Chapter 8 - Other Topics

LIBOR, MIBOR, MIBID

Inter-Bank Offer Rate

When a bank offers loan to other banks (or any other financial institutions), then it charges interest on that
loan. The interest rates charged on the loans vary from bank to bank. But these rates need to follow
a benchmark, so that interest rates does not differ too much among them (meaning, it should not happen,
that an X bank charges 10 % interest per annum on a loan, whereas, Y bank charges 20 % on the same type of
loan, it should be at par)

Generally, Inter-bank offer rate is of short-term nature (overnight to 1 year), and is followed for
deciding interest rates to be charged on the loans offered to other banks (refer Call / Notice / Term Money)
(inter-bank market). It acts like a benchmark for deciding interest rates.

Several financial markets follow different Inter-bank offer rates, like -

London Inter-Bank Offer Rate (LIBOR)

Mumbai Inter-Bank Offer Rate (MIBOR)
Tokyo Inter-Bank Offer Rate (TIBOR)
Singapore Inter-Bank Offer Rate (SIBOR)
Hong Kong Inter-Bank Offer Rate (HIBOR), etc.

LIBOR
LIBOR was first published in 1986 for three currencies - USD, GBP (Great Britain Pound)
and JPY (Japanese Yen). Later on several other currencies were added in the list (currently 10 currencies). It
is published daily at 11:30 A.M (London time) by Thomson Reuters, and Libor rates are determined for 15
borrowing periods (e.g., overnight, 1 week, 2 weeks, 1 month, etc. up to 1 year).

Formerly the Libor was maintained by British Bankers' Association (BBA), but the responsibility is now
transferred to Intercontinental Exchange.
# Reader's Question
How is Libor rate calculated?
At 11:00 AM, major banks (18 major global banks for the USD Libor) are called to participate on
the survey asking for the inter-bank offer rates. The highest four and the lowest four interest rates (on the
survey) are trimmed out (not used for calculation). Then the remaining (remaining 10 for USD Libor)
interest rates are averaged, and makes the Libor rate.

Libor rate is published at 11:30 A.M. This happens for all the 10 currencies, taking major banks for each
currency.

MIBOR
MIBOR rate is for Indian inter-bank market, and is calculated on daily basis by National Stock Exchange
(NSE), along with Fixed Income Money Market and Derivative Association of India (FIMMDA).

It is a weighted average of lending rates of a group of banks (including Public Sector banks, Private Sector
Banks, Primary Dealers, Foreign Banks in India, etc.), on funds lent to first-class borrowers (well rated
borrowers)

MIBOR is published on different timings (e.g., 9:40 A.M., 11:30 A.M. etc), and for several maturity
periods (e.g., overnight, 3 days, 2 weeks, 1 month, etc.)

MIBID
Mumbai Inter-Bank Bid Rate (MIBID) is the opposite of MIBOR. While MIBOR is the benchmark rate at
which banks are willing to offer loans to other bank, MIBID is the benchmark rate at which banks are willing
to take loans (paying the MIBID interest rate) from other banks.

Note that MIBID rate is always less than MIBOR rate, because, banks will try to pay less interest after taking
loans, and will try to get more interest while offering loans. It is also the weighted average of interest rates
at which several banks (taken as survey) are willing to pay.

Currently FIMMDA and NSE came with a new product, named as 'FIMMDA-NSE MIBID/MIBOR' which
acts like the benchmark for the inter-bank market in India (taking both MIBOR and MIBID together)
Products linked with LIBOR/MIBOR

Call, Notice, Term Money

Forward Rate Agreements
Future Interest Rate
Interest Rate Swaps (IRS)
Swap Options
Overnight Index Swaps, etc.

Non Residential Indians (NRI) Accounts

Non-Resident Ordinary (NRO)
You are a citizen of India. You work here, and you have a good income. Now suppose, you want to move to
a foreign country (for whatever purpose) (meaning you are going to be an NRI). Then what will you do to for
your Indian earnings, like rent, dividends? Or may be you want to send remittances from foreign country.
Then the handy account for you is Non-Resident Ordinary (NRO) Rupee Account.

The balance maintained in this type will be Rupee (INR) dominated. You can open Savings, Current, Fixed,
Term - types of account.

Non-Resident External (NRE)

You are already an NRI. You have foreign currency with you. You can open this type of NRE Account.
Note that you have to deposit foreign currency while opening this account (can use traveler's
cheque or notes).

The balance will be maintained in Rupee (INR). This will facilitate mostly in your remittances to India. You
have several options or opening Savings, Current, Fixed, Term accounts.

