Inflation and RBIPART-I

To understand RBI monetary policy we have to understand why RBI has to do all this mehnat, RBI has a biggest villain standing against him called as INFLATION.

INFLATION-Inflation is the biggest parasite in the Indian economy. In the condition of inflation there is flow of extra money in the economy creating excess of demand in the market for the products as compared to supply in midst of all this maara maari the producers grab this opportunity with both arms and if possible with legs too (too greedy these fellows), they mark higher prices for the goods that are excess in demand and this creates a rise in price of the products resulting in inflation.

Inflation has the following adverse effects on the economy:Here is story of Mr. Bechara(common man)

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 else being equal, inflation decreases the amount of goods or services you'd be able to purchase. Mr.Bechara  is fetching a salary of Rs.20K monthly, he was doing his best to keep up to the expectations his over sized wife and extra demanding kids, Now in inflation his salary is the same but his 20K will now cannot complete the demands of his family, because that 20K has become equivalent to say, 18K and now they can have less resources in the same prices, 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. Let’s see how, our Mr. Bechara gave Rs. 10K to a debtor in 2006 for a period of three years, after two years inflation occurred, now the value of that 10k becomes equivalent to 8k (loss in the value of Rs), 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- Expecting inflation many mafias start to collect the onions and kerosene in their backyards for releasing these when the inflation strikes, hence they will make big bucks in no time and our Mr. Bechara has to pay more than hefty amount for the daily ka aaloo ,pyazz..

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 not so aache din for aspirants.

Different stages of Inflation-

Creeping Inflation:Creeping or mild inflation is when prices rise 3% a year or less.

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 a similar conditions in 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 Inflation: Part IINow we have a brief knowledge about Inflation and its effect on the economy, So as customary there will always be a hero against a villain ,fighting for supremacy and sabotaging it to ashes.For the purpose we have our own homegrown Mr.007 and the name is Rajan… Raghuram Rajan, RBI with the help of its periodically revised monetary policy try to fight against inflation.

MONETARY POLICY-

Monetary policy consists of two tools-

(i) DIRECT TOOLS              (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 22.5% of NDTL, this the amount that the banks has to maintain in the form of gold or govt. securities before lending to the public.(must for banks).

NOTE- NDTL is the sum of all the demand (current account and savings account sum in bank ) and time (fixed deposits or recurring deposits etc. which are to be paid on maturation), these are assets for us but a liability(debt) for the banks.

Here is an example to show the effect of CRR and SLR.

Let say our Lena Bank had 100 Rs as NDTL they can give this much amount of loan to the needy hence 100Rs will flow in the market(can cause inflation), so Rajan(RBI) said keep 4% with us and 22.5% as SLR in the form of govt securities and gold(which can’t be given as loans) so theLena bank is left with only 73.5%(100-22.5-4) of the NDTL resulting in less money to be given as loans and then in market resulting in check on inflation.

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. Different methods in OMO’s are-

LAF (Liquidity Adjustment Facility)-These contains Repo rate and  Reverse Repo rate

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 with this-RBI increase the Repo rate in the conditions of high inflations so that banks are not encouraged to borrow money from RBI and release them in to the market resulting in lesser flow of money and hence inflations decreases. RBI decreases the REPO rate when the inflation is under control .Current REPO rate stands at 8% 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 7% of NDTL(-1% of REPO rate)

Bank Rate-When banks borrow long term funds from RBI. They’ve to pay this much interest rate to RBI.Current Bank Rate is at 9% 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 cr 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.Current MSF is at 9 % of NDTL(+1 % of Repo rate) .

With the help of these, our 007(RBI) try to control inflation.

All about NPA’sWhat are NPA’s (Non Performing Assets):A mortgage in default would be considered non-performing, after a prolonged period of non-payment(90 days).

The lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets werepledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency. 

Here is an example to help you understand what NPA’s are and how Banks counter it-

Mr. X decided to start a business for that he needed money (the fuel) , X had 25% of the money in his pocket, he decided to go through the route of Initial Public Offering(IPO) to generate 25% more by offering his company shares to public , the remaining 50% he borrowed from Lena bank by mortgaging his papa’s land.

Days passed and the company started to do badly then to worse and the loan installments lapsed month on month, Lena bank issued warning but X continued the bad practice for more than 90 days (condition for NPA) and the bank labeled X as defaulter and the loan as a Non Performing Asset.

Now what X will do? He could take his case against the bank to Debt recovery tribunal (DRT- A court for such cases).

What are Lena bank’s options?In 2002, Govt. gave bank’s a lifeline called as SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of security interest Act)With this Act Lena bank has the power to take possession of Mr.X’s property or can transfer this to some other ownership.

What bank will do with the acquired property?  Bank can use this for their own purpose like , opening a new branch on it, installing of ATM’s etc.  Bank can advertise in newspapers for the auction of the property acquired and could auction them on any

pre decided day.  Bank can sell the property to ARC (Asset Reconstruction Company), these are registered companies under

RBI, they buy such assets from banks and sell them at higher prices to gain profits.

NOTE- Total amount of NPA’s are around 4.4% of the total assets of banks in India and expected to increase to 4.7% till the end of FY’15

All about Fiscal DeficitDefinition of 'Fiscal Deficit: When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings).

Now let us understand what Revenues and expenditures are :

Every family needs to plan their budget so that they don’t go in to the deficit trap. In ideal conditions revenues should always exceed the expenditures.

How revenues are generated:

Tax Revenues: These are those revenues that are generated through the taxes levied on public such as Income Tax, Corporate Tax, Wealth Tax, Fringe benefit taxes (these all are direct taxes i.e. levied on the individual directly), there are some other taxes which in turn are sources of govt. revenues such as, VAT, custom duty, excise duty, service tax (these are types of indirect taxes).Grants and aids: India enjoys a special love of nature resulting in floods, droughts, lovely Tsunamis (lol), cyclones etc etc etc… So India gets different Grants and Aids from the World banks, ADBs, big boy US, or anybody who wishes to help.

Fines and Penalties: remember that traffic walle bhaiya, sometimes he refuses your chai paani k lie lelo help, All those times the income goes in to govt’s pockets.

Expenditures:As India is a developing country here Ameer is more Ameer and Gareeb is more Gareeb concepts follow so Govt. has to spend on the different Rajiv Gandhis, Mahatma Gandhis and Pradhan mantris scheme(MNERGA,JNNURAM,PDS schemes etc..).

India is lucky with some peaceful neighbors in the vicinity so India has to spend a chunk of revenues for Defense (Unplanned expenditure).

FRBM Act(Fiscal Responsibility and Budget Management act):As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP.

How Fiscal Deficit is harmful-

Debt Trap-Fiscal deficit is a type of Debt trap, It creates a deficit which can be filled by extra borrowings or increased taxes creating burden on economy or extra debt

Inflation- The money released by the govt. for different schemes never reaches to the needy and is transferred to the pockets of middlemen who can now buy a new merc or chunks of gold which leads to inflation.

