUNT STATEMENT A Financial record reflecting the transaction done in a account (showing Credits, Debits and Net Balances and the precise description of the transaction). ACCRETION A process wherein the price of a Bond bought at a “discount” is changed to “At Par value”. It denotes the change in the price of a Bond (yield) that has been bought at a discount value to the Par value of the Bond. ACCRUAL BASIS A process of accumulation of interest on a financial instrument. It is a common parameter for calculation of interest and yield on a financial product. The accrual is generally computed by

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ii | Glossary of Banking Terminology

9.

10.

11.

12. 13.

14.

15.

16. 17.

18.

19.

assuming a 30-day period in a month. The interest amount thus accumulated is called “Accrued interest”. ADMINISTERED RATE The Rate of Interest which can be changed upward or down-side, as permissible by the terms of contractual terms in an agreement. This is applicable to both Deposits and loan products. AMFI (ASSOCIATION OF MUTUAL FUNDS OF INDIA) is an apex body of all Asset Management Companies (AMCs) which have been registered with SEBI. (Note: AMFI is not a mutual funds regulator) ADJUSTABLE RATE MORTGAGE (ARM) is basically a type of loan where the rate of index is calculated on the basis of the previously selected index rate. ANBC (ADJUSTED NET BANK CREDIT) is Net Bank Credit added to investments made by banks in non-SLR bonds. ASBA (APPLICATION SUPPORTED BY BLOCKED AMOUNT) It is a process developed by the SEBI for applying to IPO. In ASBA, an IPO applicant’s account doesn’t get debited until shares are allotted to him. AMERICAN DEPOSITORY RECEIPT (ADR) ADRs are traded in the stock Exchanges in the USA only. These are Depository Receipts carrying a specified number of equity shares (say 1,2, or 4) of a company that has been issued in foreign currency. AMORTISATION (of a Loan) A process of repayment of Loans or securities in a fixed period progressively in the stipulated sum of amount. The Principal amount is amortized in installments payable over a period of tenor. ANTE-DATED CHEQUE A cheque, which bears a date before the date of issue, is said to be ante-dated. ANNUITIES A contract which guarantees return or income over a period of time, in exchange of depositing a large sum of money, paid either at the same time or over a period in staggered amounts. Some of the common types of Annuities are –Fixed, Deferred, Immediate or variable. APR (ANNUAL PERCENTAGE RATE) is a percentage that is calculated on the basis of the amount financed, the finance charges, and the term of the loan. ARBITRAGE Financial returns arising out of simultaneous purchase and sell of two identical commodities or financial instruments. These simultaneous transactions are done in order to take advantage of price variations in two different markets at a given point of time. IBC Academy Publications

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20.

21.

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25. 26.

27. 28.

29. 30.

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ASSIGNMENT means transfer of ownership in the article by means of a written and stamped document according to the provisions of the transfer of property act. ASSET Any Business resource acquired at a value which is expected to fetch financial benefit to the business over a period of time. This can be either a Tangible Asset (viz. Building, Machinery etc.) or Intangible Asset (viz. goodwill, patent etc.). ASSET BACKED SECURITY (ABS) A Financial asset which is supported or backed by a tangible asset, such as bank loans, leases, and other assets. ASSET & LIABILITY MANAGEMENT is the coordinated managing of business portfolio by a Bank or Financial Institution to contain the various risks associated in the business. AUTOMATED TELLER MACHINE (ATM) Very popular machines used by the Banks for dispensing a range of banking businesses including dispensing of cash to its customers, round-the-clock, electronically. These ATMs are installed on-site (at the branch offices) or off-site (independent locations away from Branch offices) for wider reach and comfort to the customers. BAD DEBT A loan or debt considered irrecoverable and is therefore written off as a loss to the Bank or Financial Institution. BALANCE TRANSFER (1) Transfer of credit/debt at a Bank or Financier with that of raising loan/credit from other source, a Bank/Financier etc. (2) Transfer of credit balances in an account to another account. BANK A Bank is a commercial institution which deals with money and credit. BANKRUPTCY Financial insolvency of a Person, Firm or an Institution, whereby their assets gets liquidated by the Bank or Financial Institution, through a legal process, to pay off the debt / liabilities. BANKER’S CHEQUES A banker’s cheque is one which is drawn by a banker upon himself. BANK DRAFT is an order to pay money drawn by one office of a bank upon another office of the same bank for a sum of money payable to order or on demand. BASE RATE A minimum rate that a bank is allowed to charge from the customer. Base rate differs from bank to bank. It is actually a minimum rate below which the bank cannot give loan to any customer. Earlier base rate was known as BPLR (Base Prime Lending Rate). IBC Academy Publications

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33. 34.

35.

36. 37.

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39. 40. 41.

BANCASSURANCE Is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. BALANCE SHEET A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time. BALLOON PAYMENT Is a specific type of mortgage payment, and is named “balloon payment” because of the structure of the payment schedule. For balloon payments, the first several years of payments are smaller and are used to reduce the total debt remaining in the loan. Once the small payment term has passed (which can vary, but is commonly 5 years), the remainder of the debt is due - this final payment is the one known as the “balloon” payment, because it is larger than all of the previous payments. BASIS POINTS (bps) A basis point is a unit equal to 1/100th of a percentage point. i.e. 1 bps = 0.01%. Basis points are often used to measure changes in or differences between yields on fixed income securities, since these often change by very small amounts. BCBS Basel Committee on Banking Supervision is an institution created by the Central Bank governors of the Group of Ten nations. BASEL II NORMS - BCBS has kept some restrictions on bank for the maintenance of minimum capital with them to ensure level playing field. Basel II has got three pillars:  Pillar 1- Minimum capital requirement based on the risk profile of bank.  Pillar 2- Supervisory review of banks by RBI if they go for internal ranking.  Pillar 3- Market discipline. BCSBI The Banking Codes and Standards Board of India is a society registered under the Societies Registration Act, 1860 and functions as an autonomous body, to monitor and assess the compliance with codes and minimum standards of service to individual customers to which the banks agree to. BIFR Bureau of Industrial and Financial Reconstruction. BILL MARKET refers to the market for short-term bills generally of three months duration. BILLING STATEMENT A statement containing the summary of all transactions, purchases, payments, financial charges etc., taken place during a specified period (called billing cycle). Usually Credit card, mobile phone users etc. get a Billing statement on monthly intervals. IBC Academy Publications

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47. 48. 49. 50. 51.

52. 53.

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BRANCH BANKING It is banking system under which a big bank as a single institution and under single ownership operates through a network of branches spread all over the country. BOND An instrument representing an interest bearing debt, where the Issuer is required to pay a sum of money periodically till the maturity and then receive back the accumulated amount. BRIDGE FINANCING A Loan granted to the Borrower for an interim period, pending sanction or completion of other documentation formalities etc. with other Long Term Lender, and at the end of the loan period this loan is repaid out of a Long-term Loan raised from other Lender. It is also known as Gap financing. BRIDGE LOAN A Real Estate loan or Home Loan, of interim nature, where the current residential asset is offered as collateral security for the purchase of another residential property. This is also known as “Swing Loan”. BOUNCED CHEQUE A cheque issued in the account of a customer which got returned by the Payee Banker for a host of reasons, such as No Balance or insufficient funds, Alteration in Signature or Signature does not tally, Stale cheque (Date out of order or more than 6 months’ older) etc. CAP - A cap denotes a limit on increase or decrease in interest rates and installment of an adjustable rate mortgage Loan. CASH CREDIT It is a type of loan which is given to the borrower against his current assets, such as shares, stocks, bonds etc. CASH RESERVE The total amount of cash balance available in the account and can be withdrawn at will. CAPITAL MARKET is the market in which medium-term and longterm bonds are borrowed and lent. CERTIFICATE OF DEPOSIT It is a money market instrument introduced in India in June 1989, with a view to further widens the range of money market instruments and to give investors flexibility in the development of their short-term funds. CENTRAL BANK is the apex institution which controls, regulates and supervises the monetary and credit system of the country. CLEARING of a cheque is a function, carried out at the Clearing House, whereby the cheque amount is debited from the balances available in the account of a customer and added to the payee’s account. Now a day, this function is carried out electronically. CLEARING HOUSE A Place where the representatives of various Banks meet for exchanging, confirming and clearing all the cheques/ IBC Academy Publications

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57. 58.

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60. 61. 62.

63. 64.

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instruments received at their counters. This function is generally carried out by the Cenral bank, RBI or a nominated PSU Bank at centers where it has no presence. CHAIN BANKING refers to the system in which two or more banks are brought under common control by a device other than the holding company. CHAPS (Clearing House Automated Payment System) It is a type of electronic bank-to-bank payment system that guarantees same-day payment. COMMERCIAL PAPER is a short-term negotiable money market instrument. CONSORTIUM ADVANCES If several banks join together according to their capacities in meeting the credit needs of large borrowers, such advances are known as “consortium advances.” COUNTERMANDS THE PAYMENT Countermand means “the instruction conveyed by the drawer of a cheque to drawee bank not to pay the cheque, when it is presented for payment.” CONVERSION is the unlawful taking, using, disposing or destroying of goods, which is inconsistent with the owner’s right of possession. CENTRAL CO-OPERATIVE BANK It is in the middle of the three-tier cooperative credit structure, operating at the district level. CO-BORROWER A person or Firm or Institution, who signs a Promissory Note as a Surety or co-obligant, that the loan/credit availed by the Main Borrower will be repaid. Co-borrower is equally responsible for loan repayment. CO-OPERATIVE BANKS are a group of financial institutions organised under the provisions of the Co-operative Societies Act of the states. COMMERCIAL BANKS The banks which perform all kinds of banking business and generally finance trade and commerce are called “commercial banks.” COMPOUND INTEREST is charged not only on the principal amount but also on the periodic interest charged and accumulated and the whole amount gets compounded on a sum of money deposited or borrowed for a long time. CAPITAL ADEQUACY RATIO (CAR) It’s a measure of a bank’s capital. Also known as “Capital to Risk Weighted Assets Ratio (CRAR)”, this ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. It is decided by the RBI.

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CIBIL (Credit Information Bureau of India Limited) is India’s first credit information bureau. Whenever a person applies for new loans or credit card(s) to a financial institution, they generate the CIBIL report of the said person or concern to judge the credit worthiness of the person and also to verify their existing track record. CIBIL actually maintains the borrower’s history. CRISIL (Credit Rating Information Services of India Limited) is a global analytical company providing ratings, research, and risk and policy advisory services. CAPITAL ACCOUNT CONVERTIBILITY (CAC) It is the freedom to convert local financial assets into foreign financial assets and vice versa. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back, or in other words, transfer of money from current account to capital account. CPSS Committee on Payment and Settlement Systems CALL MONEY Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule. Brokerages use call money as a short-term source of funding to cover margin accounts or the purchase of securities. The funds can be obtained quickly. CASA means low cost deposits for a bank viz. Current Account, Savings Account. CAMELS is a type of Bank Rating System. (C) stands for Capital Adequacy, (A) for Asset Quality, (M) for Management ,(E) for Earnings, (L) for Liquidity and (S) for Sensitivity to Market Risk. CORE BANKING SOLUTION (CBS) All the banks are connected through internet, meaning we can have transactions from any bank and anywhere. (e.g. deposit cash in PNB, Delhi branch and withdraw cash from PNB, Gujarat) CRAR For RRB’s it is more than 9% (funds allotted 500 cr) and for commercial banks it is greater than 8% (6000 cr relief package). CONSUMER CREDIT Loan or credit facility extended to public or consumers for financing their purchase of goods, services and real estate property. Loans allowed for consumption purposes are generally unsecured and/or secured with the help of a collateral. CLOSING of an account is the final stage of any transaction where both the parties receive almost equal consideration from each other. The Term “closing” from Ledger books where the two accounts are “closed down”, i.e. both debit and credit side becomes equal.. IBC Academy Publications

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80. 81.

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84. 85.

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CREDIT CREATION The power of commercial banks to expand deposits through loans, advances and investments is known as “credit creation.” CREDIT RATING Based on pre-defined risk parameters, a customer is assigned a Risk rating which denotes the extent (of Loan) to which the borrower would be capable of servicing, apart from the risk of default associated with it. CRISIL, ICRA, Moodys’, CARE, CIBIL are the few approved Rating agencies operating in India. CROSSING The act of drawing two transverse parallel lines on the face of a cheque is called “crossing of the cheque.” CURRENCY SWAP It is a foreign-exchange agreement between two parties to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency. Currency swap is an instrument to manage cash flows in different currency. CAD (Current Account Deficit) It means when a country’s total imports of goods, services and transfers is greater than the country’s total export of goods, services and transfers. CMIE (Centre for Monitoring Indian Economy) It is India’s premier economic research organization. It provides information solutions in the form of databases and research reports. CMIE has built the largest database on the Indian economy and companies. CONTINGENT LIABILITY A liability that a company may have to pay, but only if a certain future event occurs. CONTINGENCY FUND It’s a fund for emergencies or unexpected outflows, mainly economic crises. A type of reserve fund which is used to handle unexpected debts that are outside the range of the usual operating budget. DEPB SCHEME Duty Entitlement Pass Book. It is a scheme which is offered by the Indian government to encourage exports from the country. DEPB means Duty Entitlement Pass Book to neutralise the incidence of basic and special customs duty on import content of export product. DEBENTURES An instrument for raising debt (called Bonds in the USA) whereby a fixed rate of interest is paid by the Borrower (company) on the amount subscribed by the public/Institutions. These are generally issued for a long tenor, say 7-10 years and interest is paid at quarterly, half-yearly or yearly intervals. On maturity, the principal amount subscribed is redeemed to the Debenture holders. Debentures are generally secured against the assets of the issuing company. Convertible Debentures are IBC Academy Publications

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instruments which have the characteristics to either fully or partially convert the amount into a specified number of equity shares at predetermined values. These generally carry a relatively lower rate of interest. DEBIT A Banking term indicates that the amount of money that is owed by the borrower. The amount of money payable which has been recovered from an account is said to be “debited” from the account. DEBT A debt represent the amount of money owed by someone to another, may be an individual, Bank or an Institution. DEBT MANAGEMENT A process of managing Debt and repaying creditors. Debt Management is a broad concept covering almost anything relating to debt and their repayment. DEBT SETTLEMENT A procedure wherein a person in debt negotiates the price or amount with the Lender of a loan, in order to reduce the installments and the rate of repayment and ensure a fast and guaranteed repayment. The process may involve repayment of loan amount on a consolidated basis, with or without a waiver of a portion of interest. DEBT REPAYMENT The process of repayment of a debt; sometimes , the consolidation that is provided is also included to Debt repayment. DEBT RECOVERY A process initiated by the Banks/Financial Institutions for recovery of loan either by settlement process or realization of value of the assets held as collateral security for the loan. DSCR (Debt Service Coverage Ratio) is a financial ratio that measures the company’s ability to pay their debts. DEMAND DEPOSITS Deposits which can be withdrawn by the depositor at any time by means of cheques are known as “demand deposits.” DEPOSIT MOBILISATION It implies tapping of potential savings and putting them into banking sector for productive uses. DEPRECIATION The decrease in the monetary and book value of a fixed asset as a result of wear and tear over a period of time ,which incidentally also reflects the realizable value of the asset. DEVELOPMENT BANKS A development bank is a multi-purpose financial institution which is concerned mainly with providing financial assistance to business units. DERIVATIVE DEPOSITS Deposits which arise on account of granting loans or purchase of assets by a bank are called “derivative deposits.” IBC Academy Publications

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100. DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI) is setup in 1988 as the apex body in the Indian market for developing a secondary market for money instruments. 101. DIVIDEND A part /portion of the profit that is earned by the Joint Stock Company or a Corporation, which is distributed by them amongst the share-holders. 102. DOCUMENTS OF TITLE TO GOODS Documents, which in the ordinary course of trade, are regarded as proof of the possession or control of goods are called “documents of title to goods.” 103. DWBIS Data Warehousing and Business Intelligence System, a type of system which is launched by SEBI. The primary objective of DWBIS is to enhance the capability of the investigation and surveillance functions of SEBI. 104. EARNEST MONEY DEPOSIT is made by the buyer to a potential seller of a real estate, in the initial stage of negotiation of property. 105. E-CASH, also known as Electronic cash and Digital Cash. E-Cash is a technology where the Banks resort to the use of technology – i.e. electronic equipments, computers and networking hardware to execute various transactions and transfer of funds between Banks as well as customers’ accounts. 106. EASIEST Electronic Accounting System in Excise and Service Tax. 107. ECS Electronic Clearing Facility is a type of direct debit. 108. EXPORT CREDIT GUARANTEE CORPORATION OF INDIA (ECGC) This organisation provides risk as well as insurance cover to the Indian exporters. 109. EARNINGS PER SHARE (EPS) means the amount of annual earnings available to common stockholders as stated on a per share basis. 110. EUROBOND A bond issued in a currency other than the currency of the country or market in which it is issued. 111. ECB (External Commercial Borrowings), taking a loan from another country. Limit of ECB is $500 million, and this is the maximum limit a company can get. 112. EMI (Equated Monthly Installment) It is nothing but a repayment of the loan taken. A loan could be a home loan, car loan or personal loan. The monthly payment is in the form of post dated cheques drawn in favour of the lender. EMI is directly proportional to the loan taken and inversely proportional to time period. That is, if the loan amount increases the EMI amount also increases and if the time period increases the EMI amount decreases.

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113. ELECTRONIC FILING A method of filing of documents, such as Tax form and Tax Return filing etc. on the Internet in the electronic mode. 114. ENCRYPTION A process used to ensure privacy and security of data, while its transmission from one place to another. The process involves scrambling of the data in such a way that it get garbled while in transit and gets unscrambled at the place where it is received. 115. ENDORSEMENT means “writing of a person’s name on the back of the instrument or on any paper attached to it for the purpose of negotiation.” Endorsement is basically a process by which the rights of a financial/ legal document or a negotiable instrument is handed over to another person or firm. 116. ESCROW A negotiable instrument delivered to a person conditionally or for safe custody, but not for the purpose of negotiation, is called “escrow.” 117. EXCHANGE BANKS These Banks deal in foreign exchange and specialise in financing foreign trade and are called “exchange banks.” 118. FCCB (Foreign Currency Convertible Bond) A type of convertible bond issued in a currency different from the issuer’s domestic currency. 119. FCNR ACCOUNTS (Foreign Currency Non-Resident accounts) are the ones that are maintained by NRIs in foreign currencies like USD, DM, and GBP. 120. FIAT MONEY is a legal tender for settling debts. It is a paper money that is not convertible and is declared by government to be legal tender for the settlement of all debts. 121. FSDC (Financial Stability and Development Council) India’s apex body of the financial sector. 122. FLCC: Financial Literacy and Counseling Centres. 123. FRBM Act 2003: Fiscal Responsibility and Budget Management act was enacted by the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The main objectives of FRBM Act are:1. To reduce fiscal deficit. 2. To adopt prudent debt management. 3. To generate revenue surplus. 124. FEDAI: Foreign Exchange Dealers Association of India. An association of banks specializing in the foreign exchange activities in India. IBC Academy Publications

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125. FREE MARKET A market economy based on supply and demand with little or no government control. 126. FEMA ACT (Foreign Exchange Management Act) is useful in controlling HAWALA. 127. FUTURE TRADING It’s a future contract/agreement between the buyers and sellers to buy and sell the underlying assets in the future at a predetermined price. 128. FRP (Fair and Remunerative Price), a term related to sugarcane. FRP is the minimum price that a sugarcane farmer is legally guaranteed. However sugar Mills Company gives more than FRP price. 129. FII (Foreign Institutional Investment) The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. 130. FIU (Financial Intelligence Unit) set by the Government of India on 18 November 2004 as the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions. 131. FINANCIAL INSTRUMENT Any instrument or document that ranges from cash, negotiable instrument, a deed or any other written document which shows evidence of a transaction or an agreement. 132. FINANCIAL INTERMEDIARY A person or institutional body/ firm who acts as a link between a Provider who provides the securities and the user who purchases the securities. Banks and stock brokers are one prominent example of Financial Intermediary. 133. FINANCIAL STATEMENT A record of historical financial reports, data and a record of asset, liabilities capital, income and expenditure etc. 134. FORECLOSURE A foreclosure is a standard procedure where creditors like Banks/Financial Institution are authorized to obtain the title of the immovable property, that has been held as a collateral security with it for a Loan. 135. FPO (Follow on Public Offerings) An issuing of shares to investors by a public company that is already listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process. Remarks: IPO is meant for the companies which have not been listed on an exchange whereas, FPO is for the companies which have already been listed on an exchange but want to raise funds by issuing some more equity shares. IBC Academy Publications

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136. GARNISHEE ORDER is a judicial order served on a bank to suspend its dealings with a customer. 137. GOVERNMENT BOND A security instrument that is issued by the Government through RBI, mainly to raise funds and is a guaranteed instrument with high rate of interest yield. 138. GRACE PERIOD is an interest-free period allowed by a creditor to a Debtor after the period of the loan gets over, before initiating the process of loan recovery. In case of a bill of exchange, it represent the period in addition to the usance period for making payment of the amount of the instrument. 139. GROSS INCOME The total income of a firm or an individual during a full financial year before making any deductions towards interest paid, depreciation, taxes, amortization etc. 140. GROUP BANKING refers to a system of banking in which two or more banks are directly controlled by a corporation or an association or a business trust. 141. GOLD STANDARD A monetary system in which a country’s government allows its currency unit to be freely converted into fixed amounts of gold and vice versa. 142. GAAP (Generally Accepted Accounting Principles) The common set of accounting principles, standards and procedures that companies use to compile their financial statements. 143. HOT MONEY Money that is moved by its owner quickly from one form of investment to another, as to take advantage of changing international exchange rates or gain high short-term returns on investments. 144. HAWALA TRANSACTION It’s a process in which large amount of black money is converted into white. 145. HEDGE is an strategy used to minimize the risk of a particular investment and at the same time maximize the returns on the investment. 146. HOLDER A holder means any person entitled in his own name to the possession of the negotiable instrument and to recover or receive the amount due thereon from the parties liable thereto. 147. IFSC CODE (Indian Financial System Code) The code consists of 11 characters for identifying the bank and branch where the account in actually held. The IFSC code is used both by the RTGS and NEFT transfer systems.

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148. IPO (Initial Public Offerings) is defined as the event where the company sells its shares to the public for the first time. (or the first sale of stock by a private company to the public.) 149. IMPS (Inter-bank Mobile Payment Service) It is an instant interbank electronic fund transfer service through mobile phones. Both the customers must have MMID (Mobile Money Identifier Number). For this service, we don’t need any GPS-enabled cell phones. 150. ITPO (India Trade Promotion Organization) is the nodal agency of the Government of India for promoting the country’s external trade. 151. INDIAN DEPOSITORY RECEIPT (IDR) Foreign companies issue their shares and in return they get the depository receipt from the National Security Depository in return of investing in India. 152. IIFCL (India Infrastructure Finance Company Limited) It gives guarantee to infra bonds. 153. INTERNAL RATE OF RETURN (IRR) It is a rate of return used in capital budgeting to measure and compare the profitability of investments. 154. INCHOATE INSTRUMENT It is an incomplete instrument. 155. INTEREST RATE Interest is a charge payable by the borrower or a debtor for making use of the money. The rate of interest charged depends on several factors such as cost of funds, expected yield, risk premium etc. 156. INDUSTRIAL BANKS Bank which provide long-term credit to industries for the purchase of machinery, equipts etc., are known as “industrial banks.” 157. INDIGENOUS BANKER An indigenous banker is an individual or private firm receiving deposits and dealing in hundies or lending money. 158. INNOVATIVE BANKING implies the application of new techniques, new methods and novel schemes in the areas of deposit mobilisation, deployment of credit and bank management. 159. JUNK BONDS are issued generally by smaller or relatively less wellknown firms to finance their operations, or by large and well-known firms to fund leveraged buyouts. These bonds are frequently unsecured or partially secured, and they pay higher interest rates: 3 to 4 percentage points higher than the interest rate on blue chip corporate bonds of comparable maturity period. 160. LIBOR (London InterBank Offered Rate) An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.

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161. LIBID (London Interbank Bid Rate) The average interest rate at which major London banks borrow Eurocurrency deposits from other banks. 162. LGD (Loss Given Default) Institutions such as banks will determine their credit losses through an analysis of the actual loan defaults. 163. LOAN-TO-DEPOSIT RATIO (LTD Ratio) A ratio used for assessing a bank’s liquidity by dividing the bank’s total loans by its total deposits. If the ratio is too high, it means that banks might not have enough liquidity to cover any fund requirements, and if the ratio is too low, banks may not be earning as much as they could be. 164. LLP (Limited Liability Partnership) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. 165. LIQUIDITY It refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. 166. LIEN A lien is the right of person or a bank to retain the goods or securities in his possession until the debt due to him is settled. 167. LAND DEVELOPMENT BANK It is a co-operative bank which provides long-term agricultural credit. 168. LEAD BANK is the bank which adopts a district and integrates its schemes with district plans for an effective distribution of credit, along with the expanded banking facilities as per the local needs. 169. LEASE A contract through which the owner (Lessor) of a certain property or asset allows another interest party (Lessee) to use the same for a specified period, in exchange for a value called the lease rent. 170. LOCK-IN-PERIOD A Guarantee given by the lender that there will be no change in the quoted mortgage rates for a specified period of time. 171. LUNATIC A lunatic is a person of unsound mind. 172. MATERIAL ALTERATION An alteration which alters the business effects of the instruments if used for any business purpose is called “material alteration.” 173. MARGIN means the excess of market value of the security over the advance granted against it. 174. MINIMUM ALTERNATE TAX (MAT) is the minimum tax to be paid by a company even though the company is not making any profit. 175. MICR (Magnetic Ink Character Recognition) A 9-digit code which actually shows whether the cheque is real or fake.

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176. MICRO FINANCE INSTITUTIONS (MFI) Micro Finance means providing credit/loan (micro credit) to the weaker sections of the society. Those institutions that provide financial services to low-income clients. 177. MSME (Micro Small and Medium Enterprises) and SME (Small and Medium Enterprises) This is an initiative of the government to drive and encourage small manufacturers to enjoy facilities from banks at concessional rates. 178. M3 in banking It’s a measure of money supply. It is the total amount of money available in an economy at a particular point in time. 179. M0, M1, M2 AND M3 These terms are nothing but money supply in banking field. 180. MSF (Marginal Standing Facility) Under this scheme, banks will be able to borrow upto 1% of their respective net demand and time liabilities. The rate of interest on the amount accessed from this facility will be 100 basis points (i.e. 1%) above the repo rate. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission. 181. MERCHANT BANKING refers to specialization in financing and promotion of projects, investment management and advisory services. 182. MIXED BANKING When the commercial banks provide both shortterm and long-term finance to commerce and industry, it is called “mixed banking.” 183. MONEY-LENDER The money-lenders are those whose primary business is money lending. 184. MONEY MARKET is the market in which short-term funds are borrowed and lent. 185. MORTGAGE is a legal agreement between the Lender and the Borrower where immovable asset is used as collateral for the loan, in order to secure the payment of a debt. The legal document includes clauses enabling the Lender to confiscate the property, in case the repayment from borrower is not forthcoming or stopped by the borrower. 186. NABARD (National Bank for Agriculture and Rural Development) is essentially a development bank for promoting agricultural and rural development. 187. NEGOTIATION is the process by which the ownership of the credit instrument is transferred from one person to another. 188. NEGATIVE LIEN It is non-possessory lien.