Foreign Currency Non-Resident Bank (FCNR(B))

This is another type of account for NRIs and almost similar to NRE account. However there are some major
differences -

You can only maintain your FCNR(B) account in foreign currencies (like, Pound, Dollars, Euro,
Yen, etc)
Only one type of deposit is allowed - term deposit of 1 to 5 year maturity.
Now, try to compare these three types of accounts -

Non-Resident Foreign Currency

Non-Resident (Ordinary)
(External) Rupee Non-Resident (Bank)
Rupee Account (NRO)
Account (NRE) Account (FCNR(B))
Rupee Denominated USD, Pounds, Euro,
Currency Rupee Denominated (INR)
(INR) Yen, etc.
NRI,
Who can
Resident before becoming NRI NRI
open?
an NRI
A/c type CASA, Fixed/Term CASA, Fixed/Term Only Fixed/Term
To park Indian earnings, To park overseas To maintain account
like rent, savings remitted to in foreign currency.
Purpose
Indian salary, dividend, India Only term deposit of 1
etc. by converting to INR to 5 years
Only interest on NRO
Repatriation account balance (after Yes Yes
deducting TDS)
Taxed as per
Tax Tax free Tax free
applicable slab rate

NOSTRO, VOSTRO, LORO Accounts

Nowadays, bank operations are not confined within a national border. Banks are
opening branches inforeign countries. But the problem is - Is it possible for a bank to open branch in each
and every country?
Obvious answer is no. Then what is the easiest way to handle this situation?

Open an account in the foreign countries' bank!!

Here Nostro, Vostro and Loro accounts come into play. Note that all these accounts are termed as one's own
country-basis.

NOSTRO Account
Italian word 'nostro' means 'ours'. Hence, Nostro account points at - "Our account with you"
Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic bank (from
our perspective, our bank). It obviates that account is maintained in that foreign currency.

For example, SBI account with HSBC in U.K. (may be)

VOSTRO Account
Italian word 'vostro' means 'yours'. Hence, Vostro account points at - "Your account with us"
Vostro accounts are generally held by a foreign bank in our country (with a domestic bank). It generally
maintained in Indian Rupee (if we consider India)

For example, HSBC account is held with SBI in India. (may be)

LORO Account
Again, Italian word 'loro' means 'theirs'. Therefore, it points at - "Their account with them"
Loro accounts are generally held by a 3rd party bank, other than the account maintaining bank or with
whom account is maintained.

For example, BOI wants to transact with HSBC, but doesn't have any account, while SBI maintains an
account with HSBC in U.K. Then BOI could use SBI account. (again may be)

Line of Credit (LoC)

Line of Credit (LoC) - What do we get from the term?

To what extent (i.e., line) we can get loan / advance (i.e., credit). Of course, LoC are generally given to
the corporate for business purpose (though, often we hear news about government giving Rs. XXX Line of
Credit to ZZZ country for development)

Note that this is generally given to corporate for business, on their Cash Credit (CC) Accounts (already
discussed about CC in my previous post. Please refer that)

General Procedure
Banks analyze the audited Balance sheet of the prospective borrower (businessman) to appraise their needs
and checking their capacity to absorb the credit. The borrowers need to furnish their financial details in the
form of Credit Monitoring Arrangement (CMA) data to the bankers and file an application for loan.
This application is then processed by the bank and a suitable Line of Credit (LoC) (limit) is allowed to
the borrower.

The overall limit (LoC) is structured into various types of facilities or accounts - each with its own
limit under the overall LoC (meaning, several accounts, which to be formed, have their own limit,
which collectively is under overall LoC).

The borrower is then asked to surrender the security or title to the bank (as collateral) and open suitable
accounts (mostly Cash Credit Accounts, with different underlying securities) with the bank.

Thereafter, the borrower can operate these accounts within the limit, i.e., Line of Credit.

Note - Don't confuse Line of Credit with Letter of Credit, which is a different concept (refer to previous post
on Letter of Credit)

Letter of Credit

Letter of Credit (L/C)

It is a guarantee in the form of a letter, issued by a buyer's bank. Suppose you want
to buy or sell some goods from or to a foreign country. It is very much possible that you don't know
the seller or buyer. And also the laws regulating the trade may be different. Therefore, both the seller and
the buyer need some kind of guarantee to seamlessly perform the trade. Here Letter of Credit comes into
action.
The steps involved is very much as follows -

Step 1 - First a contract is signed between the buyer and the seller.
Step 2 - The buyer comes to his bank, and the bank issues a Letter of Credit, on behalf of the buyer, to
the seller.
Step 3 - After getting the Letter of Credit, seller knows that he will be paid surely. So
he consigns the goods to a Carrier, in exchange of a Bill of Lading (Carrier provides it to the Seller)
Step 4 - Seller takes the Bill of Lading and provide it to his bank (i.e., seller's bank), who eventually
transfers it to buyer's bank, who then provides it to the buyer.
Step 5 - Buyer takes the Bill of Lading, and gives it to the Carrier. The Carrier then getting his own Bill of
Lading, delivers the goods to the buyer.
Step 6 - Carrier then asks his payment from the Seller, by providing his Bill of Lading, that he has
actually delivered the goods.
Step 7 - Seller then asks his bank (i.e., sellers bank) for payment, who eventually asks the buyers
bank. The buyers bank settles the payment.