Black money- Now the money that is with the bribe masters cannot be in India because of Income tax officials’ fear so they are transferred to Tax heavens i.e. so called Swiss Banks, this create a shortfall of Taxes in India creating a poor Tax collection.

How Fiscal Deficit is not harmful-

Fiscal deficit occurs when govt. spends more in the fiscal year as compared to the revenues generated in the period, If all that Yojanas mentioned earlier turnout to be a success will create more employment, better health of the people, better infrastructure and will eventually leads to a prosperous economy, that will help to curb the Financial Deficit in the coming years.

Aware About RBI recent move to withdraw all currency notes...In this post, we attempt to create awareness to our readers and identify some important points about recent RBI advisory to withdraw all currency notes, including Rs 500 and Rs 1000, issued before 2005.

The Reserve Bank of India decided to withdraw all currency notes issued prior to 2005, including Rs 500 and Rs 1,000 denominations, after March 31 in a move apparently aimed at curbing black money and fake currencies.

"After March 31, 2014, it (RBI) will completely withdraw from circulation all bank notes issued prior to 2005. From April 1, 2014, the public will be required to approach banks for exchanging these notes," the RBI said in a statement.

How can you distinguish such type of notes?

The public can easily distinguish the currency notes issued before 2005 as they do not have the year of printing on reverse side. The year of printing in a small font is visible at the middle of the bottom row in notes issued after 2005.

When you can exchange notes in bank?: Asking people not to panic and cooperate in the withdrawal process, the Reserve Bank of India (RBI) said old notes will continue to be legal and can be exchanged in any bank after April 1.

"From April 1, 2014, the public will be required to approach banks for exchanging these notes. Banks will provide exchange facility for these notes until further communication," the RBI said.

Why and when you have to give proof of identity and residence to the bank? No questions or proof would be asked till 30 June 2014 when one approaches the banks for such exchange. 

From July 1, 2014, persons seeking exchange of more than 10 pieces of Rs 500 and Rs 1,000 notes will have to furnish proof of identity and residence to the bank. Although the RBI did not give any reason for withdrawal of pre-2005 currency notes, the move is expected to unearth black money held in cash.

The RBI is silent on many issues. What is the intention behind this move? Surely no demonetisation is on cards because even from 1 July, 2014 one can avoid the inconvenience of having to give proofs of identity and residence if he is prepared to go to as many bank branches as warranted.

The RBI has said that the old notes i.e. those issued prior to 2005 would be legal tender. For how long? Well, this aspect has been kept open-ended. Let us say the deadline is in due course set as 31 December, 2014 which would mean from 1 January, 2015, pre-2005 currency would no longer be legal tender. Now the entire economy would be in turmoil.

What Bankers say on this move? Bankers say that the process could have implication on unaccounted currency in circulation. Although all banks have been asked to freely exchange currencies, bankers say that RBI norms require that every transaction over Rs 10 lakh have to be reported to the authorities as a part of global anti-money laundering norms.

In the past some political leaders such as Baba Ramdev had called for withdrawal of currency note of Rs 500 and Rs 1000 denomination to curb black money.

Bankers, however, said that the move is impractical and would require ATMs to be refilled thrice a day were it to be implemented.

If this is what the plan is, it should immediately close the loophole and say even one note has to be explained for, come 1 July 2014. Black moneyed people may also hit upon another counterblast — start accumulating small denominations notes right away. Who knows in the run up to 1 April, 2014 the country might witness shortage of small denomination notes. They may even be bought at a premium.

At present, currency notes in denominations of Rs 5, Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1,000 are issued.

The total value of currency in circulation in end-March 2013 was around Rs 11,68,800 crore which is more than three times the Rs 3,61,227 crore of currency in circulation in March 2005. 

Summary:

  Banks will accept pre-2005 notes for exchange from April 2014.

  From 1 July 14 banks will demand identity and residence proof to exchange more than 10 notes.

  Notes will be acceptable until further instructions from the RBI

  Most fake currencies are based on pre-2005 design.

  Post-2005 notes have additional security features.

  Banks will get only 25% of the value from RBI for turning in Fakes.

  Banks will have to report transaction of over Rs 10 lakh to authorities.

  Total value of currency in circulation Rs 11,68,800 crore.

  Value of pre-2005 notes could be in tens of thousands of crores. 

                                    Quick NotesØ  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.

Ø  FDI: Foreign Direct Investment  - It 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.

Ø  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.

Ø  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.

Ø  SEBI: 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 exchanges3. Trading mechanisms4. Investor protection5. Corporate disclosure by listed companies etc.Note:  SEBI is also known as capital regulator or mutual funds regulator or market regulator. SEBI also created investors protection fund and SEBI is the only organization which regulates the credit rating agencies in India. (CRISIL and CIBIL).

Ø  IRDA: Insurance Regulatory and Development Authority  - It is an autonomous apex statutory body which regulates and develops the insurance industry in India.

Ø  FINANCIAL REGULATORS IN INDIA - RBI, SEBI, FMCI (Forward Market Commission of India), IRDA etc.

Ø  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.

Ø  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.

Ø  LLP: Limited Liability Partnership, is a partnership in which some or all partners (depending on the jurisdiction) have limited liability.

Ø  Balance sheet:  A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time.

Ø  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.

Ø  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.

Ø  JLG: Joint Liability Group, when two or more persons are both responsible for a debt, claim or judgment.

Ø  IRR: Internal Rate of Return, is a rate of return used in capital budgeting to measure and compare the profitability of investments.

Ø  MICR: Magnetic Ink Character Recognition    - A 9-digit code which actually shows whether the cheque is real or fake.

Ø  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.

Ø  RRBs: Regional Rural Banks  - 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.

Ø  MFI: Micro Finance Institutions  -  Micro Finance means providing credit/loan (micro credit) to the weaker sections of the society. A microfinance institution (MFI) is an organisation that provides financial services to the poor.

Ø  PRIME LENDING RATE: PLR is the rate at which commercial banks give loans to its prime customers (most creditworthy customers).

Ø  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).

Ø  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.

Ø  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.

Ø  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.

Ø  P-NOTES: “P” means participatory notes.  These are the instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India - SEBI.

Ø  Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form for funds deposited at a bank or other eligible financial institution for a specified time period.

Ø  Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990. Corporates and the All-India Financial Institutions are eligible to issue CP.

Ø  REER: Real Effective Exchange Rate.

Ø  NEER: Nominal Effective Exchange Rate.

Ø  LIBOR: London Inter Bank Offer Rate.

Ø  MIBOR: Mumbai Inter Bank Offer Rate.

Ø  EFT   – Electronic Fund Transfer

Ø  NEFT    –  National Electronic Funds Transfer

Ø  RTGS  – Real Time Gross Settlement

Ø  ATM – Automated Teller Machine

Ø  CBS   – Core Banking Solution

Ø  CORE   in CBS stands for “Centralized Online Real-time Exchange.”1.    Main Points of RBI monetary policy review:As on 1 April 2014, RBI (Reserve Bank of India) in its first bimonthly monetary policy statement kept the key policy rate (repo) unchanged.