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189. NEGOTIABLE INSTRUMENT means promissory note, bill of exchange or cheque payable either to order or to bearer. 190. NEFT (National Electronic Fund Transfer) This is a method used for transferring funds across banks in a secure manner. It usually takes 12 working days for the transfer to happen. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. (Note: RTGS is much faster than NEFT.) 191. NPA (Non-Performing Asset) It means once the borrower has failed to make interest or principal payments for 90 days, the loan is considered to be a non-performing asset. Presently it is 2.39%. 192. NMCEX National Multi-Commodity Exchange. 193. NBFC (Non-Banking Finance Company) is a company which is registered under Companies Act, 1956 and whose main function is to provide loans. NBFC cannot accept deposit or issue demand draft like other commercial banks. NBFCs registered with RBI have been classified as AssetFinance Company (AFC), Investment Company (IC) and Loan Company (LC). 194. NPCI National Payments Corporation of India. 195. NEER Nominal Effective Exchange Rate. 196. NOTING is the authentic and official proof presentment and dishonour of a negotiable instrument. 197. NON-SCHEDULED BANKS are trade banks. Their paid-capital and reserves less than Rs. 5 lakhs and are not included in the second schedule of the Reserve Bank of India Act, 1934. 198. OMO (Open Market Operations) The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Open market operations are the principal tools of monetary policy. RBI uses this tool in order to regulate the liquidity in economy. 199. OSMOS: Off-site Monitoring and Surveillance System. 200. ORIGINATION FEE The charges a lender or creditor levies for processing a loan, hence also called Loan Processing charges. It includes cost of loan documents preparation, verification of credit history of the borrower and conducting an over-all appraisal exercise by the lender. 201. PAYEE The person whom the money is to be paid by the Payer or Drawer.

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202. PERSONAL IDENTIFICATION NUMBER (PIN) is a secret code of numbers and alphabets given to customers to perform transactions through an Automated Teller Machine or Internet Banking. 203. P-NOTES: “P” means participatory notes. 204. PAN (Permanent Account Number), as per section 139A of the Act obtaining PAN is a must for the following persons:1. Any person whose total income or the total income of any other person in respect of which he is assessable under the Act exceeds the maximum amount which is not chargeable to tax. 2. Any person who is carrying on any business or profession whose total sales, turnover or gross receipts are or are likely to exceed Rs. 5 lakh in any previous year. 3. Any person who is required to furnish a return of income under section 139(4) of the Act. 205. PRIME LENDING RATE (PLR) is the rate at which commercial banks give loans to its prime customers (most creditworthy customers). 206. PE RATIO (Price to Earnings Ratio), a measure of how much investors are willing to pay for each dollar of a company’s reported profits. 207. PPF (Public Provident Fund) The Public Provident Fund Scheme is a statutory scheme of the Central Government of India. The scheme is for 15 years. The minimum deposit is Rs 500 and maximum is Rs 70,000 in a financial year. 208. PPP (Purchasing Power Parity) is an economic technique used when attempting to determine the relative values of two currencies. 209. PRIORITY SECTOR LENDING Some areas or fields in a country depending on its economic condition or government interest are prioritised and are called priority sectors i.e. industry, agriculture. 210. PRIMARY DEPOSITS - Deposits which arise when cash or cheques are deposited by customers in a bank are called “primary deposits.” 211. POST-DATED CHEQUE (PDCs) A cheque which bears a date subsequent to the date of issue is said to be post-dated. 212. PUBLIC SECTOR BANKS These are owned and controlled by the Government. 213. PRIVATE SECTOR BANKS These banks are owned by the private individuals or corporations but not by the Government or cooperative societies. 214. PROTEST is a formal certificate of dishonour issued by the Notary public to the holder of a bill or promote, on his demand. IBC Academy Publications

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215. RECORD DATE A date set by the Issuer on which an individual must own the equity shares to be eligible to receive the dividend or other incentives announced by the company. 216. RECONVEYANCE In banking parlance, Re-conveyance is transfer of property to its real owner, once the loan or the mortgage is paid off. 217. REER Real Effective Exchange Rate. 218. RETAIL BANKING It is mass-market banking in which individual customers use local branches of larger commercial banks. 219. RTGS (Real Time Gross Settlement systems) is a funds transfer system where transfer of money or securities takes place from one bank to another on a “real time”. (‘Real time’ means within a fraction of seconds.) The minimum amount to be transferred through RTGS is Rs 1 lakh. Processing charges/Service charges for RTGS transactions vary from bank to bank. 220. REVERSE MORTGAGE It’s a Loan scheme for senior citizens. 221. REGIONAL RURAL BANKS (RRBs) As its name signifies, RRBs are specially meant for rural areas, capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank. These banks are set up with the objective of increasing the local involvement of banks to meet the credit requirements of weaker sections and small entrepreneurs in the rural areas. 222. REFINANCE means clearing the current loan with the proceeds of a new loan and using the same property as a collateral. 223. RE-POSSESSION A process of taking back the property or asset by a Seller or a lender from the buyer or a borrower due to default in payment of the terms of purchase or loan. 224. RESIDUAL VALUE The estimated realizable value of the asset or property which could be possibly received on sale of an asset or property after the end of its full life. 225. SCHEDULED BANKS in India constitute those banks which have been included in the Second Schedule of RBI Act, 1934 as well as their market capitalisation is more than Rs 5 lakh. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. 226. SOFA: Status of Forces Agreement, SOFA is an agreement between a host country and a foreign nation stationing forces in that country. 227. SEPA: Single Euro Payment Area. 228. SPECIAL DRAWING RIGHTS (SDR) is a type of monetary reserve currency, created by the International Monetary Fund. SDR can be defined as a “basket of national currencies”. These national IBC Academy Publications

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229.

230. 231.

232.

233. 234. 235.

236.

237.

currencies are Euro, US dollar, British pound and Japanese yen. Special Drawing Rights can be used to settle trade balances between countries and to repay the IMF. American dollar gets highest weightage. SWIFT (Society for Worldwide Interbank Financial Telecommunication) It operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions. STRIPS Separate Trading for Registered Interest & Principal Securities. SECURITIES TRADING CORPORATION OF INDIA LIMITED (STCI) was promoted by the Reserve Bank of India (RBI) in 1994 along with Public Sector Banks and All India Financial Institutions with the objective of developing an active, deep and vibrant secondary debt market. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) is the primary governing/regulatory body for the securities market in India. All transactions in the securities market in India are governed and regulated by SEBI. Its main functions are: 1. New issues (Initial Public Offering or IPO) 2. Listing agreement of companies with stock exchanges 3. Trading mechanisms 4. Investor protection 5. Corporate disclosure by listed companies etc. STATE CO-OPERATIVE BANK It is the apex institution in the three-tier co-operative credit structure, operating at the district level. STALE CHEQUE A cheque is regarded overdue or stale when it has been in circulation for an unreasonable period of time. SYNDICATED LOAN A very large value loan extended by a group of lenders to a single borrower, especially a corporate customer, mainly with a view to dispersal of credit risk among a number of lenders. Generally, in such cases, there would be a Lead Bank/Institution, which provides a part of the loan and syndicate the balance amount or portfolio to many other Banks/FIs. TAN (Tax Account Number) is a unique 10-digit alphanumeric code allotted by the Income Tax Department to all those persons who are required to deduct tax at the source of income. TEASER LOANS It is a type of home loans in which the interest rate is initially low and then grows higher. Teaser loans are also called terraced loans. IBC Academy Publications

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238. TOBIN TAX Suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. 239. TRIPS (Trade Related Intellectual Property Rights) is an international agreement administered by the World Trade Organisation (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO Members. 240. TRIMs (Trade Related Investment Measures) A type of agreement in WTO. 241. TIEA (Tax Information Exchange Agreement) allows countries to check tax evasion and money laundering. Recently, India has signed TIEA with Cayman Islands. 242. TIME DEPOSITS Deposits which are repayable after the expiry of a specific period are known as “time deposits.” 243. TREASURY BILL A treasury bill is a kind of financial bill or promissory note issued by the Government to raise short-term funds. 244. TERM LOANS are Loans given for longer periods of over 3 years. 245. UNIT BANKING SYSTEM It is a system under which a single bank operates through a single office. 246. UTR NUMBER (Unique Transaction Reference number) A unique number which is generated for every transaction in RTGS system. UTR is a 16-digit alphanumeric code. The first 4 digits are a bank code in alphabets, the 5th one is the message code, the 6th and 7th mention the year, the 8th to 10th mentions the date and the last 6 digits mention the day’s serial number of the message. 247. UMBRELLA FUND A type of collective investment scheme. A collective fund containing several sub-funds, each of which invests in a different market or country. 248. WPI (Wholesale Price Index) is an index of the prices paid by retail stores for the products they ultimately resell to consumers. New series is 2004 2005. (The new series has been prepared by shifting the base year from 1993-94 to 2004-05). Inflation in India is measured on WPI index. 249. WHOLESALE BANKING A vertical of Banking which offers loans and services to corporate entities, Institutions, Corporations and other Financial Institutions, generally deals in bulk sizes loans. 250. WITHOUT RECOURSE A term which signifies that the Buyer is responsible for non-performance of an asset or non-payment of an instrument, instead of the seller. IBC Academy Publications

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251. YIELD The returns earned on on a stock, bond or an investment, as per the effective rate of interest, as on an effective date. 252. YIELD TO MATURITY (YTM) The average annual yield that an investor receives because he holds the investment for life or till its maturity date. 253. ZERO-BALANCE ACCOUNT A Bank account which does not stipulate any minimum balance requirements nor does it levies penal charges for the same. 254. ZERO COUPON YIELD CURVE It is also called as spot yield curve and it is used to determine discount factors.

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TRUE OR FALSE STATEMENTS

Note: “T” represents “True” and “F” represents “False” 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

14. 15. 16.

The damage payable in the case of wrongful dishonour of a cheque depends upon the amount of the cheque. (F) Maintenance of secrecy of a customer’s account is an absolute obligation. (F) When the funds are deposited for a specific purpose, the banker becomes a trustee. (T) The Law of Limitation runs from the date of the deposit. (F) A banker can exercise his particular lien on the safe custody articles. (T) A negative lien does not give any right of possession to the creditor. (T) The banker has a statutory obligation to honour customers bills. (F) To constitute a person as a customer, there must be a single transaction of any nature. (F) A current account can be opened in the name of a minor. (T) Probate is nothing but an official copy of a will. (T) A guarantee given by an adult in respect of a minor’s debt is valid. (F) An account can be opened in the name of a partner on behalf of a firm. (F) The duty of a banker is over as soon as particulars regarding creation of charges are sent to the Registrar within 30 days of their creation. (T) Contracts by lunatics in India are always void. (F) The most undesirable customer is an undischarged bankrupt. (T) Account payee crossing restricts the transferability of a cheque. (F) IBC Academy Publications

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17. Any holder of a cheque can cross it. (T) 18. A general crossing cannot be converted into a special crossing. (F) 19. Two parallel transverse lines are not essential for a special crossing. (T) 20. Double crossing, except for the purpose of collection is not valid. (T) 21. The safest form of crossing is general crossing. (F) 22. A cheque which is not crossed is called a bearer cheque. (F) 23. The cancellation of crossing is called opening of crossing. (T) 24. Account payee crossing is a direction of collecting banker. (T) 25. Endorsement is a must for a bearer cheque. (F) 26. A bearer cheque will always be treated as a bearer cheque. (T) 27. In sans frais endorsement, the endorser waives some of his rights. (F) 28. The endorser can be made liable only if he is served with a notice of dishonour. (T) 29. Assignment includes the assumption of liability. (F) 30. Partial endorsement is not valid. (T) 31. There is a statutory obligation on the part of a banker to give reasons while dishonouring a cheque. (F) 32. A Garnishee order can not attach a foreign balance. (T) 33. Any holder can count term and the payment of cheque before it is presented for payment. (F) 34. Payment made outside the banking hours does not amount to payment in due course. (T) 35. Statutory protection as given under Section 85 is not available to a bearer cheque. (F) 36. When the amount stated in words and figures differ, the banker can honour the smaller amount. (F) 37. When a Garnishee order is issued by the court attaching the account of the customer, the banker is called Garnishor. (F) 38. The statutory protection is available to a collecting banker only when he acts a holder for value. (F) 39. It is the duty of a collecting banker to note and protect a foreign bill, in case, it is dishonoured. (T) 40. The banker’s rights as a holder for value is similar to that of a holder in due course. (T) 41. The wrongful interference with the goods of another is called “mutilation.” (F) IBC Academy Publications

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42. If a banker takes a cheque as an independent holder by way of negotiation he cannot get statutory protection. (T) 43. Mortgage of Movables is called pledge. (F) 44. Advances against guarantees are secured loans. (F) 45. The extended of pledge is a case of hypothecations. (T) 46. Business people generally prefer a legal mortgage to an equitable mortgage. (F) 47. No right of sale is available in the case of conditional mortgage. (T) 48. An equitable mortgage can be created in respect of real estate. (T) 49. The most risky charge from a banker’s point of view is pledge. (F) 50. Bill of lading is a quasi-negotiable instrument. (T) 51. Banker’s receipt is issued in respect of goods deposited with the bank. (F) 52. Goods can be released before the repayment of the loan against trust receipts. (T) 53. Loans can be granted on the face value of a life policy. (F) 54. Garnishee order is issued by the court on the request of the debtor. (F) 55. ATM permits a depositor to withdraw and deposit money any time he likes. (T) 56. While appropriating payments, the money received is to be first applied towards payment of principal and then towards interest. (F) 57. In India the rules regarding appropriation of payments have been given in the Negotiable Instruments Act. (F) 58. In case of a multi-deposit scheme, a deposit may withdraw the money required without breaking his entire deposit. (T) 59. A banker has a right to retain the securities for any number of years till the loan is repaid. (T) 60. A banker’s lien is not barred by the Law of Delimitation. (T) 61. A banker is given a special privilege of charging compound interest. (T) 62. Industrial banks help industries by supplying them short-term credit. (F) 63. Land Development Banks grant short-term loans to farmers. (F) 64. Bank creates money. (T) 65. The volume of bank credit depends on the cash reserve ratio the banks have to keep. (T) IBC Academy Publications

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66. Unit banking system is most suitable to India. (F) 67. Branch banking system originated in U.S.A. (F) 68. One of the main objectives of nationalization of banks was to extend credit facilities to the borrowers in the so far neglected sectors of the economy. (T) 69. Narasimham committee strongly recommended the introduction of computerisation in banks. (T) 70. Money market is the market for long-term funds. (F) 71. Capital market deals in capital goods. (F) 72. Investor protection is assigned to stock exchange. (F) 73. Capital Issues Control Act, 1947 has been abolished. (T) 74. SEBI is to protect the interest of investors. (T) 75. SEBI has no role in the working of stock exchanges. (F) 76. SEBI is authorized to control capital market. (T) 77. Capital market helps in improving investment environment. (T) 78. Stock market is the constituent of capital market. (T) 79. Capital market is concerned with the working of financial institutions. (T) 80. Preferential allotment permitted along with right issues. (F) 81. A banking company cannot advance against own shares. (T)

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FILL UP THE BLANKS

Fill up the blanks with suitable word/words: 82. 83. 84. 85. 86.

87. 88.

89. 90. 91. 92. 93. 94. 95. 96. 97.

98.

Banking Regulation Act was passed in .......... (1949) Reserve Bank of India Act was passed in .......... (1934) Reserve Bank of India was nationalised in .......... (1st January, 1949) Post-merger of PSU Banks in 2019, which Bank would become second-largest bank in India, after SBI .......... (Punjab National Bank) RBI has unveiled a website meant to facilitate lodging of any complaint related to deposits/schemes of various Non-Banking companies/Insurance Companies etc. is known as........... (RBI.Sachet) Head Quarters of New Development Bank is located at .......... (Shanghai) Which is the first bank in India to deploy ‘software robots”, in its over 200 business processes, meant to reduce the response time to customers by up to 60 per cent, is .......... (ICICI Bank) Exchange banks specialise in financing .......... (Foreign trade) Current deposits are also called .......... (Demand deposits) Loans which can be called back by the bank at a very short notice of one day to fourteen days are called .......... (Money at call) The maturity period of term loans is more than .......... (One year) Banks are called public conservators of .......... (Commercial virtues) Unit banking system originated and grew in .......... (U.S.A.) Banking system which is very popular and successful in India is .......... (Branch banking system) 14 major commercial banks were nationalised in .......... (July, 1969) A nine member committee on the financial reforms under the Chairmanship of Narasimham submitted its report on .......... (December 1991) Lead Bank Scheme was introduced by the Reserve Bank towards the end of .......... (1969) IBC Academy Publications

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99. NABARD was set up on .......... (12th July, 1982) 100. Regional Rural Bank Act was passed in .......... (1976) 101. Post-merger of various PSU Banks in 2019, at present there are remaining .......... Public Sector banks in India. (12) 102. The Insolvency and Bankruptcy Code, 2015 is a one stop solution for resolving insolvencies, have come into force from .......... (August, 2016) 103. The market which deals in trade bills, promissory notes and government papers or bills, which are drawn for short-periods is called .......... (Money market) 104. A financial market in which short-term papers or bills are bought and sold is known as .......... (Bill market) 105. In order to protect the interests of investors and regulate the working of stock exchanges, the Government in 1988 set up the .......... (Stock Exchange Board of India) 106. The financial market for long-term funds is known as .......... (Capital market) 107. A banker is a .......... debtor. (Privileged) 108. A banker’s lien is always .......... lien. (General) 109. To claim a banking debt ..........in writing is necessary. (An express demand) 110. .......... is necessary to exercise a lien (No agreement) 111. The word customer signifies a relationship in which .......... is of no essence. (Duration) 112. For willful dishonour of a cheque .......... damage is payable by the banker. (Vindictive) 113. Accepting a bill and making it payable at the bank is called .......... (Domiciliation of a B/E) 114. Honouring of a cheque is a .......... obligation. (Statutory) 115. The relationship between the banker and customer is primarily that of a .......... (Debtor and creditor) 116. The minimum period for which a fixed deposit can be accepted is.......... (7 days) 117. Money can be withdrawn any number of times in .......... (Current A/C) 37. ..........must be obtained from a responsible person before opening an account. (A letter of introduction) 38. If there are no withdrawals for a period of 12 months in a savings bank account, the account is said to be .......... (Dormant) IBC Academy Publications

Multiple Choice Questions

Multiple Choice Questions PRACTICE TEST -1 1. The payment of a lost demand draft is made to the ______? (a ) Purcha s er (b) Pa yee (c) Nomi nee (d) Any of the a bove - a , b, a nd c (e) None of the a bove 2. A banker, while granting a loan facility against security of equity shares, should not grant loans and advances against ______? (a ) Unquoted s ha res (b) Pa rtl y pa i d-up s ha res (c) Its own s ha res (d) Thi rd pa rty’s s ha res (e) None of the Above 3. In the case of granting loan against a life Insurance policy, as a banker you should see _______? (a ) The existence of i nsurabl e i nteres t (b) The s urrender va l ue (c) The a dmi s s i on of a ge (d) Al l of the a bove (e) None of the Above 4. Among the followings, the most risky document of title to goods from the banker’s point of view is ______? (a ) Del i very Cha l l a n or order (b) Bi l l of l a di ng (c) Wa rehous e’s certi fi ca te (d) Ra i l wa y Recei pt (e) None of the Above 5. While granting Loan or Overdraft, a legal title over shares is created ______? Banking Awareness

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(a ) By s i mply depos i ti ng the s ha res (b) By depos i ti ng the s ha res a l ong wi th a bl a nk tra ns fer (c) By depositing shares along with a memorandum (d) By executi ng a tra ns fer deed (e) Al l of the Above 6. The rules framed in the Clayton’s case have been incorporated in _____? (a ) The Ba nki ng Regul a ti on Act (b) The Res erve Ba nk of Indi a Act (c) The Indi a n Contra ct Act (d) The Negoti a bl e Ins truments Act (e) None of the Above 7. When a debtor owes several debts to a banker and makes a payment, the right of appropriation lies with _____? (a ) The ba nker (b) The debtor (c) The court (d) None of the a bove (e) Al l of the Above-a , b, a nd c 8. A Garnishee order is served on A and B jointly. They maintain a joint account as well as individuals accounts with the bank. The order shall attach _______? (a ) Onl y the joi nt a ccount of A a nd B (b) Onl y the i ndi vi dua l a ccounts of A a nd B (c) Joi nt a nd i ndi vi dua l a ccounts of A a nd B (d) As per the Court Orders (e) None of the a bove 9. In terms of Section 31 of the Reserve Bank of India Act, 1934 a demand draft payable to bearer may be issued only by _______?

Multiple Choice Questions (a ) Na ti ona l i zed Ba nks (b) Schedul ed Commerci a l Ba nks (c) Res erve Ba nk of Indi a (d) Forei gn Ba nks (e) None of the Above 10. In case of original demand draft is presented after the duplicate has already been paid, the bank will ____? (a ) Pa y the ori gi na l dema nd dra ft (b) Pa y the ori ginal dema nd dra ft a s wel l a nd recover the amount from the purchaser on the s trength of the i ndemni ty bond (c) Return wi th rema rks “Dra ft reported l os t, dupl i ca te a l rea dy pa i d will pay on collecti ng ba nk’s gua ra ntee. In ca s e the ori gi na l dra ft i s a gain presented, i t s houl d be honoured.” (d) Return with the remarks payment s topped by the payee (e) None of the a bove 11. Unsigned demand draft is presented for payment, the drawee branch will _______? (a ) Honour i t (b) Di s honour i t since it does not have a ma ndate of the dra wer ba nk to pa y i t. (c) Honour i t a fter s eeki ng confi rmation from the col l ecti ng ba nk (d) Honour it i f it is for s mal l a mount (e) None of the Above 12. A major Public Sector Bank raised interest rates on loans by 25 basis points was in news in some major financial newspapers recently. This means bank has raised interest by 25 basis points of _____? Banking Awareness

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Sa vi ngs Ba nk Internet Ra te Ba s e Lendi ng Ra te Repo Ra tes Pres ent Ra tes on Depos i ts Di s counted Ra tes Interes t

13. The Finance Minister of India in one of his press conferences said that inflationary pressure is likely to continue following recent frequent spikes in commodities in the international markets. Which of the following commodities was the referring to as it gets frequent increase at international level and disturbs our home Economy substantially? (a ) Gol d a nd Si l ver (b) Petrol eum products (c) Tea a nd Coffee (d) Suga r (e) Jute a nd Jute products 14. Banks and other financial institutions in India are required to maintain a certain amount of liquid assets, like cash, precious metals and other short term securities as a reserve with RBI, at all the time. In Banking parlance, this is knows as _____? (a ) CRR (b) Fi xed As s et (c) SLR (d) REPO (e) None of the Above 15. Minimum balance required to be maintained for a Savings Account with cheque book facility is ______? (a ) Rs . 100 (b) Rs . 200 (c) Rs . 500 (d) Rs . 1000

Multiple Choice Questions (e) None of the Above 16. The committee on Banking Sector Reforms under the chairmanship of Sri. M. Narasimham was appointed in _______? (a ) 1991 (b) 1995 (c) 1998 (d) 1999 (e) None of the Above 17. Documentations means ______? (a ) Proper executi on of documents (b) Sta mpi ng of document (c) Ca ncel l a ti on of s ta mps (d) None of the a bove 18. Collateral securities can be _____? (a ) Ta ngi bl e (b) Inta ngible in the shape of personal gua ra ntee of a thi rd pa rty (c) None of the a bove (d) Both of the a bove 19. Which one of the following is not an authorised means of banking transaction for the people in India? (a ) On-l i ne (b) Mobi l e (c) Phone (d) Vi s i ti ng i ndi vi dua l l y (e) Vi deo Conferenci ng 20. Stock exchange securities do not include _______? (a ) Debentures certi fi ca te (b) Sma l l debentures i s s ued by port trus ts (c) Government promi s s ory notes (d) Pa rti ci pa ti on certi fi ca tes (e) None of the Above Banking Awareness

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21. The Definition of ‘Banking’ is given in the ________? (a ) Negoti a bl e Ins trument Act, 1881 (b) RBI Act, 1934 (c) The Ba nki ng Regul a ti on Act, 1949 (d) Contra ct Act (e) None of the Above 22. Which of the following is NOT a type of cheque issued by an individual? (a ) Bea rer cheque (b) Order cheque (c) Cros s ed cheque (d) Sta l e cheque (e) Pos t-da ted cheque 23. Presently, after the merger of several Public sector Banks in 2019, the number of the public sector banks in India is _______? (a ) 8 (b) 20 (c) 12 (d) 14 (e) None of the Above 24. The Government of India passed the “Recovery of Debts due to Banks and Financial Institutions Act” in ____? (a ) 1993 (b) 1992 (c) 1994 (d) 1990 (e) None of the Above 25. The maximum number of partners in a non-banking partnership firm is _______? (a ) 20 (b) 10 (c) 25

Multiple Choice Questions (d) 11 (e) None of the Above 26. Which of the following banks are not commercial banks? (a ) Forei gn Ba nks (b) Sta te Co-opera ti ve Ba nks (c) Pri va te Ba nks (d) Regi ona l Rura l Ba nks (e) None of the Above 27. Regional rural banks are managed by _______? (a ) The Centra l Government (b) The RBI (c) The Boa rd of Di rectors (d) The Sta te Government (e) None of the Above 28. We often read about the term “PMLA” in financial newspapers. What is the full form of PMLA? (a ) Preventi on of Moneta ry Lendi ng Act (b) Preventi on of Money Leasi ng Act (c) Preventi on of Moneta ry Li a i s oni ng Act (d) Preventi on of Money La underi ng Act (e) None of the Above 29. Appellate Tribunal for recovery of debts due to banks and financial institutions is set up at _______? (a ) Chenna i (b) Ba nga l ore (c) Mumba i (d) Kol ka ta (e) None of the Above

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30. Under Section 19 (i), a banking company can hold shares in a limited company to the extent of _______? (a ) Pa i d-up ca pita l & free res erve of compa ny (b) Pa i d-up ca pi ta l of the ba nk (c) 30% of the pa id-up ca pi ta l of the compa ny or 30% of i ts own pa i dup ca pital and reserves, whichever i s hi gher (d) 30% of the pa id-up ca pi ta l of the compa ny or 30% of i ts own pa i dup ca pital and reserves whichever i s l ower (e) None of the Above 31. Many a times we read about Special Drawing Rights (SDR) in newspapers. As per its definition, SDR is a monitory unit of reserve asset of which the following organization/ agency? (a ) Worl d Ba nk (b) International Moni tory Fund (IMF) (c) As i a n Devel opment Ba nk (ADB) (d) Res erve Ba nk of Indi a (RBI) (e) None of the Above 32. Which of the following agencies/ organizations has recently decided that all the Stock Exchanges would introduce physical settlement of Equity Derivatives? (a ) Res erve Ba nk of Indi a (b) Bomba y Stock Excha nge (c) Regi s tra r of Compa ni es (d) Securities & Exchange Board of India (e) Al l of the Above 33. As per the decision taken by the Authorities, the Qualified Institutional Buyer (QIBs) are required to pay 100% application money to make them

