INTEREST IN %

12 BULK DEPOSITS
11

10
FIXED DEPOSITS
9

8
Average Cost of Funds 7 RECURRING DEPOSITS
6

4 SAVINGS ACCOUNT DEPOSITS

The numbers on the vertical 3
lines show the rates of
2
interest CURRENT ACCOUNT DEPOSITS
1

DEPOSITS

COST OF FUNDS

LIABILITIES
 INTEREST IN %
18
PERSONAL LOANS
17
16
15

14
13
CORPORATE LOANS

12 MORTGAGE LOANS
11
Average yield HOUSE LOANS
10
9
8
7
6
All the figures are
5 approximate and taken
4 for the purpose of
3 explanation
2
1

LOANS AND ADVANCES

YIELD/INCOME
ASSETS
 CASE – 1 18

17
VIABLE BANKING 16
Note OPERATIONS 15

The given 14

figures are only 13 AVERAGE YIELD ON

12 ADVANCES 9.8%
approximations 12
11
11
10 10
9 9
AVERAGE COST OF
8 8 NET INTEREST
FUNDS 6.8%
7 7 MARGIN (NIM)
6 6 3%
5 5
4 4
3 3
The numbers on the vertical All the figures are approximate
2 2
lines show the rates of and taken for the purpose of
interest 1 1 explanation

INTEREST ON DEPOSITS INTEREST ON LOANS

(in %) AND ADVANCES (in %)
COST OF FUNDS YIELD/INCOME
 18

CASE – 2 17
16
Note STRAINED BANKING 15

The given OPERATIONS 14

13 AVERAGE YIELD ON
figures are only ADVANCES 9.8%
12 12
approximations 11 11

10 10
9 9
AVERAGE COST OF 8
NET INTEREST
8
FUNDS 7.3% MARGIN (NIM)
7 7
2.5%
6 6
5 5
4 4
3 3
The numbers on the vertical All the figures are
lines show the rates of 2 2 approximate and taken for the
interest 1 1 purpose of explanation

INTEREST ON DEPOSITS INTEREST ON LOANS

(in %) AND ADVANCES (in %)
COST OF FUNDS YIELD/INCOME
WE HAVE SO FAR LEARNT THAT…

 Net Interest Margin (NIM) is the important parameter

for the survival of any banking system.

 At present, some new generation private sector banks

along with SBI are able to achieve +3% NIM, which is the

benchmark for profitable banking operations.

 But most of the public sector banks are struggling with

NIMs of 2.2 to 2.7%. Hence these banks are not able to

achieve desired levels of profitability.

 HENCE, THE CORE OF THE BANKING OPERATIONS LIES IN

KEEPING COST OF FUNDS AS MINIMUM AS POSSIBLE

SO AS TO KEEP HIGH NET INTEREST MARGINS

CHALLENGES FOR PUBLIC SECTOR BANKS (BARRING SBI)

 Unable to attract current account deposits
 Not matching with technological upgradation of private sector banks
 Bureaucratic apathy
 High Non Performing Assets (NPAs)
 Lagging in personalised service
 Emphasis by Govt. for opening zero balance accounts like BSBDA, PMJDY etc.

IN VIEW OF THE ABOVE, MOST OF THE NEW GENERATION PVT. SECTOR BANKS ARE
INCHING AHEAD IN PROFITABILITY AND EFFICIENCY IN OPERATIONS
GNEC BALC X02X EN15
Before going into the deposits, please don’t forget …
Deposits are liabilities for banks and loans are assets.

TYPES OF ACCOUNTS

1. SAVINGS ACCOUNTS
2. CURRENT ACCOUNTS
3. FIXED DEPOSIT ACCOUNTS
4. RECURRING DEPOSIT ACCOUNTS
5. BULK DEPOSIT ACCOUNTS

Let us discuss one by one…

1. SAVINGS ACCOUNTS
COST OF FUNDS
FD
SD RD BD
CD
Approx. interest
rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 For individuals / small businesses

• Idea is to save a little out of their current incomes
• Also to make them earn some interest on their savings
 Minimum balance (varies from bank to bank)
• Normally Rs 500/- (without cheque book facility)
• Rs 1000/- (with cheque book facility)
(some banks allow premium savings a/c deposits with min. balance of Rs. 5000 to Rs. 25000/-)
 Banks offer zero balance accounts previously known as No-Frill accounts / BSBDA and now under
PMJDY
1. SAVINGS ACCOUNTS
COST OF FUNDS
FD
SD RD BD
CD
… Contd Approx. interest
rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 Eligible for Resident Indians above 18 years age (for 10 to 18 years age group account is
allowed with some restrictions and for persons below 10 years, minor account with guardian
is to be opened)
 Can be opened by individuals (single / jointly) and HUF’S
 Interest rates vary from 4% to 6% (Most of the banks offer 4% at present)
 They are classified as Demand Deposits as the customer can withdraw anytime. Only minor
portion is classified as time deposit
 Banks impose restrictions on the number of transactions in a specified period as well as
maximum amount that can be withdrawn (but not enforced strictly, because of stiff
competition from other banks)
1. SAVINGS ACCOUNTS
COST OF FUNDS
FD
SD RD BD
CD
… Contd Approx. interest
rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 Money can be withdrawn either by cheque or by withdrawal slip

 Minimum balance / minimum quarterly balance is to be followed (However, zero balance
accounts / No-Frill accounts / BSBDA / PMJDY are allowed by the banks, where maintaining
minimum balance is not necessary)
 There is no maturity date as the savings account is continuous in nature.
 Regular monthly payments through ECS are allowed for payment of house loans, personal
loans etc…
 As per the Banking Regulation Act 1949, the interest earned on savings account is not
subject to TDS, as savings accounts are demand deposits.
1. SAVINGS ACCOUNTS
COST OF FUNDS
FD
SD RD BD
CD
… Contd Approx. interest
rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 No tax is payable on interest earned on saving bank account up to Rs.10,000 per year i.e.
interest income up to Rs.10,000/- is exempted from income tax.
 From 25th October 2011, RBI has deregulated savings bank interest rates and now the banks
are free to decide the same within certain conditions imposed by RBI.
 From 1st April 2010, the interest is calculated on daily basis taking into account minimum
balance available on every day.
 Some banks have got facility to convert saving deposits into money multiplier schemes / multi
option deposits etc., to earn more interest.
 COST OF FUNDS
FD
2. CURRENT ACCOUNT CD SD RD BD

Approx. interest
rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 Firms and companies are eligible to open account

 Basically meant for business men, to run businesses
 Normally firms / companies / trusts / association of persons can open them
 It is also called running and active account
 Carry no interest on deposits
 No limit on either the number of transactions or the maximum amount of transaction
 Sometimes banks stipulate higher minimum balance depending on the services offered
 Overdraft facility (short term loan facility) is available
 Standing instruction facility is also available
 COST OF FUNDS
FD
2. CURRENT ACCOUNT CD SD RD BD

Approx. interest
… Contd rates in %
Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 Transfer of account to any branch is highly liberalized

 ATM /Debit card facility is available
 Nomination facility is normally not available (Allowed only in some cases)
 Deposits and withdrawal of money (cash) at any location
 Multi-location fund transfer
 Support from customer care executives
 Periodical download of bank statements in ‘XLS’, ‘TXT’, ‘PDF’ formats
 COST OF FUNDS
FD
WE DISCUSSED ABOUT CD SD RD BD

CURRENT ACCOUNTS Approx. interest

rates in %
0 1 2 3 4 5 6 7 8 9 10 11 12
SAVINGS ACCOUNTS

CASA RATIO IN %
CASA RATIO
CASA RATIO IS THE RATIO
OF THE DEPOSITS IN THE
FORM OF CURRENT AND
SAVINGS ACCOUNTS TO THE
TOTAL DEPOSITS
(NORMALLY EXPRESSED IN
PERCENTAGE)

Tentative Figures
 COST OF FUNDS
FD
SD RD BD
CD
Approx. interest
rates in %
0 1 2 3 4 5 6 7 8 9 10 11 12

TIME LIABILITIES DEMAND LIABILITIES

 Fixed deposits  Major portion of savings account

 Recurring deposits deposits
 Cash certificates  Current account deposits
 Time liabilities portion of savings bank  Demand drafts
deposits  Unclaimed deposits
 Staff security deposits
 COST OF FUNDS
FD
BD
3. FIXED DEPOSIT ACCOUNTS CD SD RD

(TERM DEPOSITS) Approx. interest

rates in %
0 1 2 3 4 5 6 7 8 9 10 11 12

Salient features
 Can be operated for a tenure ranging from 7 days to 10 years
 Not payable on demand and do not enjoy cheque facility
 Interest rates increases with the time period
 Approx. 4.5% for 7 day period to 9% for 10 year period
 Interest rates will be slightly higher for senior citizens (60 + years of age)
 Premature withdrawal of the deposits is possible, but it attracts penalty at the rates varying from
0.5% to 1.5%
 If the deposits are Rs 1 crore or more, they come under the bulk deposits and interest rates may
vary further
 Interest will be paid at the contracted rate for the agreed period
 COST OF FUNDS
FD
BD
3. FIXED DEPOSIT ACCOUNTS CD SD RD

(TERM DEPOSITS) Approx. interest

rates in %
0 1 2 3 4 5 6 7 8 9 10 11 12
… Contd
Salient features

 Loan facility is available up to 90% of the outstanding principal and accrued interest, generally
 Interest is taxable (No exemption) and nomination facility is available
 Moreover, Tax Deduction at Source (TDS) will be ensured by the bank, if the interest income is
more than Rs.10,000/- in a financial year
 Once the tax is deducted, banks will give form no. 16 A to the depositor to show in their IT returns
 If the depositor does not come in to the bracket of Income Tax purview, he can deposit form no.
15G or 15H (for senior citizens) so as to avoid ‘TDS’ by banks
 Quoting PAN is made mandatory for FD’s of Rs. 50,000/- and above
 COST OF FUNDS
FD
SD RD BD
CD
4. RECURRING DEPOSITS Approx. interest
rates in %

Salient features 0 1 2 3 4 5 6 7 8 9 10 11 12

 Most of the features are like fixed deposits

 It is a monthly deposit with the bank for an agreed period
 Interest is credited on the accumulated balance at regular intervals
 These are designed to induce small savers to save regularly
 Minimum period and minimum monthly deposit varies from bank to bank
 Maximum period is normally 120 months (10 years)
 Loan / overdraft facility is available up to 90% against the balance in RD account
 Nomination facility is available
 Interest is taxable, TDS is also applicable, as per the Budget 2015-16
 Penalty for premature closure
 COST OF FUNDS
FD
SD RD BD
CD

5. BULK DEPOSITS Approx. interest

rates in %
0 1 2 3 4 5 6 7 8 9 10 11 12

Salient features
 Deposits of Rs 1 crore and above constitute bulk deposits
 Interest rates vary based on the quantum of deposit
 High interest rates, so the cost of funds is high
 Normally these deposits are obtained from High Net-worth Individuals (HNIs)
 Present limit of bulk deposits is 15% of their total deposits as it will increase cost of funds. But,
banks are not following these guidelines strictly

In a nut shell, these bulk deposits will be helpful to the banks to maintain asset liability ratio, but it
will increase the cost of funds.
 NOMINATION FACILITY

Banking Companies (Nomination) rules 1985 permit banks to pay dues to nominee in the event of
death of depositor(s)
 Without asking for succession certificate
 Without verifying claims of legal heirs

WHAT IS NOMINATION FACILITY?

“ It is a facility that enables a deposit account holder(s) (Individual / Joint account holders or Sole
proprietor) or safe deposits locker holder(s) to nominate an individual who can claim the
proceeds of the deposit account(s) or contents of the safe Deposit locker(s) post the demise
of the original depositor(s) or locker holder(s)”

 Nomination facility is normally available for Savings, Fixed and Recurring deposit accounts
 For Current account deposits, it is available only in few cases
 It is advisable to record ‘nominee’ for any bank transaction
 Nominee means “A person who is proposed or formally entered as the recipient of a grant or
award”
 NOMINATION CASE 1

Husband A
IF A DIES

LEGAL HEIR

E B Wife
FIGHT
Nominee BETWEEN C D
WILL RECEIVE IN THE E&B
CAPACITY OF TRUSTEE Children
 NOMINATION
CASE 2
Husband A
IF A DIES

NOMINEE B Wife
C D Children
B WILL RECEIVE
IN THE CAPACITY
OF TRUSTEE
AT THE SAME TIME, SHE WILL
ALSO BE THE LEGAL HEIR,
HENCE, NO PROBLEM
 BENEFITS OF NOMINATION
 In the event of death of the account holder, the bank can release the account proceeds to the
nominee without insisting upon a succession certificate / court order
 The nominee holds the money in the capacity of a trustee on behalf of the legal heirs of the
deceased account holder
 The banks liability is duly discharged on payment to the nominee

MODALITIES FOR NOMINATION

 Individual account holders or Joint account holders can nominate a nominee.
 A sole proprietor can appoint a nominee to the sole proprietorship account with the bank.
 In case of a deposit in the name of a minor, nomination shall be made by a person lawfully entitled to
act on behalf of the minor.
 You can give nomination right away at the time of opening of bank account or even at a later date.
 You can cancel or change your nominee anytime during your lifetime.
 You can have only one person as a nominee.
 But, in the case of jointly operated locker account, you can nominate upto two people with common
consent.

ALLOWED WHEN THE
ACCOUNT IS HELD IN
INDIVIDUAL CAPACITY
 Individual accounts or Joint
accounts whether it is SD, FD,
RD
 Single proprietorship current
accounts
 Business accounts in individual
capacity
 Safe deposit lockers
NOMINATION
NOT ALLOWED WHEN THE
ACCOUNT IS HELD IN
REPRESENTATIVE CAPACITY
 Business accounts (current
Barring some
exceptions, accounts) of companies
 Current accounts of partnership
normally, you can
say that current firms or associations
 Any other account in
accounts do not
have nomination representative capacity
facility
HENCE NOT AVAILABLE FOR
LIMITED COMPANIES, HUFs,
PARTNERSHIP FIRMS, TRUSTS etc.
IF ACCOUNT HOLDER IF ACCOUNT HOLDER GIVES
SIGNS ON HIS THUMB IMPRESSION ON
NOMINATION FORM NOMINATION FORM

ONLY
TWO
ONE
WITNESS
WITNESS
 OTHER ASPECTS OF NOMINATION

 Any nomination registration, cancellation or change has to be witnessed.

 Nomination favoring minor is permitted.
 However, another individual is to be appointed to receive the money in the event of the death
of the account holder, while the nominee is still a minor.
 Nomination rules are governed under Banking Regulation Act 1949 and Banking Companies
(Nomination) rules 1985.
 While making nomination or cancellation witness is required and the request should be signed by
all the account holders in case of joint accounts.
 The right of nominee to receive payment arises, only after the death of the depositor.
 If the account holder makes the thumb impression, then it should be witnessed by at least 2
persons.
 ‘NO-FRILLS’ ACCOUNTS
 RBI issued guidelines in Nov 2005, for zero balance accounts.
 As per the circular issued by RBI in August 2012, all the ‘No-Frills’
accounts converted to Basic Savings Bank Deposit Accounts
(BSBDAs)

BASIC SAVINGS BANK DEPOSIT ACCOUNTS (BSBDAs)

RBI GUIDELINES ISSUED IN AUGUST 2012
 To have financial inclusion, BSBDA should be considered as normal banking service to all the
customers with zero balance irrespective of age & income
 Facility of ATM cum debit card at free of cost
 No limit on the number of times for depositing the amounts
 Only four withdrawals per month at branch or at ATMs
 Banks can decide about the price structure, if more than the above facilities are required
 KYC norms are to be followed. However, if proper KYC norms are not satisfied, then the account
should be treated as “BSBDA – SMALL ACCOUNT”
 Customer can have only one BSBDA in one bank
NOW, ZERO BALANCE ACCOUNTS
ARE PMJDY ACCOUNTS
 No minimum balance
 Interest on deposit
 Accident insurance cover of Rs 1,00,000 to all the account holders
 Life Insurance cover of Rs 30,000 to all the account
holders(However, the Govt. stated that this is applicable for the
accounts opened upto 26th Jan, 2015)
 After satisfactory operation of the account for 6 months,
overdraft facility of Rs 5000 to one member of the family
(Preferably, the lady of the household)
 Rupay card at free of cost
 If cheque book is required, minimum balance is to be maintained
 WHAT ARE “SMALL ACCOUNTS”

These are the accounts to be opened by a Bank, when the customer is not
able to satisfy KYC norms. This account has got several restrictions.

Stipulations for small accounts

 Aggregate of all deposits shall not exceed Rs one lakh per annum
 Aggregate of all withdrawals and transfers in a month shall not exceed ten thousand Rupees
 Maximum balance at any point of time shall not exceed Rs fifty thousand
 Foreign remittances cannot be credited to small accounts
However, small accounts are valid for a period of 12 months initially, which may be
extended by another 12 months, if the person provides proof of having applied for an Officially
Valid Document (OVD)
 BANKING OMBUDSMAN
 Senior official appointed by RBI to redress customer complaints against deficiency in certain banking
services.
 Under section 35 a of the Banking Regulation Act 1949.
 In operation with effect from 1995.
 At present fifteen banking ombudsmen are being operated mostly in state capitals.
 All scheduled commercial banks (including RRB’S, cooperative banks) are covered.
 Important items which come under the purview.
 Non-payment or inordinate delay in payment of cheques, drafts, bills etc…
 Failure to issue or delay in issue of drafts.
 Delay in payment of inward remittances.
 Non acceptance of coins / small denomination notes etc…
 Forced closure of deposit accounts without notice.
 Non-observance of RBI directives in certain cases.
 BANKING OMBUDSMAN

HOW TO COMPLAIN?
 First we should approach bank for any grievance.
 If the grievance is not settled by the bank in 30 days (If not replied / rejection by bank / reply does not
satisfy the customer), then we can approach the Ombudsman within 1 year.
 Complaint can be lodged on plain paper or by sending e-mail request.
 No charges involved.
 Maximum limit of award is Rs 10 lakhs. (Rs 1 lakh incase of credit card related complaints)
 If not satisfied, either of the parties can approach appellate authority within 30 days. Appellate authority
vested with a deputy governor of RBI.
 KYC GUIDELINES

 It is “Know Your Customer”

 This is customer identification process, prior to the opening of accounts
 This involves ‘identity” and “address”
 To prevent banks being used (intentionally / unintentionally ) for money laundering
 RBI issued guidelines to banks under section 35A of the Banking Regulation Act 1949 and rule 7 of the
money laundering rules 2005 to prevent banks from misuse
 It involves (a) “Legal Name Verification”
(b) “Correct Permanent Address”
 To open a bank account, customer need to submit “Proof of Identity and Proof of Address” with one
passport size photograph
 KYC is to be verified periodically, schedule is given separately for customers classified as
 Low risk
 Medium risk
 High risk
 If one does not satisfy KYC norms, accounts can still be opened, which are known as “small accounts”
 KYC GUIDELINES

OFFICIALLY VALID  These six documents given here are notified as

DOCUMENTS (OVDs) OVDs for “Proof of Identity”
 Aadhaar  If these documents also contain the address, it
 Voters Identity card would be accepted as “proof of address”
 Driving License
 If the document does not contain address
 Passport
 PAN card details, you have to submit another OVD
 NREGA card containing address details.