Current RBI Policy & Reserve Rates:1. Repo Rate – 8%           (Unchanged)  2. Reverse Repo– 7%      (Unchanged)3. CRR – 4%                      (Unchanged)4. SLR – 23%                     (Unchanged)5. MSF– 9%                        (Unchanged)6. Bank Rate – 9%              (Unchanged)

Note: i. Economic growth for 2014-15 expected at 5.5%.ii. CAD expected to come down to 2% of GDP in 2014-15.iii. Retail inflation expected to be under 6% in 2014.iv. RBI asks banks not to charge penalty for failure to maintain minimum balance in inoperative account.v. It was first bi-monthly monetary policy review, next one scheduled for June 3.

2.     World Bank has projected an economic growth rate of 5.7% in 2014-15 for India:World Bank projected an acceleration of growth (factor costs) in FY 2014 to 4.8%, further increase to 5.7% in FY 2015

3.    Panel headed by Anand SInha for benchmark floating interest rateRBI panel headed by RBI Deputy Governor Anand Sinha has recommended bringing a benchmark floating interest rate, especially for home loans. Panel also suggested Indian Banks Base Rate (IBBR).

4.    SBI launches 3 Digital banking facilities for its customers”

i. Tab Banking for Saving A/C - Opening Savings a/c at Customer’s door step using tablet PC provided to the Bank’s Sales Staff (who visit the Customer’s home).

ii. TAB  Banking for Home Loan - In-principle approval for the home loan at customer’s door step using tablet PC provided to the Bank’s Home Loan Sales Team which will capture on the tablet KYC details and details.

iii. e-KYC - Generates e-KYC (Know Your Customer) identity document. Fingerprints of the customer will be captured and sent to UIDAI (Unique Identification Authority of India) for authentication of identity and address proof. On successful authentication from UIDAI, the e-KYC service will act in response to display demographic details like [Name, year/date of birth, Gender, Address, Phone, email (if available)] and photograph.

Note: These facilities will offer ease and time saving to the customer for opening accounts with SBI bank.

5.    RBI grants ‘In-Principle’ banking licenses to IDFC and BandhanRBI has granted “in-principle” banking licences to Infrastructure Development Finance Company (IDFC) and microfinance lender Bandhan Financial Services Ltd.The declaration was made by RBI after nod from the Election Commission.  These are the first licences to be awarded by RBI since 2003-04.

RBI constituted Bimal Jalan panel scrutinized the applications for new bank licences.

Note: The in-principle approval by RBI is valid for ONLY 18 months. 

During this 18 month-period IDFC and Bandhan Financial Services Ltd will have to meet all RBI rules and guidelines in order to secure a permanent licence to start banking activities. 

6.    RBI extends deadline on capital norms under Basel IIIRBI extended deadline for banks to implement Basel III capital norms up to March 31, 2019, instead of March 31, 2018. With the extension, the RBI has also revised deadline for for meeting Minimum Common Equity Tier 1 and Capital conservation buffer (CCB).

Note: i. Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.ii. In terms of Basel III capital regulations issued by the RBI, the Capital Conservation Buffer (CCB) will be implemented from March-end 2016 (against March-end 2015 earlier). Consequently, the Regulations will be fully implemented as on March-end 2019 (against March-end 2018 earlier).iii. Basel series of norms refer to a broad supervisory standards formulated by Basel Committee on Banking Supervision (BCBS) to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

7.    Kotak Mahindra Bank links current accounts to TwitterThe private lender bank, Kotak Mahindra launched a new current account product that will enable the account holders to undertake 21 services viz. cheque book requisitioning, checking last few transactions, etc, and using their Twitter accounts.Note: i. For the activity of listed service, the bank customers have to use the dedicated hashtags (#).ii. The account christened ‘Jifi’, also involves a host of loyalty-based reward points accrued from merchant transactions carried out using the account, referrals made and ‘sharing and commenting’ of tweets/updates.Note: The bank has integrated all their systems with their core bankingsoftware and can seamlessly throw up the required result into the account holder’s Twitter handle as a direct message.

8.    Bank of India (BoI) launched Instant Money Transfer (IMT) schemeThe Bank of India (BoI) launched an Instant Money Transfer (IMT) scheme and became the first state-run lender to allow withdrawal of funds to individuals from its ATMs without an account in the bank. In other words, the IMT scheme allows customers to withdraw cash without using either debt card or credit card at BoI’s IMT-enabled ATMs.Chairman and Managing Director of Bank of India is V. R. Iyer.

9.    RBI hiked trade related remittance limit from Rs.2 lakh to Rs.5 lakh per transactionThe Reserve Bank of India (RBI) hiked the trade related remittance limit from Rs.2 lakh to Rs.5 lakh per transaction with immediate effect and also increased the number of transaction handled by exchange houses.The hike in per transaction is on the review of the permitted transactions under the Rupee Drawing Arrangements (RDAs).These changes have been included in the Memorandum of Instructions for Opening and Maintenance of Rupee/ Foreign Currency Vostro Accounts of Non-resident Exchange Houses.

Note: Vostro account (also known as a loro account) is one in which the domestic bank acts as custodian or manages the account of a foreign counterpart.

10.  Qatar based Doha Bank announced it’s First branch in MumbaiDoha Bank announced that it will be opening its first branch at Nariman Point in Mumbai in India. The branch in Mumbai will be opened as a full-fledged bank in May 2014. Note: Doha Bank is the largest private commercial bank in the state of Qatar. It was incorporated in 1978 and commenced its domestic and international banking services in Doha, Qatar in 1979.

11.  Ms Lakshmi Swaminathan : Became first Indian President of Administrative Tribunal of the ADB

Ms. Lakshmi Swaminathan became the first Indian to become president of Administrative Tribunal of the Asian Development Bank (ADB) for three years. Ms. Swaminathan is the seventh president of the Tribunal. At present, she is a member of the Panel of Arbitrators of several public sector undertakings and NSE.

12.  BSE launched Institutional Trading Platform (ITP) on SME

The Bombay Stock Exchange (BSE) launched an Institutional Trading Platform (ITP) to helpSmall and Medium Enterprises (SMEs) and start-up companies to list on the bourses without an Initial Public Offer (IPO). BSE Ltd set up the BSE SME Platform as per the rules and regulations laid down by SEBI.BANKING OMBUDSMAN

The Banking Ombudsman Scheme enables  fast and inexpensive forum to bank customers for resolution of complaints relating to certain services provided by banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995.

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services. As on date, fifteen Banking Ombudsmen have been appointed with their offices located mostly in state capitals. The addresses and contact details of the Banking Ombudsman offices has been provided by the banks.

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.

PROCEDUREOne can file a complaint with the Banking Ombudsman simply by writing on a plain paper. One can also file it online or by sending an email to the Banking Ombudsman. There is a form along with details of the scheme in our website.However, it is not necessary to use this format.

The complaint should have the name and address of the complainant, the name and address of the branch or office of the bank against which the complaint is made, facts giving rise to the complaint supported by documents.

The Banking Ombudsman may award compensation not exceeding Rs 1 lakh to the complainant only in the case of complaints relating to credit card operations for mental agony and harassment. The Banking Ombudsman will take into account the loss of the complainants time, expenses incurred by the complainant, harassment and mental anguish suffered by the complainant while passing such award.