Multiple Choice Questions eligible to bid for public issues. How much amount were the QIBs paying as application or margin money prior to the decision? (a ) 5% (b) 1% (c) 10% (d) 50% (e) None of the Above 34. As per recent newspaper reports, RBI is considering the grant of license to some new companies, particularly NBFCs, to act as full-fledged Banks. Which among the following will be considered as NBFC? (a ) NABARD (b) Li fe Insurance Corporation of Indi a (c) Ba ja j Ca pi ta l (d) SEBI (e) None of the Above 35. The limitation period in case of a bank deposit begins from ______? (a ) The da te on whi ch depos i t wa s ma de (b) The date on which the demand for pa yment was made (c) The da te when fi rs t wi thdra wa l i s ma de (d) The date when the last withdrawal is ma de (e) None of the a bove 36. In Mutual Funds, NAV is the price of ________? (a ) Entire fund va lue (b) One unit of a fund (c) Surrender value (d) Avera ge va lue of shares (e) Di vidends paid i n a year

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37. A master policy in the case of Life insurance Policy indicates ______? (a ) Pol icy is s ale (b) Pol icy i s in the name of serva nt (c) Onl y one life is assured (d) There are s everal beneficiaries (e) Li fe a ssured should be a male 38. The basic objective of CRM (Customer Relationship Management) is ________? (a ) A pre-sales a ctivity (b) A tool for l ead generation (c) An ongoing daily a ctivi ty (d) The ta sk of a DSA (e) Ba ck office duty 39. Financial inclusion needs canvassing the accounts of _______? (a ) Fi nancial Institutions (b) NRIs (c) HNIs (d) Hous ewives (e) Pers ons below a specified income l evel 40. Effective retail banking presupposes _______? (a ) La rge premises (b) Huge kiosks (c) bi g s ales force (d) coordi nation between marketing a nd front office staff (e) More products

Multiple Choice Questions PRACTICE TEST -2

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(e) None of the a bove

41. What comprises of the financial statement? (a ) Profi t a nd Los s Account (b) Ba l a nce s heet (c) Funds -fl ow-s ta tement (d) Audi tors Note (e) Al l the a bove

45. Lead Bank Scheme was introduced in the year _____? (a ) 1965 (b) 1969 (c) 1981 (d) 1992 (e) None of the a bove

42. Presently which Indian bank has the largest number of foreign branches? (a ) SBI (b) Ca na ra Ba nk (c) Ba nk of Ba roda (d) Ba nk of Indi a (e) None of the a bove

46. Savings bank deposits are exempted from wealth tax up to ___? (a ) 2 l a khs (b) 5 l a khs (c) 10 l a khs (d) 20 l a khs (e) None of the a bove

43. Under which of the following methods of note-issue the RBI issues notes? (a ) Fi xed Fi duci a ry Sys tem (b) Ma xi mum Fi duci a ry Sys tem (c) Mi ni mum Res erve Sys tem (d) Proporti ona l Res erve Sys tem (e) None of the Above 44. Cash deposit (CD) ratio means _______? (a ) The percentage of cas h-i n-ha ndba l ance with the Centra l Ba nk to the a ggrega te depos i ts (b) The percentage of total depos i ts recei ved by Ba nks (c) The percenta ge of tota l ca s h money recei ved a s depos i ts by ba nks (d) Al l the a bove Banking Awareness

47. A rise in the reserve ratio of banks _______? (a ) Wi l l l ea d to a n i ncrea s e i n the money s uppl y (b) Wi l l l ea d to a proporti ona te i ncrea s e i n the money s uppl y (c) Wi l l l ea d to a decrea s e i n the money s uppl y (d) Wi l l ha ve no i mpa ct on money s uppl y (e) None of the a bove 48. Negotiable Instruments Act (NI Act) contains as many sections as _______? (a ) 137 (b) 142 (c) 138 (d) 141 (e) None of the a bove

Multiple Choice Questions 49. A usance bill can be drawn for a minimum period of ______? (a ) 1 da y (b) 2 da ys (c) 3 da ys (d) 4 da ys (e) None of the a bove 50. The amount of unclaimed banker’s cheques is credited to ________? (a ) Res pecti ve LHO (b) Res pecti ve Modul e (c) Cha rges A/c (Mi s c) (d) Commi s s i on A/c (e) None of the a bove 51. In the case of FCNR accounts of NRI depositors, the repayment of interest is effected in _______? (a ) Indi a n Rupee (b) Onl y i n Pound (£) (c) Sa me currency i n whi ch depos i t s ta nds (d) Yen (e) None of the a bove 52. In the Financial statements, Profit and Loss Account represents _______? (a ) Pos i ti on of profi t on a pa rti cul a r da te (b) Pos ition of profit for a given peri od (c) Pos i tion of l os s for a gi ven peri od (d) B a nd C a bove (e) A a nd C a bove 53. In the Financial statements, Balance sheet is a ______? (a ) Sta tement of assets a nd liabilities on a pa rti cul a r da te Banking Awareness

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(b) Sta tement of profit and los s on a pa rti cul a r da te (c) Pos i ti on of ca s h ba l a nce (d) Sta tement of assets a nd liabilities for a pa rti cul a r yea r (e) None of the a bove 54. Balance sheet analysis helps in _______? (a ) Ra ti o a na l ys i s (b) Trend (c) Inter-fi rm compa ri s on (d) Al l the a bove (e) None of the a bove 55. For which of the following categories of instruments, the payment can be stopped by a bank? (a ) Gi ft cheque (b) Cheque (c) Bi l l of Excha nge (d) Promi s s ory Notes (e) None of the a bove 56. For which one of the following Loan Products ‘teaser loans’ are offered by Banks? (a ) Educa ti on Loa ns (b) Commerci a l Loa ns (c) Loa ns a ga i ns t s ecuri ty of gol d (d) Reta i l Tra de Loa ns (e) Home Loa ns 57. Banks are required to maintain SLR with RBI, under ______? (a ) Secti on 24 of the Ba nki ng Regul a ti on Act (b) Secti on 49 of the Ba nki ng Regul a ti on Act

Multiple Choice Questions (c) Secti on 24 of RBI Act (d) None of the a bove 58. CRR is required to be maintained by all the Banks, in the form of ______? (a ) Approved Government Securi ti es (b) Ca s h wi th RBI (c) Ca s h wi th ba nk (d) Al l the a bove (e) None of the a bove 59. Working capital requirements of a business entity, depends upon _____? (a ) Level of a cti vi ty (b) Types of bus i nes s ca rri ed (c) Na ture of Producti on cycl e (d) Al l the a bove (e) None of the a bove 60. The introducer of an account is liable to the bank under the ______? (a ) Indi a n Pena l Code (b) RBI Act (c) Contra ct Act (d) NI Act (e) None of the a bove 61. Cheque bearing ‘Non-negotiable’ crossing is endorsed to other person. In this case, the endorsee becomes _______? (a ) Hol der for va l ue (b) Hol der i n due cours e (c) Hol der onl y (d) Endors ee onl y (e) None of the a bove

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62. Which of the following are a legal tender? (a ) Dra fts (b) Cheques (c) Currency notes (d) Government dra fts (e) Al l of the a bove 63. In which of the following Acts, specimen of the cheque, bill, or a promissory note is given? (a ) Negoti a bl e Ins truments Act (b) Ba nki ng Regul a ti on Act (c) Merca nti l e La w (d) None of the a bove (e) Al l of the a bove 64. Which of the following negotiable instruments can be crossed to the banks? (a ) Cheques (b) Dra fts (c) Bi l l s of Excha nge (d) Al l the a bove (e) None of the a bove 65. Which of the following can be issued payable to bearer? (a ) Cheque (b) Dra ft (c) Bi l l of Excha nge (d) Dema nd Promi s s ory Notes (e) None of the a bove 66. Protection is available to the collecting bank for the following _____? (a ) Bi l l of Excha nge (b) Promi s s ory Note

Multiple Choice Questions (c) Us a nce Bi l l s (d) Cheque (e) None of the a bove 67. Crossing on a cheque or draft denotes _______? (a ) Cheque ca nnot be trans ferred by the pa yee. (b) A di rection to the payi ng ba nk to pa y the Cheque through a ba nk. (c) Cheque wi l l be pa i d through cl ea ri ng onl y. (d) Not pa ya bl e a cros s the counter but wi ll be credited to the account of the hol der. (e) None of the a bove 68. Among the followings, a FCNR accounts can be opened and maintained as _______? (a ) Current Accounts (b) Sa vi ngs Ba nk Accounts (c) Term Depos i t Accounts (d) Recurri ng Depos i ts (e) None of the a bove 69. Various Banks in the country have installed machines which disburse money to the general public. These machines are called _______? (a ) Coi n Di s pens i ng ma chi ne (b) Automa ti c Tel l er Ma chi ne (c) Debi t ca rd ma chi ne (d) Ledger ma chi nes (e) None of the a bove 70. What is meant by “financial inclusion”?

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(a ) To provi de a perma nent empl oyment to the unempl oyed (b) To provi de a 100 da ys job to a l l thos e who a re i n need of a job (c) To provi de banking s ervices to all thos e l i vi ng i n remote a rea s (d) To ens ure tha t a l l fi na nci a l tra ns actions amounting Rs. 5,000 a nd a bove a re done through ba nks . (e) None of the a bove 71. Total Gross National Products (GNP) of a country divided by the total population is called as _____? (a ) Per ca pi ta i ncome (b) Purcha s i ng power (c) Ra te of i nfl a ti on (d) Excha nge va l ue (e) Gros s i ncome 72. Which among the followings has suggested to the banks in India to give details of funds transfers to customers via SMS/E-mails? (a ) Res erve Ba nk of Indi a (b) Indi a Ba nks As s oci a ti on (c) Indi a n Ins ti tute of Ba nki ng & Fi na nce (d) Securi ti es & Excha nge Boa rd of Indi a (e) None of the a bove 73. Which of the following names is not associated with Insurance business? (a ) Ba ja j Al l i a nz (b) LIC (c) GIC (d) Ta ta AIG

Multiple Choice Questions (e) GE Money 74. A ‘Non-negotiable’ crossing is a _______? (a ) Genera l cros s i ng (b) Speci a l cros s i ng (c) Res tri cted cros s i ng (d) Non-tra ns fera bl e cros s i ng (e) None of the a bove 75. Which of the following is the Statutory Liquidity ratio (SLR), at present in November, 2019? (a ) 19.50% (b) 18.50% (c) 20% (d) 24% (e) 17.50% 76. RBI’s open market operation transactions are carried out with a view to regulate _______? (a ) Li qui di ty i n the economy (b) Pri ces of es s enti a l commodi ti es (c) Infl a ti on (d) Borrowi ng powers of the Ba nk (e) Al l of the Above 77. Under Open market operations, one of the measures taken by the RBI in order to control credit expansion in the economy, does _______? (a ) Sa l e a nd purcha s e of Govt. s ecuri ti es (b) Is suance of different type of Bond (c) Aucti on of Bond (d) To ma ke available direct finance to Borrowers (e) None of the Above Banking Awareness

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78. Bank rate means _______? (a ) Ra te of i nteres t cha rged by commercial Banks from borrowers (b) Ra te of interest at which commercial banks discounted bills of thei r borrowers (c) Ra te of i nteres t a l l owed by commercial Ba nks from on thei r depos i tors (d) Ra te a t which RBI purchases or redi s counts Bills of Exchange of commercial Banks (e) None of the Above 79. What is an Indian Depository Receipt (IDR)? (a ) A deposi t a ccount wi th a Publ i c s ector Ba nk (b) A deposit a ccount with any of the Depos i tori es i n Indi a (c) An i ns trument i n the form of Depository Receipt created by a n Indi a n Depos i tory a ga i ns t underlyi ng equi ty s ha res of the i s s ui ng compa ny (d) An i ns trument i n the form of depos i t recei pt i s s ued by a n Indi a n Depos i tory (e) None of the Above 80. Fiscal deficit means _______? (a ) Tota l i ncome l es s Govt. borrowi ngs (b) Tota l payments less total receipts (c) Tota l pa yments l es s ca pi ta l recei pts (d) Tota l expenditure less total recei pts excluding borrowings (e) None of the Above

Multiple Choice Questions PRACTICE TEST - 3 81. Interest on the savings bank accounts is compounded _______? (a ) Monthl y (b) Yea rl y (c) Qua rterl y (d) Ha l f-yea rl y (e) Al l of the Above 82. A minor is admitted to the partnership firm as a ______? (a ) Agent (b) Pa rtner (c) Mi nor (d) Benefi ci a ry (e) None of the Above 83. The Short-Term Crop Loan given to Farmers are generally for a period of _______? (a ) 3 months (b) 6 months (c) 9 months (d) 12 months (e) 15 months 84. The minimum period under which a Term deposit under Reinvestment Plan can be issued is ______? (a ) 1 months (b) 45 da ys (c) 7 da ys (d) 9 months (e) None of the Above 85. Legal guardian of a minor is ______?

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(a ) Nomi nated by the court for l ega l deci s i on (b) Appoi nted by the court (c) Na tura l gua rdi a n (d) Executor-administrator a ppointed by the court (e) None of the Above 86. A shareholder has been defined by _______? (a ) The Ba nking Regulati on Act, 1949 (b) The Compa ni es Act, 1956 (c) The Securi ti es Contra ct Regul a ti on Act, 1956 (d) Indi a n Contra ct Act (e) Al l of the Above 87. What is the maximum period for which a Public Limited Company can raise deposits from the public? (a ) 12 months (b) 18 months (c) 36 months (d) 24 months (e) None of the Above 88. Group of companies/ firms/ associates are defined in _______? (a ) Compa ni es Act (b) Sa l e of Goods Act (c) Contra ct Act (d) Pa rtners hi p Act (e) None of the Above 89. The Head of Reserve Bank of India (RBI) is ________? (a ) Chi ef Executi ve Offi cer (b) Ma na gi ng Di rector (c) Chi ef Ba nki ng Offi cer

Multiple Choice Questions (d) Dy. Governor (e) None of the Above 90. As a Banker, how do you consider a “Joint Hindu Family”? (a ) Lega l enti ty (b) As s oci a ti on of pers ons (c) Pa rtners hi p concern (d) Al l the a bove (e) None of the Above 91. Which of the following cheques, if paid do not get statutory protection? (a ) Bea rer cheques (b) Open cheques (c) Stol en cheques (d) Al l the a bove (e) None of the Above 92. X and Y have joint account. A Garnishee order was served on X who does not have an individual account. Bank shall ______? (a ) Atta ch the joi nt a ccount (b) Atta ch 50% of the joint a ccount l i ke attachment (c) Not a tta ch the joi nt a ccount (d) Al l the a bove (e) None of the Above 93. Period of limitation for deposits starts from _______? (a ) Da te of the cheque (b) Da te of presenti ng cheque on the counter (c) Da te of ma ki ng depos i ts (d) Da te of refus a l by the ba nk (e) None of the Above

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94. Whenever newspapers talk about the performance of “core industries”, which of the following is NOT considered among them? (a ) Petrol eum (b) Automobi l e (c) Mi ni ng (d) Steel (e) Cement 95. Which of the following is introduced by banks to increase financial inclusion for penetration of Banking services in the rural areas? (a ) Sti mul us pa cka ge (b) Internet Ba nki ng (c) Bus i nes s corres pondent (d) Mobi l e Ba nki ng (e) None of the Above 96. What is the limitation of the number of persons in a joint savings bank account? (a ) Two (b) Four (c) Fi ve (d) Twenty (e) No l i mi t 97. The minimum average balance required to be maintained in a current account to avoid payment of ‘ledger fee’ is ______? (a ) Rs . 500 credi t (b) Rs . 1,500 credi t (c) Rs . 1,500 debi t (d) Rs . 2,000 credi t (e) None of the Above

Multiple Choice Questions 98. Maximum period of a usance bill considered by bank is______? (a ) 6 months (b) 9 months (c) 12 months (d) 24 months (e) None of the Above 99. Which of the bills has no grace period? (a ) Dema nd bi l l (b) Cl ea n bi l l (c) Si ght bi l l (d) Al l the a bove (e) None of the Above 100. After acceptance, the primary liability on a Bill of Exchange is that of _______? (a ) Pa yee (b) Acceptor (c) Dra wee (d) Endors ee (e) Al l of the Above 101. Which of the following are accommodation bills? (a ) Hous e bi l l s (b) Bi l ls representing trading tra ns actions (c) Bi l ls a ccepted with considera ti on (d) None of the a bove 102. Under the Sale of Goods Act, a warehouse-keeper’s certificate is a ______? (a ) Contra ct of s a l e (b) Contra ct of pl edge (c) Document of ti tl e to goods Banking Awareness

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(d) Contra ct of l ea s e (e) None of the Above 103. Which of the following is a type of banking application which authorizes a bank to block a specific sum of money in an individual’s bank account to be invested in an Initial Public Offer (IPO) ? (a ) RTGS (b) ASBA (c) Prefunded Cheques (d) SCSBs (e) None of the Above 104. Current account becomes dormant when there are no withdrawals for the last ______? (a ) 3 months (b) 6 months (c) 12 months (d) 18 months (e) None of the Above 105. Which of the following may be adjudged as insolvent? (a ) Mi nor (b) Ma rri ed woma n (c) Fi rm (d) Luna ti c (e) None of the Above 106. In case a Partnership Firm is not registered with Registrar of Firms, the Non-registered firm cannot _______? (a ) Sue i ts pa rtners or debtors (b) Be s ued by i ts credi tors (c) Be s ued by i ts own pa rtners (d) None of the a bove

Multiple Choice Questions (e) None of the Above 107. Sets of Garnishee Order ______? (a ) 3 (b) 5 (c) 4 (d) 2 (e) None of the Above 108. A cheque becomes stale after a period of ______ from the date of issue? (a ) 2 months (b) 3 months (c) 6 months (d) 12 months (e) None of the Above 109. Bank conducts Government business at its branches as an agent of ______? (a ) RBI (b) SBI (c) Government of Indi a (d) Sta te Government (e) None of the a bove 110. The validity period of a challan/bill passed by a Treasury Officer is for______? (a ) 7 da ys (b) 10 da ys (c) 14 da ys (d) 20 da ys (e) None of the Above 111. Appropriation of accounts is provided in the _____? (a ) Negoti a bl e Ins truments Banking Awareness

(b) (c) (d) (e)

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Ba nki ng Regul a ti on Act, 1949 Indi a n Contra ct Act, 1872 Al l the a bove None of the Above

112. A draft for Rs. 18,000 is issued in the series of _____? (a ) OT (b) TT (c) OL (d) OM (e) None of the Above 113. While analyzing a balance sheet, a decreasing current ratio indicates ______? (a ) a s ta bl e l i qui di ty (b) a n i ncrea s i ng l i qui di ty (c) a s tra i ned l i qui di ty (d) Sa ti s fa ctory current s ol vency (e) None of the Above 114. Foreign exchange Reserves of India are kept in the custody of ______? (a ) Worl d Ba nk (b) Interna ti ona l Moneta ry Fund (c) Pri me Mi ni s ter Ra ha t Kos h (d) Res erve Ba nk of Indi a (e) None of the Above 115. Which of the following Apex body and Regulator has asked banks to swap customer related information so that the frauds and Defaults may be prevented? (a ) Bomba y Stock Excha nge (b) Indi a n Ba nks ’ As s oci a ti on

Multiple Choice Questions (c) Securi ti es & Excha nge Boa rd of Indi a (d) Res erve Ba nk of Indi a (e) None of the Above 116. What is meant by Repo Rate? (a ) At wha t ra te of i nteres t ba nks offer the funds to Reserve Bank of Indi a . (b) At wha t ra te of i nteres t Worl d Ba nk offer the funds to Centra l Government for not less than the peri od of 364 da ys . (c) At wha t ra te of i nteres t ba nks ba rrow the funds from Res erve Ba nk of Indi a for s hort term. (d) At wha t ra te of i nteres t ba nks ba rrow the funds from the other ba nks for l ong term. (e) At wha t ra te of i nteres t centra l government ba rrow the funds from the other ba nks for l ong term. 117. Debt Service Coverage Ratio (DSCR) indicates the ability of a company to _______? (a ) meet i ts current l i a bi l i ti es (b) s ervi ce i ts s ha rehol ders (c) meet i ts l ong term debt obl i ga ti ons (d) ra i s e further ca pi ta l (e) None of the a bove 118. If the Repo Rate increases by Reserve Bank of India, rate of interest of the loans offered by the banks ______? (a ) Decrease (b) Become Zero (c) Become 100 percent Banking Awareness

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(d) Increase (e) None of the a bove 119. What measure RBI usually takes to control Inflation in India? (a ) RBI decrea s es the Repo Ra te (b) RBI a sk the Centra l Government to i ncrea s e the Repo Ra te (c) RBI ca ncel s the opti on of Repo Ra te (d) RBI decl a res Repo Ra te a s Zero Percent (e) RBI i ncrea s es the Repo Ra te 120. Reverse Repo Rate, at present, is 4.90%. Reverse Repo Rate means that ______? (a ) the ra te a t whi ch RBI borrows money from Central Government. (b) the ra te a t whi ch s ta te governments borrows money from ba nks . (c) the ra te a t whi ch RBI borrows money from ba nks . (d) the ra te a t whi ch RBI borrows money from Sta te Government. (e) the ra te a t whi ch RBI borrows money from Worl d ba nk.

Multiple Choice Questions PRACTICE TEST -4 121. Minimum period for which a locker can be hired is ______? (a ) 1 week (b) 3 months (c) 6 months (d) 12 months (e) None of the Above 122. When a fixed deposit receipt is kept with the bank for its safety, it is known as ______? (a ) Sa fe cus tody (b) Sa fe depos i t (c) Locker (d) Va l i d s a fe depos i t (e) None of the Above 123. When a company issues shares to a select group of investor which is neither a public issue nor a rights issue, it is called ______? (a ) Bonus i s s ue (b) Ri ghts i s s ue (c) Pri va te pl a cement (d) Qua l ified i nstitutional placement (e) None of the Above 124. Which of the following is not correct in respect of targets within Priority sector lending by Scheduled Banks in India? (a ) Wea ker section target for Indi a n ba nks i s 25% of pri ori ty s ector (b) Mi cro enterprises credit ta rget i s 7.5% of ANBC (c) Export credi t i s 12% of ANBC for Indi a n ba nks (d) Agri cul ture credit ta rget i s 45% of pri ori ty s ector credi t for Indi a n ba nks Banking Awareness

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125. Gilt-edged securities are ______? (a ) Sha res of a pri va te l i mi ted compa ny (b) Fi rs t-class Government s ecuri ti es (c) Sha res of a compa ny (d) Al l of the Above (e) None of the a bove 126. SBI has signed an agreement with which of the following agencies to obtain a Guarantee cover to its small loans to Micro & Small Enterprises? (a ) Export Credi t Gua ra ntee Corpora ti on (b) Credi t Gua ra ntee Trus t (c) Sma l l Indus tri a l Devel opment Ba nk of Indi a (d) LIC (e) None of the Above 127. Certificate of Deposits can be issued for a minimum period of ____? (a ) 45 da ys (b) 3 months (c) 6 months (d) 1 yea r (e) None of the Above 128. Which among the following Guarantees is not classified as a Financial Guarantee? (a ) A Ba nk gua ra ntee i s s ued for s upply of goods on credi t ba s i s (b) A Ba nk gua ra ntee i s s ued i n fa vour of cus toms a uthori ti es (c) A Ba nk gua ra ntee i s s ued i n fa vour of ta x a uthori ti es (d) A Ba nk guarantee i ssued i n l i eu of performa nce by the Roa d Contra ctor (e) None of the a bove

Multiple Choice Questions 129. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a renewable insurance scheme. The upper age limit for this scheme is _______? (a ) 55 yea rs (b) 50 yea rs (c) 60 yea rs (d) 65 yea rs (e) None of the a bove 130. When there is a difference between all receipts and expenditure of the Government of India under both capital and revenue accounts, it is called as _______? (a ) Revenue Defi ci t (b) Budgeta ry Defi ci t (c) Zero Budgeti ng (d) Tra de Ga p (e) Ba l a nce of Pa yment Probl em 131. Where is the Head Office of “AU Small Finance Bank” located at? (a ) Muza ffa rpur (b) Fa tehpur (c) Ka npur (d) Na gpur (e) Ja i pur 132. MIBOR is one iteration of an inter-bank rate, which is the rate of interest charged by a bank on a shortterm loan to another bank. What is the full form of MIBOR? (a ) Ma na gement Inter-Bank Offer Reconstruction (b) Mumba i Inter-Ba nk Offer Ra te (c) Mumba i Inter-Bank Offer Ra ndom (d) Mumba i Inter-Bank Offer Reconstruction (e) Mumba i Inter-Ba nk Offer Ra ti o Banking Awareness

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133. Which of the following can delegate his power to a third person? (a ) Li qui da tor (b) Executor (c) Indi vi dua l (d) Pa rtner (e) None of the Above 134. Overdue interest for all types of deposits can be paid in cash to ___? (a ) Mi nor (b) Gua rdi a n (c) Depos i tor (d) Lega l hei rs of a decea s ed depos i tor (e) None of the Above 135. Sukanya Samriddhi Account can be opened up to age of ________ years only from the date of birth of the girl child? (a ) Fi ve yea rs (b) Four yea rs (c) Si x yea rs (d) Ei ght yea rs (e) Ten yea rs 136. An executor of deceased account is appointed under ___? (a ) Trus t (b) Court (c) Wi l l (d) Fa mi l y tra di ti on (e) None of the Above 137. YONO app is a digital banking app launched by the State Bank of India. YONO stands for ______? (a ) You Onl y Na me One (b) You Onl y Need ori gi na l (c) You Onl y Need Ori ented (d) You Onl y Need One

Multiple Choice Questions (e) You Onl y Na ti ona l One 138. While granting overdraft against the security of life insurance policy, the advance value is computed on the basis of ___? (a ) Tota l a mount of the pol i cy (b) Pa i d-up va l ue of the pol i cy (c) Surrender va l ue of the pol i cy (d) None of the a bove 139. Book-debts of a company can be charged to the bank by way of ___? (a ) Hypotheca ti on (b) Pl edge (c) Mortga ge (d) Li en (e) None of the Above 140. The Forfeiter is an intermediary between ______? (a ) Exporter’s Ba nk a nd Importer (b) Importer’s Ba nk a nd Exporter (c) Importer a nd Exporter (d) Exporter & hi s Bank a nd Importer & hi s Ba nk (e) None of the Above 141. Credit risk does not take form of ______? (a ) Ba nk gua ra ntees (b) Trea s ury opera ti ons (c) Cros s border expos ure (d) Equi ty pri ce cha nge (e) None of the Above 142. Under Basel-2 norms, the supervisory review process is covered by ______? (a ) Pi l l a r-1 (b) Pi l l a r-2 (c) Pi l l a r-3 Banking Awareness

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(d) Both (a ) a nd (C) (e) None of the Above 143. When a cheque is issued on a particular date and a date prior to the date of writing of the cheque is put, it is called ______? (a ) Sta l e cheque (b) Pos t-da ted cheque (c) Ante-da ted cheque (d) Inva l i d cheque (e) Bi l l of Excha nge 144. Currency notes deposited in the currency chest are the property of _______? (a ) Res pecti ve ba nk (b) RBI (c) SBI (d) Government of Indi a (e) Res pecti ve Sta te Government 145. Bank A and Bank B have been combined into a single bank. Where bank A survived and Bank B lost its corporate identity. This is called ______? (a ) Al l i a nce (b) Merger (c) Acqui s i ti on (d) Cons ol i da ti on (e) None of the Above 146. Relationship between the RBI and the bank maintaining currency chest will be of _______? (a ) Trus tee a nd benefi ci a ry (b) Pri nci pa l a nd a gent (c) Li cens or a nd l i cens ee (d) Credi tor a nd debtor (e) None of the Above

Multiple Choice Questions 147. Two or more minors, if desirous of opening a Savings bank account in your bank, whether they can open a Joint Savings Bank Account and allowed to operate as ______? (a ) Ei ther or Survi vor ba s i s (b) Joi ntl y opera te the a ccount (c) Onl y two mi nors ca n open a ccount (d) Ca nnot open a ccount (e) None of the Above 148. The minimum number of members or share-holders in a Public limited company is ______? (a ) 20 (b) 10 (c) 7 (d) 15 149. Which of the following notes cannot be exchanged? (a ) Sol i d notes (b) Mi s ma tched notes (c) Muti l a ted notes (d) Al l the a bove (e) None of the Above 150. What is true with regard the liability of a director of a company, in case of dishonor of cheque issued by a company ______? (a ) Al l the di rectors a re l i a bl e (b) Nomi nated directors als o l i a bl e (c) Di rectors responsible for conduct of the busines s of the compa ny i ncl udi ng Ma na gi ng Di rector (d) Onl y thos e di rectors who a re res pons i bl e for a ccounts ma i ntena nce of the compa ny (e) None of the a bove

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151. Upto what amount a bank draft that can be issued by banks in cash, under compliance to the KYC directives of RBI? (a ) Rs .50,000 or l es s (b) Rs .50,000 or more (c) Les s tha n Rs .50,000 (d) Upto Rs .20,000 (e) None of the a bove 152. Mr. X is maintaining a few accounts with Indian Bank with its Trichur branch. The bank branch receives an attachment order. Which of the following accounts, will be attached by the order? (a ) Overdra ft l i mi t of Rs .0.40 l a c a ga i ns t Gol d orna ments (b) Overdra ft l i mi t of Rs .0.30 l a c, wherein there is a nominal debi t ba l a nce (c) Overdra ft l imit a gainst sha res of a compa ny, where there is s ome una va i l ed ba l a nce a va i l a bl e (d) Amount of term depos i t of Rs .1 l a c mi nus the bala nce i ncl udi ng i nterest in the overdra ft l i mi t of Rs .0.50 l a c a ga i ns t thi s Term Depos i t (e) Al l the a bove 153. On a cheque instead of two parallel lines only bank’s name is written. It is a _______? (a ) Genera l cros s i ng (b) No cros s i ng (c) Pa ya bl e to bea rer (d) Speci a l cros s i ng (e) None of the Above 154. A holder in due course of a cheque does not get protection from _______?