DO YOU KNOW?
 e-KYC is also admissible as OVD
 This is for Aadhaar card holders
 You have to authorise the bank to take
biometric information from UIDAI
 IF YOU DO NOT HAVE OVD, YOU CAN STILL OPEN
NORMAL ACCOUNT, IF YOU HAVE ANY ONE OF THE
FOLLOWING

Identity card with person’s photograph issued by

 Central / State Govts.
 Statutory / Regulatory Authorities
 Public Sector Undertakings
 Scheduled Commercial Banks
 Public Financial Institutions
However, as per the clarification
given by RBI, this is not a
general rule and it is left to the
judgement of individual banks

OR
More over, RBI liberalised rules for address proof as
Letter issued by a gazetted officer with a duly
a simplified measure for low risk customers during
attested photograph of the person
June 2015. Let us look at them in the next slide…
 SIMPLIFIED NORMS FOR ADDRESS PROOF AS
NOTIFIED BY RBI IN JUNE 2015

 RBI notified “easier documentation norms” for opening bank accounts

 This additional relaxation is made possible after the Govt. amended Money Laundering
Rules 2005
 The documents notified for “proof of address” are
 A simplified measure
 For low risk customers

This liberalization is primarily keeping in view opening

of bank accounts in a massive scale by the citizens of
the country.

GNXX CALC X24A EN15

 OFFICIALLY VALID DOCUMENTS UNDER SIMPLIFIED MEASURES FOR LOW
RISK CUSTOMERS FOR ADDRESS PROOF
 Utility bill which is not more than two months old of any service provider (electricity, telephone,
post-paid mobile phone, piped gas, water bill)
 Property or Municipal Tax receipt
 Bank account or Post Office savings bank account statement
 Pension or family Pension Payment Orders (PPOs) issued to retired employees by Government
Departments or Public Sector Undertakings, if they contain the address
 Letter of allotment of accommodation from employer issued by State or Central Government
departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial
banks, financial institutions and listed companies. Similarly, leave and license agreements with
such employers allotting official accommodation and
 Documents issued by Government departments of foreign jurisdictions and letter issued by
Foreign Embassy or Mission in India.
GNXX CALC X24A EN15
 OTHER ASPECTS OF KYC
 Introduction is not reqd.
 If your permanent address on OVD shows
 If you are opening account with another bank,
Bangalore, you can still open account at any
you have to undergo fresh KYC process
other place, say Lucknow for example, by
 PAN is required to be quoted normally for
 giving OVD of permanent address of
transactions of Rs 50,000 and above.
Bangalore
 KYC is required for issue of Debit / Credit /
 self declaration about your Lucknow
Smart cards
address
 Demand drafts of Rs. 50,000 and above to be
 If our are transferring account from one branch
issued by the way of debiting to customers
to another branch of same bank, you need not
accounts or by cheques.
give KYC once again. But you need to give self
declaration of change of address
 PERIODICAL VERIFICATION OF KYC

 Periodical verification of KYC is done by banks as per the following schedule

 Low risk customers … once in 10 years
 Medium risk customers … once in 8 years
 High risk customers … once in 2 years
 For “Low risk customers”, if there is no change in address / identity / or both, simple
certification is enough.
 For “Low risk customers” , if there is only change in address, they can just send by
post for periodical verification.
NO KYC … THEN WHAT?
If the person is not able to provide KYC
Documents (OVD) to the bank, he can still open
bank account, which is known as small account.
 AUTOMATED TELLER MACHINE

SERVICES PROVIDED TYPE OF CARDS

 Account Information  ATM card
 Cash Withdrawal  ATM cum Debit card
 Cash Deposits  Credit card
 Regular Bills Payments  Open Prepaid Payment Instruments
 Mini Statement (PPIs) that permit cash withdrawal
 PIN Change
 Cheque Book request

..and many more

WHAT IS ATM?
It is the facility of accessing the account for
dispensing cash and to carry out other financial
and non financial transactions without the need
to actually visit their bank branches.
 WITHDRAWAL IN ATMS
FOR SAVINGS BANK ACCOUNT HOLDERS

BANK OWN ATMS

Minimum five transactions a month free of
charge (both financial & non financial)

OTHER BANK ATMS

IN SIX METROS OTHER PLACES

In Mumbai, Delhi, Kolkata, Chennai In other places, minimum five
Bengaluru & Hyderabad, minimum transactions free of charge in a
three transactions free of charge in month (both financial & non
a month (both financial & non financial)
financial)
NOTE:  Banks can permit beyond these specified minimum transactions also.
 If banks want to impose transaction charges beyond these minimum numbers,
maximum charge prescribed per each transaction is Rs. 20 + service tax.
 RBI GUIDELINES ON SERVICE AT ATMs
 Banks should resolve within 7 working days of complaint
 If not, banks should pay Rs 100/- per day for delay beyond 7 days
(But customer should complain within 30 days of transaction)
 If customer is not satisfied, one can approach banking ombudsman
GUIDELINES OF RBI ON ATMs
 Message of non availability of cash to be displayed on screen or in any other way, before
undertaking transaction
 ATM ID to be displayed prominently
 Forms for lodging complaints to be available in ATM premises
 Helpline numbers to be available in the premises
 PIN entry for each transaction
 Time out sessions for all screens / stages of transaction based on normal time required
 Advertisement campaign to educate the masses to avoid frauds
 BROWN LABEL / WHITE LABEL ATMs

 We all know, ATMs were initially installed in branch premises of banks. They are called Onsite
ATMs owned by banks

 As these services are required extensively at many places, banks started opening Offsite ATMs
away from the bank branches

ATMs

ONSITE ATMs OFFSITE ATMs

NORMALLY OWNED
BY BANKS IN OWNED BY BANKS PART OF THE ESTABLISHED BY
THE BANK PREMISES AWAY FROM BANK SERVICES FINANCIAL
PREMISES OUTSOURCED, INSTITUTIONS/
STILL WORK WITH NBFCs
BRAND NAME OF
BANKS
 THREE CATEGORIES OF OFFSITE ATMs
(ALSO CALLED STANDALONE ATMs)
1 2 3
MACHINE MACHINE MACHINE
LEASING LEASING LEASING
SECURITY SECURITY SECURITY
CONNECTIVITY CONNECTIVITY CONNECTIVITY
CASH MANAGEMENT CASH MANAGEMENT CASH MANAGEMENT
BRAND NAME BRAND NAME BRAND NAME

ALL THE SERVICES SERVICES IN RED THESE ARE

MAINTAINED BY OUTSOURCED & ESTABLISHED BY
BANKS GREEN BY BANKS NBFCs/FIs

OFFSITE ATMs BROWN LABEL ATMs WHITE LABEL ATMs

OWNED BY BANKS NOT OWNED BY BANKS BUT BRANDING BANKS HAS GOT NO ROLE
AND CONNECTIVITY IS BY BANK IN THESE ATMs
 WHITE LABEL ATMs

 RBI permitted NBFCs/FIs to establish ATMs with their own brand name. These are known as White

Label ATMs

 TCPS, the wholly owned subsidiary of Tata Communications, was the first to get licence

 They have to open a minimum of 5000 ATMs per year for three years

 The first WLA opened at Chandrapada, near Mumbai

 Subsequently, Muthoot Finance, Srei Infrastructure and some other firms awarded licences by RBI

 For every two ATM’s in Tier III to Tier VI centers, they have to open one ATM in Tier I & II Centers
 CLASSIFICATION OF CENTRES BASED
ON POPULATION

CLASSIFICATION POPULATION (AS POPULATION-GROUP WISE CLASSIFICATION OF

OF CENTRES PER 2001 CENSUS) CENTRES

Tier 1 1,00,000 and above

Rural Centre Population upto 9,999
Tier 2 50,000 to 99,999
Semi-urban centre from 10,000 to 99,999
Tier 3 20,000 to 49,999

Tier 4 10,000 to 19,999 from 1,00,000 to

Urban centre
9,99,999
Tier 5 5,000 to 9,999

Tier 6 Less than 5000 Metropolitan centre 10,00,000 and above

 BANK ACCOUNTS FOR NRIs

 NRO account (Non Resident Ordinary rupee account)

 NRE account (Non Resident External rupee account)

 FCNR(B) account (Foreign Currency Non Resident (Bank)

account)

WHO IS NRI (NON RESIDENT INDIAN)?

An Indian citizen, who is ordinarily
residing outside India and holds an
Indian passport.
 1. NRO ACCOUNT (NON RESIDENT
ORDINARY RUPEE ACCOUNT)

 Account will be in Indian rupees and with banks authorized by RBI.

 This account can also be maintained with the post offices in India
 Can be opened jointly with resident Indian
 Mainly used for local transactions in India
 If a citizen becomes an NRI, his existing account becomes NRO account
 Can be in the form of SA / CA / RD / FD
 Interest rates are within the purview of banks
 Income tax will be deducted as per the rules
 There is limit on the repatriation of funds. (Maximum of $ 1 million per year)
 2. NRE ACCOUNTS ( NON RESIDENT
EXTERNAL RUPEE ACCOUNTS)
 Account will be in Indian rupees and with banks authorized by RBI.
 Can be opened as joint account with another NRI.
 Can also be opened by the NRI with resident close relative, who is eligible to
operate the account as a Power of Attorney holder on “former or survivor basis”.
 Amount to be deposited in this account is earned on foreign land only.
 Can be in the form of SA / CA / RD / FD
 Minimum tenure of term deposits will be 1 year.
 Banks are free to determine interest rates. However, the interest rates shall not be
higher than the comparable domestic rupee deposits
 No income tax will be deducted in India.
 Fully repatriable to foreign countries.
3. FCNR(B) ACCOUNTS (FOREIGN CURRENCY
NON RESIDENT (BANK) ACCOUNTS)

 Only fixed deposit accounts can be opened with banks authorized by RBI.
 Can be opened as joint account with another NRI.
 Can also be opened by the NRI with resident close relative, who is eligible to
operate the account as a Power of Attorney holder on “former or survivor
basis”.
 Minimum term 1 year and maximum term 5 years.
 Can be maintained in approved foreign currencies.
 Rates of interest will be as per the RBI guidelines.
 No income tax will be deducted in India.
 Fully repatriable to foreign countries.
 LIBOR
 It is London Interbank Offered Rate
 It is the primary benchmark, for short
term interest rates around the world
 Many financial institutions set their
interest rates relative to it.
DTAA
 It is Double Taxation Avoidance
Agreement
 It is an agreement between two countries
with an objective to avoid taxation of the
same income in both the countries.
 India has got DTAA with several countries
 For availing DTAA benefit, the NRI has to
submit “Tax Residency Certificate” (TRC)
to the bank annually.
 POINT OF SALE TERMINALS (POS TERMINALS)
 It is a terminal at a store, where customer makes purchases
using debit card / credit card / prepaid card.

 Card needs to be swiped and the data embedded in the card is

electronically validated and gets authorized, if it is in order.

 It is the payment gateway of the merchant acquirer.

 The merchant establishment is required to hold an operative

account with the acquirer bank to avail this service.

 POS terminals are good source of “Non Interest Income” for

banks.

 New generation private sector banks are ahead in POS

terminals.
 IFSC CODE
 It is Indian Financial System Code.

 It is alpha – numeric code which identifies any branch under the

NEFT system

 It is 11 digit code
4 ALPHA CHARACTERS 0 LAST SIX DIGITS

Bank representative branch

 IFSC code is a must for money transfer through NEFT / RTGS.

HOW DO THE BANKS TRANSFER MONEY ELECTRONICALLY

NEFT … National Electronic Funds Transfer (For small amounts)
RTGS … Real Time Gross Settlement (For large amounts)
 NEFT – NATIONAL ELECTRONIC FUNDS TRANSFER

 It is a nation wise payment system facilitating one to one funds transfer.

 Individuals, firms and corporates can electronically transfer funds.
 Beneficiary must have an account with a NEFT enabled bank branch.
 Remitter (sender) can send maximum amount of Rs. 50,000/- per transaction (cash based
transaction), if he does not have any bank account.
 NEFT also facilitates one-way cross border transfer of funds to Nepal.
• Beneficiary need not have an account in Nepal.
• He will receive in Nepalese rupee.
• Limit is Rs. 50,000/- per each transaction.
 No limit for minimum or maximum amount of transfer. ( However, for amounts of Rs.2 Lakh and
above, RTGS is used.
 It works on the system of Deferred Net Settlement (DNS) basis, which settles transactions in
batches.
 NEFT operates on hourly basis
 No charges for inward transactions and there will be charges for outward transactions.
 RTGS… REAL TIME GROSS SETTLEMENT
 It is real time settlement without netting on an instruction by instruction basis.
 Funds settlement takes place in the books of RBI, hence it is final and irrevocable.
 Beneficiary branch should deposit in the beneficiary account within 30 minutes of
receiving the message.
 RTGS window is open from 9.00 hrs to 16.30 hrs on weekdays.
And 9.00 hrs to 14.00 hrs on Saturdays.
 Meant for high value transactions
 Minimum limit … 2 lakhs
 Maximum … no limit
 Inward transaction … no charges
 Outward transactions
 Rs. 2 lakh to Rs. 5 lakh … not exceeding Rs. 30 per transaction
 Above Rs. 5 lakh … not exceeding Rs. 55 per transaction
STANDING INSTRUCTION
 It is an instruction / order a bank account
holder gives to his or her bank to pay a set
amount at regular intervals to another account
(Payee’s account)
 It facilitates periodic scheduled payments for
funds transfer
 It is basically a remittance service
STANDING INSTRUCTION
 Salary payments
 Payments of bills / school fee / insurance
premiums
 Repayment of loan / hire purchase
installments
 Payment of safe deposit vault fee
 Inter-account transfer of funds
 Inter-account transfer of FD interest
 DEBIT CARDS & CREDIT CARDS
SIMILARITIES
 Both are plastic cards, that work on some financial platforms like Visa,

MasterCard, RuPay etc…

 They are the instruments to facilitate financial transactions, without the

need for carrying cash.

 Can facilitate transactions at millions of outlets across the world.

 May or may not have annual fee for both credit and debit cards.

 Liquidity is assured on 24x7 basis.

 DEBIT CARDS & CREDIT CARDS
MAJOR DIFFERENCES
DEBIT CARD
 Spending your own money
 Will be reflected in the monthly
statement of bank accounts
 Connected to the bank account
 Control over expenditure is
possible
CREDIT CARD
 Borrowing from a bank or financial
institution
 It is categorized under revolving credit
 Monthly bills will be generated which
should be repaid within the grace period
 Need not be connected to the bank
account
 May lead to frivolous spending
 Very high interest, if not repaid within
stipulated time
 VISA AND MASTERCARD
 VISA (Visa International Service Association) and MasterCard are Payment processing institutions and
several financial institutions use these platforms to facilitate services through Debit cards and Credit
cards and for other electronic transactions across the world.

 Both VISA and MASTERCARD are accepted at several merchant outlets.

 Both are American based financial services companies with headquarters at New York (MasterCard) and
California (Visa).

 The other processing companies are American Express, Discover etc.

 IS ANY PLATFORM DEVELOPED BY INDIA?
YES, NPCI DEVELOPED RUPAY PLATFORM

WHAT IS NPCI? MISSION OF NPCI

 It is National Payments Corporation of India.  Consolidating and integrating multiple payment

 It is incorporated in December 2008 (Under section systems.

25 of the Companies Act)  Developing uniform and standard business

 Started functioning from April 2009 (From RBI processes for all retail payment systems.

premises in Mumbai)  Facilitating affordable payment mechanism to

 Authorised capital … Rs 300 crores benefit the common man across the country.

 Paid up capital … Rs 100 crores  Developing any time, anywhere, payment services
which are simple, safe, secure and cost effective.
 At present, there are 10 core promoter banks

 Headquarters is in Mumbai
 PRODUCTS & SERVICES OF NPCI

1 2 3
National Financial Automated Clearing Immediate Payment
Switch (NFS) House Service (IMPS)

4 5
Cheque Truncation
Aadhaar Payment 6
Bridge System RuPay Card
System (CTS)
(APBS)
WHAT IS RUPAY CARD?

 It is the card indigenously developed by NPCI.

 It is domestic version for electronic payments.

 RuPay stands for Rupee Payments.

 Logo consists of orange and green arrows.

 RuPay debit cards already launched in March 2012.

 They became popularized with PMJDY scheme during

2014-15.
 NEGOTIABLE INSTRUMENTS ACT, 1881

 This was enacted in 1881 during the British Rule.

 Several amendments took place during the intervening period.

“These are the instruments used for making payments either for personal reasons or in a
business transaction and freely transferable from one person to another”

 As per section 13 of the Negotiable Instruments Act

“ Negotiable Instrument means Promissory Note, Bill of

Exchange or Cheque either to Order or to Bearer”
HENCE, SOME FEATURES OF THE NEGOTIABLE INSTRUMENTS ARE

 These are written documents.

 Transferable from one person to another merely by delivery in case of “bearer

instrument” and transferable by endorsement in case of “order instrument”

 The owner is the “bonafide holder for value”.

 No prior notice is required before transferring the instrument.

BILL OF EXCHANGE

It is a written, unconditional order by the

Drawer to the Drawee to pay money to or the
order of Payee
 FEATURES OF BILL OF EXCHANGE
 It must be in writing and duly signed by its drawer.
THE FEATURES OF DEMAND DRAFT
 It should contain an order to pay.

 The order or instruction must be unconditional.

DELHI  The sum Payable must be certain but not vague.

 The parties to the transaction must be certain.t

NOTE
IIT, Madras is refered to as IIT, Chennai with
a view to indicate the place
CHENNAI
 PROMISSORY NOTE
CREDITOR
 A promissory note is unconditional

X commitment made in writing and signed by

a debtor to make payment to a specified
person or to the order within a specified
X GAVE RS. Y WILL GIVE
period.
1,00,000 TO Y PROMISSORY NOTE
 It is always in writing. No verbal promise is
accepted.
Y  It is drawn for specified duration for
specified sum of money.
DEBTOR
 It should be stamped adequately.
 BILL OF EXCHANGE vs PROMISSORY NOTE

PROMISSORY NOTE BILL OF EXCHANGE

 This is unconditional promise to pay.  This is unconditional order to pay.

 There are two parties involved; the  It involves three parties; the drawer, the
debtor and the creditor. drawee, and the payee.

 It is drawn by the debtor.  It is drawn by the creditor.

Instruments Under NI Act 1881

• Bill of Exchange
• Promissory Note
• Cheque
 CHEQUE
 It contains unconditional order to pay a certain
sum of money.
 It is drawn by the drawer.
 It is drawn upon a specified banker.
 It is payable on demand to a specific person or
his order or to the bearer of the instrument.
 Cheque should be properly dated.
 It should be signed by the maker/drawer
CHEQUE • There are three parties in the cheque
transaction
“An unconditional order in writing drawn  Drawer
by a customer of a bank, requesting
 Drawee
them (the bank) to pay on presentation
 Payee
(on demand) a specified sum as
mentioned there in, to a person named in • If it is self cheque, payee will be drawer
only.
the instrument or to the bearer or to the
order as specified.”
 CHEQUE ISSUED TO FRIEND SELF CHEQUE

DRAWER DRAWEE DRAWER PAYEE

Bank Branch of X

X is native of Delhi SBI, Delhi X is native of Delhi

Y is native of Chennai
SBI, Delhi

Bank Branch of Y
SBI, Chennai
PAYEE DRAWEE
 NOMENCLATURE ASSOCIATED WITH CHEQUES

Order cheque A cheque payable to a particular person or his order.

Bearer cheque A cheque payable to a person who so ever bears.

Blank cheque Except signature, all other columns are blank.

Stale cheque Which is more than three months old.

Mutilated cheque The cheque is torn into two or more pieces.

Post-dated cheque A cheque which bears a date later than the date of issue.