BANKING OMBUDSMAN SCHEME 2006It was re-introduced in the year 2006 to receive and deal with the public complaints against the banks of deficiencies in specified types of services.

Under this scheme, the customer can give his complaint to the Branch Manager and it should be responded by the Branch Manager within 30 days, if not the customer can file the complaint with the Banking Ombudsman.

AMENDMENTS:In the year May 2007, the RBI has amended the Banking Ombudsman Scheme to enable the customers to appeal against the Banking Ombudsman’s decision. Before the scheme was amended, the bank customers could appeal only against the awards given by the Banking Ombudsman. The appellate authority for the Banking Ombudsman scheme is the Deputy Governor of RBI.

The RBI has amended the scheme again on 3rd February 2009, to include deficiencies arising out of Internet Banking. According to this new amended scheme, a customer would also be able to lodge a complaint against the bank for its non-adherence to the provisions of the fair practices code for lenders or the Code of Bank’s Commitment to Customer issued by the Banking Codes and Standard Board of India (BCSBI).

On 4TH January 2013, RBI has set up a working group to evaluate and make improvements in this scheme.

BANKING AWARENESS: Difference Between Unit Banking & Branch BankingDear Readers,In our previous post, we gave you the brief about Unit Banking and Branch Banking. Today, we are presenting to you the difference between Unit Banking and Branch Banking. Hope you like the post!!!

DIFFERENCE BETWEEN UNIT BANKING & BRANCH BANKING

1. Operational FreedomBranch Banking - Less operational freedomUnit Banking - More Operational freedom

2. Loans and advancesBranch Banking - Loans and advances are based on merit, irrespective of the statusUnit Banking - Loans and advances can be influenced by authority and power

3. Financial Resources Branch Banking - Larger financial resources in each branch.Unit Banking - Larger financial resources in one branch

4. Decision-makingBranch Banking - Delay in Decision-making as they have to depend on the head office.Unit Banking - Time is saved as Decision-making is in the same branch.

5. FundsBranch Banking - Funds are transferred from one branch to another.Underutilisation of funds by a branch would lead to regional imbalancesUnit Banking - Funds are allocated in one branch and no support of other branches.During financial crisis,unit bank has to close down.hence lead to regional imbalances or no balance growth

6. Cost of SupervisionBranch Banking - HighUnit Banking - Less

7. Concentration of power in the hand of few peopleBranch Banking - YesUnit Banking - No

8. SpecialisationBranch Banking - Division of labour is possible and hence specialisation possibleUnit Banking - Specialisation not possible due to lack of trained staff and knowledge

9. CompetitionBranch Banking - High competition with the branchesUnit Banking - Less competition within the bank

10. ProfitsBranch Banking - Shared by the bank with its branchesUnit Banking - Used for the development of the bank

11. Specialised knowledge of the local borrowersBranch Banking - Not possible and hence bad debits are highUnit Banking - Possible and less risk of bad debts

12. Distribution of CapitalBranch Banking - Proper distribution of capital and power.Unit Banking - No proper distribution of capital and power.

13. Rate of InterestBranch Banking - Rate of interest is uniformed and specified by the head office or based on instructions from RBI.Unit Banking - Rate of interest is not uniformed as the bank has own policies and rates.

14. Deposits and assetsBranch Banking - Deposits and assets are diversified,scattered and hence risk is spread at various places.Unit Banking - Deposits and assets are nt diversified and are at one place,hence risk is not spread.

BANKING AWARENESS: Branch Banking SytemIn our previous article, we provided to you the brief about Unit Banking. Today, we are presenting to you the other type of banking, Branch Banking. Hope you like the post!!!

BRANCH BANKING SYSTEM:   Branch banking center or financial center refers to a single bank which operates through various branches in a city or in different locations or out of the cities. This kind of banking system is common in India, e.g. State Bank of India. It offers a wide array of face to face service to its customers.

Historically, branches were housed in imposing buildings, often in a neoclassical architecture style. Today, branches may also take the form of smaller offices within a larger complex, such as a shopping mall. Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals, insurance sales, etc. 

ADVANTAGES OF BRANCH BANKING:Rapid growth and wide popularity of branch banking system in the 20th century are due to various advantages as discussed below.1. Economies of Large Scale Operations: Under the branch banking system, the bank with a number of branches possesses huge financial resources and enjoys the benefits of large-scale operations,(a) Highly trained and experienced staff is appointed which increases the efficiency of management,(b) Division of labour is introduced in the banking operations which ensures greater

economy in the working of the bank. Right persons are appointed at the right place and specialisation increases,(c) Funds are made available liberally and at cheaper rates,(d) Foreign exchange business is done economically,(e) Large financial resources and wider geographical coverage increases public confidence in the banking system.

2. Spreading of Risk: Another advantage of the branch banking system is the lesser risk and greater capacity to meet risks,(a) Since there is geographical spreading and diversification of risks, the possibility of the failure of the of the bank is remote,(b) The losses incurred by some branches may be offset by the profits earned by other branches,(c) Large resources of branch banks increase their ability to face any crisis.

3. Economy in Cash Reserves: Under the branch banking system, a particular branch can operate without keeping large amounts of idle reserves. In time of the need, resources can be transferred from one branch to another.

4. Diversification on Deposits and Assets: There is greater diversification of both deposits and assets under branch banking system because of wider geographical coverage,(a) Deposits are received from the areas where savings are in plenty,(b) Loans are extended in those areas where funds are scarce and interest rates are high. The choice of securities and investments is larger in this system which increases the. safety and liquidity of funds.

5. Cheap Remittance Facilities: Since bank branches are spread over the whole country, it is easier and cheaper to transfer funds from one place to another. Inter-branch indebtedness is more easily adjusted than inter-bank indebtedness.

6. Uniform Interest Rates: Under branch banking system, mobility of capital increases, which in turn, brings about equality in interest rates. Funds are transferred from areas with excessive demand for money to areas with deficit demand for money. As a result, the uniform rate of interest prevails in the whole area; it is prevented from rising in the excessive demand area and from falling in the deficit demand area.

7. Proper Use of Capital: There is proper use of capital under the branch banking system. If a branch has excess reserves, but no opportunities for investment, it can transfer the resources to other branches which can make most profitable use of these resources.

8. Better Facilities to Customers: The customers get better and greater facilities under the branch banking system. It is because of the small number of customers per branch and the increased efficiency achieved through large scale operations.

9. Banking Facilities in Backward Areas: Under the branch banking system, the banking facilities are not restricted to big cities. They can be extended to small towns and rural as well as underdeveloped areas,. Thus, this system helps in the development of backward regions of the country.

10. Effective Control: Under the branch banking system, The Central bank than have a more efficient control over the banks because it has to deal only with few big banks and nor with each individual branch. This ensures better implementation of monetary policy.