Multiple Choice Questions (a ) (b) (c) (d) (e)

Irregul a ri ty of endors ement Wi thout cons i dera ti on Defa ul t i n the ti tl e Al l the a bove None of the Above

155. A Bank makes use of certain other persons on hire basis for marketing of Bank services. This process is called ______? (a ) Di rect Sa l es Agent (b) Di rect Ma rketi ng Agent (c) Di rect Repres enta ti ves (d) Outs ourcing of Financial Products (e) Al l the a bove 156. Which of the following acts as the Regulators for the Credit Rating Agencies in India? (a ) RBI (b) SBI (c) SIDBI (d) SEBI (e) ARCIL 157. The Branding line of “Bank of Baroda” is ___? (a ) Interna ti ona l Ba nk of Indi a (b) Indi a ’s Interna ti ona l Ba nk (c) Indi a ’s Mul ti na ti ona l Ba nk (d) Worl d’s Loca l Ba nk (e) None of the Above 158. To make the cost of credit costlier for Banks, which of the following is done by RBI? (a ) Decrea s e i n ba nk ra te (b) Increa s e i n repo ra te (c) Increa s e i n SLR (d) Increa s e i n revers e repo ra te (e) None of the a bove

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159. One of the major challenges faced by the Banking Industry is Money Laundering. Name the Act/Norms launched by the banks to curb Money Laundering, in general? (a ) Know your cus tomer norms (b) Ba nki ng Regul a ti on Act (c) Negoti a bl e Ins trument Act (d) Na rcoti cs a nd Ps ychotropi c Act (e) None of the Above 160. The issue of and servicing of Govt. debt, is management by ______? (a ) Commerci a l Ba nks (b) Publ i c Sector Ba nk (c) Res erve Ba nk of Indi a (d) Centra l Govt. i ts el f (e) Al l the Above

Multiple Choice Questions PRACTICE TEST -5 161. A cheque issued by a Director of a Limited Company is presented for payment, after death of the Director, which the Bank pays. But the company subsequently raises the claim on the plea that Bank cannot pay such cheque after death of the Director. Find which explanation holds valid? (a) Bank cannot pay the cheque as the drawer expired (b) Bank can pay the cheque as the company is still a legally competent person to contract signed as agent of the company (c) Bank should contact the Co. because loss will be of the company is case of dispute (d) Both B and C (e) None of the Above 162. New branches in rural and semiurban area should cover an average population of over______? (a ) 13,000 (b) 17,000 (c) 20,000 (d) 25,000 (e) None of the a bove 163. The exchange rate is kept the same in all parts of the market by ______? (a ) Specul a ti on (b) Interes t a rbi tra ge (c) Excha nge a rbi tra ge

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(d) Hedgi ng (e) None of the a bove 164. If all the banks in an economy are nationalised and converted into a monopoly bank, total deposit creation _______? (a ) Wi l l i ncrea s e (b) Wi l l decrea s e (c) Wi l l neither i ncrease nor decrease (d) Al l the a bove (e) None of the a bove 165. The purpose of international trade is _______? (a ) Need for exports (b) To encoura ge exports (c) To promote international understanding (d) To i ncrea s e i ncome of pa rti ci pa ti on countri es (e) None of the a bove 166. The power of banks to create credit largely depends on _______? (a ) Amount of ca s h wi th them a nd the s a fe ra ti o (b) Sa fe ra ti o onl y (c) Amount of ca s h wi th them onl y (d) None of the a bove 167. The money the banker creates is _______? (a ) Hi s a s s et (b) Hi s l i a bi l i ty (c) Both hi s a s s et a nd l i a bi l i ty (d) Soverei gn As s et (e) None of the a bove

Multiple Choice Questions 168. High rate of investment may _______? (a ) Reduce the a mount of credi t crea ti on (b) Crea te better cha nces for the credi t crea ti on (c) Not a ffect the amount of credit i n a ny wa y (d) Lea d to a ny of the a bovementi oned occurrences (e) None of the a bove 169. The ‘monetary base for credit expansion’ consists of _______? (a ) The tota l value of ‘hi gh-powered money’ (b) The dema nd a nd ti me depos i t l i a bi l i ti es (c) The s i ze of the defi ci t i n the government’s budget (d) Al l of thes e (e) None of the a bove 170. A rise in the reserve ratio of banks _______? (a ) Wi l l l ea d to a n i ncrea s e i n the money s uppl y (b) Wi l l l ea d to a proporti ona te i ncrea s e i n the money (c) Wi l l l ea d to a decrea s e i n the money s uppl y (d) Wi l l l ea d to i ncrea s e i n cos t of depos i ts (e) None of the a bove 171. Which of the following is a borrowing facility/loan advance? _______? (a ) Term fi na nce

Banking Awareness

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Performa nce gua ra ntee Bi l l received under letter of credi t Al l the a bove None of the a bove

172. “Fixed assets ratio” means _______? (a ) Fi xed a s s ets to pa i d-up ca pi ta l (b) Net fi xed a s s ets to l ong-term funds (c) Net worth to Net fi xed a s s ets to l ong-term funds (d) Ta ngible Net Worth to Net fi xed a s s ets to l ong-term funds (e) None of the a bove 173. A decline in the current ratio and liquidity ratio indicates ________? (a ) Sound pos i ti on (b) Sol vency (c) Over tra di ng (d) Off s hore (e) None of the a bove 174. “Marginal cost” means _______? (a ) Ra w-material s elling expenses and other va ri a bl e expens es (b) Pri me cos t (c) Ma rgi n of s a l es (d) None of the a bove 175. “Assignment” means transfer of _______? (a ) Owners hi p onl y (b) Pos s es s i on onl y (c) The pol i cy-hol der onl y (d) A debi t/ri ght/property onl y (e) None of the a bove

Multiple Choice Questions 176. Margin of surrender value for the purpose of bank loan is retained to the extent of ______? (a ) 5% (b) 8% (c) 10% (d) 15% (e) None of the a bove 177. The legal status of a mutual fund is in the form of a ______? (a ) Pa rtners hi p fi rm (b) Trus t (c) Propri etors hi p (d) Joi nt s tock compa ny (e) Any of the Above 177. Selective credit control (SCC) covers ______? (a ) Ma rgi n (b) Interes t (c) Level of credi t (d) Al l the a bove (e) None of the a bove 178. Under which provisions is Selective credit control governed? (a ) Secti on 49 of the Ba nki ng Regul a ti on Act (b) Secti on 3 of the Publ i c Debt Act (c) Secti on 21 of the RBI Act (d) Secti on 131 of the Negoti a bl e Ins trument Act (e) None of the a bove 179. An advance against Pledge of securities is made against ______? (a ) Gol d

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(b) Commodi ti es (c) Coi ns a nd notes (d) Al l the a bove (e) None of the a bove 180. Banking operations in India are governed mainly by _______ Act and ______ Act and the regulator of Banks _____? (a ) Ba nking Regulati on Act, NI Act, RBI (b) RBI Act, NI Act, RBI (c) Ba nking Regulation Act, RBI Act, RBI (d) Ba nking Regulation Act, RBI Act, SEBI (e) None of the a bove 181. Contract of Insurance is contract of ______? (a ) Agency (b) Indemni ty (c) Ba i l ment (d) Gua ra ntee (e) None of the a bove

a

182. The insurance policy over the security is arranged for in the name of the ______? (a ) Borrower a nd endorsed i n fa vour of the ba nk (b) Ba nk (c) Borrower (d) Ba nk a nd Borrower joi ntl y (e) None of the a bove 183. Bank exercise pledge over the ______? (a ) Suppl y bi l l s

Multiple Choice Questions (b) (c) (d) (e)

Dema nd bi l l s Import bi l l s Export bi l l s None of the a bove

184. Which of the following is helping the banking system in sharing the information about the credit history of households? (a ) Ba nki ng codes a nd s ta nda rd Boa rd of Indi a (b) Credi t Information Burea u Indi a Li mi ted (c) CRISIL (d) ICRA (e) Al l of the a bove 185. Which of the followings are covered under pledge? (a ) Actua l del i very of the goods (b) Fa ctory type pl edge (c) Cons tructive delivery of the goods (d) Al l the a bove (e) None of the a bove 186. In order to safeguard the interest of the Bank, Cash credit accounts are closed _____? (a ) On the dea th of the a gent (b) On the dea th of the pri nci pa l borrower (c) On the dea th of the Ma na gi ng Di rector of the compa ny (d) Al l of thes e (e) None of the a bove 187. The Chairman of Regional Rural Bank is appointed by ______? (a ) Sta te Government Banking Awareness

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(b) Res erve Ba nk of Indi a (c) Centra l Government (d) Sponsoring bank in consul ta ti on wi th NABARD (e) None of the a bove 188. What is the minimum period of medium and long-term loans? (a ) 12 months (b) 18 months (c) 24 months (d) 36 months (e) None of the a bove 189. Bank’s obligation to pay the cheque drawn by the customer u/s 31 if N.I. Act exists, in which of the following circumstances ______? (a ) When the a mount i n words a nd fi gures di ffers (b) When there i s notice of dea th of the cus tomer (c) When a n a ttachment order ha s been recei ved (d) When the s i gna tures of the dra wer a re genui ne but di ffer (e) None of the a bove 190. The State Co-operative banks _____? (a ) Underta ke mobi l i za ti on of res ources a nd deployment a mong va ri ous s ectors (b) As s ume the key rol e i n the coopera ti ve credi t s tructure (c) Ca rry out the rol e of i ntermedi a ri es between the money ma rket a nd Centra l coopera ti ve ba nks

Multiple Choice Questions (d) Al l of thes e (e) None of the a bove 191. Issue of securities in the primary market is, subject to fulfillment of a number of requirements, as stipulated by ______? (a ) SEBI (b) IRDA (c) RBI (d) IBA (e) Na ti ona l Stock Excha nge 192. Which among the following is not an essential feature of a “mandate”? (a ) It i s gi ven on a s i mpl e pa per (b) It does not requi re regi s tra ti on wi th a ny Govt. a uthori ty (c) In joi nt a ccounts a nd i n pa rtnership it s houl d be s i gned by a l l a ccount hol ders / a l l pa rtners . (d) It s houl d be properl y s ta mped (e) None of the Above 193. A cheque is a dated January 12, 2019 and presented for payment by the payee on April 13, 2019. The paying bank returns the cheque stating that it is “stale”. Which among the following is not correct in this connection? (a ) The term ‘s tale’ is defi ned i n NI Act - Secti on 138 (b) The cheque becomes s tale a fter 3 months from da te of i ts i s s ue (c) The term ‘s ta l e’ i s us ed a s a ma tter of pra cti ce (d) A s ta le cheque can be revalidated wi th fresh va lidity up to 3 months Banking Awareness

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(e) None of the Above 194. Which of the following would fall under Retail Banking? (a ) Home Loa n (b) Vehi cl e Loa n (c) Credi t ca rds (d) Mutua l Funds (e) Al l of thes e 195. Convertibility of Rupee means ______? (a ) Any a mount of Rupee ca n get converted i nto other a pproved currenci es , wi thout a ny l ega l compl icati ons or a ny ques ti ons a s ked a bout the purpos e. (b) A l i mi ted a mount of Rupee ca n get converted i nto other a pproved currencies, without a ny l ega l compl i ca ti ons or a ny ques ti ons a s ked a bout the purpos e. (c) A l i mi ted a mount of forei gn currency ca n get converted i nto Indi a n Rupee a nd be kept i n a forei gn currency Ba nk depos i t, wi thout a ny l egal complications or a ny ques ti ons a s ked a bout the purpos e. (d) None of the Above 196. Which of the following is/are true about the "Sub-Prime Crisis"- a term which was in the news recently? (1) It i s a Mortgage cri sis referri ng to Credi t defaul t by the borrowers . (2) Sub-Pri me borrowers were thos e borrowers who were ra ted l ow a nd were hi gh ri s k borrowers .

Multiple Choice Questions (3) Thi s cri s i s ori gi na ted out of negligence i n credi t ra ti ng of the borrowers . (a ) Onl y 1 (b) Onl y 2 (c) Onl y 3 (d) Al l of the Above (e) None of the Above 197. Which of the following is NOT the part of the structure of the financial System in India? (a ) Indus tri a l Fi na nce (b) Agri cul tura l Fi na nce (c) Government Fi na nce (d) Devel opment Fi na nce (e) Pers ona l Fi na nce 198. Which of the following is NOT the part of the Scheduled Banking structure in India? (a ) Money Lenders (b) Publ i c Sector Ba nks (c) Pri va te Sector Ba nks (d) Regi ona l Rura l Ba nks (e) Sta te Co-opera ti ve Ba nks 199. Many times we read about Futures Trading in newspapers. What is “Futures Trading”? (1) It i s nothing but a tra de between a ny two s tock exchanges where in i t i s deci ded to purcha s e the s tocks of ea ch other on a fi xed pri ce throughout the yea r. (2) It i s an a greement between two pa rti es to buy a nd s el l a n underlying asset in the future at a pre-determi ned pri ce

Banking Awareness

(3)

(a ) (b) (c) (d) (e)

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It i s a greement between Stock Excha nges that they will not tra de the s tocks of ea ch other under a ny ci rcumstances in future or for a gi ven peri od of ti me. Onl y 1 Onl y 2 Onl y 3 Al l 1, 2 a nd 3 None of the Above

200. Inflation in India is measured on which of the following indexes/ indicators? (a ) Cos t of Li vi ng Index (COLI) (b) Cons umer Pri ce Index (CPI) (c) Gros s Domestic Product (GDP) (d) Whol esale Pri ce Index (WPI) (e) None of the Above

Multiple Choice Questions PRACTICE TEST -6 201. In a “gilt fund”, the mutual funds are required to make investment in _______? (a ) Govt. s ecuri ti es (b) Corpora te s ecuri ti es (c) Corpora te debt (d) Govt. a nd corpora te debt (e) Al l of the Above 202. Commercial banks influence money supply through _______? (a ) Pri nti ng of one rupee notes (b) Augmenta ti on of s a vi ngs a nd ti me depos i ts (c) Provi s ion of high denomi na ti on notes (d) Crea ti on of dema nd depos i ts (e) None of the a bove 203. 2nd Pillar in Basel-2 norms relates to ______? (a ) Mi ni mum ca pi ta l (b) Supervi s ory revi ew (c) Ma rket di s ci pl i ne (d) Ri s k ma na gement (e) None of the a bove

204. By “Financial inclusion”, we means that _______? (a) financial services, namely payments, remittances, savings, loans and insurance at affordable cost not been provided to the persons (b) rations at affordable cost to persons not yet been provided to the persons

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(c) house at affordable cost to persons not yet been provided to the persons (d) food at affordable cost to persons not yet been provided to the persons (e) education at affordable cost to persons not yet been provided to the persons 205. Minimum cash reserves, to be kept by Banks, as fixed by the law constitute _______? (a ) A percenta ge of a ggrega te depos i ts of the ba nk (b) A %a ge of a ggrega te l oa ns a nd a dva nces of the ba nk (c) A %a ge of ca pi ta l & res erves of the ba nk (d) Al l of the a bove i s correct (e) None of the a bove i s correct 206. The difference between the correct market value and the loan value of a given security in banking terms, is known as _______? (a ) The col l a tera l va l ue (b) The s ecuri ty va l ue di fferenti a l (c) The ma rgi n (d) Al l the a bove (e) None of the a bove 207. An increase in bank rate, other things being equal, will result into _______? (a ) A decl i ne i n the cos t of credi t i ncl udi ng grea ter a nd the dema nd for borrowi ng (b) An i ncrease in the cos t of credi t di s couraging dema nd for credi t (c) No cha nge i n the cos t of credi t a nd the dema nd for borrowi ng

Multiple Choice Questions (d) Cos t of credit has no relationship wi th dema nd for borrowi ng (e) None of the a bove 208. Inward remittances by foreign steamship and airlines companies to finance their operating expenses in the country are shown under ______? (a ) The credi t s i de of the current a ccount of bal a nce of pa yment (b) The debi t s i de of the current a ccount of bal a nce of pa yment (c) The credi t s i de of the ca pi ta l /a ccount of ba l a nce of pa yment (d) The debi t s i de of the ca pi ta l a ccount of balance of pa yment. (e) None of the a bove 209. Which of the following statement/s is/are correct with regard to a “minor”? (a ) A mi nor is a person if l es s tha n 21 yea rs of a ge where the gua rdian is a ppointed by a court (b) A mi nor ca n open a ba nk a ccount under provi s i ons of Indi a n Contra ct Act wi th the provi s i on tha t no tra ns a cti on s hould result i n debit balance i n hi s a ccount. (c) A mi nor ca n open a s el fopera ted bank a ccount because he ca n draw a cheque a nd ha s been permi tted to open the a ccount by RBI a l s o (d) Loa n gi ven to mi nor for necessities is recovera bl e from hi m pers ona l l y. (e) None of the a bove 210. Find out the correct statement _______? Ba nking Awareness

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(a ) ‘Sel ecti ve credi t control s a re s uperfluous in general moneta ry ma na gement (b) ‘Sel ecti ve credi t control s ha ve i nvers e rel a ti ons hi p wi th qua nti ta ti ve i ns truments of credi t control (c) ‘Sel ecti ve credi t control s a re compl imenta ry to qua nti ta ti ve i ns truments of credi t control (d) None of a bove i s correct 211. “Bank rate policy” as a weapon of credit control has emerged from the Central Bank’s function as ______? (a ) Ba nk of i s s ue (b) Lender of the l a s t res ort (c) Ba nker’s ba nk (d) Al l the a bove (e) None of the a bove 212. “Open market operations” are mainly used as _______? (a ) A fi s ca l devi ce whi ch a s s i s ts Government borrowi ng (b) A monetary measure to regula te qua ntity of money in circul a ti on a nd the ca s h (a ) res erves of the commerci a l ba nks (b) A mea s ure to countera ct extreme trends i n bus i nes s (c) A mea s ure to i nfl uence the ba l a nce of pa yments pos i ti on (d) None of the a bove 213. The variable reserve ratio has tremendous possibilities of effective credit control in _______? (a ) Under-devel oped economi es (b) Devel oped economi es

Multiple Choice Questions (c) Both devel oped a nd underdevel oped economi es (d) Nei ther devel oped nor underdevel oped economi es (e) None of the a bove 214. Discount rate on certificate of deposits is decided by _______? (a ) RBI (b) IBA (c) SBI (d) IRDA (e) None of the a bove 215. NABARD re-finance is available to _______? (a ) Regi ona l Rura l ba nks (b) Commerci a l ba nks (c) Sta te Co-opera ti ve ba nks (d) La nd Devel opment ba nk (e) Al l of thes e 216. Sources to meet working capital requirements of a unit are _______? (a ) Net worki ng ca pi ta l or l i qui d s urpl us (b) Sundry credi tors a nd a dva nce pa yment recei ved (c) Ba nk finance for working ca pi ta l (d) Al l the a bove joi ntl y (e) None of the a bove 217. What is Debt Equity Ratio? (a ) Ra ti o of l ong-term borrowi ng to ta ngi bl e net worth (b) Ra ti o of current a s s ets to own ta ngi bl e net worth (c) Ra ti o of fixed assets to ta ngi bl e net worth (d) None of the a bove 218. “Intangible assets” are _______? Ba nking Awareness

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(a ) Prel i mi na ry expens es (b) Pa tents , copyri ght, goodwi l l (c) Los s es which ca nnot be reduced from s ha re ca pi ta l (d) Al l the a bove (e) None of the a bove 219. Which of the following defines Current Ratio? (a ) Ra ti o of tota l a s s ets to tota l l i a bi l i ti es (b) Ea rni ng ca pa ci ty of uni t (c) Ra ti o of current assets to current l i a bi l i ti es (d) None of the a bove 220. Current Ratio represents _____? (a ) Abi l i ty of the uni t to meet i ts current l iabilities out of current a s s ets (b) Abi l i ty of ea s y profi t (c) Abi l i ty of the uni t to pa y i ns ta l l ments of term-l oa n (d) None of the a bove 221. Liability-side of the balancesheet comprises of _______? (a ) Ca pi ta l a nd res erve (b) Long-term l i a bi l i ti es (c) Current l i a bi l i ti es (d) Al l the a bove (e) None of the a bove 222. The 15th day of every month is known as _______ in a Bank? (a ) Cus tomer’s Da y (b) Compl a i nts Da y (c) Hol i da y (d) None of the a bove 223. “Inter-bank participation certificates” are issued on the

Multiple Choice Questions recommendations of which of these Committees? (a ) Ghos h (b) Va ghul (c) Cha kra va rthy (d) Na ra s i mha n (e) None of the a bove 224. A transferable letter of credit cannot be transferred more than ________? (a ) Once (b) Twi ce (c) Three ti mes (d) Four ti mes (e) None of the a bove 225. If the word irrevocable or revocable is not indicated in a letter of credit, then the credit shall be deemed to be as _______? (a ) Revol vi ng credi t (b) Sta ndby credi t (c) Revoca bl e credi t (d) Irrevoca bl e credi t (e) None of the a bove 226. Insurance policy taken by a business firm on the life of very important person to project the firm against financial loss, is called ______? (a ) Ma s ter pol i cy (b) Keyma n pol i cy (c) VIP Protecti on pol i cy (d) Umberri ma fi des (e) Term pol i cy 227. Service charges on Foreign Letter of Credit are fixed by _______? (a ) IBA (b) FEDAI Ba nking Awareness

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(c) RBI (d) IBRD (e) None of the a bove 228. Exchange portion of Demand Bills purchased is credited to which account? (a ) Di s count (b) Commi s s i on (c) Excha nge (d) Interes t (e) None of the a bove 229. Unclaimed pass-books lying with the bank may be cancelled and destroyed after how many years? (a ) 2 (b) 3 (c) 5 (d) 10 (e) None of the a bove 230. The Government has allowed certain remission on which of the following bills? (a ) Us a nce (b) Dema nd (c) Excha nge (d) Al l the a bove (e) None of the a bove 231. Export Credit Packing Advances sanctioned to SSI exporters are covered under the credit guarantee scheme of _______? (a ) DICGC (b) ECGC (c) DRI (d) GIC (e) None of the a bove 232. Total investments made in a company is _______?

Multiple Choice Questions (a ) Net fi xed a s s ets (b) Sha rehol der’s funds pl us terml i a bi l i ti es (c) The tota l assets of the compa ny (d) Tota l Outsi de l i a bi l i ti es of the compa ny (e) None of the a bove 233. Which of the following is not a function of General Insurance? (a ) Ca ttl e Ins ura nce (b) Crop Ins ura nce (c) Ma ri ne Ins ura nce (d) Fi re Ins ura nce (e) Medi ca l Ins ura nce 234. Treasury Bills are issued at ____? (a ) a di s count (b) a premi um (c) a t fa ce va l ue (d) both (A) a nd (B) (e) None of the a bove 235. Bank Accounts are allowed to be operated by cheques in respect of _______? (a ) Both s avi ngs bank accounts a nd fi xed depos i t a ccounts (b) Sa vi ngs ba nk a ccounts a nd current a ccounts (c) Both s avi ngs bank accounts a nd l oa n a ccounts (d) Both current account a nd fi xed depos i t a ccounts (e) Both Current a ccounts and fixed depos i t a ccounts 236. The term “MSME” used in banking parlance means _______? (a ) Mi ni , Sma l l a nd Medi um Enterpri s es (b) Mi ni scale Ma rketing Enterprises Ba nking Awareness

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(c) Mi cro, Sma l l a nd Medi um Enterpri s es (d) Medi um Sca l e Ma rketi ng Enterpri s es (e) None of the a bove 237. A customer is required to maintain adequate balances in his/her accounts in order to use his _____ card in the merchant establishments? (a ) Sma rt Ca rd (b) Credi t Ca rd (c) Add-on Credi t ca rd (d) Debi t Ca rd (e) None of the a bove 238. Which of the followings is not a service delivery channel for the Bank services? (a ) ATM (b) Extens i on counters of a Ba nk (c) Cl ea ri ng Hous e (d) M- Ba nki ng (e) Internet Ba nki ng 239. The term “HNI” used in banking parlance means _______? (a ) Hi ghl y Nega ti ve Indi vi dua l (b) Hi gh Networth Indi vi dua l (c) Hi gh Networked Indi vi dua l (d) Hi gh Nui s a nce Indi vi dua l (e) None of the Above 240. What is the “USP” in a Savings Bank account of a Bank over another Bank? (a ) Hi gher ra te of i nteres t (b) Low ri s k tra ns a cti on (c) Ba nking channels a nd bra nches (d) Ea s y to opera te (e) None of the Above

Multiple Choice Questions PRACTICE TEST -7 241. The Deposit Insurance Credit Guarantee Scheme was launched on _______? (a ) Jul y 1, 1975 (b) Ja nua ry 1, 1952 (c) Ja nua ry 1, 1962 (d) Ja nua ry 1, 1991 (e) None of the a bove 242. At present, the maximum interest a bank offers on Savings bank account is _______? (a ) 3.50% (b) 5% (c) 7% (d) As per ba nk policy, a s the Interest ra te on Sa vi ngs a ccount i s deregul a ted (e) None of the a bove 243. As per the recent changes, in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949, by Reserve Bank of India, Banker’s cheque is valid for a period of ________from the issue date? (a ) 3 months (b) 6 months (c) 12 months (d) 24 months (e) None of the a bove 244. X is issued a cheque of Rs.20,000 payable to B or order. The cheque is misplaced and later found by C. C forges B’s signatures and endorses in favour of D, who obtains payment from the bank. Find which of the following statement is True?