Now you can see that the risks involved is much minimized by using the Letter of Credit, as
the seller is guaranteed to be paid by the buyers bank upon delivery of goods.

Even in case, if the buyer doesn't pay the full amount to his bank (buyers bank), the buyers bank is obliged
to pay the amount to the sellers bank. The buyers bank can later settle the amount with his buyer, as happens
in loans or advances.

Since bank guarantee also provides a type of guarantee. Then what is the difference between a Letter of
Credit and Bank Guarantee?

Letter of Credit Bank Guarantee

Paid only if the contract Paid only if the contract is breached, i.e.,
Nature
is satisfied notsatisfied
Ensures a transaction proceeds Insures a buyer or seller from loss or damagedue
Use
as planned to non-performance by the other party

Banking Ombudsman
Ombudsman is an official appointed to investigate individual's complaints against
a company or organization, especially a public authority (Google definition of 'Ombudsman').

To facilitate customer complaints resolution process, RBI introduced this fast and inexpensive (no fee to
avail this facility) Ombudsman Scheme in 1995 under Section 35A of Banking Regulation Act, 1949. In
this scheme, RBI appoints the Banking Ombudsman, generally a senior official, to redress customer
complaints against deficiency in certain banking services provided by a bank.

Banks covered under this scheme

Scheduled Commercial Banks (SCBs)

Regional Rural Banks (RRBs)
Scheduled Primary Co-operative Banks
Banking Ombudsmen and their location
Currently, total 15 Banking Ombudsmen have been appointed by RBI, and their offices are located mostly in
the state capitals -

Allahabad, Bengaluru, Bhopal, Bhubaneshwar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur,

Kanpur, Kolkata, Mumbai, Delhi, Patna, Thiruvanthapuram

Legal power of Ombudsman

Banking Ombudsman is a quasi-judicial authority, who has legal power to summon both the parties -
Bank and its customer, to facilitate the resolution of complaint through mediation.

Banking Ombudsman Scheme, 2006

The latest scheme is Banking Ombudsman Scheme, 2006, which has wider extent and scope than its
previous versions, like online submission of complaints is possible. Also, if customer is not satisfied with
the resolution provided by Ombudsman, he can approach the Appellate authority, i.e., Deputy
Governor of RBI.

Complaint process
A customer can file a complaint before the Ombudsman, only after the followings -

If he has not received any reply from the bank within a period of 1 month after the bank has
received his complaint (meaning, customer has to complain to the bank first, then Ombudsman)
If the bank rejects the complaint of the customer
If the customer is not satisfied with the reply from the bank

He can file a complaint by writing on a plain paper, or online, or email to the Banking Ombudsman (under
whose jurisdiction the bank branch is)

Note that, Banking Ombudsman is not meant to replace the traditional Consumer Courts or Forums, but
the scheme only supplements them. Also note that this scheme deals with complaints of max. Rs. 10
lakh disputes.
ADR and GDR

Depository Receipts (DR)

A publicly listed (stock exchange listed) company might want to raise money from foreign countries (in
contrast to its domestic country). So it will list its securities (stocks or equities) to a foreign country's stock
exchange in form of Depository Receipts (DR).

Therefore, DRs are a type of negotiable financial security (usually stocks/equity) by a foreign publicly
listed company, which are traded on a local Stock exchange (e.g., american company trading on Bombay
Stock Exchange).

Example -
An American company (publicly listed in New York Stock Exchange, or any other stock exchange in
USA) might want to raise money from foreign countries (like, India). So, it will list its securities in Indian
stock exchanges (may be Bombay Stock Exchange) by means of Depository Receipts. Then Indian
investors can invest in these securities.

American Depository Receipts (ADR)

Depository Receipts were first started in USA in late 1920s. DRs issued by any company
of USA/America will be known as American Depository Receipts (ADR). ADRs, generally, are traded
in US Dollar.

Global Depository Receipts (GDR)

DRs became popular in other parts of the world after its introduction in USA. DRs of all other countries (other
than USA) will be known as Global Depository Receipts (GDR).