DISADVANTAGES OF BRANCH BANKING SYSTEM:Following are the main disadvantages and limitations of branch banking system:

1. Problem of Management: Under the branch banking system a number of difficulties as regards management, supervision and control arise:(a) since the management of the bank gets concentrated at the head office, the managers can afford to be lax and indulgent in their duties and are often involved in serious irregularities while using the funds.(b) Since the branch manager has to seek permission from the head office on each and every matter, this results in unnecessary delay and red- tapism in the banking business.

2. Lack of Initiative: Branch managers generally lack initiative on all-important matters; they cannot take independent decisions and have to wait for. The clearance signal from the head office.

3. Monopolistic Tendencies: Branch banking encourages monopolistic tendencies in the banking system. A few big banks dominate and control the whole banking system of the country through their branches. This can lead to the concentration of resources into a few hands.

4. Regional Imbalances:Under branch banking system, the financial resources collected in the smaller and backward regions are transferred to the bigger industrial centres. This encourages regional imbalances in the country.

5. Adverse Linkage Effect: Under branch banking system, the losses and weaknesses of some branches also have their effect on other branches of the bank.

6. Inefficient Branches: In this system, the weak and unprofitable branches continue to operate under the protection cover of the large and more profitable branches.

7. Other Defects: Other defects of branch banking system arc as follows:(a) Preferential treatment is given to the branches near the head office,(b) Higher interest rates are charged in the developed area to compensate for the lower rates charged in the backward areas,(c) There is concentration and unhealthy competition among the branches of different banks in big cities,(d) Many difficulties are faced when a bank opens branches, especially in foreign countries.

BANKING AWARENESS: RBI THIRD QUARTER MONETARY POLICYIn view of the upcoming IBPS Clerk Interview, we are presenting to you the brief about RBI Third Quarter Monetary Policy. This is the major event in the Banking Sector that happened in the recent days.

RBI THIRD QUARTER MONETARY POLICY

In the Third Quarter Monetary Policy, the Reserve Bank of India has sprang up a big surprise by hiking up the key interest rates by 0.25% to tame inflation. This policy clearly communicates that the price stability remains the overriding objective of the RBI’s monetary policy and the focus has shifted from WPI-based inflation to CPI-based inflation. This review is according to the Urijit Patel Committee Recommendations.The monetary policy review to be followed for the next two months. Next monetary policy review of the RBI will be on the 1st April 2014.

Some key features of Third Monetary Policy:• Key lending rate hiked by 0.25 per cent to 8 per cent• Cash reserve ratio kept unchanged at 4 per cent• Marginal Standing Facility (MSF) rate stands at 9 per cent• GDP growth to be less than 5 per cent in the current fiscal• Growth to improve to 5.5 per cent in 2014-15• Current Account Deficit to be below 2.5 per cent this fiscal• March-end inflation could exceed 8 per cent• Rate hike will set economy securely on disinflationary path• Growth likely to lose momentum in Q3 of 2013-14• Slowdown in economy getting increasingly worrisome• Inflation is a tax that is grossly inequitable, falling hardest on the very poor• Fiscal and monetary authorities should continue to work for macroeconomic stabilization• Henceforth, policy review to take place every two months

What is Causing Down Fall of Rupee?Rupees free fall continues against the dollar. Wonder what are the reasons behind this? Read on....

This week, the rupee touched a historic all-time low by dropping below Rs 64 (against $1).  At the Interbank Foreign Exchange (Forex) market, the rupee on Tuesday fell past 64 mark to trade at fresh low of 64.11, down by 98 paise, or over 1.5 percent.

Reasons why the rupee hit record low against the dollar ….!

1. Fundamental law of economics

If the demand for the dollar in India is more than its supply, the dollar appreciates and the rupee depreciates. Demand for dollars may be created by importers requiring more dollars to pay for their imports or by Foreign Institutional Investors (FII’s) withdrawing their investments and taking the dollars outside India, thus creating a shortage of dollar supply, which, in turn, can also increase the demand for the dollar.

Similarly, when the supply of dollars in India increases with respect to its demand, the value of the dollar decreases in terms of rupees. Supply can be created by exporters bringing in more dollars from their revenues or FIIs bringing more dollars in India to spur their investments.

2. Price of crude

The price of crude puts tremendous stress on the Indian Rupee. India has to import a bulk of her oil requirements to satisfy local demand, which is rising year-on-year. Globally, the price of oil is quoted in dollars. Therefore, as the domestic demand for oil increases or the price of oil increases in the international market, the demand for dollars also increases to pay our suppliers from whom we import oil. This increase in demand for the dollar (see earlier point) weakens the rupee further.

3.Rising Import bill

Rising import bill (arising out of gold) is also a major factor that has curtailed government’s effort to tackle the fall of rupee. Gold contributes to over 10 percent of the total import bill. Gold imports were 141 tonnes in April and rose to 162 tonnes in May. Due to certain government measures gold imports declined significantly to 31 tonnes in June but could not be held for the month of July. For the first 25 days of July, the imports stood at 45 tonnes.

4.Insufficient FDI inflows

Despite all the decisions to allow major reforms in India, the government has failed to tap major FDI inflow in the country. Instead, India has witnessed withdrawal of major projects by global giants like ArcelorMittal and Posco. Posco pulled out of its Rs 30,000 crore steel plant project in Karnataka followed by ArcelorMittal that scrapped its USD 12 billion (Rs 50,000 crore) steel plant project which it was planning to set up in Odisha. Inordinate delays, land acquisition problems, government clearance delays, lack of promptness have all contributed to the withdrawal of major companies. Last year Indian companies spent more overseas than Foreign Investors in India.

5. Current Account Deficit

A current account deficit occurs when a country’s total import exceeds the total exports. This makes the country, a net debtor to the rest of the world. This is not good for the country because, the country needs to buy more foreign currency. More demand for the foreign currency will cut the value of that country’s currency. India’s current account deficit now is more than the projected level and this also contributes to the depreciation of the Indian rupee.

6. Dollar gaining strength against the other currencies

The central banks of Eurozone and Japan are printing excessive money due to which their currency is devalued. On the other hand, the US Federal Reserve has shown signs to end their stimulus making the dollar stronger against the other currencies including the Indian rupee, at least in the short term.

 In the year to date US dollar index strengthened by 1.91 percent. The strengthening of dollar is beyond government’s control which is ultimately hammering the Indian currency. Gradual recovery in US economy coupled with rising expectations that Federal Reserve will withdraw its stimulus package soon is underpinning the US dollar index.

7. Political paralysis A major reason for Rupee Depreciation

The parliament is unable to transact any meaningful business and reforms occupy a back seat. Coalition politics make things difficult for the government to push the much-needed reforms in many sectors. This is creating panic among overseas investors who want to invest in India.

8. Volatile equity market

Our equity market has been volatile for some time now. So, the FII’s are in a dilemma whether to invest in India or not. Even though they have brought in record inflows to the country in this year, if they pull out, it will result in a decrease of inflow of dollars into the country. Therefore, the decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.

The widening current account deficit and the depreciating rupee are definitely cause for concern. A weaker rupee further erodes the returns earned by the foreign investors in the Indian market. FIIs have turned net sellers of debt securities here for the first time in 13 months. Again, the June sell-off is attributed to the weakness in the Indian currency as the rising cost of hedging a volatile rupee hurts the yield differential that FIIs work with.