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(a ) Thi s i s pa yment i n due cours e a nd bank will protecti on u/s 85 (1) of NI Act (b) Thi s i s pa yment ma de i n due cours e and bank gets protecti on u/s 131 of NI Act (c) For thi s payment on the basi s of a forged endors ement, ba nk i s l i a bl e (d) Ba nk a nd C a re l i a bl e i n equa l proporti on (e) None of the a bove 245. For which of the following, a “minor” is not considered eligible for _______? (a ) Ma ki ng a wi l l (b) Ta ki ng a l ocker i n hi s na me (c) Appoi nting nomi nee of a l ocker (d) Al l the a bove (e) None of the a bove 246. A branch can be kept opened for Government business on a public holiday on the orders of the _______? (a ) Col l ector or DM (b) Bra nch Ma na ger (c) Governor of the RBI (d) Pri me Mi ni s ter (e) None of the a bove 247. Who pays commission to banks for conducting Government business? (a ) Government of Indi a (b) Sta te Government (c) RBI (d) Centra l a nd Sta te Governments (e) None of the a bove 248. Which of the following statements can be considered to be True?

Multiple Choice Questions (a ) Memora ndum of Associa ti on of a compa ny is ca lled document of Indoor ma na gement a s i t conta i ns i nterna l rul es of the compa ny (b) Trus tee ca n ra i s e l oa n for the trus t a t thei r di s creti on (c) Objects of a company a re s tated i n Arti cl es of As s oci a ti on (d) A pers on a ppointed by a court to ma na ge the property of a decea s ed pers on i s ca l l ed ‘a dmi ni s tra tor’ (e) None of the a bove 249. Which among the followings is not correct with regard to rate of interest in case of a NRI accounts? (a ) NRE FDR a ccount- interes t i s a s per cei ling ra te fixed by RBI a nd l i nked to Ba nk Ra te (b) FCNR a ccount- a s per ceiling rate fi xed by RBI a nd linked to LIBOR (c) NRE-Sa vi ng a ccount- ba nk di s creti on but not more tha n domes ti c ra tes (d) NRO a ccount- ba nk di s creti on but not more tha n domes ti c ra tes (e) None of the a bove 250. Concept of Banking Secrecy was converted into law in _______? (a ) 1924 (b) 1927 (c) 1930 (d) 1934 (e) None of the a bove 251. Which of the following is the “Bank rate” as at 3oth October, 2019? (a ) 5% (b) 5.40% Handbook on Banking Awareness

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(c) 5.75% (d) 6.50% (e) None of the a bove 252. Bank’s charge over “boats”, against a loan, is registered with ____? (a ) RBI (b) SBI (c) Port a uthori ti es (d) Government of Indi a (e) None of the a bove 253. With regard to the export policy of the Government of India, find out the correct statement _______? (a ) Al l commodities can be exported wi thout l i cence (b) Export l i censes a re requi red for onl y a few i tems (c) Export l i censes a re requi red for a l l i tems (d) Al l the a bove (e) None of the a bove 254. We can open a savings bank account in the sole name of a minor if he completes age of _______? (a ) 6 (b) 10 (c) 18 (d) 21 (e) None of the a bove 255. The Banking Regulations Act, 1949 was enacted to _______? (a ) Na ti ona l i ze the ba nks (b) Open regi ona l rura l ba nks (c) Cons olidate and amend the l a ws rel a ti ng to ba nki ng compa ni es (d) Invi ti ng forei gn ba nks (e) None of the a bove

Multiple Choice Questions 256. The Banking Regulation Act was implemented on _______? (a ) September 6, 1949 (b) Apri l 1, 1949 (c) Ma rch 16, 1949 (d) Ma rch 31, 1949 (e) None of the a bove 257. When the need is for restricting expansion of credit, RBI does _____? (a ) Freezes the Ba nk ra te (b) ra i s es the Ba nk ra te (c) reduces Ba nk ra te (d) reduces REPO ra tes (e) None of the a bove 258. The fourteen banks nationalized on _______? (a ) Jul y 19, 1969 (b) June 1, 1969 (c) June 16, 1969 (d) Jul y 1, 1969 (e) None of the a bove

were

259. Which of the following is known as cross selling by Banks? (A) Sale of a debit card to accredit card holder (B) Sale of Insurance policy to a depositor (C) Issuance of cash against cheque presented by a third party (a ) onl y (A) (b) onl y (B) (c) onl y (C) (d) Both (A) a nd (B) (e) Al l (A) ,(B) a nd (C) 260. When a bank returns a cheque unpaid, it is called ______? (a ) pa yment of the cheque (b) dra wi ng of the cheque Handbook on Banking Awareness

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(c) ca ncel l i ng of the cheque (d) bounci ng of the cheque (e) endors i ng of the cheque 261. “Mortgage” is a form of ____? (a ) Securi ty on movable property for a l oa n gi ven by a ba nk (b) s ecurity on immovable property for a l oa n gi ven by a ba nk (c) conces s i on on a i mmova bl e property for a l oa n gi ven by a ba nk (d) fa ci lity on i mmova bl e property for a deposit received by a ba nk (e) Securi ty on immovable property for a deposit received by a ba nk 262. Which of the following types of accounts are known as “Demat Accounts”? (a ) Accounts which are zero Balance Accounts (b) Accounts whi ch a re opened to fa ci l i ta te repa yment of a l oa n ta ken from the ba nk No other bus iness can be conducted from there (c) Accounts i n whi ch s ha res of va ri ous companies are traded i n el ectroni c from (d) Accounts whi ch a re opera ted through i nternet banking facil i ty (e) None of thes e 263. The Lead Bank Scheme was introduced on the basis of recommendations of _______? (a ) Res erve Ba nk (b) NABARD (c) Study group a ppoi nted by Na ti onal Credit Council under the cha i rmanship of Prof. D.R. Gadgi l (d) None of the a bove

Multiple Choice Questions 264. Find which of the following statement is True – “When the rate of inflation increases”, ________? (a ) Purcha s i ng power of money i ncrea s es (b) purcha s i ng power of money decrea s es (c) va l ue of money i ncrea s es (d) purcha s i ng power of money rema i ns una ffected (e) a mount of money i n ci rcul a ti on decrea s es 265. “Bank Rate” implies the rate of interest _______? (a ) Pa i d by the Res erve Ba nk of Indi a on the depos i ts of commerci a l ba nks (b) Cha rged by banks on l oa ns a nd a dva nces (c) Pa ya bl e on bonds (d) At whi ch the Res erve Ba nk of Indi a di s counts the Bi l l s of Excha nge (e) None of thes e 266. The Lead Bank in the district ___? (a ) Does not ha ve monopol y i n the di s tri ct (b) Identifies the under-banked a reas for openi ng i ts bra nches i n the di s tri ct (c) Formulates the credit plans for all the ba nks i n the di s tri ct (d) Al l the a bove (e) None of the a bove 267. What is the prevailing rate of “Statutory Liquidity Ratio (SLR)” as at 01st November, 2019? (a ) 18% (b) 20% (c) 18.50% Handbook on Banking Awareness

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(d) 25% (e) None of the a bove 268. The Lead Bank Scheme was launched towards the end of 1969 for the following objectives _______? (a ) Extens ion of i nstitutional fina nce fa ci l i ti es to negl ected a rea s (b) Extens i on of credi t to pri ori ty s ector (c) Integration of va rious elements of development, vi z., infra s tructure extens i on a nd credi t (d) Al l the a bove (e) None of the a bove 269. The Service Area Approach is in force since _______? (a ) 1975 (b) 1978 (c) 1985 (d) 1988 (e) None of the a bove 270. Which among the following is not considered a money market instrument? (a ) Trea s ury bi l l s (b) Repurcha s e Agreement (c) Commerci a l Pa per (d) Certi fi ca te of Depos i t (e) Sha res a nd bonds 271. Which among the following best describe “money laundering”? (a ) Convers ion of a s s ets i nto ca s h (b) Convers ion of i llegally obta i ned money i nto accountabl e money (c) Convers i on of ca s h i nto gol d (d) Convers i on of gol d i nto ca s h (e) None of thes e

Multiple Choice Questions 272. What is the prevailing rate of “REPO”, as at 30th October, 2019? (a ) 7.75% (b) 7% (c) 24% (d) 5.15% (e) None of the a bove 273. Who are the Regulators for Regional Rural Banks (RRB)? (a ) Res erve Ba nk of Indi a (b) NABARD (c) SIDBI (d) Both A a nd B (e) None of the a bove 274. The Reserve Bank of India Act, 1934 was enacted on the recommendations of _______? (a ) The Ja mes Ra j Commi s s i on (b) The Hi l ton Young Commi s s i on (c) The Ba nki ng Commi s s i on, 1933 (d) The Pres i dent of Indi a (e) None of the a bove 275. The currency notes issued by Reserve Bank of India are under the signature of_____? (a ) Pres i dent of Indi a (b) Dy. Governor (c) Governor (d) Secreta ry, Fi na nce Mi ni s try (e) None of the a bove 276. The term “Bancassurance” means ______? (a ) As s urance of qua l i ty s ervi ces by the Ba nk (b) Sel ling of Ins ura nce products by Ba nks (c) Sel l i ng of Thi rd pa rty Mutua l Funds Products (d) Sel l i ng of Add-on Ba nki ng Servi ces (e) Sel l i ng of Credi t Ca rds Handbook on Banking Awareness

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277. Banks are increasingly selling Insurance products mainly due to ___? (a ) It hel ps in increase in depos i ts of a ba nk (b) It hel ps in growing Loan portfol i o of a ba nk (c) It hel ps i ncrea s e commi s s i on i ncome of a ba nk (d) It di vers i fy the ri s k of a Ba nk (e) Ba nks have taken over Insura nce compa ni es 278. The term “Deficit Financing“ means that the Government borrows money from the _______? (a ) IMF (b) Loca l bodies (c) RBI (d) La rge corporate (e) Publ ic a t large 279. Identify which among the following is not considered a Consumer Loan product offered by Banks in India? (a ) Pers ona l Loa n (b) Ca r Loa n (c) Cons umer Dura bl e Loa n (d) Ba nk Overdra ft (e) Home Loa n 280. A “Debit Card” is issued by a bank to _____? (a ) Al l cus tomers of a Ba nk (b) Al l customers having Savings bank a ccount wi th a ba nk (c) Al l customers having loan account wi th a Ba nk (d) A Ba nk customer who i s Income Ta x a s s es ee (e) Al l Corpora te Sa l a ry a ccount hol der

Multiple Choice Questions PRACTICE TEST -8 281. First item on the debit side of the account is discharged and reduced by the first item on the credit side in the chronological order as per _______? (a ) Rul e of a ppropri a ti on (b) Rul e i n Cl a yton ca s e (c) Ri ght of s et off (d) Ba nker’s genera l l i en (e) None of the Above 282. A bond issued at a discount and repaid at its face value is called, a _______ bonds? (a ) Coupon bond (b) Converti bl e bond (c) Commerci a l bond (d) Zero coupon bond (e) None of the Above 283. Which of the following instrument has three parties - i.e. drawer, payee and drawee, to the instrument? (a ) Bi l l of excha nge a nd cheque (b) Bi l l of exchange a nd promi s s ory note (c) Promi s s ory note a nd cheque (d) Promi s s ory note a nd dema nd dra ft (e) Both A a nd C 284. Which of the following is not a function of SEBI? (a ) To regul a te s ecuri ti es ma rket (b) To protect the i nteres t to i nves tors i n s ecuri ti es (c) To promote the development of s ecuri ti es ma rket (d) None of the a bove

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(e) Al l of the a bove 285. As regards the borrowing powers of the Board of Directors of a company, which statement is not true? (a ) Are mentioned i n the Arti cl es of As s oci a ti on (b) If not mentioned i n the Arti cl es , i t i s equa l to pa i d up ca pi ta l + res erves of the compa ny (c) Where boa rd of di rectors does not ha ve adequate powers, it has to a pproach the s hareholders u/s 293 (d) (i ) (d) None of the a bove (e) Al l of the a bove 286. A customer of the bank has written a ‘Will’ and he died. The execution of this Will shall be carried by ______? (a ) Admi ni s tra tor (b) As s i gnee (c) Li qui da tor (d) None of the a bove (e) Any of the a bove 287. In which of the following circumstance, the banker-customer relationship does not come to an end? (a ) Dea th of the cus tomer (b) Ins ol vency of the cus tomer (c) Ins a ni ty of the cus tomer (d) Receipt of garnishee order which ha s been s a ti s fi ed by pa yment (e) None of the a bove 288. Which of the following is not a feature of an ‘account payee crossing’?

Multiple Choice Questions (a ) It i s defined as per Section 130 of NI Act (b) Its pa yee i s hol der onl y (c) It ca n be endors ed a nd tra ns ferred a ny number of times (d) Al l of the a bove (e) None of the a bove 289. One-rupee notes and coins are issued in India by_______? (a ) Secreta ry, Fi na nce Mi ni s try (b) Governor, Reserve Ba nk of Indi a (c) Pres i dent of Indi a (d) Pri me Mi ni s ter (e) None of the a bove 290. Which among the following is the objective of issuing KYC guidelines by RBI? (a ) Check fra udulent a ctivities of the borrowers (b) Check money l a underi ng a cti vi ti es (c) Avoi d undes i ra bl e cus tomer to enter the ba nki ng s ys tem (d) Both B a nd C (e) Al l of the Above A to C 291. RBI had constituted the Working Group on Flow of Credit to SSI sector under the Chairmanship of ________? (a ) M Na ra s i mha m (b) M N Goi pori a (c) Dr A S Ga ngul i (d) Ja gdi s h Ka poor (e) None of the a bove 292. An e-Commerce transaction refers to exchange of information by way of _____ for selling and buying between the customer and the seller? (a ) Credi t ca rds Banking Awareness

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Debi t ca rds Pa perl es s i ns tructi ons POS Al l of the a bove

293. Banking Codes and Standards Board of India (BCSBI) has been constituted as a _______? (a ) Joi nt s tock compa ny (b) Trus t (c) LLC (d) Soci ety (e) Pa rtners hi p fi rm 294. Cheque truncation can be done by_______? A. using image processing B. using MICR data C. sending by courier or speed post for early delivery (a ) A, B a nd C a l l (b) A a nd B onl y (c) B a nd C onl y (d) A a nd C onl y (e) None of the Above 295. The State Financial Corporations have been set up under _______? (a ) Sta te Fina nci a l Corpora ti on Act, 1951 (b) Res erve Ba nk of Indi a Act (c) Ba nki ng Regul a ti on Act (d) Compa ni es Act, 1956 (e) None of the a bove 296. State Financial Corporation extends financial assistance to _____? (a ) Propri etary a nd partnership fi rms (b) Publ i c a nd Pri va te l i mi ted compa ni es a nd co-opera ti ve s oci eti es (c) Hi ndu undivided fami l y concerns

Multiple Choice Questions (d) Al l the a bove (e) None of the a bove

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(c) Certi fi ca te of Depos i t (d) Equi ty Sha res (e) Govt. Bonds

297. Amount is immediately recovered from the card-holder online for the amount of card used, in case of a ________? (a ) Debi t ca rd (b) Credi t ca rd (c) Pos t-pa i d ca rd (d) Sma rt Ca rd (e) Al l of the a bove

302. Which among the following is a retail banking product? (a ) Home Loa ns (b) Worki ng ca pi ta l Fi na nce (c) Corpora te Term l oa ns (d) Infra s tructure fi na nci ng (e) Export Credi t

298. The system of “Decimal coinage” was introduced in India on _______? (a ) 26th Ja nua ry, 1950 (b) 15th Augus t, 1947 (c) 1st Apri l , 1957 (d) 1st September, 1960 (e) None of the a bove

303. Which of the following is NOT a function of the Reserve Bank of India? (a ) Fi s ca l Pol i cy Functi ons (b) Excha nge Pol i cy Functi ons (c) Is s ua nce, Excha nge a nd des tructi on of currency notes (d) Moneta ry Authori ty functi ons (e) Supervi s ory a nd Control Functi ons

299. The term ‘Smart Money’ refers to _______? (a ) Forei gn Currency (b) Internet Ba nki ng (c) US Dol l a rs (d) Tra vel ers cheques (e) Credi t Ca rds 300. NABARD provides refinance assistance for _______? (a ) Promoti on of a gri cul ture (b) Promoti on of s ma l l s ca l e i ndus tri es (c) Cotta ge a nd vi l l a ge i ndus tri es (d) Al l the a bove (e) None of the a bove 301. Which one of the following is not a ‘Money Market Instrument’? (a ) Trea s ury Bi l l s (b) Commerci a l Pa per Banking Awareness

304. Which of the following is NOT required for opening a bank account? (a ) Identi fy Proof (b) Addres s Proof (c) Recent Photogra phs (d) Domi ci l e Certi fi ca te (e) None of thes e 305. What is the maximum deposit amount of the Depositors insured by DICGC? (a ) 2,00,000 per depositor per ba nk (b) 2,00,000 per depositor a cross a l l ba nks (c) 1,00,000 per depositor per ba nk (d) 1,00,000 per depositor a cross a l l ba nks (e) None of thes e

Multiple Choice Questions 306. With reference to a cheque which of the following is the drawee bank? (a ) The ba nk tha t col l ects the cheque (b) The pa yee’s ba nk (c) The endors er’s ba nk (d) The endors er’s ba nk (e) The ba nk upon which the cheque i s dra wn 307. Regional Rural Banks were set up vide _______? (a ) Res erve Ba nk of Indi a Act (b) Regi ona l Rura l Ba nks Act, 1976 (c) NABARD Act (d) None of the a bove 308. Regional Rural Banks carry on normal banking business as defined in _______? (a ) Res erve Ba nk of Indi a Act (b) Ba nki ng Regul a ti on Act, 1949 (c) Regi ona l Rura l Ba nk Act, 1976 (d) Compa ni es Act, 1956 (e) None of the a bove 309. What does the term Short-selling refer to ________? (a ) Contra ct wi th a broker for sa l e of s ha res i n a ri s i ng ma rket (b) Hoa rding commoditi es to crea te a rti fi ci a l s horta ge a nd reduce s a l es (c) Sel ling s ha res through a broker wi thout a ctual l y hol di ng s ha res generally either in a falling market a nd or to i nduce a bea r pha s e (d) Sel ling shares through a broker i n a ‘Bea r’ pha s e of the ma rket (e) None of thes e

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310. Inflation has become a major area of concern in India these days. What measures does the Government of India/RBI normally take to control the same? A. Fixation of maximum price of the commodities B. System of Dual prices C. Increase in supply of food grains D. Control on credit and liquidity in market (a ) Onl y A (b) Onl y B (c) Onl y C (d) Onl y B, C a nd D (e) Al l A, B, C a nd D 311. The issued capital of the Regional Rural Banks was to be subscribed as under _______? (a ) Centra l Government- 50% ,Sta te Government 15% a nd Sponsor Ba nk - 35% (b) Centra l Government- 25% ,Sta te Government 25% a nd Sponsor Ba nk - 50% (c) Centra l Government- 50% ,Sta te Government 35% a nd Sponsor Ba nk - 15% (d) Centra l Government- 15% ,Sta te Government 50% a nd Sponsor Ba nk - 35% (e) None of the a bove 312. What does the term Depreciation mean as used in finance/banking operations? (a ) Cl os ure of a Plant due to lock out (b) Reduction i n the va l ue /l os s of equi pment /pl a nt over a ti me due to wea r a nd tea r (c) Los s incurred duri ng a yea r due to pl a nt brea kdown

Multiple Choice Questions (d) Unus ually high repa i r expens es i ncurred on the plant duri ng the yea r (e) None of thes e 313. Providing bank finance to Self Help Groups (SHGs) is considered a part of _______ business portfolio? (a ) Mi cro Credi t (b) Agri cul tura l Fi na nce (c) Mobi l e Ba nki ng (d) Rura l Ba nki ng (e) None of thes e 314. Mr. Rajendra P. had filled a complaint with Banking Ombudsman but is not satisfied with their decision. What is the next option before him for getting his matter resolved? (a ) Wri te to the CMD of the Ba nk (b) Fi l e an appeal before the Finance Mi ni s ter (c) Fi l e an appeal before the Banking Ombuds ma n a ga i n (d) Fi l e an appeal before the Deputy Governor, RBI (e) Si mply cl ose the matter as goi ng to court i nvolves ti me a nd money 315. Which of the following is not a measure to control inflation as adopted by Govt. of India and/or RBI? (a ) Moneta ry Pol i cy (b) Fi s ca l Pol i cy (c) Fi na nci a l Incl us i on (d) Pri ce control (e) Ba nk Ra te Pol i cy 316. Current accounts are meant and useful for _______? (a ) Inves tment purpos es (b) Identi ty purpos es (c) Sa vi ngs purpos es (d) Da y-to-da y bus i nes s needs

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(e) Opera ti ona l conveni ence 317. A short term loan given by a Bank is repayable within _______? (a ) 20 yea rs (b) 10 yea rs (c) 3 yea rs (d) 5 yea rs (e) As l ong a s the Borrower requi res ti me to repa y the l oa n 318. A ______ card is basically a payment mechanism which allows the holder to make purchases without any immediate cash outflows either physically or through his accounts? (a ) Debi t (b) Sma rt (c) Credi t (d) ATM (e) Ki s a n Credi t 319. “Micro Finance” is a ______ stage of banking services? (a ) Introducti on s ta ge (b) Sa tura ti on s ta ge (c) Res ea rch s ta ge (d) Decl i ne s ta ge (e) None of the Above 320. Which among the following is not an important function of Reserve Bank of India? (a ) Ma na gement of Forei gn Excha nge Res erves (b) Forei gn Exchange related current a nd ca pital a ccount management (c) Devi sing Foreign Tra de pol i cy of Indi a (d) Debt a nd Cash Mana gement for Sta te Government (e) Regul a ti on of Government Securi ti es

Multiple Choice Questions PRACTICE TEST -9 321. To constitute a person as a ‘customer’ ______? (a ) There must be a single tra nsaction of a ny na ture (b) There mus t be s ome s ort of a n a ccount (c) There mus t be frequency of tra ns a cti ons (d) There mus t be dea l i ng of a ba nki ng na ture (e) None of the a bove 322. Co-operative banks are _______? (a ) Pri va te s ector ba nks (b) Publ i c s ector ba nks (c) Joi nt-s ector ba nks (d) None of the a bove 323. Certificate of Deposit can be issued by ______? (a ) Res erve Bank, NABARD a nd Exi m Ba nk onl y (b) Commerci a l ba nks a nd term l endi ng i ns ti tuti ons (c) Schedul ed commerci a l ba nks excl udi ng regi ona l rura l ba nks (d) Al l the a bove (e) None of the a bove 324. The minimum acceptable amount under the Scheme of Certificate of Deposit is ___? (a ) Rs . 5 l a khs (b) Rs . 10 l a khs (c) Rs . 20 l a khs (d) Rs . 25 l a khs

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(e) None of the a bove 325. Banks are promised to grant loans against certificates of deposits _______? (a ) Yes (b) No (c) Yes , onl y to NRI (d) Yes , onl y up to 50% of the fa ce va l ue (e) None of the a bove 326. In addition to the normal services as defined in the Banking regulation Act, banks also undertake activities like project appraisal, underwriting of issue, technical know-how etc. This business is called _______? (a ) Cons ul ta ncy s ervi ces (b) Ba nca s s ura nce (c) Mercha nt ba nki ng (d) Advi s ory s ervi ces (e) Anci l l a ry s ervi ces 327. “Business Correspondent Framework” launched by the Reserve Bank of India is a step forward in achieving which of the followings? (a ) Fi na nci a l Incl us i on (b) Tra ns pa rency in ba nki ng tra ns a cti ons (c) Better control over coopera ti ve s ma l l ba nks (d) Provi di ng di rect s ubs i dy to cons umers of Public Di s tri buti on Sys tem (PDS) (e) None of thes e 328. The commercial paper can be issued to raise deposits by ___?