Open cheque Cheque which has not been crossed.

Crossed cheque Cheque which carries two parallel transverse lines across the face of the cheque.
 MICR CODE ON CHEQUES
 It is Magnetic Ink Character Recognition (MICR).
 It is a 9 digit code.
 First three digits … city / district
 Next three digits … name of bank
 Last three digits … location of branch / branch name

6 9 5 2 4 0 0 0 2

TRIVANDRUM HDFC BRANCH

 MICR code is essential for Electronic Clearing Service (ECS)

(Electronic Clearing Service (ECS) is the electronic mode of payment / receipt for transaction
that is repetitive and periodic in nature).
 MATERIAL ALTERATION OF CHEQUES

“ Material Alteration “ is the alteration, that alters substantially the operation of the
instrument.

 Alteration of the date

 Alteration of the sum payable

 Alteration of the name of the payee

 Alteration of the crossing marks

Sometimes, the cheque with material alteration will be dishonored.

However, FULL SIGNATURE is essential after material alteration.

 WHY CROSSING OF CHEQUE IS NEEDED?
 This is to prevent possibility of the cheque to fall into the hands of wrong or
unauthorized parties. Hence crossing is required.
 Crossing is applicable only for cheques.

TYPES OF CROSSING AS PER NI ACT

General crossing
(Direction to the bank not to pay across the counter in cash, but should be paid to the account holder only)

Special crossing “Non – Negotiable”

(Cheques with special crossing shall be considered to be crossed to that banker only)

HOWEVER, CROSSING WITH BECAME CONVENTIONAL, THOUGH IT IS NOT

MENTIONED IN THE NI ACT.
 SPECIAL CIRCUMSTANCES WHERE
Banks can withheld payments
 DEATH OF THE DRAWER
… If the drawer dies before the payment is made.
 INSOLVENT DRAWERS
… When a customer is declared insolvent by the court of law, the rights of the
account vests with the official assignee.
 COMPANY IN LIQUIDATION
… As the rights of the account rests with the official liquidator, they can not be DO YOU KNOW?
honoured. Banks are under statutory obligation
 INSANE CUSTOMERS to honour the customers cheques
provided…
… Also called lunatics due to mental derangement. An insane customer cannot
understand what is right or what is wrong. The Payment should be made as  There are sufficient funds with
per the orders of the court. Insanity should be certified by the registered the drawer.
medical practitioner.  Funds are meant for payment of
such cheque.
 COUNTERMANDING
 There is proper demand to make
… After receiving stop payment instruction by the bank from the drawer. the payment.

BOUNCING OF CHEQUES
 Sections 138 to 142 in the NI Act,
1881 deals with the cases of
bouncing of cheques.
 When the cheque is returned
unpaid due to insufficient funds
or due to stop payment
instruction, the drawer deemed to
have committed criminal liability.
DO YOU KNOW?
 If amount written on the cheque in words
and figures differs, amount written in
words should be paid irrespective of
whether it is less or more.
 When cheques are drawn by arrested
persons, under trials or convicted, they
should be honoured
MORE ABOUT BOUNCING OF CHEQUES
 Cheque should be presented for encashment within validity.
 After receiving cheque return memo from the bank due to
“insufficiency of funds”, the payee should give notice demanding
payment to the drawer within 30 days.
 The drawer can make the payment within 15 days to the payee
after receiving the notice (In some articles, this period is
mentioned as 30 days).
 If it is not complied, the complaint is to be made within one
month of the cause of action arising.
 No court inferior to that of Metropolitan Magistrate or I Class
Judicial Magistrate will try the offence.
 Punishable with imprisonment for a term which may extend up
to one year or with fine which may amount to twice the amount
of cheque or both.
 DEMAND DRAFT
 It is a Bill of Exchange drawn by a bank
on another bank or by itself to its other
CHEQUE DEMAND DRAFT
 Drawer is individual  Drawer is normally a
branch to pay to the third party i.e. payee. account holder scheduled bank

 It is not mentioned in the Negotiable  No certainty of payment  Payment is certain

Instruments Act.  Drawer can stop it by  No one can stop it
issuing order
 Due to its nature, it is classified under Bill
of Exchange.  Defined in NI Act, 1881  Not defined in NI Act,
1881
 Demand drafts along with cheques are
commonly used by the customers of banks.
 CTS - 2010

 It is Cheque Truncation System – 2010

 Truncation is the process of stopping the flow of the physical cheque.
 The physical instrument will be truncated at some point en route to the drawee
branch and it will be verified digitally.
 Hence the need to move the cheque physically will be eliminated.
 As a pilot project, it was first introduced in NCR.
CTS CHEQUES
 CHEQUE ISSUED TO FRIEND

DRAWER DRAWEE

Bank Branch of X

X is native of Delhi SBI, Delhi

Y is native of Chennai

Bank Branch of Y
SBI, Chennai
PAYEE
 The images captured at the presenting
bank or at the designated point would be
transmitted to the drawee branch with
digital signature.
 Each image will carry digital signature
apart from endorsement of the presenting
branch.
 Entire process will involve image based
clearance in stead of physical clearance.
 Faster clearing cycle.
 Better reconciliation / verification.
 Better customer service.
 Minimise transaction costs.
 Additional security features.
 Fear of loss of cheque en route is not
there.
 Frauds can be eliminated.
 INTEREST IN %
LET US
RECAPITULATE…
12 BULK DEPOSITS
11

10
FIXED DEPOSITS
9

8
Average Cost of Funds 7 RECURRING DEPOSITS
6

4 SAVINGS ACCOUNT DEPOSITS

The numbers on the vertical 3
lines show the rates of
2
interest CURRENT ACCOUNT DEPOSITS
1

DEPOSITS

COST OF FUNDS

LIABILITIES
 INTEREST IN %
18
LET US PERSONAL LOANS
17
RECAPITULATE… 16
15

14
13
CORPORATE LOANS

12 MORTGAGE LOANS
11
Average yield HOUSE LOANS
10
9
8
7
6
All the figures are
5 approximate and taken
4 for the purpose of
3 explanation
2
1

LOANS AND ADVANCES

YIELD/INCOME
ASSETS
LET US CASE – 1 18

RECAPITULATE… VIABLE BANKING

17
16
Note OPERATIONS 15

The given 14

figures are only 13 AVERAGE YIELD ON

12 ADVANCES 9.8%
approximations 12
11
11
10 10
9 9
AVERAGE COST OF
8 8 NET INTEREST
FUNDS 6.8%
7 7 MARGIN (NIM)
6 6 3%
5 5
4 4
3 3
The numbers on the vertical All the figures are approximate
2 2
lines show the rates of and taken for the purpose of
interest 1 1 explanation

INTEREST ON DEPOSITS INTEREST ON LOANS

(in %) AND ADVANCES (in %)
COST OF FUNDS YIELD/INCOME
LET US 18

RECAPITULATE… CASE – 2 17
16
Note STRAINED BANKING 15

The given OPERATIONS 14

13 AVERAGE YIELD ON
figures are only ADVANCES 9.8%
12 12
approximations 11 11

10 10
9 9
AVERAGE COST OF 8
NET INTEREST
8
FUNDS 7.3% MARGIN (NIM)
7 7
2.5%
6 6
5 5
4 4
3 3
The numbers on the vertical All the figures are
lines show the rates of 2 2 approximate and taken for the
interest 1 1 purpose of explanation

INTEREST ON DEPOSITS INTEREST ON LOANS

(in %) AND ADVANCES (in %)
COST OF FUNDS YIELD/INCOME
HOW THE MONEY FLOWS IN THE
BANKING SYSTEM…
PRIORITY
SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS

+
 INTEREST IN %
18
PERSONAL LOANS
17
16
15

LOANS AND ADVANCES

14
13
CORPORATE LOANS

12 MORTGAGE LOANS
Loans and advances are given by banks for 11
HOUSE LOANS
various purposes such as 10
Average yield
 Home loans 9
 Personal loans 8

 Car loans 7

 Loans against securities 6

All the figures are
 Agriculture loans 5 approximate and taken
 Corporate loans 4 for the purpose of
 Mortgage loans 3 explanation
2
1

LOANS AND ADVANCES

YIELD/INCOME
ASSETS
 INTEREST IN %
WHAT IS THE INDEX TO BE FOLLOWED BY 18
PERSONAL LOANS
BANKS FOR LOANS? 17
16
…IT IS CALLED THE BASE RATE 15

14
“IT IS THE INTEREST RATE BELOW WHICH SCHEDULED 13
CORPORATE LOANS
COMMERCIAL BANKS WILL LEND NO LOANS TO ITS
12 MORTGAGE LOANS
CUSTOMERS”
11
HOUSE LOANS
10
…Hence it is the floor rate of interest Average yield
9
8
HISTORICAL PERSPECTIVE 7

 From 2003, BPLR (Benchmark Prime Lending 6

All the figures are
5
Rate) was in operation. approximate and taken
4 for the purpose of
 It fell short of transparency.
3 explanation
 Ultimately, it resulted in one borrower getting 2
loan at lower interest than the other. 1

 It led to the review of the policy by RBI.

LOANS AND ADVANCES
YIELD/INCOME
ASSETS
 INTEREST IN %
18
PERSONAL LOANS
17
16
HISTORICAL PERSPECTIVE (Contd…) 15

 In view of the above, RBI constituted a working 14

CORPORATE LOANS
group under the Chairmanship of Shri Deepak 13

Mohanty. Base Rate 12 MORTGAGE LOANS

11
HOUSE LOANS
10
 The committee suggested changes to make Average yield 9
credit pricing more transparent and submitted 8
report in October 2009. 7
6
All the figures are
 Hence, Base rate came into effect replacing BPLR 5 approximate and taken
4 for the purpose of
w.e.f. 1st July, 2010.
3 explanation
2
 Now all categories of loans are priced with 1
reference to base rate only, except some
LOANS AND ADVANCES
exemptions.
YIELD/INCOME
ASSETS
 INTEREST IN %
18
PERSONAL LOANS
17

THE EXEMPTIONS 16
15
There are three primary exemptions. 14
13
CORPORATE LOANS

Base Rate 12 MORTGAGE LOANS

11
1. Loans granted under DRI (Differential HOUSE LOANS
10
Rate of Interest) scheme. Average yield 9
8
2. Loans to own employees of the bank, 7
including retired employees. 6
All the figures are
5 approximate and taken
4 for the purpose of
3. Loans to depositors of the bank against 3 explanation
their own deposits. 2
1

LOANS AND ADVANCES

YIELD/INCOME
ASSETS
 WHAT ARE DRI LOANS?

 Differential Rate of Interest (DRI) is a lending programme launched by GOI in 1972.

 All the Scheduled Commercial Banks (except RRBs) have to lend 1% of the total advances of the

previous year to the “poorest among the poor”

 The interest rate will be 4% per annum.

 It is the need based financial assistance to those who intend to take up any productive activity.

 No collateral security. Only hypothecation of assets created should be with the banks.

 Groups covered are SCs/STs, Adivasis engaged in agricultural operations, physically handicapped,

orphanages, women's homes etc.

 WHAT ARE THE OTHER EXEMPTIONS FROM BASE RATE?
In addition to the three primary categories as mentioned previously, the interest rates can go below
base rate for the following categories.
 In case of crop loans up to Rs 3 lakh.
 Interest rates are as specified by the Govt. of India
 Interest subvention is given by Govt. of India to banks.
 In case of rupee export credit advances.
 Interest rates can be below base rate to the extent of interest subvention available.
 For financing projects under Jawaharlal Nehru National Solar Mission (JNNSM).
 Interest rates may be fixed by the Central Govt. from time to time.
 Sometimes refinance is available from Govt. of India.
 Extending Financial assistance for prescribed schemes under
 National scheduled Tribes Finance and Development Corporation (NSTFDC)
 National Handicapped Finance and Development Corporation (NHFDC)
 National Safai Karamcharis Finance & Development Corporation (NSKFDC)

NOTE : The above exemptions may change from time to time depending on the Govt’.s policy
 GUIDELINES GIVEN BY RBI
WITH REGARD TO LOANS AND ADVANCES AND BASE RATE

 Base rate is to be reviewed at least once in a quarter with the approval of the Board or Asset
Liability Management Committee (ALMC) as per the bank’s practice.

 Banks should convey the change in base rates to general public through appropriate channels.

 Banks can choose fixed or floating rates.

 Banks were advised to calculate interest on monthly basis except for loans given for agricultural
purposes, where interest is calculated normally on annual basis.
 Banks are free to formulate a transparent policy for charging penal interest.
 No foreclosure charges/prepayment penalties, when the loan is on floating interest rate basis.
 Banks are free to determine service charges for any type of transaction.
 WHO IS THE REGULATOR FOR HOUSING
FINANCE COMPANIES?
 It was established after C. Rangarajan committee report.
 It came into existence under the National Housing Bank Act, 1987, and started functioning from 9th July,
1988.
 It is fully owned by RBI.
 Headquarters is in New Delhi.
 Vision is “Promoting inclusive expansion with stability in
housing finance market”.
 Its functions are
• Regulation of HFCs.
• Refinance to different primary lenders.
• Promotion and development of HFCs.
 HFCs can raise public deposits, but with the approval from NHB.
 Public deposits can be accepted up to a maximum duration of 10 years
as per the instructions given by NHB in August 2013.

NHB RESIDEX
 It is the Residential Index for
tracking prices of residential
properties in India.
 Started in July 2007.
 2007 is taken as the base year
with index 100.
 Initially, it was started in 26 cities
across the country.
REVERSE MORTGAGE LOAN
 It is primarily intended for senior citizens (60+ age).
 Married couples are also eligible. One should be (60+age)
and other should not be below 55 years of age.
 House owned by the senior citizen will be mortgaged to
the bank/lender and the lender will pay money to the
senior citizen on monthly basis or on agreed terms.
 Max. period is 20 years normally.
 The loan is not required to be serviced as long as the
borrower as well as spouse is alive or in occupation.
 After the borrower‘s death, the loan will be repaid through
sale of property and any surplus will be paid to the heirs.
 WHAT IS THE DIFFERENCE BETWEEN CASH CREDIT
ACCOUNT & OVERDRAFT ACCOUNT?
CC A/C … CASH CREDIT ACCOUNT
OD A/C … OVERDRAFT ACCOUNT

SIMILARITIES OF THESE TWO ACCOUNTS

 A borrower can withdraw funds as and when needed, upto the credit limit given by the banker.
 Borrower can repay the amount as per the terms and conditions, and the interest will be charged over
the amount borrowed only.
(If the credit limit is Rs. 20 lakhs, and the borrower withdraws only Rs. 10 lakhs, he is required to pay
interest only for Rs. 10 lakhs up to the date of repayment)
 It gives flexibility to the borrower.

DIFFERENCES BETWEEN THESE TWO ACCOUNTS

 The distinction between an Overdraft and a Cash Credit is in the nature of the security.
 When the advance is secured by the pledge/hypothecation of goods or produce, it is treated as a Cash
Credit Account.
OVERDRAFT LIMIT IS RS. 10 LAKH

Rs. 10 Lakh
Rs. 10 Lakh
Rs. 8.5 Lakh
Rs. 8 Lakh

Rs. 5 Lakh
Rs. 4 Lakh

0
1 2 3 4 5 6 7 8 9 10 11 12
(TIME IN MONTHS)

OVERDRAFT FACILITY GIVEN BY SBI TO FIRM XXX

 DIFFERENCE BETWEEN CC A/C & OD A/C

CC A/C OD A/C

PLEDGE/HYPOTHECATION OF SECURED AGAINST PLEDGE,

GOODS OR PRODUCE MORTGAGE OR HYPOTHECATION
OF SECURITIES ACCEPTABLE TO
THE BANK.

( IF THE OD A/C IS
OPERATED, WITHOUT
KEY CASH OPEN CASH SECURITY, IT IS CALLED
CREDIT A/C CREDIT A/C CLEAN OVERDRAFT
FACILITY)

POSSESSION GOODS /
OF GOODS COMMODITIES
WITH THE WILL BE WITH
BANKS THE BORROWER
 FIXED AND FLOATING INTEREST RATES

FIXED INTEREST FLOATING INTEREST

 It is normally fixed as Base Rate +

 Interest is fixed for the whole
Certain %
tenure of the loan period (15
to 20 years)  As the base rate changes quite
frequently, the floating interest rate
 Normally, interest will be
changes.
slightly higher than the floating
interest as it is difficult to  Normally, banks vary the repayment

analyse the economic situation period by keeping the EMI constant.

for the entire loan period.

 ILLUSTRATION TO EXPLAIN
TERMINOLOGY OF LOANS
SPREADING PAYMENTS OVER
MULTIPLE PERIODS
AMOUNT TO BE PAID EVERY
… AMORTIZATION
MONTH
… EMI

0
10 20 30 40 50 60 70 80 90 100 110 120 months

PERIOD NOT REQUIRED TO PAY BACK PROCESS OF PAYING BACK EVERY

… MORATORIUM MONTH … SERVICING OF LOAN

FIRM XXX TOOK TERM LOAN FROM SBI

 WHAT IS EMI

 It is Equated Monthly Installment.

 It is the fixed amount paid by the borrower to the lender on the specified date every month.

 EMI is normally constant.

 It includes both interest and principal.

 During the initial years, interest will be more and principal will be less. (If the EMI is Rs.10,000,
interest may be Rs.9,900 and principal may be Rs.100. During the fag end of the loan period,
this will be reversed).

 The schedule indicating the components of principal and interest is known as Amortization
Schedule.
WHAT IS AMORTIZATION ?
 spreading payments over multiple periods
LET THE MONTHLY EMI BE Rs. 11,000
The Amortization schedule runs like this (in Rs.)
WHAT IS AMORTIZATION SCHEDULE ?
MONTH INTEREST PRINCIPAL BALANCE
 We know that EMI is fixed every month. 1 10000 1000 999000
 The schedule showing the components of 2 9990 1010 997990
3 9979 1021 996969
interest and principal, which vary is known as
4 9969 1031 995938
Amortization Schedule

EMI INTEREST + PRINCIPAL

240 100 10900 0

FIXED BOTH VARY EVERY MONTH

 LESSOR AND LESSEE

LESSOR LANDLORD COMPANY

LAND/REAL TRADEMARK/
ESTATE BRAND NAME
LESSEE TENANT FRANCHISEE

 Lessor / Landlord is the rightful owner of the property.

 By making onetime / periodic payments, the Lessee got the right to use it.

 The lease agreement is for a specified period only.

 Lease agreement guarantees the Lessee use of asset and the Lessor the regular payment.
 BAILOR AND BAILEE

BAILOR CUSTOMER BORROWER

SAFE DEPOSIT COLLATERAL
LOCKER SECURITY
BAILEE BANK BANK

Bailment is the contractual transfer of possession of asset or property for a specific objective

 Ownership lies with the Bailor

 Bailee cannot use the property

 Bailee is responsible for safe keeping and eventual return.

 WHAT IS COLLATERAL
SECURITY?

 Fixed property or other assets the borrower offers to the lender to secure a
loan.
LENDER
 Since the lender can recoup losses in case the borrower fails to repay, the
interest rates will be less in comparison to unsecured loans. COLLATERAL
SECURITY
 Hence, the interest rates on personal loans, interest rates on the balances
BORROWER
of credit card transactions beyond the grace period are more because of no
collateral security.