The main reason for the decline of the rupee is the appreciation in the dollar. The latter has been rising since fear of the Federal Reserve tapering its quantitative easing (QE) has hit all asset classes. The currencies of all emerging markets, such as Indonesia, Thailand, Brazil and India have depreciated. Similarly, as in other countries, the Indian bond market has also seen withdrawals by FIIs. With a risk-off environment setting in globally, there have been redemptions from global exchange-traded funds (ETFs). This has led to selling by FIIs in the Indian equity market, compounding the rupee's woes.

Even Rupee is depreciated, Many Big Companies are in a profit from a weakening rupee…

Eleven companies that account for nearly 45% of the weight age of the BSE Sensex - ITC, Infosys, Tata Motors, Mahindra & Mahindra, Dr Reddy's Laboratories, Tata Consultancy Services, Sun Pharmaceuticals, Wipro, Bajaj Auto, Cipla and BHEL - benefit from a weakening rupee.

The reason is simple: the total foreign exchange earnings of these firms are far greater than their forex spends. The more the rupee falls, the more these companies gain, other things remaining constant.

Even Mukesh Ambani-controlled Reliance Industries - the country's largest exporter - gains from a weak rupee. While its forex outgo is more than its forex earnings, a significant part of its rupee earnings are pegged to the dollar. Therefore, a weakening rupee adds to Reliance's margins and profits, and most analysts cite an 'appreciating rupee' as a risk factor for the company.

The three biggest gainers are the IT heavyweights - TCS, Infosys and Wipro. At 65 to a dollar, the three will approximately gain an additional 5,700 crore, 3,600 crore and 2,700 crore, respectively, on net dollar earnings for 2013-14. 

Why and how RBI control exchange rate?RBI will interfere in this area because a steady value of rupee is essential for the orderly growth of the economy. A depreciating rupee will harm all import oriented businesses. This may help the exporters, who get their payment in dollars.RBI will be watching the position and interfere to stabilize the currency value. In case of depreciation, RBI will sell foreign currency from the reserve and this will help in arresting the fall of rupee to some extent.

BANKING AWARENESS: Unit BankingThe Unit Banking System is that system of banking under which an individual bank carries on banking business either through a single office or through a few offices operating with a limited area. In this system, independent, isolated units perform banking business. The size of operation of Unit Banking are much smaller when compared to branch banking. Unit banking system originated in the USA.

MERITS OF UNIT BANKING1. Local Development: Unit banking is localized banking. The unit bank has the specialised knowledge of the local problems and serves the requirements of the local people in a better manner than branch banking. The funds of the locality are utilised for the local development and are not transferred to other areas.

2. Promotes Regional Balance: Under unit banking system, there is no transfer of resources from rural and backward areas to the big industrial commercial centres. This tends to reduce regional in balance.

3. Easy Management: The management and supervision of a unit bank is much easier and more effective than that under branch banking system. There are fewer chances of fraud and irregularities in the financial management of the unit banks.

4. Initiative in Banking Business: Unit banks have full knowledge of and greater involvement in the local problems. They are in a position to take initiative to tackle these problems through financial help.

5. No Monopolistic Tendencies: Unit banks are generally of small size. Thus, there is no possibility of generating monopolistic tendencies under unit banking system.

6. No Inefficient Branches: Under unit banking system, weak and inefficient branches are automatically eliminated. No protection is provided to such banks.

7. No dis-economies of Large Scale Operations: Unit banking is free from the dis-economies and problems of large-scale operations which are generally experienced by the branch banks.

8. No delay in taking decisions: In unit banking system, every bank is an independent unit. Hence, there will be no delay in decisions taking.

9. Personal Contact with the customers: Unit Banking System being a small scale independent unit can maintain good personal contacts with the customers for efficient management of the bank. It is said that in case of unit banking system the manager can maintain good personal contact with the customers and businessmen.

10. Low overhead cost:  In case of Unit Banking, the overhead cost will be low than in case of branch banking system.

11. More operational freedom: The managers of the Unit Banking system are given more discretionary powers so that they can study the problems of local customers and provide better services to them on merit.

DISADVANTAGES OF UNIT BANKINGThe following are the disadvantages of unit banking system:1. No. Distribution of Risks: Under unit banking, the bank operations are highly localised. Therefore, there is little possibility of distribution and diversification of risks in various areas and industries.

2. Inability to Face Crisis: Limited resources of the unit banks also restrict their ability to face financial crisis. These banks are not in a position to stand a sudden rush of withdrawals.

3. No Banking Development in Backward Areas: Unit banks, because of their limits resources, cannot afford to open uneconomic banking business is smaller towns and rural area. As such, these areas remain unbanked.

4. Lack of Specialization: Unit banks, because of their small size, are not able to introduce, and get advantages of, division of labour and specialization. Such banks cannot afford to employ highly trained and specialized staff.

5. Costly Remittance of Funds: A unit bank has no branches at other place. As a result, it has to depend upon the correspondent banks for transfer of funds which is very expensive.

6. Disparity in Interest Rates: Since easy and cheap movement of does not exist under the unit banking system, interest rates vary considerably at different places.

7. Local Pressures: Since unit banks are highly localised in their business, local pressures and interferences generally disrupt their normal functioning.

8. Undesirable Competition: Unit banks are independently run by different managements. This results in undesirable competition among different unit banks.

Banking Awareness: Finance CommissionDear readers, in continuation of our Banking Awareness Series, here we are presenting another brief article on "Finance Commission".

The government has constituted the 14th Finance Commission under the chairmanship of former RBI Governor YV Reddy. The commission will submit its report by October 31, 2014.

Finance Commission of India:   A finance commission is set up every five years by the President under Article 280 of the Constitution. Finance Commission of India came into existence in 1951.

It was formed to define the financial relations between the centre and the state. These recommendations cover a period of five years.

The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India. It is also required to suggest measures to augment the resources of states and ways to supplement the resources of panchayats and municipalities.

Composition of the Fourteenth Finance Commission:The Fourteenth Finance Commission has been set up under the Chairmanship of Dr. Y.V.Reddy [Former Governor Reserve Bank of India]. 

Other Members of the Commission are:i. Ms. Sushma Nath [ Former Union Finance Secretary ],ii. Dr. M.Govinda Rao [ Director, National Institute for Public Finance and Policy, New Delhi ),iii. Dr. Sudipto Mundle, Former Acting Chairman, National Statistical Commission.iv. Prof Abhijit Sen (Member, Planning Commission) is the part-time Member of the Fourteenth Financev. Commission.  Shri Shri Ajay Narayan Jha is the Secretary, Fourteenth Finance Commission.