Multiple Choice Questions (a ) (b) (c) (d) (e)

Commerci a l ba nks Res erve Ba nk of Indi a IDBI Every non-ba nki ng compa ny None of the a bove

329. The aggregate amount of commercial paper issued by a bank should not exceed to ___? (a ) Rs . 25 crores (b) 5% of i ts dema nd a nd the l i a bi l i ti es (c) 75% of i ts fund ba s ed worki ng ca pi ta l l i mi ts (d) 1% of i ts net worth (e) None of the a bove 330. By increasing repo rate by the RBI, the economy may observe the following effects? (a) Rate of interest on loans and advances will be costlier (b) Indus tri a l output woul d be a ffected to a n extent (c) Ba nks wi l l i ncrea s e ra te of i nteres t on depos i ts (d) Indus try hous es ma y borrow money from forei gn countri es (e) Al l of thes e 331. Increase in interest rates on loans by banks, the impact on the economy will ______? (a ) Lea d to hi gher GDP growth (b) Lead to lower GDP growth (c) Mea n hi gher cos t of ra w ma teri a l s (d) Mea n l ower cost of ra w materials (e) Mea n hi gher wa ge bi l l

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332. Demand deposits mean ______? (a ) Depos i ts wi thdra wa bl e on dema nd by the depos i tor (b) (c) (d) (e)

Current depos i ts Fi xed depos i ts Short depos i ts None of the a bove

333. What is “Call Money”? (a ) Money borrowed a nd l ent for overni ght or a da y (b) Money borrowed for more than a da y but upto 3 da ys (c) Money borrowed for more than a da y but upto 7 da ys (d) Money borrowed for more than a da y but upto 14 da ys (e) None of the a bove 334. “Time deposits” means _______? (a ) The depos i ts whi ch a re l ent to ba nk for a fi xed peri od (b) Ti me depos i ts i ncl ude overdue fi xed depos i ts (c) Ti me depos i ts do not i ncl ude recurri ng depos i ts a s wel l (d) Ti me depos i ts do not i ncl ude depos i ts under Home Loa n Account Scheme (e) None of the a bove 335. Fixed deposits are for the bank _______? (a ) Dema nd l i a bi l i ty (b) Fi xed a s s et (c) Ti me l i a bi l i ty (d) None of the a bove (e) None of the a bove

Multiple Choice Questions 336. Which of the following services is provided only by the Reserve Bank of India? (a ) Compi l a ti on of economi c da ta (b) Is s ue of currency notes (c) Purcha s e and sale of gol d / gol d coi ns (d) Sa l e of Dema nd Dra fts (e) Sa fe deposit cockers for keepi ng va l ua bl es 337. In the following given situations, which decision taken by a bank is not correct, specifically in regard to an insolvent customer? (a ) A cheque signed by the i nsolvent pers on as drawer i s presented for pa yment a nd ba nk returns i t unpa i d (b) Ins olvent person comes to open a new deposit a ccount and ba nk refus es to open the a ccount (c) An i ns olvent person comes a s a pa yee of a cheque a nd ba nk refus es to pa y to hi m (d) An i ns ol vent pers on comes to ba nk a nd s eek a n overdra ft fa ci l i ty a nd the ba nk refus es (e) None of the a bove 338. The Negotiable Instruments Act deals with _______? (a ) Cheques, demand drafts, banker’s cheques (b) Promi s s ory notes , bi l l s of excha nge a nd cheques (c) Bi l l s of excha nge, cheques a nd dema nd dra fts (d) Cheques , dema nd dra fts a nd s a vi ng ba nk wi thdra wa l forms (e) None of the a bove Ba nking Awareness

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339. Which of the following are considered negotiable instruments per custom? (a ) Ra i l wa y recei pts (b) Dema nd dra fts (c) None of the a bove (d) Both the a bove 340. The term “escrow” means _____? (a ) Condi ti ona l del i very of a n i ns trument (b) An i nchoa te i ns trument (c) Ki te fl yi ng (d) Wi ndow dres s i ng (e) None of the a bove 341. “Hundies” are _______? (a ) Negoti a bl e i ns truments cus toms a nd us a ges (b) Negoti a bl e i ns truments defi ni ti on (c) None of the a bove (d) Both the a bove

by by

342. A person cannot be called a holder of an instrument if he has obtained the Instrument _______? (a ) By unl a wful mea ns (b) For a n i l l ega l cons i dera ti on (c) By fra ud, coercion, duress or fea r (d) Al l of thes e (e) None of the a bove 343. The relationship between a banker and a customer is ______? (a ) Tha t of a debtor a nd a credi tor (b) Tha t of a credi tor a nd a debtor (c) Pri ma ril y tha t of a debtor a nd a credi tor

Multiple Choice Questions (d) (a ) a nd (b) together (e) None of the a bove 344. Which of the followings acts as Regulators for Credit rating agencies in India? (a ) RBI (b) NSDL (c) SEBI (d) SIDBI (e) None of the a bove 345. The banker has a lien on ______? (a ) Bonds gi ven for col l ecti on (b) Bonds gi ven for s a fe cus tody (c) Bonds l eft by mi s ta ke (d) (a ) a nd (b) together (e) None of the a bove 346. The banker has a statutory obligation to ______? (a ) Honour cus tomer’s cheques (b) Exerci s e l i en (a ) Ma i ntain s ecrecy of his customer’s a ccounts (c) Honour cus tomer’s bi l l s (d) None of the a bove 347. In executing the standing instructions, there exists a relationship of _______? (a ) Trus tee a nd benefi ci a ry (b) Debtor a nd credi tor (c) Ba i l ee a nd ba i l or (d) Agent a nd pri nci pa l (e) None of the a bove 348. The most undesirable customer for a Bank, is ________? Ba nking Awareness

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A mi nor A ma rri ed woma n An unregi s tered fi rm An undi s cha rged ba nkrupt None of the a bove

349. Contracts by lunatics in India _______? (a ) Al wa ys va l i d (b) Al wa ys voi d (c) Al wa ys voi da bl e (d) At ti mes voi da bl e (e) None of the a bove 350. The best procedure for opening an account in the name of a minor x and the guardian y would be under the style _______? (a ) “x” a ccount (b) “x” a ccount - mi nor (c) “y” i n trus t for x (d) “y” a ccount (e) None of the a bove 351. The balance of joint account in the name of x, y and z should be paid on the death of x ___? (a ) To the l ega l repres enta ti ve of x (b) To y a nd z (c) To y or z (d) To l ega l repres enta ti ves of x, y a nd z (e) None of the a bove 352. A customer’s letter of instructions, without any stamp, in connection with the operations of his account is known as _______? (a ) Ma nda te

Multiple Choice Questions (b) (c) (d) (e)

Proba te Power of a ttorney Authori ty l etter None of the a bove

353. The most important feature of negotiable instrument is _______? (a ) Free tra ns fer (b) Tra ns fer free from defects (c) Ri ght to i s s ue (d) Both (a ) a nd (b) together (e) None of the a bove 354. Inflation in India is measured on the Indices _______? (a ) Whol es a l e Pri ce Index (b) Cos t of Li vi ng Index (a ) Cons umer Pri ce Index (b) Gros s Domes ti c Product (f) None of the a bove 355. “Money Laundering” involves _______? (a ) Pl a cement of Funds (b) La yeri ng of Funds (c) Integra ti on of Funds (d) Al l the a bove a , b a nd c (e) None of the a bove 356. In 1969 and in 1980, the Government of India started the Nationalization of Commercial Banks in 2 phases, and in all, as many as _______ Banks were Nationalized? (a ) 14 (b) 15 (c) 24 (d) 20 (e) 9 Ba nking Awareness

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357. “Muhammad Yunus” is associated with Banking Industry and is acclaimed for his contribution in the field of ______? (a ) Mi cro-fi na nce (b) Technol ogi ca l a dva ncement (c) Cons umer fi na nce (d) Ba nking Reforms i n Ba ngl a des h (e) Low-cos t hous i ng 358. Companies which generally finance the early-stage, highpotential, high risk growth startup companies are _______? (a ) Mi cro-Fi na nce compa ni es (b) Venture Ca pi ta l Funds (c) Corpora te Fi na nci ng Ba nks (d) Non-Banking Finance Compa ni es (e) Sta te Fi na nce Corpora ti ons 359. A NBFC is prohibited to offer or undertake _______? (a ) a ccept dema nd depos i ts (b) a ccept ti me depos i ts (c) Lend l ong term l oa ns (d) Pa y a hi gher ra te of i nteres t on deposits a s compa red to Ba nks (e) None of The Above 360. “Grameen Bank” is a microfinance organization and community development bank which operates in ________? (a ) Pa ki s ta n (b) Sri La nka (c) Ba ngl a des h (d) Indi a (e) Nepa l

Multiple Choice Questions PRACTICE TEST -10 361. The document drawn by a debtor on the creditor agreeing to pay a certain sum is called ______? (a ) Promi s s ory note (b) Cheque (c) Bi l l of excha nge (d) Dra ft (e) None of the a bove 362. The following one is a negotiable instrument, negotiable by usage or custom ______? (a ) Bi l l of excha nge (b) Sha re wa rra nt (c) Accommoda ti on bi l l (d) Promi s s ory note (e) None of the a bove 363. In the case of negotiable instrument, the following person generally gets a good title ______? (a ) Fi nder of the l os t i ns trument (b) Hol der of a s tol en i ns trument (c) Hol der-i n-due cours e (d) Hol der of a forged i ns trument (e) None of the a bove 364. A cheque which is not crossed is called ______? (a ) Open cheque (b) Bea rer cheque (c) Uncros s ed cheque (d) Order cheque (e) None of the a bove

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365. The safest form of crossing is _______? (a ) Account pa yee cros s i ng (b) Genera l cros s i ng (c) Speci a l cros s i ng (d) Doubl e cros s i ng (e) None of the a bove 366. The following one is absolutely essential for a special crossing _____? (a ) Two pa ra l l el tra ns vers e l i nes (b) Words “And compa ny” (c) Words “Not negoti a bl e” (d) Na me of a ba nker (e) None of the a bove 367. Not negotiable crossing is a warning to the ______? (a ) Pa yi ng ba nker (b) Col l ecti ng ba nker (c) Hol der (d) Both (a ) a nd (b) together (e) None of the a bove 368. A not negotiable crossing restricts what of the cheque ______? (a ) Tra ns fera bi l i ty (b) Negoti a bi l i ty (c) Nei ther tra ns fera bi l i ty nor negoti a bi l i ty (d) Both tra ns fera bi l i ty a nd negoti a bi l i ty (e) None of the a bove 369. An order cheque can be converted into a bearer cheque by means of _______? (a ) Sa ns recours e endors ement (b) Speci a l endors ement

Multiple Choice Questions (c) Bl a nk endors ement (d) Sa ns fra i s endors ement (e) None of the a bove 370. Which of the following is the currency of Syria? (a ) Pound (b) Dol l a r (c) Shi l l i ng (d) Di rha m (e) None of the a bove 371. Endorsement signifies that the ______? (a ) Endors er ha s got a good ti tl e (b) Endors er’s signa ture i s genui ne (c) Previ ous endors ements a re genui ne (d) Al l the a bove (e) None of the a bove 372. One of the following endorsements is not a valid one ______? (a ) Condi ti ona l endors ement (b) Res tri cti ve endors ement (c) Pa rti a l endors ement (d) Fa cul ta ti ve endors ement (e) None of the a bove 373. Negotiability gives to the transferee what title of the transferor _______? (a ) Better ti tl e (b) No ti tl e (c) The s a me ti tl e (d) No better ti tl e (e) None of the a bove

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374. To get statutory protection, the paying banker must make ______? (a ) Pa yment to a hol der (b) Pa yment i n due cours e (c) Pa yment to a hol der i n due cours e (d) Pa yment to a dra wee i n ca s e of need (e) None of the a bove 375. The best and the safest answer for returning a cheque for want of funds in the account is _______? (a ) Refer to dra wer (b) Not provi ded for (c) Exceeds a rra ngement (d) Not s uffi ci ent funds 376. When the amount stated in words and figures differs, the banker _______? (a ) Ca n honour the amount in figures (b) Ca n honour the amount in words (c) Ca n honour the sma l l er a mount (d) Ca n di s honour i t (e) None of the a bove 377. When a Garnishee order is issued by the court attaching the account of a customer, the banker is called ______? (a ) Ga rni s hee (b) Ga rni s hor (c) Judgement credi tor (d) Judgement debtor (e) None of the a bove 378. A collecting banker is given protection only when he collects ___? (a ) A cros s ed cheque

Multiple Choice Questions (b) (c) (d) (e)

An order cheque A bea rer cheque A muti l a ted cheque None of the a bove

379. A collecting banker is given the statutory protection only when he acts as ______? (a ) An a gent (b) A hol der (c) A hol der for va l ue (d) A hol der i n due cours e (e) None of the a bove 380. In the Banking parlance, “SubPrime” refers to ______? (a ) Lending by Ba nks a t ra tes bel ow PLR (b) Funds ra i s ed by ba nks a t s ubLIBOR ra tes (c) Group of ba nks whi ch a re not ra ted a s Pri me Ba nks a s per Ba nkers ’ Al ma na c (d) Lendi ng done by Ba nks /FIs to cus tomers not meeti ng wi th norma lly required credit appraisal s ta nda rds (e) None of the a bove 381. “Federal Reserve” is the Financial Organization of ______? (a ) The USA (b) The UK (c) UAE (d) Fra nce (e) Ja pa n 382. Collecting a cheque payable to the firm to the private account of a

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partner without enquiry constitutes ______? (a ) Gros s negl i gence (b) Contri butory negl i gence (c) Negl i gence under remote grounds (d) Negl i gence connected wi th i mmediate collection of a cheque (e) None of the a bove 383. Bankers undertake the duty of collection of cheques and bills because ______? (a ) Secti on 131 of the Negoti a bl e Ins truments Act compels them to do s o (b) Secti on 85 of the Negoti a bl e Ins truments Act compels them to do s o (c) Col l ection is a must for a cros s ed cheque (d) They wa nt to do i t a s a s ervi ce (e) None of the a bove 384. The most risky charge from a banker’s point of view is ______? (a ) Pl edge (b) Hypotheca ti on (c) Mortga ge (d) Li en (e) None of the a bove 385. The most convenient charge from a/an businessman or an industrialist’s point of view is ______? (a ) Equi ta bl e mortga ge (b) Lega l mortga ge (c) Hypotheca ti on (d) Li en (e) None of the a bove

Multiple Choice Questions 386. The stock market Index of London Stock Exchange is ______? (a ) Sens ex (b) Foots i e (FTSE) (c) NIFTY (d) NASDAQ (e) S&P 500 387. An equitable mortgage can be created in respect of _______? (a ) Government s ecuri ti es (b) Rea l es ta te (c) Whea t i n a godown (d) Li fe pol i ci es (e) None of the a bove 388. A charge where there is neither the transfer of ownership nor the possession is called _______? (a ) Hypotheca ti on (b) Li en (c) Pl edge (d) Mortga ge (e) None of the a bove 389. The liability of the mortgager is gradually reduced in the case of ______? (a ) Equi ta bl e mortga ge (b) Lega l mortga ge (c) Us ufructua ry mortga ge (d) Condi ti ona l mortga ge (e) None of the a bove 390. Real estate is not popular as a security because of ______? (a ) Di ffi cul ti es i n a s certa i ni ng the ti tl e (b) Di ffi cul ti es i n i ts va l ua ti on Banking Awareness

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(c) The a bs ence of rea dy ma rket (d) Long-term na ture of the l oa n (e) None of the a bove 391. When banks deal with large no. of individual customers for deposits as well as loans (liabilities and assets). This is called _____ banking? (a ) Na rrow ba nki ng (b) Reta i l ba nki ng (c) Uni vers a l ba nki ng (d) Whol es a l e ba nki ng (e) Commerci a l ba nki ng 392. These days Banks are offering Loans against Property? Under which business segment, this activity may be categorized? (a ) Corpora te Ba nki ng (b) Pers ona l Ba nki ng (c) Mercha nt Ba nki ng (d) Portfol io Ma na gement Servi ces (e) None of the a bove 393. In wholesale banking, banks normally do not deal with which of the following? (a ) Corpora tes i ncluding mul tinationals (b) Tra di ng hous es (c) Pri me public s ector compa ni es (d) Corpora te empl oyees for Pers ona l Loa ns (e) None of the a bove 394. “Currency Swap” is an instrument to manage_______? (a ) Currency Ri s k (b) Interes t Ra te Ri s k (c) Currency a nd Interes t Ra te Ri s k

Multiple Choice Questions (d) Ca s h Flows in different currencies (e) Al l of the a bove 395. “Plastic Money” denotes _____? (a ) Bea rer cheque (b) Credi t ca rd (c) Dema nd Dra ft (d) Tra vel l er’s cheque (e) Gi ft cheque 396. RBI has recently introduced Cheque Truncation System, which means that _______? (a) Phys i cal movement of a cheque is s topped between ba nks a nd i ns tead a n el ectroni c i ma ge be excha nged for cl earance of funds (b) The phys i ca l movement of a cheque for clearance of funds be ma de more s ecure (c) Is sue of cheques to customers be ma de more s ecure by i ntroducing more enhanced security features (d) A new technol ogy to proces s pa yments between Ba nks excl us i vel y (e) None of the Above 397. To define a bank, the basic functions of a bank would be? (a ) Accepti ng Depos i ts (b) Soci a l Upl i ftment (c) Lendi ng moni es /Inves tments (d) Both a a nd c (e) Al l of the a bove 398. The term “Floating Rupee” means _______? (a ) Li mi ted Converti bi l i ty of Rupee

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(b) Removal of all controls on cros s movement of Forei gn excha nge on ca pi ta l a ccount (c) Removal of all controls on cros s movement of Forei gn excha nge on Tra de & Servi ces (d) Remova l of control s on cros s movement of US Dol l a r a ga i ns t Indian Rupee on US-Indi a Tra de (e) None of the Above 399. The DICGC covers Bank Deposits under its Deposit Insurance Scheme of the commercial banks and includes _______? (a ) Forei gn Banks operating i n Indi a , (b) Regi ona l Rura l Ba nks (c) Co-opera ti ve Ba nks (d) Urba n Co-opera ti ve Ba nk (e) Al l of the Above 400. Under the provisions of Section 16(1) of the DICGC Act, the insurance cover available to the Depositors of a bank “in the same right and in similar capacity” at all the Bank branches of a bank put together is ________? (a ) Rs . 2,000 (b) Rs . 25,000 (c) Rs . 100,000 (d) Rs . 500,000 (e) None of The Above

Multiple Choice Questions PRACTICE TEST -11 401. The major quantitative monetary tool available with the RBI is ______? (a ) Ra ti oni ng of credi t (b) Regulation of consumer credit (c) Ma rgi n requi rements (d) Res erve ra ti o requi rements (e) None of thes e 402. Who is the Chairman of the 15th Finance Commission of India? (a ) Bi ma l Ja l a n (b) Na nd Ki s hore Si ngh (c) As hok La hi ri (d) Sha kti ka nta Da s (e) None of thes e 403. CASA, a term used in banking means ______ ? (a ) Ca pi tal Account Savings Account (b) Current Ana lysis Savi ngs Account (c) Cos t Ana l ys i s Stra tegy As s es s ment (d) Current Account Savings Account (e) None of thes e 404. As per the reports published in the newspapers the banks, particularly public sector banks are tying up with various Rating agencies for providing a qualitative assessment of the credit needs of the borrowers. Which amongst the following is/are such credit rating agencies in India ? 1. CARE 2. CRISIL 3. ARCIL (a ) Onl y 1 Banking Awareness

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Onl y 2 1 a nd 2 onl y Onl y 3 Al l 1, 2 a nd 3

405. RBI approved transactions in the “currency futures” in _______ currencies? (a ) Euro (b) Pound (c) Yen (d) Al l the a bove (e) None of thes e 406. How many Stock Exchanges are there in India? (a ) 2 (b) 3 (c) 21 (d) 23 (e) None of thes e 407. Mr. Maniraju issues a cheque favouring Mr. Raj Kumar, who endorses it in blank and delivers to Mr. Tahir Hussian. Mr. Tahir makes another endorsement in favour to Mr. Ravi Kumar. Who can encash the cheque? (a ) Ra vi Kuma r (b) Ra j Kuma r (c) Ta hi r Hus s i a n (d) Mr. Ma ni ra ju a nd Ra j Kuma r onl y (e) None of thes e 408. The rate at which Banks lend money to the RBI is known as _____ ? (a ) Repo ra te

Multiple Choice Questions (b) (c) (d) (e)

Revers e repo ra te Ca l l ra te Ba nk ra te CRR

409. Mr. Krishna borrowed a loan from a bank and failed to make interest or principal payment for 90 days, the Bank classified the loan as ______? (a ) Ba nk debt (b) Credi t l oa n (c) Sub-pri me l endi ng (d) Non-perfomi ng a s s ets (e) None of thes e 410. The Special Drawing Right (SDR) is an international Reserve Asset, created by _______? (a ) Worl d Ba nk (b) IMF (c) ADB (d) WTO (e) RBI 411. Lack of access to financial services is technically known as ____? (a ) fi na nci a l i ncl us i on (b) fi nancial s tability (c) fi nancial i nstability (d) fi nancial exclusion (e) poverty 412. Loans of very small amounts given to low income groups is called _______? (a ) Mi cro Credi t (b) Ca s h Credit (c) Si mple Overdraft Banking Awareness

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(d) Rura l Credit (e) No Fri l ls Loan 413. When a bank dishonors a cheque ______? (a ) i t i s ca l l ed wi thdra wi ng of the cheque (b) i t i s ca l l ed s ettl ement of the cheque (c) i t i s ca l l ed nul l i fyi ng of the cheque (d) i t i s called return of the cheque unpa i d (e) i t i s ca l l ed trunca ti ng of the cheque 414. When a retail loan is granted for purchase of white goods, it is called _______? (a ) Whi te goods l oa n (b) Cons umer durable l oan (c) Bus iness loan (d) Cons umpti on l oa n (e) Propri eta ry l oa n 415. While tackling the problem of inflation, which one of the following aspects is taken into consideration by the Reserve Bank of India (RBI)? (a ) Ba l ance between budget defi ci t a nd pri ce s ta bi l i ty (b) Ba l a nce between pri ces of the es s enti a l commodi ti es (c) Ba l a nce between growth a nd fi na nci a l s ta bi l i ty (d) Ba l ance between growth, pri ce s ta bili ty a nd fi na nci a l s ta bi l i ty (e) Al l of the a bove

Multiple Choice Questions 416. When we deposit a cheque issued in our name, the bank always checks if the cheque has been crossed or not. Why is this done? (a ) It i s a proces s by whi ch the pers on who ha s i s s ued the cheque comes know whether the cheque i s encha s ed or not (b) It ens ures tha t the money i s deposited only i n the a ccount of the pers on i n whos e na me the cheque ha s been dra wn (c) The ba nk insists on i t onl y when the pa rty wa nts the pa yment i mmediately a nd that too i n ca s h onl y (d) Thi s is the instruction of RBI tha t a l l the cheques of the a mount of Rs 10,000 s houl d be a ccepted onl y i f they a re cros s ed (e) None of thes e 417. Reserve Bank of India (RBI) issues directives to the Banks in India, under provisions of the Act/s _____? (a ) Ba nki ng Regul a ti on Act (b) Es s ential Commodities Act (c) Ba nking Regulation Act (d) RBI a nd Banking Regulation Act (e) None of thes e 418. In banking terms, BCSBI stands for which of the following? (a ) Ba nki ng Credi t a nd Securi ti es Boa rd of Indi a (b) Ba nki ng Codes a nd Sta nda rds Boa rd of Indi a (c) Ba nki ng Cons umer a nd Sta te Boa rd of Indi a (d) Ba nki ng Commerce a nd Secreta ri a l Boa rd of Indi a

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(e) Ba nki ng Communi ca ti ons a nd Sys tems Boa rd of Indi a 419. ________ market provides a platform for trading of existing securities and price discovery thereof? (a ) Pri ma ry ma rket (b) Seconda ry ma rket (c) Money ma rket (d) Ins ura nce ma rket (e) None of thes e 420. What is the extent of claim that can be entertained by a “Lok Adalat”? (a ) upto Rs . 1 La c (b) upto Rs . 10 La c (c) upto Rs . 20 La c (d) upto Rs . 50 La c (e) There i s no s uch l i mi t 421. Which among the following relationship of Bank and customer is not properly matched? (a ) Lockers – Les s or a nd Les s ee (b) Sta nding Instruction – Agent and Pri nci pa l (c) As s i gnment – As s i gnor a nd a s s i gnee (d) Loa n a ccount – Credi tor a nd Debtor (e) None of the Above 422. What is meant by the term “Gross Domestic Product”? (a ) It i s the cos t of s ervi ces ma de wi thin the borders of a country in a yea r.

Multiple Choice Questions (b) It i s the cost of producti on of a l l fi nal goods a nd s ervices ma de i n the country. (c) It i s the market va lue of a l l fi na l goods a nd s ervices ma de wi thi n the borders of a country i n a yea r. (d) It i s the market va lue of a l l fi na l goods a nd s ervices ma de i n the country. (e) None of thes e 423. Which of the following rates decided by the RBI is called ‘Policy Rate’? (a ) Lendi ng Ra te (b) Ca s h Res erve Ra ti o (c) Ba nk Ra te (d) Depos i t Ra te (e) Excha nge Ra te 424. India signed BIPA with many countries. BIPA is known as - Bilateral Investment Promotion and Protection _______? (a ) Act (b) Agreement (c) Arra ngement (d) As s ociation (e) Approva l 425. Which of the following is not a type of cheque issued by an individual? (a ) Bea rer cheque (b) Order cheque (c) Cros s ed cheque (d) Sa vi ngs cheque (e) Pos t da ted cheque

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426. Under which of the following circumstances, a Bank need to give notice to the customer, before exercising right of set-off? (a ) When cus tomer ha s expi red (b) When cus tomer ha s gone a broa d i ndefi ni tel y (c) When garnishee order has been recei ved (d) When a tta chment order ha s been recei ved (e) None of thes e 427. Total Gross National Product (GNP) of a country divided by total population is called _______? (a ) Per ca pi ta l i ncome (b) Purcha s i ng Power (c) Ra te of Infl a ti on (d) Excha nge va l ue (e) Gros s i ncome 428. Certain category of banks in India are incorporated under the provisions of Companies Act, 1956 which mainly include ______? (a ) Publ i c s ector ba nks , pri va te ba nks a nd forei gn ba nks (b) RRBs , private banks and forei gn ba nks (c) pri va te banks and foreign ba nks (d) pri va te banks, foreign banks a nd Co-opera ti ve ba nks (e) None of thes e 429. Red Herring Prospectus is issued by a ______ for ______? (a ) Compa ny, to ra ise funds through a commerci a l pa per

Multiple Choice Questions (b) Compa ny, to ra i s e funds from ba nk for a l ong term project (c) Compa ny, to ra ise ca pi ta l from ma rket under book bui l di ng process i n whi ch a pri ce of the s ha re i s not di s cl os ed (d) Ba nk, to ra i s e funds from the overs ea s l enders . (e) None of thes e 430. The rule in Clayton case becomes applicable in banking transactions in the following cases – A. when death of a customer takes place B. when the partner retires C. when the guarantor withdraws his guarantee D. when the director of a company dies who has been operating the account? (a ) A, B a nd C onl y (b) B, C a nd D onl y (c) A, C a nd D onl y (d) A to D a l l (e) None of thes e 431. When an unlisted company issues fresh securities for the first time, it is called _______? (a ) Ini ti a l publ i c offeri ng (b) Ri ghts i s s ue (c) Fol l ow – on publ i c offeri ng (d) Bonus s ha res (e) None of thes e 432. The most appropriate measure of a country’s economic growth is its ______? (a ) Gros s Domes ti c Product Banking Awareness

(b) (c) (d) (e)

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Net Domes ti c Product Net Na ti ona l Product Per Ca pi ta Rea l Income Hi gh i ndus tri a l growth

433. Among the following pairs about various Foreign Banks and their Parent Country, which pair is not correct? (a ) UBS – Swi tzerl a nd (b) Ba rcl a ys Ba nk – UK (c) ABN Amro Ba nk – US (d) Kookmi n Ba nk – South Korea (e) PNB Pa ri ba s – Fra nce 434. In India, the Foreign Exchange Reserves are kept in the custody of _______ ? (a ) Mi ni s try of Fi na nce (b) EXIM ba nk (c) Res erve Ba nk of Indi a (d) Sel ect publ i c s ector ba nks (e) SEBI 435. An investment plan of a mutual fund which is available for subscription and repurchase on a continue basis, is called _______? (a ) Cl os e- ended s cheme (b) Ba l a nced s cheme (c) Open ended s cheme (d) Growth s cheme (e) None of thes e 436. RBI has introduced Cheque Truncation System recently, which shall facilitate Banks to _______? (a ) Reduce the expenses of Banks on i s s ue of cheque books to cus tomers

Multiple Choice Questions (b) Reduce dra s ti ca l l y the funds cl ea ra nce under i nter-ba nk Cl ea ri ng to jus t one da y (c) Does not impact the ti me ta ken to cl ea r the funds under InterBa nk Cl ea ri ngs (d) Is sue customized Cheque books to cus tomers cheap with the help of new technol ogy (e) None of the Above 437. Tele-banking service is based on ______? (a ) Vi rtua l Banking (b) Onl i ne Banking (c) Voi ce processing (d) Core Ba nking (e) None of the a bove 438. A ____ card stores and provide identification, authentication, data storage and application processing applications? (a ) Debi t ca rd (b) Sma rt Ca rd (c) Credi t ca rd (d) ATM ca rd (e) None of The Above 439. Internet banking allows Bank customers to ________? (a ) vi ewi ng a ccount ba l a nces (b) downloading bank statements of thei r a ccount (c) orderi ng cheque books (d) Pa yi ng third parties, including bill pa yments a nd tel egra phi c/wi re tra ns fers (e) Al l of the a bove

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440. The acronym “NEFT” means ________? (a ) Na ti ona l El ectroni c Funds Tra ns fer (b) New El ectroni c Funds Tra ns fer (c) Na ti onal Emergency Funds Treaty (d) Na ti ona l Emergency Funds Tel egra phi c Tra ns fer (e) None of the Above

Multiple Choice Questions PRACTICE TEST -12 441. Reserve Bank of India’s functions is classified into _______? (a ) Supervi s ory & Regul a tory (b) Promoti onal & Devel opmenta l (c) Refi na nce Acti vi ti es (d) Lendi ng to Govt. Of Indi a (e) Al l of the a bove 442. All entities or persons engaged in the marketing and selling of mutual funds products are required to pass a certification test and obtain a registration number from ______? (a ) AMFI (b) SEBI (c) IRDA (d) NSE (e) None of the a bove 443. Sec._______ of RBI Act,1934 gives sole power to RBI to issue currency notes? (a ) 10 (b) 18 (c) 22 (d) 26 (e) None of the a bove 444. By the term “KYC”, we mean ______ ? (a ) Know Your Cus tomer very wel l (b) Know Your exi s ti ng Cus tomer very wel l (c) Know Your pros pecti ve Cus tomer very wel l (d) Sa ti s fy yours el ves a bout the cus tomer’s i denti ty a nd a cti vi ti es . (e) None of the a bove