 If there is no collateral security, the loan is known as unsecured loan or

signature loan
 DIFFERENCE BETWEEN
PLEDGE MORTGAGE HYPOTHECATION
HOW THE MONEY FLOWS IN THE
BANKING SYSTEM…
PART OF PRIORITY
MONETARY POLICY SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS

 Money Market
 Capital Market
+
 Classification of MSMEs as per MSMED Act, 2006

MANUFACTURE/PRODUC-
ACTIVITY OF ENTERPRISE RENDERING OF SERVICES
TION OF GOODS

TYPE OF INVESTMENT PLANT AND MACHINERY EQUIPMENT

MICRO ENTERPRISE UP TO Rs. 25 LAKHS UP TO Rs. 10 LAKHS

MORE THAN Rs. 25 LAKHS MORE THAN Rs. 10 LAKHS

SMALL ENTERPRISE
AND UP TO Rs. 5 CRORES AND UP TO Rs. 2 CRORES

MORE THAN Rs. 5 CRORES MORE THAN Rs. 2 CRORES

MEDIUM ENTERPRISE
AND UP TO Rs. 10 CRORES AND UP TO Rs. 5 CRORES

 The above cost excludes the cost of land and buildings.

 Micro, Small and Medium Enterprises come under priority sector lending.
 WHAT IS PRIORITY SECTOR LENDING?

Priority sector refers to the sectors of the

economy which may not get timely and adequate
credit in the
absence of this special dispensation.

AND

Priority sector lending comprises small value loans to

agriculture and allied sectors, micro, small and medium
enterprises, social infrastructure, renewable energy, housing
for poor people, students and weaker sections
 PRIORITY SECTOR LENDING

HISTORICAL PERSPECTIVE

 Description of the priority sectors first formalized in 1972.

 Initially, agriculture and small scale industries were considered.
 Banks were advised in 1974, to raise share of advances to these sectors to 33 13 % of total
advances by 1979.
 Based on Dr. K.S. Krishnaswamy committee recommendations, banks were advised to
achieve the target of 40% for priority sector lending by 1985.
 However, Committee on Financial Systems (CFS) headed by Mr. M. Narasimham in 1991
had suggested cutting PSL down to 10%. But, Government did not accept these
recommendations.
 Later on, M.V. Nair Committee was appointed in 2011 to examine the existing
classification of priority sector lending.
 PRIORITY SECTOR LENDING
REVISED GUIDELINES

 Distinction between Direct and Indirect Agriculture was

taken away.
 Lending to Agriculture include
 Farm Credit
 Agriculture Infrastructure
 Ancillary Activities
 Priority sector lending now includes
 Agriculture
 Micro, small & medium enterprises
 Export credit
 Education
NEWLY ADDED SECTORS  Housing
 Social infrastructure
 Medium Enterprises
 Renewable energy
 Social Infrastructure  Others
 Renewable Energy
(Contd…)
 PRIORITY SECTOR LENDING GUIDELINES
(…Contd)
DO YOU KNOW?
Marginal Farmer  Within 18% to Agriculture, 8% sub-target is kept for
 Owner / Tenant of agricultural marginal & small farmers, with the time line of
land up to 1 Hectare (2.5 acres)
Small Farmer  7% by March 2016
 Owner / Tenant of agricultural  8% by March 2017
land from 1 to 2 Hectares (2.5 to 5
acres)  7.5% target is kept for micro enterprises with the time
line of
NO CHANGE…
 7% by March 2016
 No change in the target of 10% for
weaker sections.  7.5% by March 2017
 Non-achievement will be assessed on quarterly basis
 Foreign Banks with 20 branches and
above have to ensure 40% target by from 2016-17 onwards.
March 2018.
GNXX CALC X17A EN15  Foreign Banks with less than 20 branches will move to
40% target by 2019-20.
(Contd…)
 PRIORITY SECTOR LENDING GUIDELINES
(…Contd)
LOANS TO INDIVIDUALS FOR HOUSING
FOR CLASSIFICATION UNDER PSL

PREVIOUS NOW
Metropolitan centres with 10 lakh & above population Rs 25 lakh Rs 28 lakh
Other centres with below 10 lakh population Rs 15 lakh Rs 20 lakh

 However, overall cost of the house should not exceed Rs 35 lakh and Rs 25 lakh in
Metropolitan and other centres respectively.
 Loans for repairs to damaged dwelling units of families up to Rs.5 lakh in metropolitan
centres and up to Rs. 2 lakh in other centres also classified under PSL.
OTHER ASPECTS
 Bank loans up to a limit of Rs. 5 crore per borrower for building social
infrastructure like schools, health care centres, drinking water facilities in Tier II
to Tier VI centres.
GNXX CALC X17A EN15
 Bank loans up to a limit of Rs. 15 crore per borrower for building renewable
energy projects like solar based power generation, wind mills etc. For Individual
borrowers the limit is Rs. 10 lakh.
 PRIORITY SECTOR LENDING GUIDELINES
(…Contd)
SUB GROUPS UNDER AGRICULTURE
Farm Credit
 Loans to individual farmers including Self Help Groups (SHGs) or Joint Liability Groups (JLGs) directly
engaged in Agriculture and Allied Activities.
 Allied activities involves dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.
 Loans to farmers up to Rs. 50 lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months.
 Loans to farmers under the Kisan Credit Card Scheme.
Agriculture infrastructure
 Loans for construction of storage facilities to store agriculture produce/products, irrespective of their
location.
 Soil conservation and watershed development, plant tissue culture and agri-biotechnology, seed
production, production of bio-pesticides, bio- fertilizer, and vermicomposting.
For the above loans, an aggregate sanctioned limit of Rs.100 crore per borrower from the banking
system, will apply.
Ancillary activities
 Loans up to Rs.5 crore to co-operative societies of farmers for disposing of the produce of members.
 Loans for Food and Agro-Processing up to an aggregate sanctioned limit of Rs.100 crore per borrower
from the banking system. (Contd…)
 PRIORITY SECTOR LENDING GUIDELINES
(…Contd)
Education
 Loans to individuals for educational purposes including vocational courses up to Rs. 10 lakh irrespective of
the sanctioned amount will be considered as eligible for priority sector.
Others
 Loans not exceeding Rs.50,000 per borrower provided directly by banks to individuals and their SHG/JLG,
provided the individual borrower’s household annual income in rural areas does not exceed Rs. 1,00,000 and
for non-rural areas, it does not exceed Rs. 1,60,000.
Weaker Sections Category
 Small and Marginal Farmers.
 Artisans, village and cottage industries, where individual credit limits do not exceed Rs.1 lakh.
 Beneficiaries of Differential Rate of Interest (DRI) scheme.
 Individual women beneficiaries up to Rs. 1 lakh per borrower.
 Persons with disabilities.
 Minority communities as may be notified by Government of India from time to time.
 Self Help Groups (SHGs)
HOW THE MONEY FLOWS IN THE
BANKING SYSTEM…
PART OF PRIORITY
MONETARY POLICY SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS

 Money Market
 Capital Market
+
 NON PERFORMING ASSETS
“An asset becomes non-performing, when it ceases to
generate income for the bank”

HISTORICAL PERSPECTIVE
 Committee on Financial System (CFS) headed by Shri M. Narasimham was constituted in the year 1991 and the
committee gave recommendations in line with the international practices.
 Subsequently, RBI introduced norms for
 Income recognition
 Asset classification
 Provisioning for advances
 The policy of income recognition should be objective.
 Banks are urged to ensure realistic repayment schedules on the basis of cash flows with borrowers.
 In spite of these precautions taken by banks, NPAs are on the rise either due to reasons beyond their control or
wilful defaulting.
 NON PERFORMING ASSETS

WHAT IS NON PERFORMING ASSET?

Interest and / or installment of principal remain overdue for a period

of more than 90 days in respect of a term loan.

OR

The installment of principal or interest thereon remains overdue for

two crop seasons for short duration crops/one crop season for long
duration crops.

OR

If the cash credit account or overdraft account becomes out of order.

 NON PERFORMING ASSETS
1 2 3
SUBSTANDARD ASSETS DOUBTFUL ASSETS LOSS ASSETS
 Which remained NPA for a  Which remained in the  Where loss has been identified by
period less than or equal to substandard category for a the bank or internal or external
12 months. period of 12 months. auditors or during RBI inspection
 It indicates well defined  It indicates that the but the amount has not been
credit weakness. weaknesses may lead to written off.
 Indicates distinct possibility liquidation.  It indicates continuance as a
that banks may sustain loss. bankable asset is not warranted.

90 Days 12 Months
TIME
0

BORROWER NPA …
STOPPED Doubtful Asset
PAYING BACK
Substandard Asset
 NON PERFORMING ASSETS

REASONS FOR MORE NPAs DURING 2013 TO 2015

1 2
Macroeconomic situation in the country. Increased Interest rates in recent past.

3 4
Aggressive lending by banks during good
System-based identification by SCBs.
times.

5
Some sectors like infrastructure, power 6
etc. are faring badly due to land
Wilful defaulting
acquisition, environment & forest related
issues, coal linkages etc.
 NON PERFORMING ASSETS

WHAT CAN THE BANKS DO?

If the bank feels that there is If the bank feels that there is no
genuine reason genuine reason
1. Restructuring the loan on 1. Referring the matter to Debt Recovery
easy terms with longer time Tribunals (DRTs)
period 2. Referring the matter to Asset
Reconstruction Companies (ARCs) as per
SARFAESI Act, 2002
3. Filing winding up petitions in court of
law
4. By filing criminal cases against the wilful
defaulters
 IF THE BANK FEELS THAT THERE IS GENUINE REASON

1
RESTRUCTURING OF LOANS
 Done through Corporate Debt Restructuring (CDR) mechanism.
 Implemented by RBI from August 2001.
 Aimed at corporates affected by certain genuine internal and external factors.
 It covers only multiple banking accounts, consortium accounts / syndicated loan accounts, where the
outstanding exposure is Rs. 10 crores or more.
 In CDR mechanism, lenders can allow
 Extension of repayment period.
 Reduction in interest rate.
 Moratorium for some period.
 Additional loan
 CDR is approved, if at least 75% of the banks by value of the loan and 60% by number agree to the proposal.
 Restructured loans will go out of the books of NPAs
 The biggest worry is more and more cases are coming up for restructuring, some times without genuine
reasons.
 IF THE BANK FEELS THAT THERE IS NO GENUINE REASON
1 2
DEBT RECOVERY TRIBUNALS
 These are established in various cities under the
“Recovery of Debts Due to Banks and Financial
Institutions (RDDBFI) Act, 1993”.
 Banks or FIs can file an application with DRT to recover
dues from persons / companies.
 As per the Act, the issue is to be settled in 6 months.
 So far, the success rate is around 20% to 30%.
 In addition, DRATs (Debt Recovery Appellate Tribunals)
are located at Allahabad, Chennai, Kolkata, Mumbai &
New Delhi.
ASSET RECONSTRUCTION COMPANIES
 These are formed as per the “Securitization and
Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002”.
 It empowers Banks & FIs to recover NPAs without the
intervention of the court.
 This was brought to circumvent the inefficiency of DRTs.
 Banks have got powers to sell the “declared bad loans.”
 This is applicable for loans with outstanding of Rs. 1 Lakh
and above.
 RBI has power to issue licences to ARCs and Asset
Reconstruction Company (India) Ltd (ARCIL) is the first
ARC established in India.
 It is too early to comment on the success or failure of
ARCs.
 IF THE BANK FEELS THAT THERE IS NO GENUINE REASON

3 4
FILING OF CRIMINAL CASES WINDING UP PETITIONS
 Criminal cases can be filed against the  Winding up petitions can be filed, if the
borrower, if the bank feels that the non- borrower fails to pay back loan, under the
repayment of debt is due to “wilful default.” Companies Act.

 But, it is rarely resorted to by the banks.  “Official liquidator” will be appointed by the

competent authority, if there is genuine reason.

 It is long drawn procedure in courts and has not

given satisfactory results to Banks.

HOW THE MONEY FLOWS IN THE
BANKING SYSTEM…
PART OF PRIORITY
MONETARY POLICY SECTOR
LENDING
LOANS
AND +
ADVANCES
LENDING TO
RESERVES UNDER OTHER
SECTORS
BANK
DEPOSITS
CRR & SLR
AS PER RBI
+
GUIDELINES
INVESTMENTS

 Money Market
 Capital Market
+
 MONETARY POLICY OF RBI

BEFORE GOING INTO THE DETAILS, LET US DIFFERENTIATE BETWEEN…

 FISCAL POLICY
 MONETARY POLICY
 STRUCTURAL DEFICIENCIES IN THE SYSTEM
 FISCAL POLICY

EXPENDITURE

FISCAL DEFICIT
REVENUE
MONETARY POLICY

“TO PRESERVE THE INTRINSIC VALUE

OF RUPEE”
 STRUCTURAL DEFICIENCIES IN
THE SYSTEM
INADEQUATE INFRASTRUCTURE NO PROPER POST-HARVESTING FACILITIES

IMPROPER COLD STORAGE FACILITIES

 MONETARY POLICY

RESERVE POLICY OPEN MARKET

1 RATIOS 2 RATES 3 OPERATIONS
 CRR  REPO  BUYING & SELLING
 SLR  REVERSE REPO OF GOVT.
 MSF SECURITIES (BONDS)
 BANK RATE

“ TO PRESERVE INTRINSIC VALUE OF RUPEE”

“INDIRECTLY TO CONTROL INFLATION”

 MONETARY POLICY
RESERVE
1 RATIOS

CRR
 This is as per section 42(1) of the RBI Act, 1934.
{Amended through RBI (Amendment) Act, 2006}
 Scheduled Banks are required to maintain certain
percentage of NDTL in cash form with a special
account with RBI.
 For securing monetary stability in the country.
 No floor & No ceiling rate.
SLR
 This is as per section 24 of the Banking Regulation
Act, 1949. {This was amended through the Banking
Regulation (Amendment) Act, 2007}
 No floor rate, but the ceiling is 40%.
 To be maintained in cash, gold & approved
securities.
 To hold certain percentage of NDTL in the above
forms as prescribed from time to time.
 CASE - 1
IF CRR IS DECREASED BY 1%

Rs. 80,000 crore

 CASE - 2
IF CRR IS INCREASED BY 1%

Rs. 80,000 crore

 CASE - 1
IF SLR IS DECREASED BY 1%

Rs. 80,000 crore

 CASE - 2
IF SLR IS INCREASED BY 1%

Rs. 80,000 crore

 MONETARY POLICY
POLICY
2 RATES
REPO RATE REVERSE REPO RATE
 This is the rate of interest the RBI charges from its  Banks park additional funds with RBI under LAF.
clients (mostly SCBs) for short term borrowing.
 Basically to adjust liquidity in banks’ day to day  This will be for short term and they also earn
operations. interest.
 Most of the western economies call it “rate of
discount.”  It is kept 100 basis points below Repo rate.
 It is the benchmark rate for inter bank short term  This facility can be used by banks in case of
market (i.e. call money market) in India.
 Banks normally use this route for one day surplus funds and interest rates are low.
borrowing to fulfill short term liquidity crunch.
 Higher the repo rate, costlier the loans will become.
 MONETARY POLICY
POLICY
2 RATES

MARGINAL STANDING FACILITY BANK RATE

 This came into existence with effect from
9th May, 2011.
 This is the last resort for banks at higher rate.
 It is introduced by RBI to reduce volatility in
overnight lending rates in inter-bank market and
to ensure smooth monetary transmission in
financial system.
 Minimum amount which can be accessed through
MSF is Rs. 1 crore and can be in multiples of Rs. 1
crore.
 The interest rate which the RBI charges for its
long term lending is known as bank rate.
 Normally Banks, Financial institutions utilise this
facility.
 This has got direct bearing on the long-term
lending activities of the Financial system.
 This was realigned with MSF from February
2012.
 POLICY RATES
WHERE DO THEY STAND?

MSF
& BANK RATE

REPO + 100 BASIS POINTS

REPO RATE

REPO - 100 BASIS POINTS

REVERSE
REPO RATE

NOW REPO RATE STANDS AS BASIS FOR ALL OTHER POLICY RATES
CASE - 1 MONETARY POLICY
OPEN MARKET
3 OPERATIONS

RBI SELLS BONDS

Government Securities
CASE - 2 MONETARY POLICY
OPEN MARKET
3 OPERATIONS

RBI PURCHASES BONDS

Government Securities
QUANTITATIVE CREDIT QUALITATIVE (SELECTIVE)
CONTROLS CREDIT CONTROLS
1. Policy Rates 1. Margin requirements
 Bank Rate 2. Rationing of credit
 Repo & Reverse Repo Rates 3. Regulation of consumer credit
2. Reserve Ratios 4. Moral suasion
 CRR 5. Direct action
 SLR 6. RBI guidelines
3. Open Market Operations
 PUBLIC SECTOR PRIVATE SECTOR
100 %
“Organisations are privately
owned and are not part of

“Minimum the Govt.”

ownership by
TOTAL OWNERSHIP
51 % Governments / their
IN A COMPANY
Agencies /
Departments”

0%
 DISINVESTMENT OR DIVESTMENT

100 % 100 %

“Ownership by
Divestment by 29 %
Governments /
80 %
their Agencies /
Departments” “Ownership by
TOTAL OWNERSHIP 51 % Governments /
IN A COMPANY their Agencies /
Departments”

0% 0%
BEFORE DIVESTMENT AFTER DIVESTMENT

 Disinvestment pertains to Public Sector Enterprises only.

 PRIVATISATION

100 % 100 % 100 %

80 %
Privatisation by Privatisation by
“Ownership by
selling 50% selling entire
TOTAL OWNERSHIP Governments /
stake
IN A COMPANY their Agencies /
Departments”

“Ownership by
30 % Governments /
their Agencies /
Departments”
“Ownership by
0% Governments /
0% 0%
their Agencies /
BEFORE AFTER AFTER Departments”
PRIVATISATION PRIVATISATION PRIVATISATION
CASE 1 CASE 2
 PRIVATE LIMITED PUBLIC LIMITED
COMPANY COMPANY
 Fully owned by a group of  Here owners are public in addition to
promoters. the promoters.
 All shares are in private hands  Shares are open to anyone to buy
 Shareholders comprise close group and sell.
of friends and relatives.  Majority shareholder runs the
 Can not sell shares to public company.
 It should indicate specifically as  Can transfer shares freely through
“Pvt. Ltd”. stock exchanges.
 No stringent rules  Ltd is enough to indicate “Public Ltd”.
 Stringent rules.
 FUND BASED NON – FUND BASED
SUPPORT SUPPORT
 Vehicle Loans  Performance Guarantee
 Agriculture Loans  Letter of Credit
 Personal Loans  Solvency Certificate
 Credit Card Advances
 Overdraft Accounts
 Cash Credit Accounts
 PERFORMANCE GUARANTEE
OR BANK GUARANTEE

AGENCY
XXX

AGENCY XXX IS THE

CUSTOMER OF SBI

PERFORMANCE
GUARANTEE
 If Agency XXX fails to fulfil the contractual
obligations, CPWD will invoke the Bank Guarantee
 LETTER OF CREDIT

BUYER SELLER
XXX YYY
CHENNAI GOODS SENT NEW DELHI

 If buyer XXX failed to pay back after getting the goods, then Note: This illustration pertains to
YYY can get payment through Letter of Credit. domestic Letter of Credit
 DEAR MONEY BARREN MONEY
“The money which is available at high “Money which is not earning any
interest rates and hence restricts interest”
expenditure by companies.” OR
“Money which is not invested
AND anywhere”
OR
“ Due to restricted money supply, interest
“Money which is kept in a safe deposit
rates will be pushed up. Hence, it is very
locker”
difficult to raise money during this period
of dear money.”
 NARROW BANKING SHADOW BANKING
“The obsession of the banks to invest The activities / services undertaken by
more in risk free securities like Govt. NBFCs / Unincorporated bodies, similar to
securities or Govt. approved securities” the activities undertaken by banks

OR AND
“Tendency of banks to play safe” They are unregulated / loosely regulated
and hence the risks associated with shadow
banking are very high in the financial
system.
More risk comes from
 Finance companies (not in the ambit of RBI)
 Unincorporated bodies
 Collective investment schemes
 UNIVERSAL BANKS DIFFERENTIATED BANKS

 Payment banks
 Small finance banks
(for the first time, in principle
approval is given by RBI for
differentiated banks in 2015)

AND

 They can undertake only limited

“These can undertake multiple financial range / narrow range of activities.
activities under one roof”  They are also called “niche” banks.