Issuance of DRs
When a foreign company intends to list its securities on another country's stock exchange, it goes
through DR mode. Steps -

1. The shares of the foreign company (which the Depository Receipts represent)
are delivered and deposited with the custodian bank (bank that facilitates the company's DR).
2. On receipt of the delivery of shares, the custodian bank creates Depository Receipts (DR) and
issues to investors in the country (investor's country, not company's country)
3. These DRs are then listed and traded in the local stock exchange of that country.
Recession and Subprime Lending
Recession
For a healthy economy, a country needs to have smooth economic activities of production,
distribution and consumption of goods and services at all levels. But what if all these activities drastically
reduced (due to some reason) to a very low-state and continues to be in that state for a long time?
This kind of slowdown or a massive contraction in economic activities, is known as Recession. It
may last for some quarters, which have a great adverse effect on the growth of
an economy (making negative GDP growth, may be). Other adverse effects, like -

Unemployment
Drop in Stock Market
Decline in Housing Market
Business losses
Social effects, like low living standards, low wages, etc.

The technical indicator of a recession may be two consecutive quarters of negative GDP growth.
Recessions can occur for excessive subprime lending, as described below.

Subprime Loans
A bank generally follows a credit scoring system to determine borrowers eligibility for a loan. If
a borrower doesn't have a good credit history, then the bank can deny him/her a loan. But if the bank
decides to allow him/her a loan (even with that limited credit history), then the loan is known as subprime
loan.
This type of loan carries more credit risk, and therefore carries higher interest rate. Think what will happen,
if he/she eventually cannot pay back the loan (with extra interest rate on it!)

US Subprime Crisis of 2007-09

US banks started to lend subprime loans to the low credit borrowers,
with houses, or properties as mortgage. They thought that if the borrowers become unable to pay back, then
they could seize the properties and sell in high prices to recover the loans.

But what happened is the prices of houses/properties declined drastically, leading

to mortgage delinquencies and devaluation of housing-related securities. This led the banks to
become bankrupt (e.g., Lehman Brothers), because they couldn't recover the amount of their
huge subprime lending against mortgage securities.
Current Recession in Venezuela
Due to political instability and falling oil prices, Venezuelan economy (highly dependent on oil
exports) shrank by 2.8 % in 2014, while inflation topped 64 %. It led Venezuela to fall in recession.

DEAF Scheme

There are several accounts in banks which are not operated for 10 years (or more), or there
are deposits which are unclaimed for 10 years (or more). There is little possibility that
thedeposits will be reclaimed by the owner (as it is unclaimed for that long period).

RBI decided to acquire those unclaimed amounts and create a fund, which could be used for the good of
the public. It amended the Banking Regulation Act, 1949, by adding Section 26A, which empowers RBI to
establish the Depositor Education and Awareness Fund (DEAF).

All the unclaimed amounts in the banks need to be transferred within 3 months after becoming 10 years
default, to the DEAF fund. Also note that the transfer is allowed only in electronic mode.

The goal of this DEAF fund is to promote depositor interest, like educating them, or creating awareness
among them, or some other purpose.

Situational Question
If someone comes to your bank and claims for his/her deposit (which has already been transferred to
DEAF fund, because it defaulted for 10 years), what will you do?

You will verify his/her claim, and after successful verification, will honor the claim.

Note that the bank would be liable to pay the amount to the depositor/claimant and claim refund of
such amount from the DEAF fund (even after 10 years).
Purchasing Power Parity (PPP)
PPP Theory
It states that the exchange rate of a currency with another (currency) is in equilibrium when
their domestic purchasing power are equivalent at that exchange rate.

It means that a good should cost same in India and USA after considering the exchange rate of Indian Rupee
(INR) and US Dollar (USD).

Example
Suppose, the current exchange rate of Indian rupee to US Dollar is Rs. 60 per USD (i.e., 1 USD = Rs. 60).
Now suppose a laptop costs Rs. 60,000 in India.

According to the PPP theory, the laptop should cost USD (60,000 / 60) = USD 1,000 (considering the
current exchange rate of these two currencies) to maintain parity in purchasing power of these two
currencies.

But, it may happen that the actual market price of the laptop in USA is USD 800 (say) (equivalent to Rs.
48,000 in India). Therefore, there is an advantage of buying the laptop in USA at much less price than India
(Rs. 12,000 less) (it means that the purchasing power is not in parity between these two currencies)

What happens if not in parity?

Indian consumers will go to the exchange office and sell their INR and buy USD, and then buy the laptop
from USA. It will cause the Indian currency less valuable than the US dollar.

The demand of laptop sold in India will decrease (since high price), and the price of laptop will go down. In
contrast, the demand of laptop in USA will increase, and the price will rise accordingly.

These factors will cause the exchange rate (of the currencies) and the prices (of laptops) to change such that
there is purchasing power parity in both the currencies.

Long term effect

PPP theory tells us that the price differences between countries are not sustainable in the long run,
as market forces will equalize prices between the countries and change the exchange rates accordingly.
Subsidy leakage - JAM Trinity
Subsidy in India
Government of India provides subsidies to the needy people on several commodities like rice, wheat, pulses,
kerosene, sugar, LPG, water, fertilizer, iron ore, etc. The estimated direct fiscal cost of subsidies is
approx Rs. 3.78 lakh crore, which is almost 4.24 % of GDP.