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445. In a Garnishee Order, the banker on whom garnishee order served is called ________? (a ) Judgement Debtor’s Credi tor (b) Judgement Credi tor’s Credi tor (c) Judgement Credi tor’s Debtor (d) Judgement Debtor’s Debtor (e) None of the a bove 446. Sec 131 of Negotiable Instruments Act, 1881 extends protection to the _________ ? (a ) Pa yi ng Ba nker (b) Col l ecti ng Ba nker (c) Advi s i ng Ba nker (d) Is s ui ng Ba nker (e) None of the a bove 447. Hypothecation is applicable in the case of _______? (a ) Mova bl e goods (b) Immova bl e property (c) Book debts (d) Corpora te gua ra ntee (e) None of the a bove 448. A cheque is dated 12/05/19, thus its due date/validity is ________? (a ) 11/08/19 (b) 13/08/19 (c) 14/09/19 (d) 12/11/19 (e) None of the Above 449. Charge created on LIC Policy is _______ ? (a ) Hypotheca ti on (b) Pl edge (c) As s i gnment (d) Mortga ge (e) None of the Above

Multiple Choice Questions 450. Which one of the following is not barred by law of limitation? (a ) Pl edge (b) Hypotheca ti on (c) Ba nker’s l i en (d) Gua ra ntee (e) None of the a bove 451. The term “Credit Management” covers _______? (a ) Ca pi ta l a dequa cy norms (b) Ri s k ma na gement i ncl udi ng As s et/Li a bi l i ty ma na gement (c) Sa fety of moni es l end (d) Credi t a ppraisal – deci s i on a nd revi ew of l oa ns & a dva nces (e) Al l of the a bove 452. Bank’s Assets are classified in to standard assets, substandard assets doubtful assets and loss assets, based on the recommendations of _______ Committee? (a ) Ra nga ra ja n (b) Na ra s i mha m (c) Ghos h (d) Ta ndon (e) None of the a bove 453. The time taken to convert cash into raw materials, semi finished goods, finished goods and into cash, is known as _______? (a ) Tra de cycl e (b) Ca s h cycl e (c) Opera ti ng cycl e (d) Revol vi ng cycl e (e) None of the a bove 454. A company which pools money from investors and invests in stocks,

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bonds, shares is called _______? (a ) A ba nk (b) An i ns ura nce compa ny (c) Ba nca s s ura nce (d) Mutua l Fund (e) None of the a bove 455. “Bancassurance” is _______? (a ) An i ns urance s cheme to i ns ure ba nk depos i ts (b) An i ns urance s cheme to i ns ure ba nk a dva nces (c) A composite fi na nci a l s ervi ce offeri ng both ba nk a nd i ns ura nce products (d) A ba nk depos i t s cheme excl us i vel y for empl oyees of i ns ura nce compa ni es (e) None of the a bove 456. Jitendra Yadav and Ramesh Singh are friends aged 14 and 15 respectively. They want to open a joint account in your bank. You will ________? (a ) Al l ow them to open a joi nt a ccount to be opera ted joi ntl y (b) Al l ow them to open a joi nt a ccount wi th opera ti ng i ns tructi ons Ei ther or Survi vor (c) Al l ow them to open a joi nt a ccount wi th opera ti ng i ns tructions Former or Survi vor (d) Al l ow them to open a joi nt a ccount wi th opera ti ng i ns tructions Any one or Survi vor (e) None of the a bove 457. Mr. Suresh Ramnathan, as director of a Ltd. company expired. Subsequently, the Bank received a cheque signed by Mr. Suresh

Multiple Choice Questions Ramnathan as director of the Ltd. company. The bank _______? (a ) Ca n honour the cheque onl y a fter obta i ni ng confi rma ti on from other di rectors (b) Ca n honour the cheque (c) Ca nnot hounour the cheque (d) The company should issue a stop pa yment i ns tructi ons to the ba nk (e) None of the a bove 458. Identify the incorrect statement about Debit cards? (a ) It a l lows for i nstant wi thdra wa l of ca s h through ATMs (b) It ca n be us ed for i ns ta nt pa yment for purchases done a t s tores . (c) A cus tomer opens a n opera ti ve a ccount wi th a Ba nk whi ch i s s ues a Debi t ca rd (d) Even a not credi t-worthy cus tomer ma y obta i n a Debi t ca rd (e) It hel ps you ma ke i mmedi a te pa yment even if balances i n your a ccount i s i na dequa te 459. Securitization is a process of acquiring the loans classified as _______? (a ) Book debts (b) Performi ng debts (c) Ba d debts (d) Non performi ng debts (e) None of the a bove 460. A banker is expected to honour the cheques within the specified banking hours, as per Section ______ of N.I. Act, 1881? Banking Awareness

(a ) (b) (c) (d) (e)

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22 25 31 65 None of the Above

461. Cash Budget is a statement of ________? (a ) Ca s h-Non ca s h funds (b) Ca s h receipt a nd Ca sh payments (c) Another na me for ca s h fl ow (d) Al l the a bove (e) None of the a bove 462. In bank’s parlance, credit risk in lending is _______? (a ) Defa ul t of the ba nker to ma i nta i n CRR (b) Defa ul t of the ba nker to ma i nta i n SLR (c) Defa ult of the banker to releas e credi t to the cus tomer (d) Defa ult of the customer to repay the l oa n (e) None of the a bove 463. The apex institution which handles refinance for agriculture and rural development is called ______? (a ) RBI (b) SIDBI (c) NABARD (d) SEBI (e) None of the a bove 464. If the holder of a cheque wants to file complaint in a court u/s 138 of N.I. Act and other related provisions of NI Act, he can do so ______? (a ) Wi thi n one month from date of ca us e of a n a cti on

Multiple Choice Questions (b) Wi thi n one month from date of returni ng of the cheque by the col l ecti ng ba nk (c) Wi thi n one month of da te of recei pt of the i nforma ti on a bout dis honor by the hol der (d) Wi thi n one month of da te of di s honor of the cheque. (e) None of the a bove 465. The regulator for Mutual Funds in India is ________? (a ) FIMMDA (b) AMFI (c) RBI (d) SEBI (e) None of the a bove 466. FIMMDA’s general principles and procedures are applicable to ________? (a ) Fi xed Income Ma rkets (b) Money Ma rkets (c) Deri va ti ves Ma rkets (d) Al l of the a bove 467. Your bank’s customer, NM Clothings Ltd, enjoys a Cash Credit limit of Rs. 1,00,000.00. The Cash Credit account shows a credit balance of Rs. 10,205.00. The relationship between your bank and XYZ Ltd is _______? (a ) Debtor/Credi tor (b) Credi tor/Debtor (c) Ba i l or/Ba i l ee (d) Ba i lee/Ba i l or (e) None of the a bove 468. The right of set-off is _______? (a ) Cus tomer’s Ri ght (b) Cus tomer’s Obl i ga ti on (c) Ba nker’s Ri ght

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(d) Ba nker’s Di s creti on (e) None of the a bove 469. Which of the following forms of business are permissible under Banking Regulation Act ________? (a ) Borrowi ng (b) Sel l i ng Ins ura nce Pol i ci es (c) Is s ua nce of Letters of Credi t (d) Buyi ng a nd s el l i ng of bul l i on (e) Al l of the a bove 470. A Co-Operative Bank operating in different States is regulated by ________? (a ) Sta te Co-Operative Societies Act (b) Ba nki ng Regul a ti on Act (c) Mul ti Uni t Co-Opera ti ve Soci eti es Act (d) Ba nking Laws (applicabl e to CoOpera ti ve Soci eti es ) (e) None of the a bove 471. Indian insurance industry is run on globally acceptable standards and for that purpose IRDA carries following functions. Find which one is not correct? (a ) Regi s tra ti on of i ns ura nce (b) Sol vency ma rgins of i ns ura nce (c) Conduct of re-i ns ura nce bus i nes s (d) Functi ons a l s o a s i ns ura nce Ombuds ma n (e) None of the a bove 472. Law of limitation is not applicable in respect of _______? (a ) Adva nce a ga i ns t pl edge of s ha res (b) Ca s h Credi t gra nted a ga i ns t hypotheca ti on of i nventory (c) Term l oan s ecured by mortga ge of Pl a nt & Ma chi nery

Multiple Choice Questions (d) Ba nk Term Depos i t (e) None of the Above 473. A Bank in India, wants to undertake capital market activities, it should _______? (a ) Obta i n s pecial license from AMFI (b) Obta i n s peci a l l i cens e from FIMMDA (c) Both a a nd b (d) Regi s ter wi th SEBI (e) None of the Above 474. FIMMDA stands for_______? (a ) Forei gn Exchange Ma rkets a nd Deri va ti ve Ma rkets (b) Fi xed Income Ma rkets Money Ma rkets a nd Deri va ti ves Ma rkets (c) Fi xed Income Ma rkets a nd Deri va ti ves Ma rkets (d) None of the a bove 475. The Capital Adequacy Ratio for the Banks is stipulated as per BASEL II is _______? (a ) 6% (b) 8% (c) 9% (d) 10% (e) None of the Above 476. By adopting Cheque Truncation System, the banks in India would be required to print security logo on the face of the cheque leaves as ______? (a ) CTS 2012 (b) CTS 2013 (c) CTS 2010 (d) CTS 2009 (e) None of the Above 477. In terms of Reserve Bank of India (RBI) guidelines, Banks in India Banking Awareness

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must pay a minimum interest on the balances held in Savings bank account at _______? (a ) 4% (b) 3.50% (c) 5% (d) 6% (e) 7% 478. In terms of Reserve Bank of India (RBI) guidelines, Banks in India must pay a minimum interest on the balances held in Current Account at ________? (a ) 3% (b) 0% (c) 5% (d) Ba nks are free to deci de thei r ra tes (e) None of thes e 479. “Deposits at call” means that the deposits held with a Bank may be withdrawn at call, i.e. when asked for by the depositor, cannot be held for a period of _______? (a ) 90 da ys (b) 180 da ys (c) 7 da ys (d) 1 yea rs (e) 2 yea rs 480. Commercial Banks offer Locker facility for safekeeping of valuables. Which of the following item is though prohibited for safe keeping in the Locker? (a ) Jewel l ery (b) Negoti a bl e s ecuri ti es (c) Currency notes (d) Documents of ti tl e, wi l l s (e) None of thes e

Multiple Choice Questions PRACTICE TEST -13 481. Which one of the following activities undertaken by the Banks is not known as Non Fund based facilities _______? (a ) Letters of Credit (b) Ba nk Guarantees (c) Co-a cceptance of Bills (d) Trus t Receipt (e) None of the Above 482. FIMMDA’s guidelines cover the following products, except one? (a ) Ca l l Money (b) Cros s Currency Interest Rate s wa ps (c) Commerci al Pa per (d) Certi fi cate of Deposit (e) None of the Above 483. Except one of the following others are part of Public Sector Banks? (a ) Sta te Bank of Hyderabad (b) Centra l Bank of India (c) Regi onal Rural Bank, sponsored by a na tionalized bank (d) HDFC Ba nk (e) None of the Above 484. Which of the following instruments is used by public to directly lend to the Government? (a ) Ba nk Deposits (b) Publ ic Provi dent Fund (c) T-Bi lls (d) Certi fi cates of Deposit (e) None of the Above

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485. Inter-bank call money refers to borrowing among banks for _______? (a ) Overni ght (b) Two da ys (c) More tha n 14 da ys (d) Les s than 14 days (e) None of the Above 486. Certificates of Deposits have to be of a minimum value of ______? (a ) Rupees 1 l akh (b) Rupees 10 l akh (c) Rupees 25 l akh (d) Rupees 1 crore (e) None of the Above 487. Commercial paper can be issued _______? (a ) By a l l corporates (b) By a l l corporates with net worth of a t l east Rs. 10 crores (c) By a l l corporates with net worth of a t l east Rs. 5 crores (d) Ca n be i ssued only by ba nks (e) None of the Above 488. In a joint deposit account, which of the following is correct? (a ) When nomination i s proposed to be ma de, i t s houl d be by a l l of them (b) When a ccount is to be cl os ed i t s hould be done by a ll even i f the a ccount i s Ei ther or Survi vor, where specific a uthority to do s o ha s not been obta i ned i n the a ccount openi ng form (c) Ga rni s hee order wi l l be a ppl i ca bl e on thi s a ccount on pro-ra ta ba s i s i f the orders

Multiple Choice Questions recei ved i n the na me of one of the a ccount hol ders (d) Ba nk ca nnot use the ri ght of s et off a l oan in the na me of one of them (e) None of the Above 489. Which of the following statements is not true? (a ) Ca l l money ma rket dea l s wi th overni ght l oa ns (b) As s pecial cases, few FIs l i ke LIC, UTI ca n borrow i n the call money ma rket (c) Ca l l loans a re made on a ‘cl ea n’ ba s i s (d) Is a pa rt of orga ni s ed money ma rket (e) None of the Above 490. A scheduled commercial bank is one _______? (a ) Whi ch is i ncluded i n the Second Schedul e of the RBI Act, 1934 (b) Whi ch is i ncluded in the Ba nki ng Regul a ti on Act, 1949 (c) Both (a ) and (b) (d) None of the a bove 491. Which of the following actions can be considered an action of a partner that would bind other partners? (a ) Acknowl edgement of debt a l rea dy obta i ned by the fi rm (b) Opening a ba nk a ccount of the fi rm, i n hi s own na me (c) Gi vi ng a ma nda te to a l l ow a nother pers on to opera te the a ccount

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(d) To s ell the i mmova bl e property rel a ti ng to the fi rm (e) None of the Above 492. Bank can be held liable for conversion, in which of the following circumstance? (a ) Pa yment of a bearer cheque to a pers on other than payee without endors ement by the pa yee. (b) Col l ection of a cheque belongi ng to one X for a nother Xwho opened the a ccount you wi th proper i ntroducti on. (c) Col l ection of a cheque of l a rge a mount for a cus tomer ha vi ng poor fi na nci a l ba ckground, wi thout enquiring the s ource of the cheque. (d) Al l the a bove (e) None of the Above 493. What is the stipulated share of the priority sector in the net bank credit? (a ) 35% (b) 20% (c) 40% (d) 45% (e) None of the Above 494. Mutual funds are regulated by _______? (a ) As s ocia ti on of Mutua l Funds of Indi a (AMFI) (b) Securi ties a nd Exchange Board of India (SEBI) (c) Res erve Bank of India (d) None of the a bove

Multiple Choice Questions 495. A “growth fund” is _______? (a ) One i n whi ch the money i s i nves ted i n equi ti es (b) One i n whi ch the money i s i nves ted i n government bonds (c) One i n whi ch the money i s i nves ted equa l l y i n equi ty a nd bonds (d) Money i s i nvested onl y i n money ma rket i ns truments (e) None of the Above 496. “ARCIL” is an example of ______? (a ) A fi nancial institution (b) A mutual fund (c) An a s set management company s et up to a cquire NPAs of banks (d) A di scount a nd financing house (e) None of the Above 497. The rate at which the RBI borrows money from commercial banks is known as ______? (a ) Repo Rate (b) Ba nk ra te (c) Revers e Repo Rate (d) Ca l l Money Ra te (e) None of the Above 498. The phenomenon of a continuous decrease in prices of goods and services in the economy is, known as _______? (a ) Infl a ti on (b) Defl a ti on (c) Sta gfl a ti on (d) Ma rket cra s h (e) None of the Above

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499. The interest rate charged on loans by banks to their most creditworthy customers (usually the most prominent and stable business customers) is called ______? (a ) Ba nk ra te (b) Pri me Lendi ng Ra te (c) Sub Pri me Ra te (d) Ca rd Ra te (e) None of the a bove 500. Where a minor is admitted for benefit in a partnership firm and he attains majority and decides to join the firm as partner, his liability begins from ______? (a ) Da te of hi s ma jori ty (b) Da te of his deci s i on to joi n the fi rm (c) Da te of informati on to hi m tha t he wa s a dmi tted for benefi ts (d) Da te when he was a dmi tted for benefi ts (e) None of the a bove 501. ______ is a component of the liability side of the commercial Bank’s balance sheet? (a ) Deposits (b) Loa ns (c) Securi ties (d) Ca s h Balances with RBI (e) Investments 502. ______ is a component of the Asset side of the commercial Bank’s balance sheet? (a ) Deposits (b) Ca pi tal (c) Res erves

Multiple Choice Questions (d) Investments (e) None of the Above 503. What matters most during a run on the bank, is _______? (a) The l iquidity of the bank (b) The s olvency of the bank (c) The number of depositors (d) Sa fety of bank (e) Al l of the Above 504. For a scheduled bank the paid-up capital and collected funds of bank should not be less than _______? (a ) Rs . 5 l a kh (b) Rs . 6 l a kh (c) Rs . 1 crore (d) Rs . 5 crore (e) Rs . 50 l a kh 505. During the early 1900s, the “Swadeshi Movement”, inspired establishment of several Banks in India. Which among the following was not established during this movement? (a ) Ba nk of India (b) Sta te Bank of India (c) Ca na ra Bank (d) Ba nk of Baroda (e) Centra l Bank of India 506. In order to provide protection to the deposits held with banks and insurance for a minimum of their deposits with Banks, the following Institution was established _______? (a ) Res erve Bank of India (b) Sta te Bank of India Ba nking Awareness

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(c) Deposit Insurance and Credit Gua ra ntee Corporation (d) Securi ties a nd Exchange Board of India (e) Li fe Insurance Corporation of India 507. Reserve Bank of India (RBI) was established on ______, as Central Bank of India? st (a ) 1 September, 1935 (b) 1st Apri l , 1935 st (c) 1 Apri l , 1947 st (d) 30 Ja nuary, 1925 (e) None of these 508. Which Corporation was established in 1850, to undertake Non-Life Insurance business in India which no longer undertakes Non-Life Insurance business now? (a ) Li fe Insurance Corporation of India (b) Uni t Trus t of India (c) Uni ted Insurance Company of India (d) General Insurance Company (e) Sta te Bank of India 509. The salient features of a Bank, defined in terms of Banking Regulation Act stipulate that a bank must engage in _______? (a ) Accepti ng deposits (Resources) (b) Lending or Investing the Res ources (c) Lending the Resources (d) Both A a nd C (e) Both A a nd B

Multiple Choice Questions 510. Which among the following is not qualified in order to qualify as a customer of a Bank _______? (a ) He s hould have a n saving bank a ccount with the bank (b) He s hould have a n Fixed Deposit a ccount with the bank (c) He s hould have a Current account wi th the bank (d) He s hould have a Credit card with the ba nk (e) None of the Above 511. As a bank officer, you shall not open a _______ account in the name of a minor customer? (a ) Sa vi ngs a ccount (b) Current Account (c) Fi xed Deposit Account (d) Not open any of the above a ccounts (e) Al l ow a ny of the a bove account 512. In case of death of the Father, as natural Guardian, before the Minor customer attains majority, you shall _______? (a ) You s hall either pay the money to the Mi nor or open a new a ccount wi th a Guardian appointed by the Court (b) You s hall a llow mother to joi n a s Gua rdi a n i n the a ccount (c) You s ha l l pa y the money to mother a s Mi nor’s Gua rdi a n (d) Al l of the a bove (e) None of the Above 513. While opening an account in the name of a married woman, among

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other things, what precautions you would take as a Banker _______? (a ) Obta i n her Pa rents name a nd a ddress (b) Obta i n her s pouse name and a ddress (c) Obta i n her Office a ddress and conta ct details (d) Obta i n her marriage certificate (e) Al l of the Above 514. While allowing cash withdrawal by a Pardanashin women, you shall take precautions as ______? (a ) Ma tch her fa ce wi th the photo a va i l a bl e wi th the Ba nk (b) Obta i n a wi tnes s on the wi thdra wa l cheque from a res pecta bl e pers on (c) Obta i n thumb i mpressi on on the wi thdrawal cheque in a dditi on to her s i gna ture (d) Woul d refuse cash withdrawals (e) None of the Above 515. A Bank would usually allow opening of a current account to ____? (a ) Mi nor Cus tomer (b) Luna tic person (c) Decl ared Insolvent person (d) Il literate person (e) None of the Above 516. In case of death of a Partner of a Partnership firm, you shall take precautions by _______? (a ) Al l operations in the pa rtners hi p fi rm to cea s e i mmedi a tel y. (b) The exi s ti ng a ccount mus t be cl os ed

Multiple Choice Questions (c) A new a ccount, a s per new pa rtnershi p deed to be opened a nd operations a l l owed therei n (d) Al l of the Above (e) None of the Above 517. Which of the followings in regard to a “HUF customer” is correct? (a ) HUF i s governed by the “Mi tha ks ha ra l a w” (b) HUF i s managed and represented by the the hea d of the fa mi l y ca l l ed Ka rta . (c) Documents shoul d be s i gned by the Ka rta and major co-parceners (d) The ba nker should a s certa i n the purpose for the loan if i t i s rea l l y needed by the joint Hindu fa mi l y for i ts bus i nes s . (e) Al l of the a bove 518. While opening a Trust account, the banker should obtain _______ document? (a ) Memora ndum and Article of As s ociation (b) Trus t Deed (c) Trus t Registration Certificate (d) Deed of Pa rtnership (e) Al l of the Above 519. The Banker’s right of set-off can be exercised by the banker, only if _______? (a ) An a greement to tha t effect i s s i gned (b) Onl y i n the ca s e of dea th of the cus tomer (c) Even i n a bs ence of a wri tten expres s a greement

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(d) Onl y a fter obta i ni ng a court decree (e) None of the Above 520. The conditions under which the Banker’s Right of Set-off can be exercised ________? (a ) If the a ccounts a re not i n the s a me ri ght. (b) The obli ga ti ons a re for a future conti ngent debt e.g., a bi l l whi ch wi l l ma ture i n future. (c) If the a mounts of debts a re uncerta i n. (d) Trus t a ccount in whi ch pers ona l a ccount of the cus tomer ca nnot be combi ned. (e) Al l of the Above

Multiple Choice Questions PRACTICE TEST -14 521. “CASA” is basically the combination of Current account and savings account deposits with a Bank. Why do the Banks put greater emphasis on mobilizing a high CASA ratio? (a ) In order to fulfill RBI s ti pul a ti on for i t (b) It hel ps reduction in avera ge cos t of funds (c) Thes e a re s ta bl e depos i ts (d) Thes e hel p Ba nks ma i nta i n a hea l thy a s s et-l i a bi l i ty ra ti o (e) None of the Above 522. The rate at which the RBI lends money to commercial banks is called ______? (a ) Revers e Repo Ra te (b) Repo ra te (c) Ba nk ra te (d) Mi ni mum Lendi ng ra te (e) Pri me Ra te 523. The RBI uses the regulatory tool in the form of _____ to drain out excessive money from the system? (a ) SLR (b) CRR (c) Revers e Repo Ra te (d) Pri ori ty Sector Lendi ng (e) Sel ective Credit Control methods 524. A customer has balance in his saving bank account. In which of the following cases, the Bank’s Right to

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Set-Off can be used for recovery of a loan? (a ) A ba nk guarantee i s s ued by the ba nk (b) A Term l oan has been sanctioned a nd the i nstalment is s ti l l to fa l l due (c) A Ca s h credit limit i s s a ncti oned to the pa rty a nd i t i s runni ng regul a r (d) Cus tomer i s guarantor i n a l oa n a ccount of a nother pers on a nd tha t pers on ha s defa ul ted i n repa yment of the l oa n. (e) None of the Above 525. A crossing is direction of the drawer to ______. Which among the following is not correct? (a ) General crossing --- to collecti on ba nk (b) Not-negoti a bl e cros s i ng -- to col l ecti ng ba nk (c) Account pa yee cros s i ng -– to pa yi ng ba nk (d) Al l a re correct (e) None of the Above 526. One of the State Government avails of a temporary financial assistance from Reserve Bank of India. This type of finance is called ______? (a ) Overdra ft (b) Tempora ry l oa n (c) Short term fi na nce (d) Wa ys a nd Mea ns a dva nce (e) None of the Above 527. The objective of the sales promotion of a Bank is to inform,

Multiple Choice Questions persuade or remind target customers of the Bank’s _______? (a ) Sa l ary a nd Remunera ti on pol i cy (b) Product-mi x (c) Ma rket a pproa ch (d) Ma rketi ng mi x (e) None of the a bove 528. Obligation of a Banker to maintain secrecy is applicable to _______? (a ) Onl y i n ca s e of exi s ti ng depos i t a ccounts (b) Onl y i n res pect exi s ti ng l oa n a ccounts (c) Onl y i n ca s e of cl os ed a ccounts (d) Al l types of deposit/loan a ccounts (e) None of the Above 529. Bank A allows one of its clients to withdraw against clearing of a cheque. The banker is called as _____? (a ) Col l ecti ng a nd Pa yi ng ba nker (b) Hol der i n due cours e (c) Hol der for va l ue (d) Rei mburs ement ba nker (e) None of the Above 530. As per the provisions of NI Act, 1881 a banker gets protection for payment of a cheque only if it is a ______? (a ) Hol der i n due cours e (b) Pa yment i n due cours e (c) Hol der for va l ue (d) Al l of the a bove (e) None of the Above

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531. At a Railway station, you withdraw cash from ATM of State Bank of India. SBI is a ______? (a ) Pa yi ng Ba nker (b) Col l ecti ng Ba nker (c) Advi s i ng Ba nker (d) Is s ui ng Ba nker (e) None of the Above 532. Management of a Bank vests with _______? (a ) Res erve Ba nk of Indi a (b) Ma na gement Commi ttee (c) As s et Li abili ty Commi ttee (ALCO) (d) Boa rd of Di rectors (e) None of the a bove 533. Hari issues a stop-payment instructions to his banker to “Stop payment of a cheque” for Rs. 20,000.00. This is ______? (a ) A reques t from Ha ri (b) An i nti ma ti on from Ha ri (c) An a dvi ce from Ha ri (d) A ma nda te from Ha ri (f) None of the a bove 534. Except one of the following instruments others are issued at discount. Identify the exception ____? (a ) A Certi fi ca te of Depos i t (CD) (b) A Trea s ury Bi l l (T Bi l l ) (c) A Commerci a l Pa per (CP) (d) A Fi xed Depos i t (FD) (e) None of the a bove 535. Cash Reserve Ratio (CRR) is to be maintained on Net Demand and Time

Multiple Choice Questions Liabilities (NDTL). SLR is thus required to be maintained on _______? (a ) Tota l Demand and Time Liabilities (b) Net Demand and Time Liabi l i ti es (c) Tota l Dema nd a nd Ti me As s ets (d) Net Dema nd a nd Ti me As s et (e) None of the Above 536. Garnishee order is issued by___? (a ) Judgement Debtor (b) Judgement Credi tor (c) Judgement Debtor’s Debtor (d) None of the a bove 537. “CAMEL model” is used by ____? (a ) Ba nkers to eva l ua ted a credi t propos a l (b) Ba nkers to ma na ge thei r ri s ks (c) RBI i nspectors to evalua te ba nks functi ons (d) Mercha nt Ba nkers to eva l ua te portfol i o i nves tment (e) None of the Above 538. One of your NRI customers wants to place FCNR deposits in Canadian $ with your bank. You will ______? (a ) Accept hi s reques t a nd open a FCNR a /c (b) Wi l l not a ccept hi s reques t to open FCNR a /c i n Ca na di a n $ (c) Wi l l inform the customer to pla ce FCNR i n a ny one of the currencies (US$/GBP/ JPY/ EUR) (d) Both b a nd c 539. Which one of the Non-Resident Deposit schemes is now not permitted? Ha ndbook on Banking Awareness

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FCNR a /cs NRNR a /cs NRE a /cs NRO a /cs None of the Above

540. At the time of receipt of a garnishee order your customer’s accounts showed : I. SB a /c uncl ea red ba l a nce Rs .2,000.35 (Cl eared bala nce Rs 550.35) II. An overdue fi xed depos i t for Rs .25,753.22 ma tured one week ea rl i er III. OD a ccount s howed a credi t ba l a nce of Rs .8,728.96 IV. CC a ccount s howed a credi t ba l a nce of Rs ,2,247.18 Indicate the amount which can be attached by the garnishee order? (a ) Rs .28,550.75 (b) Rs .10,228.96 (c) Rs .37,729.71 (d) Rs 4,247.53 (e) None of the Above 541. You receive a cheque in an overdraft account for Rs.27,000.00. The debit balance in the account is Rs.30,000.00 and the OD limit is Rs 55,000.00.What reason you will state while returning cheque ______? (a ) Refer to dra wer (b) Effects Not cl ea red (c) Exceeds a rra ngement (d) Endors ement not correct (e) None of the Above

Multiple Choice Questions 542. Match the following: i ) Pa yment in Due A) Ins ura nce Cours e i i ) Ka rta B) Ca s h Credi t i i i ) IRDA C) HUF i v) Hypothecation D) Pa yi ng Banker of Inventory (a ) i -D,i i -C,i i i -A,i v-B (b) i -A,i i -B,i i i -C,i v-D (c) i -B,i i -A,i i i -D,i v-C (d) i -D,i i -C,i i i -B,i v-A (e) None of the Above 543. Match the following: Identify the Committees: a . Cl a s s i fi ca ti on of As s ets b. Computeri s a ti on i n Ba nks c. Worki ng Ca pi ta l for SSIs d. Ca pi ta l Account Converti bi l i ty A) Na ya k B) Ta ra pore C) Na ra s i mha m D) Ra nga ra ja n (a ) (b) (c) (d) (e)

i -B,i i -D,i i i -C,i v-A i -D,i i -C,i i i -A,i v-B i -B,i i -A,i i i -C,i v-D i -C,i i -D,i i i -A,i v-B None of the Above

544. Match the following: I. Fi na nci a l i ntermedi a ri es II. ATMs III. Certi fi ca te of Depos i ts IV. Book debts (A) Mutua l funds (B) E- Ba nki ng (C) Money Ma rkets (D) As s i gnment

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(a ) i -C,i i -D,i i i -A,i v-B (b) i -D,i i -C,i i i -B,i v-A (c) i -A,i i -B,i i i -C,i v-D (d) i -A,i i -C,i i i -B,i v-D (e) None of the Above 545. The banker acts as a Bailee and the customer as Bailor, this relationship is applicable ______? (a ) When a ba nk l ends funds to a corpora te cus tomer (b) When a ba nk a ccepts US$ FCNR depos i ts form a NRI cus tomer (c) When a customer operates a sa fe depos i t l ocker (d) When a customer keeps articles in s a fe cus tody wi th a ba nk (e) None of the Above 546. One of your customers lost the Fixed Deposit Receipt issued by the bank. To obtain a duplicate FD, he needs to furnish ________? (a ) A Promi s s ory note (b) A Gua ra ntee (c) A Letter of Credi t (d) An Indemni ty bond (e) None of the Above 547. In a demand draft (DD) the word “order” is changed to “bearer” by the holder of the DD. It is called as _____? (a ) Endors ement (b) Ma teri a l a l tera ti on (c) Cros s i ng (d) None of the a bove 548. Capital adequacy is worked out, based on _______?