Qualifications of the members :   The Chairman of the Finance Commission is selected among people who have had the experience of public affairs. The other four other members are selected from people who:

1. Are, or have been, or are qualified, as judges of High Court, or2. Have knowledge of Government finances or accounts, or3. Have had experience in administration and financial expertise; or4. Have special knowledge of economics

Procedure and Powers of the Commission :   The Commission has the power determine their own procedure and:

1. Has all powers of the civil court as per the Court of Civil Procedure, 1908.2. Can summon and enforce the attendance of any witness or ask any person to deliver information or produce a document, which it deems relevant.3. Can ask for the production of any public record or document from any court or office.4. Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of Criminal Procedure, 1898

Tenure of the 14th Finance Commission: The Finance Commission is required to give its report by 31st October, 2014. Its recommendations will cover the five year period commencing from 1st April, 2015.

Note: The First Finance Commission was constituted vide Presidential Order dated 22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952. 

Banking Awareness: Capital MarketDear Readers,

Today, we are presenting to you the brief about Capital Market. Hope you like the post!! Also, don't forget to visit us tomorrow for the brief of its counterpart, Money Market.

CAPITAL MARKET

Capital Market is one of the significant aspects of every financial market. Broadly speaking, the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market instruments become mature for the period above one year.

Capital Market is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector.

Capital market can be classified into primary and secondary markets. The primary market is the market for new shares, whereas as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting.

Capital market plays an important role in mobilizing resources, and diverting them in productive channels. In this way, it facilitates and promotes the process of economic growth in the country.

Various functions and significance of capital market are discussed below:

1. Link between Savers and Investors:The capital market functions as a link between savers and investors. It plays an important role in mobilizing the savings and diverting them in productive investment. In this way, capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity of the country.

2. Encouragement to Saving:With the development of capital, market, the banking and non-banking institutions provide facilities, which encourage people to save more. In the less- developed countries, in the absence of a capital market, there are very little savings and those who save often invest their savings in unproductive and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous consumption.

3. Encouragement to Investment:The capital market facilitates lending to the businessmen and the government and thus encourages investment. It provides facilities through banks and nonbank financial institutions. Various financial assets, e.g., shares, securities, bonds, etc., induce savers to lend to the government or invest in industry. With the development of financial institutions, capital becomes more mobile, interest rate falls and investment increases.

4. Promotes Economic Growth:The capital market not only reflects the general condition of the economy, but also smoothens and accelerates the process of economic growth. Various institutions of the capital market, like nonbank financial intermediaries, allocate the resources rationally in accordance with the development needs of

the country. The proper allocation of resources results in the expansion of trade and industry in both public and private sectors, thus promoting balanced economic growth in the country.

5. Stability in Security Prices:The capital market tends to stabilize the values of stocks and securities and reduce the fluctuations in the prices to the minimum. The process of stabilization is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.

6. Proper Regulation of Funds:Capital markets not only help in fund mobilization, but it also helps in proper allocation of these resources. It can have regulations over the resources. It can have regulations over the resources so that it can direct funds in a qualitative manner.

7. Benefits to Investors:The credit market helps the investors, i.e., those who have funds to invest in long-term financial assets, in many ways:(a) It brings together the buyers and sellers of securities and thus ensures the marketability of investments,

(b) By advertising security prices, the Stock Exchange enables the investors to keep track of their investments and channelize them into most profitable lines,

(c) It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund in the event of fraud and default.

BANKING AWARENESS: Money MarketDear Readers,In our previous post, we provided to you the brief about Capital Market. Today, we are providing to the brief idea about its counterpart, Money Market. Happy Reading!!!

MONEY MARKET:A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements.

The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper.

The main features of Indian Money Market are as follows:

1. Dichotomy:The Indian Money market is divided between two sectors, namely organised sector and unorganised sector. There is very little cooperation and contact between them.Consequently the rate of interest in both the markets varies widely.

2. Seasonal Variations:Considering the demand for funds, there are two seasons, the busy season and slack season. The busy season covers the period from November to April when agricultural products come into the market.There is great demand for funds during this period. The slack season covers the period between May and

October. The funds begin to be repaid and there is substantial fall in the demand for funds.

3. Inter-Call Money Market:The core of the Indian money market is the inter-bank call money market. It is the most sensitive sector of the money market.

4. Predominant Place of Government Securities:In the Indian money market, the predominant place is enjoyed by government and semi government securities.

5. Absence of Acceptance and Discount Houses:There is almost complete absence of acceptance and discount houses in the Indian money market. This is due to the underdeveloped bill market in India.

6. Isolation from Foreign Money Market:The Indian money market is isolated from foreign markets. There is hardly any movement of funds between Indian Money Market and foreign markets.

7. Variety of Financial Institutions:The Indian market is characterised by the presence of a large number of financial institutions such as non-banking financial intermediaries, cooperative banks, Export-Import banks. They cater to the financial needs of different sectors.

Banking Awareness: CASAIn continuation to our Banking Awareness series, today we are providing you a brief about CASA.

Casa Ratio:   Casa is basically the current and savings account deposits. The CASA ratio shows how much deposit a bank has in the form of current and saving account deposits in the total deposit. 

If the CASA ratio is higher than it means that a higher portion of the deposits have come from current and savings deposit.

This means that the bank is getting money at low cost, since no interest is paid on the current accounts and the interest paid on savings account is usually low.

Current and Saving Accounts are demand deposits and therefore pay lower interest rates compared to term deposits where the rates are higher.

In India, interest rates paid on current and savings account deposits is administered by banking regulator - the Reserve Bank of India.

Why are banks keen on gained a higher share of CASA?

Interest rate paid on Casa is much lower compared to other deposits like term deposits or recurring deposits. While banks do not pay any interest on current account, interest paid on savings account deposit is 4%.

Banks therefore make maximum effort to increase the share of Casa on their books to reduce their overall cost of deposits. HDFC Bank has the highest share of Casa to total deposits at 52%, followed by the State Bank of India at 48% and ICICI Bank at 45%.

What does Casa mean for customers?

Recently interest paid on savings account deposits is 4%. Banks pay interest on savings deposits on a daily basis rather than paying on the minimum balance maintained by them in six months.

As a result, savings account customers earn better returns compared to what they earned a year ago.

Further, interest earned on savings account deposits does not attract TDS (tax deduction at source). Interest income above 10,000 a year attracts TDS of 10% in case of term deposits. However, there is no major benefit for current account deposits, which is mainly maintained by corporates and traders.

What are the disadvantages of high CASA?

These deposits can move out of banks' books anytime, leading to asset-liability mismatches. While in case of term deposits, banks are almost certain that the depositor may not withdraw money before the maturity of the deposit and may also renew the deposit on maturity.

Further, to finance long-term projects, banks need to have long-term liabilities on their books to avoid mismatches. Banks cannot rely on Casa deposits to fund long-term loans.

Banking Awareness1.    Nachiket Mor panel to study financial services for small businessesi. The Reserve Bank of India has set up a committee headed by Nachiket Mor on comprehensive financial services for small businesses and low-income households.ii. The committee has been asked to come out with a set of design principles that will guide the development of institutional frameworks,iii. The committee has also been asked to develop a comprehensive monitoring framework to track progress of the financial inclusion and deepening efforts on a nationwide basis.iv. It will review existing strategies and develop new ones that address specific barriers to progress and that encourage participants to work swiftly towards achieving full inclusion and financial deepening, consistent with the design principles.