Now you can see, how enormous is the subsidy in India. But the real question is - does the subsidy reach
the target household properly? Unfortunately, a significant portion of this subsidy is wasted due to leakage.
Let's look into an example -

Kerosene is provided to the poor in a highly subsidized rate, as it is the

primary fuel for cooking and lighting in the Below Poverty Line (BPL) households. Government
distributes kerosene to the beneficiaries through Public Distribution System (PDS). But it is found
that approx 45 % of subsidized kerosene does not reach the intended beneficiaries. This is just an indication
of subsidy leakage on kerosene. Think about other commodities!

Government's steps to reduce leakage

Government has now taken some significant steps on reducing the subsidy leakage problem. Prime
Minister Shri Narendra Modi's pet scheme of Jan Dhan Yojana (PMJDY) and Direct Benefit Transfer
(DBT) are indeed good ones, as these mechanisms can eliminate leakage and ensure that subsidies reach those
who deserves.

JAM Trinity
The 'JAM Trinity' is intended for the very purpose of restricting the subsidy leakage problem, and
efficient transfer of subsidies to the beneficiaries (directly, rather than through intermediaries). In the Budget
2015-16, government proposed this. It consists of three schemes -

Jan Dhan Yojana

Aadhar (linked Direct Benefit Transfer)
Mobile numbers

JAM allows the state to offer subsidy support to poor households in a targeted and less distorting manner.

Now the subsidy amount for LPG is directly credited to your bank account, rather through intermediaries.
Thus government can keep track of the subsidy flow, and whether it reaches to the intended beneficiaries or
not.
Post Offices
Apart from the above mentioned ways, Post Offices can be effectively utilized for this purpose,
since India has the largest postal network in the world with over 1,55,015 Post Offices of which approx 90
% are in the rural areas.

Interest Rate Swap (IRS)

# Readers' Question
Please explain Interest rate swap with example

An Interest Rate Swap (IRS) is a financial instrument that works in a derivative market, where two
parties exchange interest rate payments between them.

IRS is useful when one party wants to receive payment with a variable interest rate, while the
other party wants to limit future risk with a fixed interest rate.

Clear the concept with an example -

Example
Suppose, two companies X and Y has come up with an agreement of Interest Rate Swap (IRS) with
a nominal value of Rs. 1,00,000.

Company X offers a fixed rate of 5 % per annum to Y on the nominal amount, whereas Y agrees to pay
a variable rate, like Mibor rate + 2 % per annum to X in return. Note that Mibor rate changes on daily
basis, making the rate a variable one.

(Don't take the following figures of Mibor rate as actual!)

Here, both X and Y know that Mibor rate (variable) will remain roughly around 3 % (just a figure), making
it almost equal to the fixed rate, i.e., 3 + 2 = 5 %. Note that X will make a profit if the Mibor rate is
greater than 3 %, because in that case, Y will pay X more than 3 + 2 = 5 %.
Conversely, if the Mibor rate is lower than 3 %, then X will make a loss, because Y will pay less than 3 +
2 = 5 %.

Clear it with figures -

CASE 1 - Mibor rate is greater than 3 %, say 3.5 %

Y will pay 3.5 + 2 = 5.5 % interest rate on the nominal amount (i.e., Rs. 1 lakh) to X at the end
of that year, making total interest = Rs. 1,00,000 x 5.5 % = Rs. 5,500 interest
Also, X will pay the fixed 5 % interest rate on the same nominal amount of Rs. 1 lakh, making
total interest = Rs. 1,00,000 x 5 % = Rs. 5,000 interest.

Note that only the net difference is settled in case of Interest Rate Swap, meaning only Rs. 5,500 -
5,000 = Rs. 500 will be paid to X by Y.
In this case X made a profit, while Y faced a loss of Rs. 500.

CASE 2 - Mibor rate is less than 3 %, say 2.5 %

Y will pay 2.5 + 2 = 4.5 % interest rate on the nominal amount (i.e., Rs. 1 lakh) to X at the end
of that year, making total interest = Rs. 1,00,000 x 4.5 % = Rs. 4,500 interest
Also, X will pay the fixed 5 % interest rate on the same nominal amount of Rs. 1 lakh, making
total interest = Rs. 1,00,000 x 5 % = Rs. 5,000 interest.

Note that only the net difference is settled in case of this Interest Rate Swap, meaning only Rs. 5,000 -
4,500 = Rs. 500 will be paid to Y by X.
In this case Y made a profit, while X faced a loss of Rs. 500

Why IRS agreement?