Project Finance

Loans & Advances Insurance

Investment Banking Mutual Funds

Credit Cards
DOVISH MONETARY POLICY

MORE MONEY
CIRCULATION

LOWER
INTEREST
RATES
HAWKISH MONETARY POLICY

LESS MONEY IN
CIRCULATION

INCREASE IN
INTEREST
RATES
 HOT MONEY

INDIA

USA

ILLUSTRATION OF
HOT MONEY

MEXICO
 It moves from one country to another
 Moves from low interest rate yielding countries to high interest rate yielding countries
 To maximize interest gain
HARD CURRENCY

 Currency, which is normally expected to be relatively

stable over a shorter period of time
 Widely accepted around the world for payments for
goods and services
 Highly liquid in the foreign exchange market
 They normally belong to politically and economically
stable countries
 TERM LOANS
 House loans
 Vehicle loans
 Personal loans
 Corporate loans
LOAN
(RS)
REVOLVING CREDIT
 Overdraft Account
 Cash Credit Account
 Credit Card Advances
 Kisan Credit Card
LOAN LIMIT IS FIXED
TIME (Months)
GREENFIELD PROJECT BROWNFIELD PROJECT

Starting project afresh, Expanding / modifying /

without any link to the upgrading / extending the

previous project existing project

NOSTRO ACCOUNT VOSTRO ACCOUNT
(OUR) (YOUR)
INDIA UK

EXAMPLE
HSBC maintains
Account for SBI in
London
SBI, DELHI HSBC, LONDON
“It is Nostro Account for SBI” “It is Vostro Account for HSBC”

Used in International Transactions

 SOFT LOAN
 Loans at below market
interest rates
 Longer repayment
period
 Interest holidays
 Moratorium for some
period
(Also known as concessional lending)
HARD LOAN
 Higher than the normal
interest rates
 When the risk element is
more, lenders will charge
more interest from the
borrowers
 Stringent conditions
AND
 Overseas loans in hard
currencies are sometimes
known as Hard loans
 BULLET LOAN TERM LOAN
 Lump sum repayment at  Vehicle loan
the end of the duration  House loan
of the loan  Personal loan
 Entire principal and  Corporate loan
interest to be paid at
once

Crop Loan
 FOREIGN PORTFOLIO INVESTMENTS (FPIs)

USA

 Volatile (unstable)
 Cause asset bubbles, crash in stock
markets
 Sometimes, emerging economies will
be affected due to capital inflows /
capital flight
 FOREIGN DIRECT INVESTMENT (FDI)

USA

SWITZERLAND

 Stable
 Supplements GDP
 Creates employment
 Stays for longer duration
SOUTH KOREA
 TRUSTEE

CUSTOMER X
A

TRUSTEE NOMINEE Y
 He is nominated to manage the
property as per the terms of the  If X dies, bank will discharge their
agreement. liabilities of ‘X’ to ‘Y’. Y will hold in
 He is not the owner of the the capacity of Trustee.
property.
 He is the caretaker of assets.
 LEGAL HEIR

X
If X dies, these buildings will go to
legal heirs… wife & son
(If there is no will written by X)

An individual who receives land /

property from an ancestor who died
 CREDITOR & DEBTOR

CASE - 1 DEPOSIT

CUSTOMER
CUSTOMER X DEPOSITED X
MONEY IN SBI
DEBTOR CREDITOR

CASE - 2 LOAN

CUSTOMER
CUSTOMER Y TAKEN Y
LOAN FROM SBI
CREDITOR DEBTOR
 INSURER & INSURED

Premium
CUSTOMER
X
CUSTOMER X TOOK A LIFE
INSURANCE POLICY FROM LIC
BY PAYING PREMIUM

INSURER INSURED

DO YOU KNOW ABOUT UNDERWRITERS?

 SKIMMING PHISHING
 “Attempt to acquire your
sensitive information like
username, passwords of your
internet banking account or
collecting the details of your
credit card”

 “Illegally copying / stealing

information from the magnetic stripe
credit / debit cards”
 “This is done by a skimmer which is a
small device inserted in the ATM
card slot / at merchant
establishments
 BRIDGE LOAN

“ A short term financing, normally up

to one year, until the company secures

permanent / long term financing or to

tide over current obligations”

 CHANNEL FINANCE

MARUTI SENT 1000

CARS TO DEALERS IN
HYDERABAD

MANESAR PLANT VARUN MOTORS HYDERABAD

“Working capital finance to

CHANNEL FINANCE
dealers having business

relationships with large

companies”
 LEGAL TENDER

50 Paisa Rs. 1 Coin

“Medium of payment recognised by law”

AND Rs. 2 Coin Rs. 10 Coin
“In every country, National Currency is the legal
tender”
 VELOCITY OF MONEY
3rd JAN 8th JAN

1st JAN
KIRANA SHOP BOOK SHOP

31th JAN
22nd JAN 12th JAN

RESTAURANT CLOTH SHOP

“Rate at which money is exchanged from one transaction to another”
 DEBT & EQUITY

X INVESTED
IN EQUITY
PERSON X
X PURCHASED RIL
SHARES FOR RS. 1,000 X IS PART
OWNER IN RIL

Y TAKEN RIL
DEBENTURES WORTH Y INVESTED
RS. 1,000 AT 10% INTEREST IN DEBT
PERSON Y
Y GAVE LOAN
TO RIL
 SECURED LOAN

BORROWER
X
LENDER
LENDER
SBI

COLLATERAL SECURITY

 Some property as collateral REMEMBER!

 Lender will have lien over that property Interest rates will be
less, when the loan is a
 Interest rates will be less
secured one
 UNSECURED LOAN

BORROWER
Y

LENDER
LENDER NO
SBI COLLATERAL
SECURITY

 No collateral
 Risky from the lenders point of view
 Given based on the credit worthiness of the borrower
 Also called signature loan
 Interest rate will be high
 Credit card advances / personal loans are examples of unsecured loans
 INSOLVENCY

PERSON
X CREDITOR 1

OR CREDITOR 2

COMPANY ASSETS LESS

THAN CREDITOR 3
XXX LIABILITIES

TOTAL ASSETS TOTAL LIABILITIES

INSOLVENCY MEANS

“State of being not able to “Condition of having more

pay back OR debts (liabilities) than total
the liabilities” assets”
 BANKRUPTCY

PERSON
X CREDITOR 1

OR CREDITOR 2

COMPANY CREDITOR 3
XXX
TOTAL ASSETS TOTAL LIABILITIES

“LEGAL STATUS OF A PERSON OR A COMPANY THAT

CANNOT REPAY THE DEBTS IT OWES TO THE
CREDITORS”
 LIQUIDATION

“Process by which a company is

COMPANY brought to an end”
XXX
AND

The assets of the company will be

redistributed

AND

Sometimes, undertaken with the

intervention through a court of law
 LIQUIDITY

MOST LIQUID ASSETS OTHER LIQUID ASSETS NON-LIQUID ASSETS

 Some Financial
Instruments
 Gold

SAVINGS BANK ACCOUNT

“The extent of assets which can be

converted into cash form, without
much loss of value.”
 LET US LOOK AT SOME CENTRAL BANKS ACROSS THE WORLD !

WHAT DO YOU KNOW ABOUT BIS?

BIS is headquartered at Basel, Switzerland with representative offices in Hong Kong & Mexico City
 PREAMBLE OF
RESERVE BANK OF INDIA

“To regulate the issue of bank notes and

keeping of reserves with a view to secure
monetary stability in India and generally to
operate the currency and credit system of
the country to its advantage”
 SALIENT POINTS

 Nationalized in 1949
 As per RBI Act, 1934
 Fully owned by Government of India
 Established on April 1, 1935
 Office is on Mint Street, Mumbai
 Initial headquarters is in Calcutta
 Governed by the Central Board of
 Shifted to Mumbai in 1937
Directors
 Originally privately owned
 19 regional offices and 8 sub-offices
 CENTRAL BOARD OF DIRECTORS

OFFICIAL NON - OFFICIAL

 Governor
 4 Deputy  10 Directors from various fields
Governors  4 Directors … one each from
local boards
 2 Govt. officials
 LEGAL FRAMEWORK

IMPORTANT ACTS OTHER ACTS

 RBI Act, 1934
 Public Debt Act, 1944 / Govt.
Securities Act, 2006
 Payment and Settlement Systems
Act, 2007
 Banking Regulation Act, 1949
 SARFAESI Act, 2002
 Negotiable Instruments Act, 1881
 SBI Act, 1955
 Companies Act, 1956 / Companies Act,
2013
 DICGC Act, 1961
 Banking Companies Act, 1970
 Banking Companies Act, 1980
 NABARD Act, 1981
 NHB Act, 1987
 RRBs Act, 1976
 RTGS
NEFT
ECS etc.
NEW BANK OF
INDIA
 MAIN FUNCTIONS

1 2

Regulator and supervisor of

Monetary Authority
the financial system

3 4
Manager of Foreign
Issuer of currency
Exchange
5 6

Banker to the Govt. and

Developmental functions
Scheduled Banks
FULLY OWNED SUBSIDIARIES OF RBI
SHRI R GANDHI
Chairman,
Deputy Governor,
Reserve Bank of India, Mumbai
TRAINING ESTABLISHMENTS OF RBI
AUTONOMOUS INSTITUTIONS
ESTABLISHED BY RBI
NATIONAL INSTITUTE OF BANK
MANAGEMENT (NIBM), PUNE
INDIRA GANDHI INSTITUTE OF DEVELOPMENT RESEARCH, MUMBAI
 INSTITUTE FOR DEVELOPMENT AND
RESEARCH IN BANKING TECHNOLOGY
(IDRBT) - HYDERABAD
 KEY TERMINOLOGY

IPO
 IPO is Initial Public Offering or
Initial Public Offer
 Issue of shares to the public by
FPO
 FPO is Follow on Public Offer
 Process by which a company, already listed
on an exchange, issues new shares to the
investors / the existing shareholders

the promoters of a company for  Used by companies to diversify their equity

base
the first time
 Now, the shares are being
offered in demat form only

DO YOU KNOW BONUS SHARES AND RIGHTS ISSUE?

 KEY TERMINOLOGY
TANGIBLE ASSETS INTANGIBLE ASSETS
 Land  Goodwill
 Building  Brand name
 Car  Creditworthiness
 T.V.  Knowledge
 Mobile Phone  Intellectual capability

(Non-Physical Assets)
(Material Assets)
 KEY TERMINOLOGY
AUTHORISED CAPITAL PAID UP CAPITAL

“Amount of share capital fixed as per “This is the authorized capital of a

the Memorandum of Association as per company that has actually been paid
the Companies Act” up by the shareholders”
This is the limit up to which
company can issue shares.
 KEY TERMINOLOGY

MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION

 It is the supreme public document  It is the secondary document

 It contains objects, powers and scope of  Defines rules and regulations for
the company day to day management
 Contains all the information required for  Rules and regulations for the
the company at the time of incorporation internal governance
 To be registered with ROC  Subordinate to MOA
 KEY TERMINOLOGY

MACROECONOMICS MICROECONOMICS

 It looks at the behavior of the  It looks at the behavior of the

economy “as a whole”
 Main indices are GDP, Inflation,
Unemployment, Investment, Savings
etc.
In Greek, Macro means “Large”
individual units, individual businesses,
firms, individual households etc.
 It looks at the demand / supply
elasticity of individual entities.
In Greek, Micro means “Small”
 KEY TERMINOLOGY

PRIMARY MARKET SECONDARY MARKET

 It refers to buying of equity  Transaction of shares from one

shares when IPO is released by investor to another investor
the company

COMPANY

INVESTOR Stock INVESTOR

X Exchange Y
IPO

INVESTORS
 KEY TERMINOLOGY
EQUITY SHARES PREFERENCE SHARES

 Also called common stock
 It shows ownership of the
company
 Can be issued through IPO / FPO
/ bonus shares / rights issue /
convertible debentures
 Traded in the stock exchanges
 They are also shares, but with
stated dividend and priority over
equity shares
 They are hybrid instruments
 Combines the properties of
debentures as well as equity shares

In case of liquidation, debenture holders, preference shareholders &

equity shareholders will get priority in this order.
 KEY TERMINOLOGY

DEBENTURES BONDS

 Generally issued by companies  Generally issued by Govt. agencies

 May be secured / unsecured and large corporates

 Interest rate is high  Generally secured

 Risk is high  Interest rate is less

 Risk is low

Both are debt instruments. In case of liquidation, bond holders

will get priority over debentures holders.
 KEY TERMINOLOGY
SHADOW BANKING PARA BANKING

 “Credit intermediation involving The financial services undertaken by

activities outside the banking banks such as credit cards, smart
system” cards, mutual funds, primary dealers,
 Like house loans, gold loans, pension funds comes under Para
vehicle finance etc. Banking activities
 Regulation is weak
 Hence risk prone
 These are called NBFCs
 KEY TERMINOLOGY

M1 … NARROW MONEY M3 … BROAD MONEY

Currency and coins in circulation M1 (Narrow Money)

+ Demand Deposits with banks + Time deposits with banks

M0 – Reserve Money (High Powered Money)

Currency in circulation + Bankers’ deposits with RBI + other
deposits with RBI + Banks cash reserves with themselves
 KEY TERMINOLOGY
HARD CURRENCY
 Currency of highly industrialized
country
 Country should be politically
stable / transparent
 Highly liquid in forex market
 Normally stable over a period of
time
SOFT CURRENCY
 Highly fluctuates
 Country will be politically,
economically unstable
 Normally, not accepted for
international transactions
 Also known as weak currency
 currencies of several African
nations fall in this category

BANKS
 Companies Act, 1956 / 2013
 Banking Regulation Act, 1949
 RBI Act, 1934
 Various Acts for nationalization of
banks in 1955, 1969, 1980 etc.
SCHEDULED BANKS AS
PER SCHEDULE 2 OF RBI
ACT, 1934
 State Co-operative Banks
 Primary (Urban) Co-op Banks
 SBI & its Associates
 Nationalized Banks
 Private Sector Banks
 Foreign Banks
 Gramin Banks (RRBs)
NON-BANKING
FINANCIAL COMPANIES (NBFCs)
 Companies Act, 1956 / 2013
 RBI Act, 1934 (Now, other regulators are
entrusted to regulate some NBFCs)
 Other relevant Acts.
MAIN ACTIVITIES OF NBFCs
 Business of loans and advances
 Acquisition of bonds / shares /
debentures etc.
 Business of Leasing
 Business of Hire Purchase
 Chit Business
NBFC ACTIVITIES DOES NOT INCLUDE
x Agricultural activity
x Industrial activity
x Purchase or sale of any goods
x Sale / purchase / construction of immovable
property
 AT THE OUTSET
NBFCs NBFCs

 Deals with financial transactions

 Mainly deals with loans and advances
 Core finances of various service sector activities

But, many scheduled commercial banks also deal with loans and advances.
Hence, there are several similarities between banks & NBFCs
BANKS

WHAT ARE THE MAIN DIFFERENCES BETWEEN BANKS AND NBFCs

1. NBFCs can not accept demand deposits and cannot issue cheques drawn
on themselves.
2. NBFCs do not form part of the payment and settlement system.
3. Deposit insurance facility of DICGC is not available for NBFCs.
 TO HAVE MORE CLARITY ON
BANKS AND NBFCs…

BANK NBFC

Financial institution which accepts Financial institution almost similar

different forms of deposits and lends
them to the prospective borrowers
and allows the depositors to withdraw
their money from the account by
cheques.
to the function of a bank, but can
not accept demand deposits and
no facility of cheques to withdraw
money.

 NBFCs cannot start business without the registration of RBI / other authorized regulators.
 To collect term deposits from public, they should take specific approval from their regulators.
 TYPES OF DEPOSITS
BANKS & NBFCs

DEMAND TIME
DEPOSITS DEPOSITS

 All the scheduled 

 All the scheduled
banks can collect banks can collect
demand deposits time deposits

X NBFCs cannot Only the NBFCs as approved

 X by RBI / their regulators can
collect demand
deposits collect term deposits
 RBI / regulators set certain
criteria
 Credit rating is normally
required
 Subject to several other
conditions
 1. BANKS IN INDIA
SCHEDULED BANKS (Schedule 2 of RBI Act, 1934)

COMMERCIAL BANKS CO-OPERATIVE BANKS

 SBI & its Associates  State Co-operative Banks
 Other Nationalized Banks  Urban (Primary) Co-
 Regional Rural Banks operative Banks
 Private Sector Banks
 Foreign Banks

Can transact normal banking operations

i.e., accepting demand / time deposits,
issue of cheques, loans and advances
etc..
 2. TYPES OF NBFCs REGULATED BY RBI

1. ASSET FINANCE COMPANY (AFC)

 Financial institution supporting financing of physical assets
i.e., tractors, earth moving equipments, automobiles etc.

2. INFRASTRUCTURE FINANCE COMPANY (IFC)

 Principal business is arranging infrastructure loans

3. INFRASTRUCTURE DEBT FUNDS (IDF)

 Flow of long term debt to infrastructure sector
 Dollar / rupee denominated bonds of minimum 5 years
validity.
 2. TYPES OF NBFCs REGULATED BY RBI (Contd…)

4. NBFC-MFIs
 Loans to poor households.
 Loans without collateral.
 75% of the loans for income generation.
 Repayable in weekly, fortnightly or monthly installments.

5. NBFC-Factors
 It is non-deposit taking NBFC.
 Principal business is factoring.
 It is a company , which buys another company’s
accounts receivable (against invoice) at a discount.
 It assumes credit risk of the company.
 2. TYPES OF NBFCs NOT REGULATED BY RBI
CATEGORY REGULATOR
Chit Funds Respective State Governments
Insurance companies IRDAI
Housing finance companies NHB
Stock broking companies SEBI
Venture capital funds SEBI
Mutual funds SEBI
Nidhi companies Ministry of Corporate Affairs, GOI
Multi Level Marketing (MLM) State Governments
Collective Investment Schemes (CIS) / Ponzi Schemes (the SEBI
definition is vague and it is grey area and the State Govts.
can regulate similar Schemes under PCMC Act, 1978 )
Future commodity trades SEBI
NOTE : Regulators found it difficult to define the domain of Collective Investment Schemes (CIS) / Ponzi
schemes and hence, it became grey area for regulation. However, now it is mandatory for all the CIS
firms, who collect Rs. 100 crores or more to register with SEBI.
WHAT ARE RNBCs?

 These are Residuary Non Banking Companies.

 RNBC is a company with principal business being the receipt of deposits under
any scheme or arrangement and not for asset financing, loans, investments etc.
 Most of their assets will be in liquid form and governed by special instructions
from RBI, which is the regulator.

WHAT ARE UNINCORPORATED BODIES (UIBs) ?

 They are not companies.
 They may be single proprietorship firms, partnership firms, unincorporated
association of individuals.
 They can not accept deposits, except from relatives.
 They are regulated by the State Govts.
 LET US DISCUSS SOME OF THE NBFCs

CHIT FUNDS

 As per the Chit Funds Act, 1982.