Multiple Choice Questions (a ) (b) (c) (d) (e)

Tota l demand and time liabil i ti es Net dema nd a nd ti me a s s ets Ri s k wei ghted a s s ets Ri s k wei ghted l i a bi l i ti es None of the a bove

549. One of your customers dies without leaving a will and the court appoints a person to handle the customer’s Property. Such a person is called as _______? (a ) An a dmi ni s tra tor (b) An executor (c) A l i qui da tor (d) A s ucces s or (e) None of the a bove 550. A negotiable instrument is endorsed as “Pay to Raju only”. This is called as ______? (a ) Bl a nk endors ement (b) Res tri cti ve endors ement (c) Sa ns recours e endors ement (d) Endors ement i n Ful l (e) None of the a bove 551. The data/ information provided by a credit information company to member banks is called ______? (a ) Credi t i nforma ti on report (b) Credi t report (c) Confi denti a l report (d) Confi dentia l credi t report (CCR) (e) None of the a bove 552. A holder of a cheque can recover the amount from the drawer u/s 138 of NI Act where ______

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(A) the cheque is issued for discharge of liability (B) the cheque is dishonoured for insufficiency of funds (C) the cheque is presented within its validity period irrespective of maximum period. Which of these conditions is correct? (a ) A, B a nd C a l l (b) A a nd B (c) B a nd C (d) A a nd C (e) None of the a bove 553. The Garnishee order “Nisi” is _______? (a ) It i s a final order on the judgment Debtor. (b) It i s a n i nteri m order pendi ng hea ri ng by the Court. (c) It i s a request ma de by the Ba nk to the court. (d) It i s a warning to the debtor by a Court. (e) None of the Above 554. Banks are not under obligations to honour cheques issues by customers in his account, if ______? (a ) Adequa te ba l a nces a re ma i nta i ned (b) Cheque has no material alteration (c) Si gnature on the cheque ha s no a l tera ti on (d) Cheque i s pos t-da ted (e) None of the Above 555. Micro-Finance is related to ____? (a ) Hi gh Net-worth Indi vi dua l (b) Sma l l Sca l e Indus tri es

Multiple Choice Questions (c) Poor ci ti zen (d) Indus tri a l uni ts (e) Tra ns port s ector 556. The banker has an obligation to maintain secrecy of the customer’s account, excepting when ______? (a ) In ca s e of protecti ng the Publ i c Interes t i n genera l (b) In ca s e of proof of Treas on when Govt. ca l l for i nforma ti on (c) In ca s e of dema nd ra i s ed by Income Ta x Dept. (d) In compl i a nce to a Court Order (e) Al l of the Above 557. A Customer of the Bank is under the obligation to ________? (a ) Not to dra w cheques wi thout ma i nta i ni ng s uffi ci ent ba l a nce (b) To dra w cheques s o a s to a voi d a ny cha nge or a l terna ti on. (c) To pa y rea s ona bl e cha rges for s ervi ces rendered by the Ba nk (d) To ma ke a demand on the banker for repa yment of depos i ts (e) Al l of the Above 558. Which of the following instruments is not a Negotiable Instrument, as per NI Act, 1881? (a ) Bi l l s of Excha nge (b) Letter of credi t (c) Ba nk Dra ft (d) Promi s s ory Notes (e) Cheque 559. Which is the following is not a feature of a Promissory note? (a ) It i s dra wn by the Debtor. Ha ndbook on Banking Awareness

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(b) It conta i ns a n uncondi ti ona l Promi s e to pa y. (c) There a re two pa rti es i nvol ved (d) Accepta nce to a Promiss ory Note i s requi red. (e) None of the Above 560. Which is the following is not a feature of a Bills of Exchange? (a ) It i s dra wn by the Credi tor. (b) It conta ins an unconditional order to pa y. (c) There a re two pa rti es i nvol ved (d) Accepta nce to a Promiss ory Note i s requi red. (e) None of the Above

Multiple Choice Questions PRACTICE TEST -15 561. Post introduction of CTYS-2010, if a customer desires to see/get the physical cheque issued by him, in case a dispute ______? (a ) The pa yi ng ba nk ca n provi de i ma ges of cheques dul y a uthenticated, a fter obta i ni ng a fee (b) The pa yi ng ba nk i s under no obl i ga ti on to provi de ei ther a n i ma ge or photocopy of a cheque (c) The cus tomer has onl y opti on to obta i n a court order to get a copy/i mage of the cheque from to the Pa yi ng Ba nk (d) The cus tomer ma y obta i n a n i ma ge/photo copy of the cheque from the Cl ea ri ng Hous e of RBI (e) None of the Above 562. Small scale industries in India are not characterized by _______? (a ) Low ca pi ta l -l a bour ra ti o (b) Hi gh output-ca pi ta l ra ti o (c) Equi table distributi on of i ncome (d) Abs ence of probl em of s i cknes s (e) None of the Above 563. “DAX” is the stock exchange of ________? (a ) Germa ny (b) Ja pa n (c) USA (d) Ma xi co (e) None of the Above 564. When a document is executed outside India, it requires payment of

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stamp duty in India. The duty can be paid on this document within ______? (a ) Before i t i s us ed i n Indi a (b) Immediately when the document enters Indi a (c) Wi thi n 4 months from date of i ts executi on a broa d (d) Wi thi n 3 months of i ts entry i nto Indi a (e) None of the Above 565. Increase in deposit rate results in ________? (a ) Decrea s e the credi t growth (b) Increase the Agri cul ture defa ul t pa yments (c) Decrea s e the cus tomer ba s e (d) Increa s e the credi t growth (e) Al l of the a bove 566. Rise in inflation rate leads to decline in _______? (a ) Interes t ra te (b) Ra i se in the deposits i n the ba nks (c) Decrea s e the rea l i nteres t ra te (d) Ra i se the credit growth by ba nks (e) None of the Above 567. Difference between interest earned and interest paid is called _______? (a ) Gros s Interes t Income (b) Pa i d Interes t Income (c) Free Interes t Income (d) Net Interes t Income (e) Al l of the a bove 568. The banks are issuing the Kisan credit cards these days to give the free

Multiple Choice Questions credit period. Generally what is the Validity period of the Kisan Credit Card? (a ) 1 yea r (b) 10 yea rs (c) 5 yea rs (d) 8 yea rs (e) 3 yea rs 569.The banker-customer relationship arises from various types of services rendered by the Bank. Which of these is not a correct statement? A. deposit B. lending C. remittances, such as demand drafts etc. D. conducting govt. transactions (a ) C onl y (b) D onl y (c) C a nd d onl y (d) None of the a bove 570. Bank has obligation of maintaining secrecy of customer’s account. Which of the following is not correct in this connection? (a ) The obl i ga ti on ends wi th the cl os ure of the a ccount (b) The obligation is not a bsolute a s in certa i n ci rcums ta nces , i nforma ti on i s di s cl os ed (c) The obl i ga ti on i s res ul t of contra ctual obliga ti on a nd a l s o provi sions of Banking Companies (Acqui s i ti on & Tra ns fer of Underta ki ngs ) Act. (d) Excha nge of i nforma ti on a mongs t ba nks s houl d be i n genera l terms .

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(e) None of the a bove 571. _______is the largest stake holder in the National Securities Depository Limited? (a ) SBI (b) Corpora ti on Ba nk (c) Syndi ca te Ba nk (d) IDBI Ba nk (e) ICICI Ba nk 572. Recently RBI advised the banks to reduce the Net Interest Margin comedown to see the double digit growth. What is meant by it _______? (a ) Ba nks accept the deposits a t hi gh ra te of i nterest a nd l end a t higher ra te of i nteres t (b) Ba nks accept the deposits a t hi gh ra te of i nteres t a nd l end a t no ra te of i nteres t (c) Ba nks accept the deposits a t hi gh ra te of i nterest a nd l end a t l ower ra te tha n the pres ent ra tes (d) Ba nks a ccept the depos i ts a t l ower rate of i nterest and l end a t hi gher ra te (e) None of the Above 573. The Former RBI Governor C. Rangarajan said which one as the “flawed business model”? (a ) Ba nks (b) Compa ni es (c) Mi cro Fi na nce Compa ni es (d) School s (e) Pri va te Ba nks 574. “Interest Corridor” includes ________? (a ) Ba s e ra te a nd s a vi ngs ra te

Multiple Choice Questions (b) (c) (d) (e)

Ba nk ra te and Reverse Repo ra te Ba s e ra te a nd Repo ra te Repo ra te and Reverse Repo ra te None of the Above

575. Asset-Liability mismatch usually happened in _______? (a ) Home Loa n a nd Infra s tructure Project Fi na nci ng (b) Educa tion loan and personal l oa n (c) Pers onal l oan a nd ma rri a ge l oa n (d) Tra vel l oa n a nd ma rri a ge l oa n (e) None of the Above 576. The main function of Reserve Bank of India includes _______? (a ) Mi nti ng Currency (b) fra mi ng the moneta ry a nd credi t pol i cy (c) Wi th the hel p of Ci rcul a ti on of money, maintaining price s tabili ty (d) Forei gn Excha nge ma tters (e) Al l of the a bove 577. A customer deposits some money in his deposit account with the bank but forgets to provide complete particulars of the account. The bank credits the funds in sundries account. The relationship between bank and customer, in this case, is ______? (a ) Debtor – Credi tor a s the funds were depos i ted for a depos i t a ccount (b) Ba i lee and Bailor, a s the money ha s been recei ved by ba nk (c) Agent a nd Pri ncipal, as the ba nk wi l l a ct a s a gent for the funds (d) Trus tee a nd Benefi ci a ry (e) None of the a bove Ba nking Awareness

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578. The government of India has the mint at _______? (a ) Noi da (b) Kol ka ta (c) Mumba i (d) Hydera ba d (e) Al l of the a bove 579. “Sub prime lending” is a loan made to _______? (a ) The corporate business compa ny whi ch pay back its loan before the da te (b) The i ndividual who ta kes l oa n by keepi ng s ecuri ty (c) the ba nk was authorized by RBI to gi ve l oa ns a t reduced ra tes to s ome peopl e (d) Such person do not ha ve a good credi t hi s tory (e) The l oa d of l oa ns 580. Indian paper currency is minted in Mysore and also in _______? (a ) Kol ka ta (b) Chenna i (c) Benga l uru (d) Na s i k (e) Del hi 581. In which of the following circumstances, the Bank can exercise its “right of set off” to adjust the loan account from deposit in the name of the customer, after giving a notice only? (a ) Dea th of the cus tomer (b) When cus tomer ha s become i ns ol vent

Multiple Choice Questions (c) When garnishee order ha s been recei ved by the ba nk (d) When l oan has become NPA a nd there i s urgency to recover the a mount (e) None of the a bove 582. Which industry manufactures white paper to supply to Indian Security Press? (a ) Gurgoa n ( Ha rya na ) (b) Gol konda (Andhra Pra des h) (c) Hous hangabad (Madhya Pra desh) (d) La da kh (Ja mmu) (e) None of the Above 583. Business Correspondent appointed to represent the bank in rural area. Who is not eligible to act as business correspondent? (a ) Hous e Wi fe (b) Ba nk empl oyee (c) Pri va te empl oyee (d) The res i dent of vi l l a ge (e) None of the Above 584. Financial inclusion means _______? (a ) provi ding banking s ervices in rural a rea s wi th a fforda bl e cos t (b) provi ding corpora te a ccounts i n i ndus tri a l a rea (c) gi vi ng many joint a ccounts to save the money of ba nks (d) not to a l low the banks to vi ll a ges ha vi ng already branch of a nother ba nk there (e) Al l of the a bove

Ba nking Awareness

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585. Non-Performing Assets do not include ______? a) Interes t a nd /or i ns ta l l ment of pri nci pa l rema i n overdue for a peri od of more tha n 90 da ys i n res pect of a term l oa n b) the a ccount rema i ni ng “out of order” for a period of more tha n 90 da ys i n res pect of a n overdra ft/ca s h credi t c) the bi l l rema i ns overdue for a peri od of more tha n 90 da ys i n the ca s e of bi l l s purcha s ed a nd di s counted d) the cus tomer does not do a ny tra ns action i n the l a s t 90 da ys i n s a vi ngs ba nk a ccount e) the cheque does not honor wi thin 180 da ys (a ) Both a & b (b) Both a & d (c) Both c & d (d) Both d & e (e) Both c & e 586. Deposit Insurance and Credit Guarantee Corporation (DICGC) insures the deposits of the bank customers up to 1 lakh. DICGC is the wholly owned subsidiary of _______? (a ) SBI (b) NABARD (c) Uni on Government (d) RBI (e) IDBI 587. Monetary Policy of RBI does not include _______? (a ) Control the s uppl y of Money (b) Reducti on of ta xes

Multiple Choice Questions

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(c) Fi xa tion of ra te of interest ( l ea s t i n s ome ca tegori es ) (d) Fi xa tion of Repo ra te and Reverse Repo ra te (e) Fi xa ti on of Ca s h

(d) RBI a nd banks buy a nd s ell s hares i n the open ma rket for profi t duri ng the fi rs t s es s i on of s tock excha nge bus i nes s . (e) Al l of the a bove

588. RBI in one of their statement said that the Rupee is “over-valued”, it means_______? (a ) Rupee wea kened where a s the other currenci es a re becomi ng s tronger (b) Dol lar weakened a gainst Rupee in the morning but i n evening i t l os t to Rupee (c) Rupee a ppreciates a ga i ns t other currenci es ; where a s other currenci es a re wea keni ng (d) Al l currenci es a re s tronger tha n Rupee, except the Dol l a r a s i t i s uni vers a l currency (e) Rupee becoming stronger i n tha t week aga i ns t the a l l currenci es

590. RBI said all _______ should open no frills accounts for Minority communities for availing various scholarships? (a ) Co-Opera ti ve Ba nks (b) Regi ona l rura l ba nks (c) Loca l Area ba nks (d) Schedul ed Commerci a l Ba nks (e) NABARD

589. RBI does some Open Market Operations. Open Market Operations mean _______? (a ) RBI enters in the Ba nki ng s ector a nd offers the di rect s ervi ce to cus tomers . It ca n gi ve current a ccount to cus tomers a nd pa rti ci pa te i n the mutua l fund ma rkets (b) RBI pa rticipates i n the s elling a nd buyi ng of s ha res i n s tock excha nge. (c) It buys a nd sells the government s ecurities i n the open ma rket. By buyi ng it s wel l s the l i qui di ty by s el l i ng i t s ucks the l oa d of l i qui di ty.

Ba nking Awareness

591. An advocate has two accounts with your branch in his name ______ (a) one in which he transacts his office transactions (b) one his client account. A garnishee order is received? (a ) The order wi l l a tta ch onl y the cl i ent account a nd not the offi ce a ccount (b) The order wi l l not a tta ch the cl i ent a ccount a nd a tta ch the offi ce a ccount onl y (c) The order wi l l a tta ch both the a ccounts (d) The order wi l l not a tta ch a ny a ccount, as the a ccounts bel ong to a n a dvoca te (e) None of the a bove 592. Mr. X opened an account in the name of his minor daughter, under his guardianship. He also writes a will and appoints Z as Testamentary guardian. Subsequently, he changes his religion.

Multiple Choice Questions In the circumstances, the account will be operated _______? (a ) By X’s wi fe i f a live and by Z i f s he i s not a l i ve (b) By X’s wi fe i f a l i ve a nd by court a ppointed guardian if s he i s not a l i ve (c) By Z onl y (d) Account wi l l conti nue to be opera ted by X onl y bei ng hi s gua rdi a n (e) None of the a bove 593. European Central Bank (ECB) has its Headquarters at ________? (a ) Pa ri s (b) London (c) Ma dri d (d) Rome (e) Fra nkfurt 594. INFINET is a communication channel for transmission of electronic communication by banks. INFINET stands for _______? (a ) Indian Financial Internal Network El ectroni c Tra ns a cti on (b) Indian Financial Internal Network (c) Indian Na tional Financial Interna l Net Extra Tra ck (d) Indi a n Fi na nci a l Network (e) None of the Above 595. If a bank account that automatically transfers amounts that exceed (or fall short of) a certain level into a higher interest earning investment option at the close of each business day that account usually called as _______?

Ba nking Awareness

(a ) (b) (c) (d) (e)

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Freeze Account CASA Account Il l ega l Account Sweep Account In opera ti ve Account

596. In a news paper it is read that “Higher Provisioning erodes public sector banks profit”. Here Provisioning means charge for ______? (a ) Da i l y Expens es (b) Cos t to erect ATMs (c) Conducti ng Exa ms to recrui t new Pers ona l (d) Ba d l oa ns (e) Es ta bl i s h new bra nches 597. Bank’s obligation to pay the cheque drawn by the customer u/s 31 of N..I. Act exists, in which of the following circumstances? (a ) When the cheque is pres ents by the dra wer after busines s hours (b) When the cheque is reported to be l os t a nd confi rma ti on from dra wer i s s ti l l a wa i ted. (c) When garnishee order ha s been recei ved, cheque through cl ea ring i s debi ted but cl ea ri ng returni ng ti me ha s not l a ps ed (d) When cheque da ted June 31, 2007 i s pres ented on June 30, 2007 598. The banking business use the word “Hot Card”. Hot card means ________? (a ) Ca rd us ed to buy Petrol (b) Ca rd us ed to buy hot dea l s i n webs i te

Multiple Choice Questions (c) Ca rd i s s ued, but not us ed by cus tomer (d) Ca rd i s s ued by ba nk but not honoured by a nother ba nk. (e) Los t Credi t Ca rds 599. “Repatriation of Funds” means _______? (a ) Ca pi tal flow from a home country to the forei gn country. (b) Depos i ts move from the l ow i nterest area to high i nterest area (c) Ca pi ta l fl ow from a forei gn country to the country of ori gi n (d) Ca pi tal flow from s hare market to s a fe depos i ts (e) Ca pi tal move from the ri sk a rea to non- ri s k a rea 600. "Loan Servicing" means _______? (a ) Lendi ng the money (b) A mortga ge bank or s ub-servi ci ng fi rm col lects the ti mel y pa yment of i nteres t a nd pri nci pa l from borrowers (c) Hel ping the customer to get l oa n i n other ba nks by provi di ng the deta i l s of the runni ng a ccount (d) Gi vi ng a loan if the cus tomer ha s a ny depos i t (e) Gi vi ng s econd loan after payment of fi rs t l oa n regul a rl y

Ba nking Awareness

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Multiple Choice Questions ANSWER SHEET

Answers: Practice Test - 1 1 2 3 4 5 6 7 8 9 10

a c d c d c b c c b

11 12 13 14 15 16 17 18 19 20

b b b c d c a d e d

21 22 23 24 25 26 27 28 29 30

c d c a a b c d c c

Answers: Practice Test - 3 31 32 33 34 35 36 37 38 39 40

b d c c b b d b e d

Answers: Practice Test - 2 41 42 43 44 45 46 47 48 49 50

e a c a b b c b a d

51 52 53 54 55 56 57 58 59 60

c d a d b e a b d b

Ba nking Awareness

61 62 63 64 65 66 67 68 69 70

81 82 83 84 85 86 87 88 89 90

a d d c b b c a e a

91 92 93 94 95 96 97 98 99 100

b c b b c e d a d b

101 102 103 104 105 106 107 108 109 110

a c b b b a d b a b

111 112 113 114 115 116 117 118 119 120

b c c d b c c d e c

d b c b b c d c b c

151 152 153 154 155 156 157 158 159 160

c d d b d d b b a c

Answers: Practice Test - 4 a c d c a d d c b c

71 72 73 74 75 76 77 78 79 80

a a e a b e a d c d

121 122 123 124 125 126 127 128 129 130

c a c c b c b e b b

131 132 133 134 135 136 137 138 139 140

e b c d e c d c a c

141 142 143 144 145 146 147 148 149 150

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Multiple Choice Questions Answers: Practice Test - 5 161 162 163 164 165 166 167 168 169 170

b a c c d a b b a c

171 172 173 174 175 176 177 178 179 180

a b c a d c b c b c

181 182 183 184 185 186 187 188 189 190

Answers: Practice Test - 7 b a c b d b d b a d

191 192 193 194 195 196 197 198 199 200

a d a e a d c a b d

a d b a a c b a c c

211 212 213 214 215 216 217 218 219 220

b b a e e d a d c a

Ba nking Awareness

221 222 223 224 225 226 227 228 229 230

c d a a d a c d a d

251 252 253 254 255 256 257 258 259 260

b c c b c c b a d d

261 262 263 264 265 266 267 268 269 270

b c c b d d c d d e

271 272 273 274 275 276 277 278 279 280

b d d b c b c c d b

d a a d c e d b c d

311 312 313 314 315 316 317 318 319 320

a b a d c d c c a c

Answers: Practice Test - 8

Answers: Practice Test - 6 201 202 203 204 205 206 207 208 209 210

241 242 243 244 245 246 247 248 249 250

d a b a c b b d b a

231 232 233 234 235 236 237 238 239 240

b b e a b c d c b a

281 282 283 284 285 286 287 288 289 290

b d a d d d d d c d

291 292 293 294 295 296 297 298 299 300

c c d b a d a c e d

301 302 303 304 305 306 307 308 309 310

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Multiple Choice Questions

Answers: Practice Test - 9 321 322 323 324 325 326 327 328 329 330

b a d d b c a a c a

331 332 333 334 335 336 337 338 339 340

b a a a c b e b d a

341 342 343 344 345 346 347 348 349 350

Answers: Practice Test - 11 a d c c a a d d c c

351 352 353 354 355 356 357 358 359 360

d a d a d d a b a c

Answers: Practice Test - 10 361 362 363 364 365 366 367 368 369 370

a b c a a d c b c a

371 372 373 374 375 376 377 378 379 380

d c a c d b a a a d

Ba nking Awareness

381 382 383 384 385 386 387 388 389 390

401 402 403 404 405 406 407 408 409 410

d b d c d d a b d b

411 412 413 414 415 416 417 418 419 420

d a d b b b d b b a

421 422 423 424 425 426 427 428 429 430

c c b b d b a c c a

431 432 433 434 435 436 437 438 439 440

a d c c c b c b e a

b d c a d d a d e c

471 472 473 474 475 476 477 478 479 480

d d d b c c a b e c

Answers: Practice Test - 12 a d d b c b b a c a

391 392 393 394 395 396 397 398 399 400

b b d d b a d b e c

441 442 443 444 445 446 447 448 449 450

e a c d d b a a c c

451 452 453 454 455 456 457 458 459 460

e b c d c a b e d d

461 462 463 464 465 466 467 468 468 470

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Multiple Choice Questions

Answers: Practice Test - 13 481 482 483 484 485 486 487 488 489 490

d b d b a a c c b a

491 492 493 494 495 496 497 498 499 500

a c c b a c c b b d

501 502 503 504 505 506 507 508 509 510

Answers: Practice Test - 15 a d a a b c b d e d

511 512 513 514 515 516 517 518 519 520

b a b b e d e b c e

c a d c d d d b c a

551 552 553 554 555 556 557 558 559 560

a b b d c e e b d c

Answers: Practice Test - 14 521 522 523 524 525 526 527 528 529 530

b b a d c d b d c b

531 532 533 534 535 536 537 538 539 540

a d d d b d c c b c

Ba nking Awareness

541 542 543 544 545 546 547 548 549 550

561 562 563 564 565 566 567 568 569 570

a d a d d c d e c a

571 572 573 574 575 576 577 578 579 580

d c c d a e d e d d

581 582 583 584 585 586 587 588 589 590

d c b a d d b c c d

591 592 593 594 595 596 597 598 599 600

b a e d d d d e c b

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