To hedge (reduce risk) an investment

To earn some extra money, with a little risk (in the above example, Y agreed in IRS with X, because,
he hoped that if Mibor rate gets increased, making the total interest rate (Y paying to X) greater
than the fixed interest rate (X paying to Y), then he will make a profit (refer Case 2). Albeit
he risked a little (refer Case 1)
Note that the risk is less, because they both know that Mibor rate will remain roughly around 3
% (not making huge difference from 3 %. Mibor rate will never become, say, 6 % or 1 %, etc.) (just a
figure). Selecting a good variable rate (like Libor, Mibor, etc.) is very much important for IRS.
Disinvestment
Investment can be thought as the conversion of money into securities / assets (you invest in some company,
means you use your money to buy some security, like shares, bonds, debentures, etc.)

Conversely, Disinvestment can be thought as the conversion of securities / assets into money.

Generally, disinvestment is the action of an organization, or government, selling its asset (may be shares,
or stocks, or any other security) or its subsidiary. In return, the organization or government gets, or
raises money, which it can use for other purpose.

Example
Currently, the government sold 63.16 crore shares (10 % stake) of Coal India Limited (CIL) on January
30, 2015, reducing government stake in CIL to 79.65 % (from 89.65 %). By
this disinvestment, government raised Rs. 22,558 crore. (meaning, government sold some of its shares, and
raised money against it)

Why Disinvestment by government?

Financing the fiscal deficit (to reduce it)

Financing large-scale infrastructure development
To reduce government debt
Any other purpose

Finance Ministry
Ministry of Finance (MoF)
Finance Ministry is one of the most important ministries of Government of India. It governs the following -

Taxation (direct and indirect - CBDT and CBEC comes under this ministry)
Financial Institutions (Banks, NBFCs, etc.)
Capital Markets (SEBI, etc)
Financial Legislation (Money Bills, etc.)
Center and State finances
General Budget (presented by Finance Minister)
Departments of MoF
Ministry of Finance of India comprises 5 departments -

1. Economic Affairs
Department of Economic Affairs (DEA) formulates and monitors the economic policies and programmes of
the government. It performs the following functions -

General Budget (excluding Railway Budget) preparation

Formulation of macroeconomic policies - fiscal policy, inflation, public debt management, capital
market regulation, stock exchange, etc.
Deals with external resources through Bilateral and Multilateral cooperation with foreign
countries, foreign investments, forex, balance of payments (BOP), etc.
Indian currency production (bank notes and coins), postal stamps, cadre management, etc.

Economic Affairs Secretary - Shri Rajiv Mehrishi

2. Expenditure
Department of Expenditure governs the public financial management system in the Central government. It
performs the following functions -

Appraises major schemes or projects before sanction (both Plan and non-Plan expenditure)
Center to State financial resources transfer
Implementation of Central Pay Commission (currently 7th Pay Commission chaired by Justice
Ashok Kumar Mathur) and Finance Commission (currently 14th Finance Commission chaired
by Dr. Y.V.Reddy) recommendations.
Expenditure management of Central Ministries or Departments, etc.

Expenditure Secretary - Shri Ratan P.Watal

3. Revenue
Department of Revenue controls all the Direct and Indirect Taxes by Central Board of Direct Taxes
(CBDT) and Central Board of Excise and Customs (CBEC) respectively.
Note that Income Tax, Customs Duty, Excise Duty, etc. - all type of taxes are governed by Revenue
Department.
Revenue Secretary - Shri Shaktikanta Das

4. Financial Services
Department of Financial Services (DFS) governs all banks, insurance, pension and financial
services (including MSMEs) provided by government agencies or private corporations.

Financial Services Secretary - Shri Hasmukh Adhia

5. Disinvestment
Department of Disinvestment is responsible for making policy
regarding disinvestment and privatization of Public Sector Units (PSU) of government of India.

Disinvestment Secretary - Smt. Aradhana Johri

Cadres of MoF
The following cadres of Indian Civil Services work under Ministry of Finance -

Indian Economic Service (IES)

Indian Revenue Service (IRS)
Indian Cost Accounts Service
Indian Civil Accounts Service

Finance Minister
First Finance Minister of independent India is Shri R.K.Shanmukham Chetty and current Finance Minister
is Shri Arun Jaitley.

Minister of State for Finance

Current Minister of State for Finance is Shri Jayant Sinha

Finance Secretary
Finance Secretary plays the leadership role among the 5 departmental secretaries (chosen among them).
Generally Finance Secretary tends to be the senior most of the 5 (seniority based on entry into civil
services, not based on actual age).

Current Finance Secretary is Economic Affairs Secretary - Shri Rajiv Mehrishi

Financial Market Entities
Financial Market Entities

1. Commercial Banks
Commercial banks include Public Sector Banks (PSB), Private Sector Banks and Foreign Banks. The main
activity of these banks are acceptance of deposits from the public for the purpose of lending or investment.