 As per this Act, State Govts are authorized to issue guidelines and hence State
Govts regulate them.
 Around the globe, they are called “Rotating Savings and Credit Associations”.
 In India, they are called by many names like Chit, Chitti, Kuri etc…
 They lack any standardized form of working.
 They make periodic subscriptions and the beneficiary is one among them.
 As the regulatory framework is weak, there were instances of failures several
times in the past.
 LET US DISCUSS SOME OF THE NBFCs

NIDHI COMPANIES

 They are registered under the Companies Act, 1956 / 2013.

 Also called Mutual Benefit Companies.
 Mostly working in South India, especially in Tamil Nadu.
 Mostly local in nature.
 P. Sabanayagam Committee gave its report on the functioning.
 They can collect deposits from their members and can advance
loans to their members only.
 They are controlled by Ministry of Corporate Affairs / GOI.
 LET US DISCUSS SOME OF THE NBFCs
 It is a fraudulent investment operation.
 Became familiar with the name of Charles Ponzi of Italy.
PONZI SCHEMES
 They promise exhorbitant interest rates of 50% to 100% or
even more .
 Pay to initial depositors and vanish after exponential
growth of depositors.
 Now, controlled by SEBI.
 Several times, the regulators are not aware about the
existence of these schemes, till they vanish.
IMPORTANT NOTE
In India, the definition of CIS / Ponzi
/Money Circulation schemes is vague There is another Act, Prize Chits and Money Circulation
and several firms challenged SEBI, ( Banning) Act, 1978, which is vested with State Govts.
when it interfered. Hence, there is a confusion whether State Govts./SEBI
will regulate such schemes and the domain is unclear.
 LET US DISCUSS SOME OF THE NBFCs

MULTI-LEVEL MARKETING

 They are also called pyramid scheme or network

marketing.
 It not only involves selling of products but also
recruiting of sales force.
 Opposite to MLM is single level marketing.
 Business practices are sometimes not ethical and
cost of products is very high.
 Controlled by State Governments.
CO-OPERATIVE BANKS
 ERA OF BANKING AFTER NATIONALIZATION…
1970 – 2000 MAIN FOCUS
1 2 3
PRIORITY SECTOR STRENGTHENING CO-
ESTABLISHING RRBs
LENDING OPERATIVE BANKS

SUPERVISORY ROLE BY

NABARD
All the above institutions / mechanisms were initiated to ensure timely credit to
Agriculture, Small Scale Industries (SSIs), Rural Artisans etc.

POST 2000 MAIN FOCUS

 Financial inclusion  Kisan credit cards
 Business correspondents  No frill accounts / BSBDA / PMJDY
 Core banking solutions  Linking with Aadhar
 Mobile banking  Micro ATMs / white label ATMs
 CO-OPERATIVE BANKING INSTITUTIONS

URBAN CO-OPERATIVE RURAL CO-OPERATIVE CREDIT

BANKS INSTITUTIONS

LONG-TERM SHORT-TERM

SCARDBs PCARDBs State Co- District Central Co- Primary Agricultural

operative Bank operative Bank Credit Societies
 Not in existence in several States.  In States where SCARDBs are not available, long term finance is
 For development of farm/non-farm provided by them.
activities with long term funds.  These are playing prominent role in taking care of small/marginal farmers
1. CO-OPERATIVE BANKS

 Originated in India after the enactment of Co-op Credit

Societies Act of 1904.
 However, co-op central banks were established
subsequent to the new act passed in 1912.
 Maclagan committee was formed in 1915 to review
working of co-op banks.
 Anyonya Co-op Bank, Vadodara was the first co-op bank
not only in India but also in Asia. Co-operative banks
collect funds through shares.
 They accept deposits and grant loans
 CO-OPERATIVE BANKS

STATE CO-OPERATIVE BANKS

(At State level) PRIMARY (URBAN) CO-OP BANKS

 Main aim - micro finance to urban poor

CENTRAL CO-OPERATIVE BANKS
(At district level normally)
PRIMARY AGRICULTURAL CREDIT SOCIETIES
(PACSs) (At village level)
 Normally situated in urban areas
 There will be shareholders
 Controlled by State Govts & RBI

 Main aim – Rural finance to agriculture, small  Issue & cancellation of licence lies with RBI
scale sector, rural artisans etc..  Main loan portfolio is small scale industry,
 Issue and cancellation of licence for Co-op Banks
lies with RBI (for PACS, RBI has no role to play) housing, gold loans, personal loans etc.
 Administrative control .. State Govts
 Policy guidelines… NABARD
 There will be shareholders
 It will be federal in structure with distinct
jurisdiction and control
 1. STATE CO-OPERATIVE BANKS

 This is also called Apex Bank

 They get their funds from general public by
way of deposits and funds at lower rate of
interest from NABARD (major portion)
 They grant loans and advances to the Central
Co-op Banks and supervise / inspect their
functioning
 Focus areas of lending/refinance are
 Production credit for agricultural
activities MAIN DEFECTS
 Micro credit
 They mix up commercial banking activities with
 Co-op sugar mills
co-operative banking.
 Non farm sector finance etc…
 Some of the state co-op banks have insufficient
 It simplifies the procedures so that PACS can
share capital.
give loans easily to the needy persons
 They utilize reserve funds as working capital.
 Most of the banks have inefficient management.
 Normally headed by politicians of ruling party.
2. CO-OP CENTRAL BANKS
 They are established as per the Co-op Societies
Act, 1912.
 The jurisdiction will be normally one district
and the headquarters will be district
headquarters.
 They get finance from State Co-op Banks at
lower interest rates and deposits from public
and give loans against securities like gold.
 They give credit to the PACSs as they are
important link between PACSs at village level
and State Co-op Banks at state level.
 They keep a watch on the functioning of PACSs MAIN DEFECTS
and act as balancing centers by shifting excess  Some are financially and organizationally weak.
funds from cash surplus PACSs to cash deficit  They mix up both the concepts “Commercial” and
PACSs. “Co-operative”
 Take up non credit activities like supply of  No mechanism to examine creditworthiness of PACS
seeds, fertilizers and consumer goods necessary  Utilize reserve funds as working capital
to farmers (in some cases).  Regulatory mechanism is weak due to political
pressures.
 3. PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACSs)
 They are association of persons residing in a
particular locality.
 Can be started with 10 or more persons.
 They can have one PACS for each village or for two
to five villages.
 Each member contributes to the share capital of
the society, normally nominal.
 Under each CCB branch, there will be 5 to 15
PACSs.
 The management is honorary, the only paid
member is secretary.
 They give short term loans for agricultural
purposes to their members.
 Profits of PACS will be used for the development
of the village.
 They are expected to attract deposits from well to
do families but most of them failed to do so.
MOST IMPORTANT
 Technically, PACS is not a Bank.
 It does not come under BRA, 1949.
 RBI has no role to play.
 DICGC facility is not available.
MAIN DEFECTS
 Failed to fulfill the credit needs of small
farmers and tenants.
 Most of them financially unviable.
 They have failed to fulfill the diverse
credit needs of farmers.
 High political interference.
 CO-OPERATIVE BANKING SYSTEM
AS A WHOLE …

SUCCESSES FAILURES

 Provided cheap credit to farmers  Excessive over dues

saving them from the clutches of  Inefficient societies

money lenders.  Political interference

 Some of the small / marginal farmers  Multiple controls

are benefited.  Benefits to big land owners, in some cases

 Promoted saving and banking habits  Dependence on external resources

among the rural people.  Inadequate coverage

 Credit linked to assets

HOWEVER, THEIR EFFECT CANNOT BE UNDERESTIMATED.

REGIONAL RURAL BANKS
 REGIONAL RURAL BANKS
 In spite of nationalization in 1969, large segment of the rural population were beyond the
reach of banking services. To fill this gap, it was felt to create a new banking system.
 After the emergency was imposed in 1975, the then Prime Minister Smt Indira Gandhi
announced 20 point programme, one of which was “Institutional credit to farmers and artisans
in rural areas”.
 As such, GOI promulgated RRB ordinance on 26th September, 1975 (Replaced by RRB Act 1976)
to set up RRBs throughout the country.

The main purpose is

To provide credit and other facilities to small and marginal farmers, agricultural laborers,
artisans and small entrepreneurs so as to develop agriculture, trade, commerce, industry and
other productive activities in rural areas.
 SALIENT INFORMATION
Name of the first RRB “Prathama Grameena Bank”
Date of inauguration October 2, 1975
Names of the first five sponsored banks SBI, Syndicate Bank, Punjab National Bank,
United Commercial Bank, United Bank of India
The first five RRBs started  Moradabad and Gorakhpur (U.P.)
 Bhiwani (Haryana)
 Jaipur (Rajasthan)
 Malda (West Bengal)
Authorized capital Rs. 5 crore
Share of organizations Central Govt : State Govt : Sponsored Bank
(50 : 15 : 35)

However, as per the RRB’s Amendment Act, 2015, the authorized capital was increased to Rs.
2,000 crore and the share of organizations was modified so that the holdings of the Centre and
Sponsored Bank put together will not be allowed to go below 51 per cent
FEATURES OF RRBs
 RRB is a scheduled commercial bank.
 Area of operation limited to specific region.
 Enjoy many concessions and privileges, especially refinance from NABARD.

FUNCTIONS
 Accepts various types of deposits.
 Loans and advances to small and marginal farmers, agricultural laborers, rural artisans etc…
 Loans and advances to co-op societies, co-op farming societies, small entrepreneurs etc…
 ARE THEY SUCCESSFUL?

YES NO

 They attained only partial success.

 A M Khusro committee on agricultural credit review recommended merger with sponsor banks.
 M.C Bhandari committee suggested amalgamations to create bigger / financially viable entities.

REASONS FOR FAILURE

 Losses as they are not viable economically due to their spread over rural areas.
 Poor deposit mobilization
 Hasty branch expansion
 Inefficient staff
 Multi agency control (RBI, NABARD, Sponsored Banks etc)

In view of the above, to make them viable, the Govt is in the process of
amalgamation to ensure bigger entities.
 NABARD
WE LEARNT ABOUT
RRBs and Co-op Banks meant for the development of agriculture and rural development.
WHO REGULATES THEM?
 Technically, for issue and cancellation of licences, it is RBI.
 But for day to day supervision and policy issues, it is NABARD.

NABARD – HISTORICAL PERSPECTIVE

 At the instance of GOI, RBI constituted a “Committee to Review the
Arrangements For Institutional Credit for Agriculture and Rural
Development” i.e., CRAFICARD under the Chairmanship of B. Sivaraman.
 Based on the recommendations, NABARD (National Bank for Agriculture
and Rural Development) started functioning from 12th July, 1982.
 It was formed by clubbing Agricultural Credit Department (ACD) and
Rural Planning and Credit Cell (RPCC) of Reserve Bank of India and
Agricultural Refinance and Development Corporation (ARDC).
OTHER FEATURES
 Set up with initial paid up capital of Rs. 100 crores.
 At present, it has paid up capital of Rs. 4000 crores of
which around 99.5% was held by Govt. of India.

MISSION

Promote sustainable and equitable agriculture and

rural prosperity through effective credit support

related services, institution development and other

innovative initiatives
 MAIN ACTIVITIES OF NABARD
1. FINANCIAL
REFINANCE
Short / medium / long term loans (maximum 15
years) to agriculture and allied activities / artisans /
SSIs / micro and small enterprises / self help groups
for loans granted by
 State Co-op Agriculture and Rural
Development Banks (SCARDBs)
 RRBs
 State Co-op Banks
 Scheduled Commercial Banks
 Primary Urban Co-op Banks
 Northeast Finance Development
Corporation (NFDC)
DIRECT FINANCE
 Credit facilities to recognized marketing
federations / co-operatives
 RIDF (Rural Infrastructure Development Fund) to
State Govts for Rural Development
 Direct lending to CCBs (based on Vaidyanathan
Committee recommendations)
 Financing and supporting producer organizations
 NABARD Infrastructure Development Assistance
(NIDA) to State Govts
 Financing and developing PACS
 MAIN ACTIVITIES OF NABARD

2. DEVELOPMENT
 Institutional development of Co-op Banks & RRBs
 Financial inclusion
 Micro-credit innovation
 Farm / non-farm sector innovation
 Core Banking Solutions to Co-op Banks
 R&D Fund to promote research in Agriculture and Rural Development
 NABARD is the main force behind Kisan Credit Cards (Now developed Rupay KCC)

3. SUPERVISION
 Supervisory role over Co-op Banks & RRBs with regard to implementation of rural development
initiatives of Govt of India.
 Co-ordinates the activities of Central and State Govts, and all other All India / State Level
Institutions entrusted with SSIs, village and cottage industries, rural crafts etc…
 LEAD BANK SCHEME

 After the nationalization of 14 banks in 1969, Govt. initiated steps to extend banks reach to

the rural areas.

 “National Credit Council” study group headed by Prof. D.R. Gadgil, first recommended “Area”

approach.

 The Committee of Bankers (Nariman Committee) appointed by RBI accepted the ‘Area’

approach and gave the name “Lead Bank Scheme”.

 In 1969 itself, 380 districts in the country were identified with Lead Bank Scheme, later on

extended to all the rural districts of the country.

ROLE AND RESPONSIBILITY OF LEAD BANK
 Main aim is to act as co-ordinator for credit deployment in the district.
 Act as a leader to bring about co-ordination among Co-op Banks, RRBs, SCBs and other financial
institutions to bring about rapid economic development in rural areas.
 Identify unbanked areas and prepare a phased programme for branch expansion.
 To inculcate dynamic relationship between various financial institutions.

WEAKNESSES OF LBS
 Voluminous data without commensurate results.
 No authority over others and co-ordination failed to achieve results.
 No clarity in the powers delegated.

In spite of all the weaknesses, RBI has further gone ahead and nominated lead banks for
metropolitan cities also in June, 2013.
 SERVICE AREA APPROACH

 To augment various mechanisms for rural lending, another method of “Service Area
Approach” (SAA) was brought in 1988-89.
 Each semi-urban and rural branch has assigned a specific area comprising a cluster of villages
within which it would operate to have planned economic development in rural areas.
 The rationale is to avoid duplication of efforts and scattered lending over wider areas.
 By April 1, 1995, the scheme was launched all over the country.
 The following difficulties arose.
 Irrational allocation of villages.
 More number of villages in tribal and hilly areas were allotted.
 Organizational problems.
Overall, it happened to be a failed experiment.
 LOCAL AREA BANKS

 Guidelines were issued by RBI in 1996.

 To provide institutional mechanism for promoting rural
savings and for provision of credit in those areas.
 Activities should be limited to a maximum of three
geographically contiguous districts.
 Paid up capital should be minimum of Rs. 5 crores of which
promoters contribution should be at least Rs. 2 crores.
 They are supposed to deliver the similar activities of RRBs.
 They are planned for under-banked regions of the country.
 6 licences were given by RBI.
 At present, four of them are functioning.
LOCAL AREA BANKS
COMMRCIAL BANKS Co-OPERATIVE BANKS REGIONAL RURAL BANKS
COMMERCIAL BANKS
 REGIONAL RURAL BANKS

MULTIPLE CONTROLS BY
PARENT/ 1 2 3
SPONSOR
BANK
 CO-OPERATIVE BANKS

MULTIPLE CONTROLS BY
1 2 3
STATE
GOVERNMENTS
 REFINANCE DIRECT FINANCE
Note: Note:
DFIs like NABARD will Banks will finance
arrange finance to the banks customers directly.
up to the extent banks are
giving to customers.
This is Refinance.
 WHAT IS FINANCIAL MARKET?

FUND SURPLUS FUND SCARCE

GROUPS / GROUPS /
INDIVIDUALS INDIVIDUALS

 Exchange of money / money value instruments

 With interest / dividend

FINANCIAL MARKET
The market of an economy, where funds are transacted between the Fund Surplus and Fund Scarce
individuals and groups is known as FINANCIAL MARKET
 BUT, WHAT ABOUT DURATION ?

GENERAL CLASSIFICATION

Requirement of funds up Requirement of funds for

to 364 days 365 days and more
(< 1 year) (1 year and above)

Short term funds Long term funds

Money market Capital market

Financial market
Normally, borrowing for few days is call
money. But, there are specific names
Borrowing For Specific Name
1 day Call Money
2 to 14 days Notice Money

These are Part of Money Market

 Normally, borrowing for up to 1 year is
Money Market. But, there are specific names

Borrowing For Specific Name

1 day Call Money
2 to 14 days Notice Money
15 days to 1 year Term Money
 MONEY MARKET AND CAPITAL MARKET

I. MONEY MARKET

 Treasury Bills
 Cash Management Bills
 Repo and Reverse Repos
 Certificate of Deposits
 Commercial Papers
 Commercial Bills
 Call Money Market
 II. CAPITAL MARKET

1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market

 IPO (for new  All India Financial Institutions  Investment Banks

stocks) i.e. IFCI, IIBI, etc..
 Stock  Sectoral Finance/Refinance  Merchant Banks
Exchanges Institutions like SIDBI, NHB,  Mutual Funds
(for old IIFCL, REC, PFC, IRFC, TFCI etc…
Though, Technically it is stocks)  State Finance Corporations  Leasing Companies
part of Capital Market, but
this Market along with  Venture Capital
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated By RBI.
 INDIAN MONEY MARKET
SALIENT POINTS
 Here money is traded between individuals or groups (Financial
Institutions, Banks or Govt. Companies).
 Between cash surplus and cash scarce.
 For short term lending up to 364 days.
 Instruments which are traded can facilitate quick conversion to
money.
 The interest rate depends on demand and supply of cash.
 Money market takes care of the financial mismatch of day to
day operations of organizations, where as capital market is
used for creation of assets.
 Vibrant money market is essential for any economy and co-
exists with capital market.
 Organised money market in India is just more than 2 decades
old.
 In 1985, Chakravarthi Committee underlined the need for
organised money market.
 INDIAN MONEY MARKET

1. Treasury Bills (TBs)

2. Cash Management Bills (CMBs)

3. Repo and Reverse Repos

4. Certificates of Deposits (CDs)

5. Commercial Paper (CP)

6. Commercial Bill

7. Call Money Market

Let us discuss in brief…

Money Market
1. TREASURY BILLS

 They are available in various forms since independence.

 Got organized from 1986.
 Issued by RBI on behalf of Central Government.
 Used by the Central Government to fulfill short-term liquidity
requirements up to 364 days.
 91-day, 182-day, 364-day TBs are issued by the Govt.
 In addition to Governments, they also function as short term
investment avenues for Banks and Financial Institutions.
 Trading is done on discounted rate, hence they are also called
discounted instruments.
 Eligible as security for SLR.
Money Market
2. CASH MANAGEMENT BILLS
 They are also discounted instruments like Treasury Bills,
issued by RBI on behalf of Central Govt.
 They are for maturities less than 91 days.
 They were introduced in 2010 by RBI for short term liquidity
 Most of the features are similar to Treasury Bills.

Money Market
3. REPO AND REVERSE REPOS
 These were introduced by RBI in December 1992 and November 1996
respectively.

We have already discussed about them in previous lectures

Money Market
4. CALL MONEY MARKET

 It is short term financial market.