2.    Mayaram submits report on NSELi. A high-level panel, headed by Economic Affairs Secretary Arvind Mayaram, submitted its report to Finance Minister P. Chidambaram  on the alleged irregularities at the National Spot Exchange Ltd (NSEL).ii. Panel was set up in August 2013 to look into the 5600 crore Rupees payment crisis at the Financial Technologies-promoted NSEL. Secretaries from the Union Corporate Affairs and the Union Consumer Affairs Ministries, the Revenue Department, and head of Enforcement Directorate, are part of the committee.iii. The report was finalised based on the reports of two working group from Enforcement Directorate and Reserve Bank.iv. NSEL is grappling with a payment crisis for settling dues worth 5600-crore Rupees and had to suspend trading activities on 31 July 2013 following a government directive.

About National Spot Exchange Limited (NSEL)i.  National Spot Exchange Limited (NSEL) is the national level, institutionalized, electronic, transparent spot trading platform for commodities.ii. It is a structured market place, set-up to transform the commodity market by way of reducing the cost of intermediation and thereby improving marketing efficiency. Its state-of-the-art technology facilitates risk free and hassle free purchase and sale of various commodities.iii. NSEL provides customized solution to farmers, traders, processors, exporters, importers, arbitrageurs, investors and other stakeholders pertaining to commodity procurement, storage, marketing, warehouse receipt financing, etc.

iv. NSEL commenced Live trading on 15 October 2008. At present, NSEL is operational in 16 States in India, providing delivery-based spot trading in 52 commodities.

3.    First-ever India International Bullion Summit to be held in Mumbaii. The Bombay Bullion Association, the apex body of all bullion and jewellery associations in India, said it would host the first-ever India International Bullion Summit, IIBS in Mumbai on October 5th.ii. BBA President Mohit Kamboj said in a release that IIBS is likely to see participation of more than 2,000 delegates from India and abroad.iii. The IIBS would serve as a platform for industry experts, suppliers and buyers to converge and address concerns of the industry.

4.    ‘Own Your NPA’ campaign launched by IDBIi. In a bid to speedily recover Non-Performing Assets (NPA), the IDBI Bank has launched a campaign named ‘Own Your NPA’.ii. It is a NPA recovery drive launched by the IDBI Bank through which it has tasked its managers — at the zonal, regional and branch levels — to focus their on making recoveries from the top 20 bad loan accounts in their jurisdiction.Non-Performing Assets (NPA)i. In simple words, the assets of the Banks which don’t perform (means don’t bring any return) are called Non Performing Assets. In more general sense they are “bad Loans”.ii. Any asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

However, there is a prescribed definition by the RBI which defines the NPAs as:i. Terms Loans on which interest and / or installment of principal remain overdue for a particular quarter for a period of more than 90 days from the end of that particular quarter.ii. The Bills those remain overdue for a period of More than 90 Days from the end of a quarter.iii. Any amount to be received remains overdue for a period of more than 90 days.iv. The Cash Credit account remains out of order for a period of more than 90 days. Out of order means over the sanctioned limit.

5.    Investment through P-Notes hits 3-month high of $26 billioni. As per share market regulator SEBI, investments into Indian shares through participatory notes (P-Notes), hit a three-month high of Rs 1.65 lakh crore (about $26 billion) in August 2013.

Participatory Notes or P-notes are derivative instruments, used by Foreign Institutional Investors (FIIs) who are NOT registered with SEBI.i. The major characteristics of P-notes are:ii. They are derivative instrumentsiii. They are used by Foreign Institutional Investors (FIIs) who are NOT registered with SEBI.iv. They are used on Indian shares, but at a location outside of India.

Note: This means that the FIIs who are not registered with SEBI but wish to take exposure in the Indian securities markets can use P-notes.ii. P-Notes, mostly used by overseas HNIs (High Networth Individuals), hedge funds and other foreign institutions, allow them to invest in Indian markets through registered Foreign Institutional Investors (FIIs), while saving on time and costs associated with direct registrations.

iii. Brokers buy or sell securities on behalf of their clients on their proprietary account and issue such notes in favor of such foreign investors.

6.    Moody’s cuts 2013-14 GDP growth forecast to 4.5%i. Moody’s has lowered its outlook for India's GDP growth to 4.5 per cent for 2013-14 from 5.5 per cent.ii. This reflects the recent depreciation of the rupee, which will exacerbate inflationary pressures, keep domestic interest rates relatively high, and hinder a recovery in domestic demand growth

Moody’s lowers SBI’s debt ratingi. Global rating firm, Moody’s Investors Service, has downgraded State Bank of India’s senior unsecured debt and local currency deposit ratings to Baa3 or lowest investment grade rating from Baa2 and altered the outlook on SBI’s financial strength rating to negative from stable as the economic slowdown impacts bank’s credit quality.

Why did Moody’s downgrade SBI’s rating?i. As per rating agency, the combination of mounting pressure on credit fundamentals and the ongoing dependence on the fiscally constrained Indian government to maintain Capital Adequacy Ratio (CAR) are key players behind the rating downgrade at a level no higher than the sovereign.

7.    Fitch slashed India’s growth projectioni. Global rating agency Fitch has scaled down its projections on India’s growth to 4.8% for the current fiscal from the earlier estimate of 5.7% made in June, 2013.The following are the key reasons behind the cut in growth projectionsi. Weak Indian currency against dollarii. Expanding Current Account Deficit (CAD) on account of rising crude prices and falling rupeeiii. Weak demand

8.    White-label ATM Indicash ATMs opened in Mysorei. Tata Communications Payment Solutions Ltd (TCPSL), a wholly owned subsidiary of Tata Communications Ltd, today inaugurated Indicash ATMs in Mysore.ii. The company simultaneously launched more than five ATMs across Mysore.iii. TCPSL is planning to deploy a minimum of 1,000 Indicash ATMs in Karnataka, a region which plays a vital role in the company’s rollout plans of 15,000 Indicash ATMs across India over the next three years.

Note: The company’s first white-label ATM was launched at Chandrapada village in Thane district on June 27. This is in keeping with the Reserve Bank of India’s vision to accelerate growth and improve ATM penetration across the country. 

9.    What is Financial Stability Board (FSB)?i. FSB is an international body which was established after the 2009 G-20 London summit in April 2009 as a successor to the Financial Stability Forum.ii. FSB work is to coordinate at the international level the work of national financial authorities and international standard-setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.iii. The Board includes all G-20 major economies, FSF members, and the European Commission. It is headquartered in Basel, Switzerland.

Note: The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the Ministry of Finance are the members of FSB from India.

10.  China launches its first direct banki. China launched its first direct bank, a new mode of providing online banking services without any entity outlets.ii. The direct bank has been launched by the Bank of Beijing in co-operation with the Netherlands-based ING Group.

Note: i. A direct bank is a bank without any branch network that offers its services remotely via online banking and telephone banking and may also provide access via ATMs (often through interbank network alliances), mail and mobile.ii. By eliminating the costs associated with bank branches, direct banks can make substantial savings which they may pass on to clients via higher interest rates or lower service charges.