2. Cooperative Banks
Coop Banks are also allowed to raise deposits and provide advances from and to public. Urban Cooperative
Banks (UCBs) are controlled by respective state governments and RBI, while other Coop banks are
controlled by NABARD and state governments. Except for certain exemptions in paying a higher interest on
deposits, the UCBs regulatory framework is similar to the other banks.

3. Non-Banking Financial Companies (NBFCs)

NBFCs are allowed to raise money as deposits from the public and lend through various instruments
including leasing, hire purchase, bill discounting, etc. These are licensed and supervised by RBI.

4. Primary Dealers (PDs)

PDs deals with government securities both in Primary market and Secondary market. Their basic
responsibility is to provide markets for government securities and strengthen the government securities
market.

5. Financial Institutions (FIs)

FIs are those developmental institutions that provide long-term funds for industry and agriculture. FIs raise
their resources through long-term bonds from the financial market and borrowings from international FIs.

6. Payment and Settlement System / Clearing Houses / Currency Chests

An efficient and effective Payment and Settlement system is a necessary condition for a well
running financial system. Maintenance of Clearing Houses at various centers, creation
of currency holding chests in different geographical areas and creation of the mechanism for electronic
transfers of funds (EFT) are vital activities undertaken by RBI.

7. Stock Exchanges
A stock exchange is duly approved by capital market regulator to provide sale and purchase of securities on
behalf of investors. The stock exchanges provide Clearing House facilities
for netting of payments and securities delivery. Securities include equities, debt, derivatives, etc.
8. Brokers
Only brokers are approved by capital market regulator to operate on the stock exchange. Brokers perform the
job of intermediary between buyers and sellers of securities. They help build-up an order book, carry
out price discovery and are responsible for broker's contracts being honored. The services are subject
to brokerage.

9. Equity and Debt Raisers

Companies wishing to raise equity or debt through stock exchanges have to approach the capital market
regulator with the prescribed applications and a proforma for permission to raise equity and debt and get
them listed on a stock exchange.

10. Investment Bankers / Merchant Bankers

Merchant banks undertake a number of activities such as undertaking the issue of stocks, fund raising and
management. They also provide advisory services and counsel on mergers and acquisitions (M&A), etc.
They are licensed by capital market regulator.

11. Foreign Institutional Investors (FIIs)

FIIs are foreign-based funds authorized by capital market regulator to invest in the Indian equity and debt
market through stock exchanges.

12. Depositories
Depositories hold securities in demat form (not in physical form), maintain accounts of Depository
Participants (DPs), who in turn, maintain sub-accounts of their customers. On instructions of the stock
exchange clearing house, supported by documentation, a depository transfers securities from
the buyers to sellers accounts in electronic form.

13. Mutual Funds (MFs)

An MF is a form of collective investment that pools money from investors and invests in stocks, debt and
other securities. It is a less risky investment option for an individual investor. MFs require the regulators'
approval to start an Asset Management Company (AMC) and each scheme has to be approved by the
regulator before it is launched.

14. Registrars
Registrars maintain a register of share and debenture holders and process share and debenture
allocation, when issues are subscribed. Registrars too need regulator's approval to do business.
Pre-2005 Banknotes and MG-2005 Series
Banknotes Series
Since Independence of India, three different series of banknotes are issued -

1. Ashoka Pillar Banknotes - Issued in 1949

2. Mahatma Gandhi (MG) Series 1996 - Issued in 1996
3. Mahatma Gandhi (MG) Series 2005 - Issued from 2005

MG Series - 2005 Banknotes

These series banknotes are issued in the denomination of Rs. 10, 20, 50, 100, 500 and 1000, and contain
some additional new security features that MG Series-1996 doesn't have. Started from August 2005, MG
Series - 2005 banknotes are currently being used in India.

It is very easy to distinguish MG-Series 2005 notes from its predecessors, because these notes bear the year of
printing on the reverse side.

Withdrawal of Pre-2005 Banknotes

RBI changed the design of pre-2005 banknotes and introduce new security features primarily to minimize
the risk of counterfeiting. So that the economy can be protected from counterfeiters or forgers.

Also, the withdrawal exercise is in conformity with the standard international practice of not
having multiple series of notes in circulation at the same time.

Public can visit any bank branch, or RBI Issue Office to exchange pre-2005 banknotes.

Recently, the deadline of January 1, 2015 has been extended to June 30, 2015 by RBI.

Situational Question
RBI has given a deadline for the exchange of pre-2005 banknotes. What will happen to those notes (that
will still remain in circulation) after the deadline? Will those remain a legal tender?

RBI has clarified that the public can continue to freely use those notes for any transaction and
can unhesitatingly receive those notes in payment, as all such notes continue to remain legal tender.

But public is encouraged to exchange pre-2005 notes with MG Series-2005 notes.

New Social Security Schemes
New Social Security Schemes by PM Modi

After Jan Dhan (PMJDY), the government will launch 3 mega social security initiatives
in India (a Pension and two Insurance schemes) on May 9, 2015 in Kolkata.