 Transaction takes place on overnight basis.
 Funds are transacted for a period between 1 to 14 days
normally.
 All the Scheduled Commercial Banks, Co-operative Banks and
Primary Dealers (PDs) participate in the auction. (Regional
Rural Banks and Land Development Banks are not eligible to
participate.)
 Interest rates are market driven.
Money Market
5. COMMERCIAL PAPER
 Introduced in India in 1990.
 It is a privately placed Instrument.
 It is unsecured money market instrument issued in the
form of a promissory note.
 Companies, Primary Dealers, Financial Institutions are
permitted to issue Commercial Paper.
 Net worth of the company should not be less than Rs.4
crore.
 Duration is from 7 days to 1 year.
Money Market
6. CERTIFICATE OF DEPOSIT
 Introduced in 1989.
 Can be issued by Scheduled Commercial Banks or FIs (as authorized
by RBI).
 Minimum amount Rs.1 Lakh (further in multiples of Rs. 1 Lakh).
 It is also a discounted instrument.
 Time period... 7 days to 1 year (If issued by Commercial Banks)
1 year to 3 years (If issued by FIs)

Money Market
7. COMMERCIAL BILLS DISCOUNTING
 These are the instruments that help companies to get advance
payment for the invoices they raise after making sales to their
customers.
 They help companies to get money in advance for the sales they
make.
 WHAT IS DFHI Ltd

 It is Discount and Finance House of India Ltd.

 It is one of the Primary Dealers (PDs) with majority shareholding by SBI.

 It is established in 2004 with the merger of RBI promoted DFHI and SBI gilts Ltd.

 It is one of the Primary Dealers dealing with Govt. Dated Securities, T-Bills, Call

Money etc.
 WHAT IS CCIL Ltd?

 It is The Clearing Corporation of India Ltd.

 Commercial operations started from April, 2001.

 SCBs, FIs and PDs have established CCIL jointly.

 Primarily for providing exclusive clearing and settlements in money

market instruments, dated government securities and foreign exchange.

 Headquarters is in Mumbai.
 A SNAPSHOT ON MONEY MARKET INSTRUMENTS IN INDIA
TREASURY BILLS (T-BILLS) CERTIFICATE OF DEPOSITS
 Issued by RBI.  Introduced in 1989.
 Discounted instruments.  Commercial banks/FIs can issue CD
 91 day, 182 day, 364 day are available.  Minimum amount Rs.1 Lakh.
 For short term liquidity requirements.  7 days to 1 year (if issued by banks), 1 year to 3 years (if issued by FIs).
 Also discounted instruments.

CASH MANAGEMENT BILLS COMMERCIAL PAPER

 Issued by RBI for the first time in 2010.  Private unsecured money market instrument.
 Discounted instruments.  Introduced in 1990.
 Issued up to the duration of 90 days only.  Designed primarily for high rated corporate borrowers.
 Features almost similar to treasury bills.  Companies with minimum net worth of Rs. 4 crores, PDs, FIs are also
allowed.
 7 days to 1 year.
 Also a discounted instrument.

REPO AND REVERSE REPO CALL / NOTICE MONEY

 Introduced in Dec 92 and Nov 96 respectively.  Overnight borrowing.
 RBI announces the rates through its monetary policy.  1 to 14 days.
 Banks can resort to overnight lending subject to the limits.  Interest is market driven.
 The repo rate will have an impact on other interest rates.  Commercial banks, co-operative banks, PDs are only allowed (RRBs
and LDBs are not allowed).
 II. CAPITAL MARKET

1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market

 IPO (for new  All India Financial Institutions  Investment Banks

stocks) viz. IFCI, IIBI, etc.
 Stock  Sectoral Finance/Refinance  Merchant Banks
Exchanges Institutions like SIDBI, NHB,  Mutual Funds
(for old IIFCL, REC, PFC, IRFC, TFCI etc.
Though, Technically it is stocks)  State Finance Corporations  Leasing Companies
part of Capital Market, but
this Market along with  Venture Capital
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated by RBI.
 1. G–SECs (GOVERNMENT SECURITIES)

DATED TREASURY CASH MANAGEMENT

SECURITIES BILLS BILLS

State Govts can also

issue Govt. Securities up
1 Year to to a maximum period of Up to Up to
40 years 10 years. But they are 364 days 90 days
known as State
Development Loans
(SDLs). They are also
managed by RBI MONEY
CAPITAL
MARKET MARKET
INSTRUMENTS INSTRUMENTS
GOVERNMENT
SECURITIES
 1. G–SECs (GOVERNMENT SECURITIES)

FEATURES OF G–SECs

 If the security is more than 1 year, it is called Dated Security.

 All the securities are managed by RBI only.
 Auction held electronically on PDO-NDS platform ( Public Debt Office – Negotiated Dealing
System).
 They can also be purchased through primary dealers in secondary market.
 Minimum subscription for T-bill is Rs.25,000 and Dated Security is Rs.10,000.
 Normally SCBs, FIs participate in auction of G-Secs.
 If the State Governments borrow money, they are known as State Development Loans (SDLs)
and RBI also manages them. These are also eligible for SLR. They will carry less interest in
comparison to Dated Securities of Central Govt.
 2. INDUSTRIAL SECURITIES MARKET

 This is one of the segments of the financial

market.
 Headquarters is in
 Long term capital is raised.
Mumbai
 Instruments used are shares, bonds, debentures
 Established in 1988.
etc.
 Securities regulator (SEBI), stock exchanges,
different share indices like SENSEX, NIFTY are
associated with this.
 A company becomes Public Limited from Private
Limited by issue of shares to public.
 Shares are issued through IPO (Initial Public
Offering).
 2. INDUSTRIAL SECURITIES MARKET
 An individual can purchase shares through IPO or through Stock Exchanges.
 Hence, it can be divided into Primary Market (issue of shares through IPOs)
and Secondary Market (trading of shares).

SECURITIES MARKET

PRIMARY MARKET SECONDARY MARKET

 Companies go for expansion by raising
funds through IPOs.
 Companies take the help of investment
banks to work as underwriters (to
render services like pricing,
establishing market etc.).
 It is institutional set up where shares,
bonds, debentures are traded.
 First Stock Exchange was established in
Antwerp, Belgium in 1631.
 In India BSE and NSE are the main stock
exchanges.
 2. INDUSTRIAL SECURITIES MARKET
STOCK EXCHANGES
BSE
 It is Bombay Stock Exchange Ltd.
 Initial name was “the Native Share and Stock Brokers’
Association” (1875).
 Asia’s first Stock Exchange.
 SENSEX (Sensitive Index) is the 30 Stock Index of BSE and
is widely regarded as the benchmark.
 BSE SME is the platform for Small and Medium
Enterprises from 2012.
 Base year 1978-79 and Index is 100 as on 1st April, 1979.
NSE
 It is National Stock Exchange of India Ltd.
 Established in 1992.
 Sponsors are DFIs including IDBI, LIC, GIC etc.
 CNX-NIFTY is the Index of the 50 top shares
from 24 sectors.
 Base year 1995, Base Index 1000.
 EMERGE is the SME platform of NSE.
 CNX-NIFTY was developed by Ajay Shah and
Susan Thomas.
 II. CAPITAL MARKET

1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market

 IPO (for new  All India Financial Institutions  Investment Banks

stocks) viz. IFCI, IIBI, etc.
 Stock  Sectoral Finance/Refinance  Merchant Banks
Exchanges Institutions like SIDBI, NHB,  Mutual Funds
(for old IIFCL, REC, PFC, IRFC, TFCI etc.
Though, Technically it is stocks)  State Finance Corporations  Leasing Companies
part of Capital Market, but
this Market along with  Venture Capital
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated by RBI.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
 Primarily intended to fulfill capital requirements of Industry /
GENERAL SECTORAL Infrastructure.
IFCI NABARD
 In other words, to take care of “Project Finance”.
ICICI SIDBI

IDBI NHB  After independence, banks were not in a position to lend for industry
IIBI REC
PFC
/ long term projects due to lesser deposits.
NSIC
 However, after economic reforms of 1991, Industries have got other
IRFC
EXIM BAK sources of tapping funds at cheaper rates and also the base of funds
ECGC

TFCI
for commercial banks increased rapidly.

DFIs include Finance Firms, Refinance Firms and Firms for Technology
Transfer also.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
 High Power Committee on DFIs headed by S.H. Khan
submitted its report in April 1998, which felt that the dividing
GENERAL SECTORAL
IFCI NABARD
line between commercial banking and development banking
SIDBI
ICICI got blurred and suggested merger of both towards “Universal
IDBI NHB

IIBI REC Banking”. Govt. approved the recommendation.

PFC

NSIC
 Hence DFIs lost their relevance and some of them merged
IRFC with their own commercial banks like ICICI Bank and IDBI
EXIM BAK

ECGC Bank.
TFCI
 However, sector specific FIs still in existence taking care of
specific sectoral needs like SIDBI, NHB, NABARD, REC, IRFC etc.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
IFCI
GENERAL SECTORAL  It is Industrial Finance Corporation of India.
IFCI NABARD
 Headquarters is in New Delhi.
ICICI SIDBI

IDBI NHB  It is the first DFI established by GOI.

REC
IIBI
PFC
 Started on 1st July,1948.
NSIC
 Got access to low-cost funds of RBI.
IRFC
EXIM BAK  Name changed to IFCI Ltd in Oct, 1999.
ECGC

TFCI
 Primarily to cater for industrial finance.
 Now, it lost its relevance.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs ICICI
 It is Industrial Credit and Investment Corporation of India.
GENERAL SECTORAL
 Started its operations in 1955.
IFCI NABARD

ICICI SIDBI
 It is in the private sector.
IDBI NHB
 Out of all the DFIs, it achieved spectacular success.
IIBI REC
PFC  It established ICICI Bank in 1994.
NSIC

IRFC
 Subsequently, ICICI Limited merged with ICICI Bank in 2002 to
EXIM BAK
facilitate “Universal Banking” as recommended by Khan Committee.
ECGC

TFCI  At present, it is the largest private sector bank in India.

 Hence ICICI is no more in existence as DFI.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)
IDBI
DFIs
 Established as DFI under IDBI Act on 1st July, 1964.
 Started as a wholly owned subsidiary of RBI, but the ownership
GENERAL SECTORAL
was transferred to GOI.
IFCI NABARD

ICICI SIDBI  Headquarters is in Mumbai.

NHB
IDBI
 It is Government owned institution.
IIBI REC
PFC  For 40 years, it served as a premier Project Finance Organization.
NSIC

IRFC  IDBI was changed to IDBI Ltd and with effect from Oct 1, 2004, it
EXIM BAK
has been functioning as a Bank.
ECGC

TFCI  IDBI Ltd became IDBI Bank Ltd in 2008. Now it is another
‘Universal Bank’ and IDBI as a Financial Institution no more exists.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs IIBI
 It is GOI owned institution established in 1971.
GENERAL SECTORAL  HQ is in Kolkata.
NABARD
IFCI
 Initially started as Industrial Reconstruction Corporation of
ICICI SIDBI

IDBI NHB India Ltd to rehabilitate sick companies.

IIBI REC
PFC  It became Industrial Reconstruction Bank of India Ltd. in
NSIC
1985.
IRFC
EXIM BAK  It became Industrial Investment Bank of India Ltd. in 1997.
ECGC

TFCI  It is no more in existence.

 II. CAPITAL MARKET

1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market

 IPO (for new  All India Financial Institutions  Investment Banks

stocks) i.e. IFCI, IIBI, etc..  Merchant Banks
 Stock  Sectoral Finance/Refinance  Mutual Funds
Exchanges Institutions like SIDBI, NHB,  Leasing Companies
(for old IIFCL, REC, PFC, IRFC, TFCI etc…  Venture Capital
Though, Technically it is stocks)  State Finance Corporations
part of Capital Market, but
this Market along with
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated By RBI.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs SIDBI
 It is Small Industries Development Bank of
GENERAL SECTORAL India.
IFCI NABARD  Established in 1990 as a fully owned subsidiary
ICICI SIDBI
NHB
of IDBI, but the present shareholding is
IDBI
REC
IIBI diversified.
PFC

NSIC  Headquarters in Lucknow.

IRFC
EXIM BAK
 It is the principal financial institution for
ECGC
Promotion, Financing, Development of MSME
TFCI

MUDRA Sector.
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
REC
 It is Rural Electrification Corporation Ltd.
GENERAL SECTORAL
NABARD
 It is Navratna CPSE.
IFCI

ICICI SIDBI  Established in 1969.

IDBI NHB

IIBI REC  Headquarters .. New Delhi.

PFC
 It issues Tax Free Bonds to collect funds at lesser interest.
NSIC

IRFC  Finance and promote Rural Electrification Projects across

EXIM BAK

ECGC the Country.

TFCI

MUDRA
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
PFC
GENERAL SECTORAL  It is Power Finance Corporation Limited.
IFCI NABARD
 It is Navratna CPSE.
ICICI SIDBI

IDBI NHB  Established in 1986 with headquarters in New Delhi.

IIBI REC
PFC
 Mobilization of funds through taxable (mostly)/ non
NSIC
taxable bonds, term loans from FIs.
IRFC
EXIM BAK  They finance power generation projects.
ECGC

TFCI

MUDRA
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
NSIC
 It is National Small Industries Corporation.
GENERAL SECTORAL
NABARD
 Headquarters in New Delhi.
IFCI

ICICI SIDBI  Established in 1955 as CPSE.

IDBI NHB

IIBI REC  It facilitates the growth of MSMEs.

PFC

NSIC
 It is promoting, aiding and fostering growth
IRFC of small industries by modernization,
EXIM BAK

ECGC upgradation of technology, strengthening

TFCI

MUDRA
linkages etc.
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs

IRFC
GENERAL SECTORAL  It is Indian Railway Finance Corporation.
IFCI NABARD

SIDBI
 It is the financing arm of Ministry of Railways.
ICICI

IDBI NHB
 Headquarters in New Delhi.
IIBI REC
PFC  To tap funds through Tax-free bonds/ Foreign
NSIC
currency loans etc.
IRFC
EXIM BAK
 To finance Indian Railways to purchase wagons /
ECGC

TFCI locomotives or other assets.

MUDRA
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs

EXIM BANK
GENERAL SECTORAL
 It is Export-Import Bank of India.
IFCI NABARD

ICICI SIDBI  Established in 1982 under the Export-Import

IDBI NHB

REC
Bank of India Act 1981 by GOI.
IIBI
PFC
 Headquarters is in Mumbai.
NSIC

IRFC  Set up for the purpose of Financing,

EXIM BAK

ECGC
Facilitating, Promoting Foreign Trade of India.
TFCI

MUDRA
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs
ECGC
 It is Export Credit Guarantee Corporation of India
GENERAL SECTORAL
Ltd.
IFCI NABARD  Based on the T. C. Kapur Committee
ICICI SIDBI
recommendations, Export Risk Insurance
NHB
IDBI Corporation was established in 1957 with
REC
IIBI
Headquarters in Mumbai.
PFC

NSIC
 Name changed to Export Credit & Guarantee
IRFC
Corporation Ltd. In 1964.
EXIM BAK  Renamed as Export Credit Guarantee Corporation of
ECGC India Ltd in 1983.
TFCI  Primarily for insurance against export credit risks and
MUDRA
BANK
trade related services.
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs

TFCI
GENERAL SECTORAL
IFCI NABARD  It is Tourism Finance Corporation of India Ltd.
ICICI SIDBI
 Established on the recommendations of National
IDBI NHB

IIBI REC Committee on Tourism (Yunus Committee).

PFC

NSIC
 Started functioning from 1989.
IRFC
 Provides Financial Assistance to Enterprises of
EXIM BAK

ECGC Tourism related Projects.

TFCI

MUDRA
BANK
 3. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

DFIs

MUDRA BANK
GENERAL SECTORAL  It is Micro Units Development & Refinance
IFCI NABARD
Agency (MUDRA) Bank.
ICICI SIDBI  This will be responsible for developing and
IDBI NHB refinancing of Micro and Small Enterprises.
IIBI REC  The bank will partner with various
PFC Commercial Banks / MFIs / FIs to Finance
NSIC Micro & Small Enterprises.
IRFC
 It is refinance agency.
EXIM BAK
 Headquarters in Mumbai.
ECGC
 At present it is NBFC and is the subsidiary of
TFCI

MUDRA
SIDBI.
BANK
 II. CAPITAL MARKET

1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market

 IPO (for new  All India Financial Institutions  Investment Banks

stocks) i.e. IFCI, IIBI, etc..  Merchant Banks
 Stock  Sectoral Finance/Refinance  Mutual Funds
Exchanges Institutions like SIDBI, NHB,  Leasing Companies
(for old IIFCL, REC, PFC, IRFC, TFCI etc…  Venture Capital
Though, Technically it is stocks)  State Finance Corporations
part of Capital Market, but
this Market along with
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated By RBI.
 4. FINANCIAL INTERMEDIARIES
1. INVESTMENT BANKS Top 10 Investment Banks in the World
Main functions are
 Debt and Equity underwriting of corporates. NEW YORK

 Banking services to Companies, Financial NEW YORK

Institutions. NEW YORK

 Strategic advice w.r.t. M & As. CHARLOTTE, USA

 Portfolio Management of HNIs. FRANKFURT
(Germany)

NEW YORK
Top Investment Banks in India
ZURICH
(Switzerland)

LONDON
ZURICH
(Switzerland)
LONDON
 4. FINANCIAL INTERMEDIARIES
2. MERCHANT BANKS
(In United Kingdom, Investment Banks are known as Merchant Banks)

If one goes by theory, differences can be listed as follows…

INVESTMENT BANKS MERCHANT BANKS
 Services for large sized companies.  Services for medium sized companies
 Focus on IPOs.  Focus on placing equity in companies with growth
potential with other Financial Institutions.
 Involve in International Financial Activities.
 M&A of big companies.  Look at Foreign Corporate Investment and Foreign
 Portfolio Management of HNIs. Real Estate Investment

However, Investment Banks are familiar all over the World

 4. FINANCIAL INTERMEDIARIES
3. MUTUAL FUNDS
What is meant by Mutual Fund?

COMPANY X
PROFESSIONALLY
MANAGED COMPANY Y
FUND HOUSE
COMPANY Z
SMALL INVESTORS
MONEY IS POOLED UP
HERE

MUTUAL FUND
An investment vehicle made up of a pool of funds collected from many investors for
investing in Shares, Bonds, Money Market Instruments etc.
 4. FINANCIAL INTERMEDIARIES
4. LEASING COMPANIES

WHAT IS LEASE ?

Contract between two parties for hire of a specific asset when the
Lessor retains the ownership, while the Lessee has possession and use of asset
on payment of specified rentals over a period of time.

SOME LEASING COMPANIES IN INDIA

 First Leasing Company of India Ltd.

 Sundaram Finance
 Bajaj Finance
 M & M Financial
 4. FINANCIAL INTERMEDIARIES
5. VENTURE CAPITAL

WHAT IS VENTURE CAPITAL?

Money provided by investors to start-up firms and small
businesses with perceived long-term growth potential.