These schemes are aimed at providing affordable universal access to essential social security protection in a
convenient manner linked to auto-debit facility from the bank account of a subscriber.

The Insurance and Pension Schemes

1. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) - Life Insurance

2. Pradhan Mantri Suraksha Bima Yojana (PMSBY) - Accidental Insurance
3. Atal Pension Yojana (APY) - Pension

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

It will offer a renewable one-year life cover of Rs. 2 lakh to all savings bank account holders in the age
group of 18-50 years, covering death due to any reason, for a premium of Rs. 330 / annum per subscriber.

The scheme would be offered or administered through Life Insurance Corporation (LIC) or other Life
Insurance companies willing to offer the product on similar terms on the choice of the bank concerned.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

It will offer a renewable one-year accidental death-cum-disability cover of Rs. 2

lakh for partial/permanent disability to all savings bank account holders in the age group of 18-70
years for a premium of Rs. 12 / annum (i.e., Rs. 1 / month) per subscriber.

The scheme would be administered through public sector General Insurance companies or other general
insurance firms willing to offer the product on similar terms on the choice of the bank concerned.
Atal Pension Yojana (APY)

It will focus on the unorganized sector and provide subscribes a fixed min. pension of Rs. 1000, 2000, 3000,
4000 or 5000 per month starting at the age of 60 years, depending on the contribution option exercised on
entering at an age between 18-40 years.

The period of contribution by any subscriber under APY would be 20 years or more. The fixed min.
pension would be guaranteed by the government.

While the scheme is open to bank account holders in the prescribed age group, the central
government would also co-contribute 50 % of the total contribution, or Rs. 1000/annum, whichever
is lower, for a period of 5 years for those joining the scheme before December 31, 2015 and are not
members of any statutory security scheme and are not income tax payers.

Beti Bachao, Beti Padhao Initiative

Child Sex Ratio (CSR)
Child Sex Ratio is the number of females per thousand males in the age group of 0 - 6 years (under 7 years).
Ratio greater than 1 means, there are more boys than girls in the population. Note that this trend
of imbalance, if allowed, will follow in older ages (in future years).

According to the decennial (10 year) census of India, the CSRs in different census are -

1991 census - 945 girls per 1000 boys

2001 census - 927 girls per 1000 boys
2011 census - 918 girls per 1000 boys

Note the drastically declining figure of girl child. This is a major indicator of women dis-empowerment.
There may be several practical reasons, but the most important is our patriarchal mindset, which needs to be
changed.

Therefore, the need of the hour is to educate people and start campaigns to save the girl child. We should
remember, 'The Happiness of a Nation lies in the Dignity of its Daughters'.

PM's message - "Bete ki aash mein beti ki bali maat chadhaiye"

Beti Bachao Beti Padhao Initiative
To ensure the survival, protection and empowerment of the girl child, government has launched a
commendable initiative - 'Beti Bachao Beti Padhao'. This is a joint initiative of 3 ministries of government
of India -

Ministry of Women and Child Development

Ministry of Health and Family Welfare
Ministry of Human Resource Development

This initiative will be implemented through a national campaign and focused multi-sectoral
action in 100 selected districts, that are low in CSR.

Objectives

Prevention of gender-biased sex selective elimination - enforcement of laws, especially the

implementation of Pre-Conception & Pre-Natal Diagnostic Techniques (Prohibition of Sex
Selection) Act, 1994 (PC&PNDT Act) with stringent punishments for violations.
Ensuring survival and protection of the girl child - the access to various entitlements, changes
in patriarchal mind-set, etc. are to be addressed in order to ensure equal value, care for
and survival of the infant and young girl child.
Ensuring education and participation of the girl child - access and availability
of services and entitlements during the various phases of the life cycle of the girl child - related
to nutrition, health care, education, etc.

Outlays

Budgetary allocation - Rs. 100 crore

Fund will be mobilized from 'Care and Protection of Girl Child - A Multi Sectoral Action Plan' - Rs.
100 crore
Corporate Social Responsibility - for additional resources

Sukanya Samriddhi Account

Sukanya Samriddhi account can be opened in the name of girl child, before she attains 10 years age. Some
important points about this special account scheme -

Minimum deposit - Rs. 1,000

Maximum deposit in a year - Rs. 1.5 lakh
Interest rate - 9.1 % per year for the savings accounts
 Full income tax exemption (no tax)
Partial withdrawal, maximum up to 50 % balance can be withdrawn by the girl child after
attaining 18 years
Account will remain operative till the girl attains - 21 years
A legal guardian / natural guardian can open account in the name of girl child
A guardian can open only one account in the name of one girl child and max. 2 accounts in the
name of two different girl children
Account can be opened up to age of 10 years from date of birth (initially 1 year grace period has
been given).