SOME OF VENTURE CAPITAL FIRMS IN INDIA

 IFCI Venture Capital Funds
 India Innovation Investors
 Reliance Venture
 Sequoia Capital
 Trident Capital
 General Atlantic
 Canaan Partners
 BANKING CODES AND OMBUDSMAN
STANDARDS BOARD OF INDIA
(BCSBI)  Appointed by RBI

 Based on S.S. Tarapore Committee

recommendations.
 Established in February 2006.
 Registered as a Society under the Societies
Registration Act of 1860.
 Governing Council is nominated by RBI.
 Self Regulatory Organization.
 Looks at systemic issues with regard to the
quality of service.
 CHIEF CUSTOMER SERVICE
OFFICER (CCSO)

ALL THE
PUBLIC
SECTOR
+ +
BANKS

CCSO IS “INTERNAL OMBUDSMAN”

 INTEREST SUBVENTION SCHEME
11
10
YEAR
2015-16 9 Interest subsidy
8 2%
7 7% Interest on crop loans
6
3%
5
4
If farmer pays in time,
3 additional subsidy of 3%
2
1 INTEREST EQUALISATION SCHEME
0 It is also interest subsidy of 3% so as to
Interest (%) promote exports. Valid for 5 years from 1st
April, 2015
 BPLR / BASE RATE / MCLR

Benchmark Prime Marginal Cost of

Lending Rate
(BPLR)
 Brought in 2003.
 Not found transparent.
 Replaced by Base
Rate.
Base Rate funds based Lending
Rate (MCLR)
 Brought in 2010. • Marginal costs i.e., latest cost
 Banks should not lend conditions will reflect in the interest
below base rate, except rates.
some exempted • Deposit costs & repo rates will
categories. reflect in MCLR.
• Banks have to set five benchmark
rates for different tenors or time
periods ranging from “overnight” to
“one-year”.
• It results in quick transmission of
policy rates i.e., when RBI reduces
repo rates, it will reflect in MCLR.
• Applicable from 1st April, 2016
Deepak Mohanty
 DEPOSITORIES

NATIONAL SECURITIES DEPOSITORY

LIMITED

 Depositories Act was enacted in August 1996.

 NSDL is the first depository in India.
 Depository holds securities likes shares, debentures, bonds etc in electronic
form.
 It is similar to banks holding our accounts.
 If you open demat account with a bank, bank is only a Depository Participant
and it is held actually with a Depository i.e., either NSDL or CDSL.
 DEPOSITORIES / DEPOSITORY
PARTICIPANTS (DPs)

+
National Securities Depository Limited

Depositories

Depository
Participants INVESTORS
(DPs)
 NET NEUTRALITY

VIEWS / COUNTER VIEWS

FOR DIFFERENTIAL PRICING FOR NET NEUTRALITY & AGAINST

OF DATA SERVICES
 Internet connectivity for poor &
marginalized
 Improves internet penetration
 Benefits the customers
 Promotes competition
 It is differentiation, but not
discrimination
DIFFERENTIAL PRICING
 May force some of the web sites and
applications out of business
 Not possible to regulate or monitor
 Will only benefit large content companies and
Telcos.
 Kills innovation
 Defeats the main purpose of internet … Non
discrimination and freedom of choice.
 START-UPS / BUSINESS
INCUBATORS
START-UPS
“ Budding company in search of a
scalable business model. The
essence of start-ups is the concepts
of ambition, innovation, scalability and
growth ”
It is normally referred to technology
related companies.
BUSINESS
INCUBATORS
It is the center where an “idea” will be
converted into a “profitable business venture”
through fostering entrepreneurship, mentoring,
management expertise etc.
 ANGEL INVESTMENT /
VENTURE CAPITAL

ANGEL INVESTMENT VENTURE CAPITAL

 For start-ups at too early stage.
 Few thousands of dollars.
 May be from relatives & friends.
 Invest their own money.
 Emphasis is on person.
 In return take up equity in
company.
 For start-ups, after assessing high
growth potential.
 Moderate investment of at least 1
to 2 million dollars.
 Pooled up money from various
professionally managed sources.
 In return, take up equity in
company.
 PRIMARY DEALERS

REGULATOR PRIMARY DEALERS

 They participate in primary auction of Govt. Securities.

 Sell Govt. Securities in secondary market so as to create liquidity for G-Secs.
 They also participate in money market instruments like certificate of deposits,
commercial papers, call & notice money transactions.
 AUTHORISED DEALERS

REGULATOR AUTHORIZED DEALER BANKS

 Authorized Dealers are the authorized money changers, authorized by the RBI
under section 10 of the FEMA, 1999, to deal in foreign exchange for specified
purposes.
 CAPITAL EXPENDITURE (CAPEX)

“It is the Expenditure to acquire /

upgrade buildings or equipment.
This expenditure is for the
acquisition of long term assets”.
 REVENUE EXPENDITURE

“These are short term expenses to

meet the ongoing operating costs of
running a business i.e., operating
expenses”.
 CAPITAL REVENUE
EXPENDITURE EXPENDITURE
 CAPITAL REVENUE
EXPENDITURE EXPENDITURE
 CAPITAL REVENUE
EXPENDITURE EXPENDITURE
 CAPITAL REVENUE
EXPENDITURE EXPENDITURE
 EXCHANGE RATES
APPRECIATION &
APPRECIATION DEPRECIATION
Rs. 40 per dollar

January
2016

Rs. 68 per dollar

DEPRECIATION

THIS IS BECAUSE
OF MARKET
FORCES
Rs. 100 per dollar
 EXCHANGE RATES
DEVALUATION &
REVALUATION REVALUATION
Rs. 40 = 1 Dollar

January
2016

Rs. 68 = 1 Dollar

DEVALUATION

HERE, GOVERNMENT
FIXES THE RATE
Rs. 100 = 1 Dollar
MEMORANDUM OF UNDERSTANDING (MoU)

 It is most akin to and formal alternative to Gentleman’s

Agreement.
 It is intended common line of action.
 It may lead to agreement in later stages.
 MoU cannot be enforced legally.
 It is the first stage in the formation of a formal contract.
 It shares common intent.
TAXATION BY GOVT. OF INDIA

These are the taxes levied by

the Govt. of India

DIRECT TAX INDIRECT TAX

NOTE
Only taxes levied by
the Govt. of India are
taken. Various taxes
by the State
Governments are not
discussed here.
 DIRECT TAX

These are the taxes directly levied on

the income / profits of the person / firm,
who directly pays. It is progressive in
nature.

Direct taxes are

1. Personal Income Tax
2. Corporation Tax
It looks at Direct Taxes
3. Gift Tax
4. Wealth Tax (Abolished in
2015-16 budget)
 DIRECT TAX
1 PERSONAL INCOME TAX
 DIRECT TAX
2 CORPORATION TAX
 DIRECT TAX
3 GIFT TAX

Receiver has
to pay the gift
tax
 DIRECT TAX
4 WEALTH TAX

It is 1% tax on the wealth, which does not

generate income but, was abolished in
2015-16
 INDIRECT TAX
These are the taxes levied on goods or services. It is imposed
uniformly on all the citizens, who ever purchase / use the service.

CENTRAL GOVT.
1. Excise Duty
2. Customs Duty
3. Service Tax
NOTE
Various taxes by the State
Governments are
1. Value Added Tax
2. Entry Tax
3. Octroi
4. Luxury Tax
 INDIRECT TAX
1 EXCISE DUTY

This is levied on goods manufactured in India

 INDIRECT TAX
2 CUSTOMS DUTY

This is levied on goods imported into the country

 INDIRECT TAX
3 SERVICE TAX

This is paid on services availed.

 GOODS & SERVICES TAX

SO FAR, WE HAVE SEEN …

CENTRAL GOVT. STATE GOVTS.

1. Excise Duty 1. VAT ONLY ONE TAX
2. Service Tax + 2. Entry Tax i.e., GOODS AND
3. Octroi SERVICES TAX
4. Luxury Tax

These are indirect taxes levied by both State

Governments & the Central Government. In
future, they will be replaced by GST
 DEVELOPED COUNTRIES
USA
 More industrialized
 More National Income based on services followed by
industry.
 High per capita income
 World class infrastructure … both physical & social JAPAN
 Very few people below poverty line
 High standard of living
 High HDI

GERMANY

FRANCE

UK SOUTH KOREA AUSTRALIA CANADA

 DEVELOPING COUNTRIES
INDIA
 These are in the process of industrialization i.e. shift from
agrarian economy to industrialized economy.
 Substantial people below poverty line
 Less per capita income CHINA
 Poor infrastructure … both physical and social
 Low HDI
 Poor education standards

BRAZIL

SOUTH
AFRICA

MEXICO TURKEY NIGERIA

 1. TRADE DEFICIT

NOTE
Predominantly,
- $ 150 billion world trade is being
undertaken in
dollars

MERCANTILE GOODS EXPORTS & IMPORTS

TRADE DEFICIT = IMPORTS - EXPORTS

AROUND $ 450 bn AROUND $ 300 bn

per annum per annum
Hence, there is a Trade Deficit of around $ 150 bn
 CURRENT ACCOUNT
DEFICIT
IT IS THE DEFICIT DUE TO 1 , 2 , 3 ,& 4

1 2 SERVICES
TRADE IN PHYSICAL
GOODS

3 4
PRIMARY INCOME SECONDARY INCOME
 1. TRADE IN PHYSICAL GOODS

NOTE
Predominantly,
- $ 150 billion world trade is being
undertaken in
dollars

MERCANTILE GOODS EXPORTS & IMPORTS

TRADE DEFICIT = IMPORTS - EXPORTS

AROUND $ 450 bn AROUND $ 300 bn

per annum per annum
Hence, there is a Trade Deficit of around $ 150 bn
 2. SERVICES

OUR SOFTWARE & ICT EXPORTS ARE MORE IN

+ $ 80 billion
COMPARISON TO SOFTWARE IMPORTS
 3. PRIMARY INCOME

THIS IS ROYALTIES / PROFITS / INTEREST / OTHER CHARGES

- $ 20 billion TAKEN AWAY BY MULTINATIONAL COMPANIES IN EXCESS OF

WHAT WE ARE GETTING

 4. SECONDARY INCOME

THESE ARE THE REMITTANCES SENT BY INDIANS

+ $ 70 billion
STAYING ABROAD TO THEIR PARENTS / RELATIVES

USA

GULF
 CURRENT ACCOUNT
DEFICIT
1 2 SERVICES
TRADE IN PHYSICAL
GOODS

TOTAL = - $ 20 bn

Since it is (-), it is
- $ 150 bn + $ 80 bn Current Account Deficit.
3 4 It is around 1 to 1.5% of
PRIMARY INCOME SECONDARY INCOME GDP.

- $ 20 bn + $ 70 bn
 BALANCE OF PAYMENTS

STATEMENT OF ECONOMIC TRANSACTIONS BETWEEN

THE RESIDENTS OF THE COUNTRY AND THE REST OF
THE WORLD

CURRENT ACCOUNT CAPITAL ACCOUNT

- $ 20 bn + $ 40 bn
This is FPI & FDI

HENCE, WE ARE COMFORTABLE WITH BALANCE OF

PAYMENTS POSITION
 CAPITAL ACCOUNT

FOREIGN PORTFOLIO INVESTMENT FOREIGN DIRECT INVESTMENT

VOLATILE STABLE
INVESTMENT INVESTMENT
 SPECIAL MENTION ACCOUNTS

SMA SUB-CATEGORY BASIS OF CLASSIFICATION

Principal or interest payment not overdue

SMA – 0
for more than 30 days

Principal or interest payment overdue

SMA – 1
between 31-60 days

Principal or interest payment overdue

SMA – 2
between 61-90 days

We all very well know that the loan account becomes “Non
Performing Asset (NPA)” once either the principal or interest
or both is unpaid for more than 90 days.
 CENTRAL REPOSITORY OF INFORMATION
ON LARGE CREDITS (CRILC)

1 Banks should furnish credit information to CRILC of

the borrowers having aggregate fund-based or non-
fund based exposure of Rs. 5 crores and above once
in a quarter.

2 Banks should report SMA category to CRILC.

3 Banks should also report SMA -2 category account

to CRILC on 61st day itself.
 LENDING THROUGH
CONSORTIUM OF BANKS
Several banks coming together finance a borrower with common appraisal,
common documentation, joint supervision & follow up exercises.

LENDING AS A
GROUP

One bank will act as a lead bank

 LENDING THROUGH
MULTIPLE BANKING ARRANGEMENTS (MBAs)

 Borrower avails loans

1
independently from more than
one bank.
2  There is no contractual
relationship between various
bankers.
3
 Each banker will do his own
credit assessment.

4  Each banker holds security

independent of others.
 JOINT LENDERS’ FORUM (JLF)

 This is applicable for Consortium Lending

or Multiple Banking Arrangement (MBA)
Lending.
 At the stage of SMA-2, it is mandatory to
form a Committee known as Joint Lenders’
Forum (JLF), if the aggregate exposure
Consortium Lending (both fund-based / non-fund based) is Rs.
100 cr or above.
 Under the consortium arrangement,
consortium leader will be the convener &
in case of Multiple Banking Arrangement,
the bank with highest exposure will
convene JLF.
 JLF will look at the option of rectification /
restructuring / recovery.
Multiple Banking Arrangement Lending
 STRATEGIC DEBT RESTRUCTURING (SDR)
This is applicable only for Consortium
Loans or Multiple Banking Arrangements
(MBAs)

DEBT

COMPANY XXX
BORROWED RS. 1000 COMPANY
Consortium Lending
CRORES, FAILED TO XXX
OR REPAY

EQUITY
 Now this debt can be converted to equity.
 It gives ownership of the firm for the banks.
 They can change management.
Multiple Banking Arrangement Lending
 They can make turnaround of the company.
 BASEL NORMS

BANK FOR INTERNATIONAL SETTLEMENTS

 It was established on 17th May, 1930.

 It is the world’s oldest international
financial organization.
 BIS has two representative offices in
Hong Kong & in Mexico City.
 It was established subsequent to
The Hague Agreement of 1930.
 It has 60 Central Banks as its members
representing countries from around the world that
together make up about 95% of world GDP.
 Head office in in Basel, Switzerland.
 It acts as Bank to Central Banks.
MISSION
“Promoting global monetary and financial stability
through international cooperation”
 It is governed by Board of Directors, which elect
Chairman & Vice-Chairman.
 Present Chairman is Jens Weidmann and Vice-
Chairman is Raghuram G.Rajan.
 JENS WEIDMANN
Chairman

RAGHURAM G.RAJAN
Vice-Chairman
 BASEL NORMS
BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)

 It is a forum for regular cooperation on banking

supervision matters.

MISSION
“To strengthen the regulation, supervision and
practices of banks world wide with the purpose of
enhancing financial stability”

BASEL - I
BCBS devised Basel-I in 1988. It is
focused entirely on credit risk. Just
prescribed minimum capital requirement of
8% against Risk Weighted Assets (RWAs).
BASEL - II
BCBS devised Basel-II in 2004. In addition to capital
adequacy (credit risk), it also considered risk
management (market risk and operational risk) &
disclosure requirements.
 BASEL NORMS
BASEL COMMITTEE ON BANKING SUPERVISION
BASEL III NORMS

1 To improve banking sector’s ability to

absorb shocks arising from financial and
economic stress

2 To improve risk management and

governance
 Basel-II failed because, it could not
consider systemic risk.
 It could not prevent 2008 financial 3 To strengthen banks transparency and
crisis. disclosures
 Basel-III was proposed after 2008
financial crisis.
 BASEL III NORMS

1 CAPITAL ADEQUACY 2 LEVERAGE RATIO

CET1 Tier 1 Capital
≥ 4.5% ≥ 3%
RWAs Total Exposure
In India, total capital adequacy
is kept at 9% and to be
ensured by 31st March, 2019

3 LIQUIDITY 4 NET STABLE

COVERAGE RATIO FUNDING RATIO
High Quality Liquid Assets
LCR =
Total Net Liquidity Outflows The available amount of stable
over 30 days funding to exceed the required
≥ 100% amount of stable funding over
In India,100% LCR is to be ensured one year period
by 1st Jan, 2019
 UNEMPLOYMENT
UNEMPLOYMENT
“Total number of people, who do not have
jobs in a particular place or area”
OR
“ People who do not have a job, who have
actively looked for work during the past 4
weeks and are currently available for work ”

UNEMPLOYMENT RATE
“Percentage of total labour force that is
unemployed but actively seeking
employment and willing to work”
UNDER EMPLOYMENT
“Highly skilled workforce, but working in low skilled jobs”

Clark
TYPES OF UNEMPLOYMENT
1. Seasonal unemployment
2. Cyclical unemployment
3. Frictional unemployment
4. Structural unemployment
1. SEASONAL UNEMPLOYMENT
“ Unemployment that is expected to occur at certain periods of the year ”

AGRICULTURE SUMMER RESORTS

2. CYCLICAL UNEMPLOYMENT
It is the unemployment that relates to the cyclical trends in growth and
production that occur within the business cycle.
3. FRICTIONAL UNEMPLOYMENT
It is the time period of unemployment, when the worker / employee is
shifting from one job to another.
4. STRUCTURAL UNEMPLOYMENT
 When there is mismatch between the skills the workers possess and
the skills required.
 Unemployment due to technological changes.
 INFLATION
INFLATION

“ It is the sustained increase in the general level of prices for goods and services. It
is measured with reference to the period one year ago”.
Opposite of Inflation is Deflation.

IT CAN BE DUE TO
1. Demand Pull Factors
2. Cost Push Factors
3. Structural Deficiencies
 TYPES OF INFLATION (Based on % increase)

1 2
CREEPING INFLATION WALKING INFLATION
(1% - 3%) (4% - 10%)

3 4
RUNNING INFLATION GALLOPING INFLATION
(11% - 20%) (21% - 50%)

5
HYPER INFLATION
> 50%(Sometimes, much higher than this)

NOTE : These percentages are not sacrosanct and vary from source to source
 HOW INFLATION IS MEASURED IN OUR COUNTRY?

WHOLESALE PRICE INDEX (WPI) CONSUMER PRICE INDEX (CPI)

 Base year is 2012
 Base year is 2004-05  Food & Beverages … 45.86
 Weightages are as follows  Cereals … 9.67
 Non-food manufactured  Milk … 6.61
products … 55%  Vegetables … 6.04
 Fuel and power… 15%  Pulses … 2.38
 Food items … 24%  Housing … 10.07
 Clothing & Footwear… 6.53
 Fuel & light … 6.84
 Pan & tobacco … 2.38
 Miscellaneous … 28.32
Central Statistics Office
 GROSS DOMESTIC PRODUCT
(GDP)
“ It is the total monetary value of all the finished goods and services produced within
a country’s borders in a specific time period ”
It is a broad measurement of nation’s overall economic activity
GDP = C + G + I + NX

+ +

AGRICULTURE INDUSTRY SERVICES

(Primary) (Secondary) (Tertiary)

GDP Growth If we compare it with same period of previous year, the % increase is GDP growth
 GROSS NATIONAL PRODUCT (GNP)
“It is the measure of country’s economic performance
of goods and services by its citizens / nationals

GNP = GDP + -

GNP = GDP
+ Income earned by residents from overseas investments
- Income earned within domestic economy by overseas
residents
 NET DOMESTIC PRODUCT (NDP)
& NET NATIONAL PRODUCT (NNP)

Net Domestic Product = GDP - Depreciation

Net National Product = GNP - Depreciation

Depreciation
Reduction in the value of an asset over the passage of
time, due to wear and tear. This decrease is measured
as depreciation
 GROSS DOMESTIC PRODUCT

1. PRIMARY SECTOR IT IS THE ECONOMY OF NATURAL RESOURCES / PRODUCTS

Agriculture
 GROSS DOMESTIC PRODUCT

1. PRIMARY SECTOR

Forestry Allied sectors of Agriculture

 GROSS DOMESTIC PRODUCT

1. PRIMARY SECTOR

Fishing Mining & Quarrying

 GROSS DOMESTIC PRODUCT

2. SECONDARY SECTOR

Industry Construction
 GROSS DOMESTIC PRODUCT

3. TERTIARY (SERVICES) SECTOR

Hotels and Restaurants Banking & Insurance

 GROSS DOMESTIC PRODUCT

3. TERTIARY (SERVICES) SECTOR

Schools Hospitals
 GROSS DOMESTIC PRODUCT

3. TERTIARY (SERVICES) SECTOR

Transport Business Services