Money & Banking: Different Stages of The Development of Indian Banking

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MONEY & BANKING
Different Stages of the Banking industry. Effective from 5. United Commercial Bank
Development of Indian Banking APRIL 1, 2017 with the merger,
6. Syndicate Bank
 In order to make the Reserve Bank State Bank of India entered in the
league of Top 50 Global Banks 7. Bank of Baroda
of India more powerful, the Indian
Government nationalized it on with balance sheet sign of ‘ 41 8. United Bank of India
January 1 , 1949. With a view to trillion, 277,000 employees, 500 9. Union Bank of India
have the co-ordinated regulation million customers and more than 10. Dena Bank
of Indian banking, the Indian 22,500 branches and 58,000
11. Allahabad Bank
Banking Act was passed in March ATMs. SBI’s market share
1949. increased to 22 per cent from 17 12. Indian Bank
per cent. 13. Indian Overseas Bank
 According to this Act, the Reserve
Bank of India was granted  Besides these public sector Banks 14. Bank of Maharashtra
extended powers for the , 13 Old private sector Banks, 9  After one decade, on April 15 ,
inspection of non-scheduled banks. New private Sector Banks and 56 1980, those 6 private sector banks
For the development of the Regional Rural Banks are in whose reserves were more than ‘
banking facilities in the rural areas operation as on March 31 , 2017 200 crore each were nationalized
the Imperial Bank of India was  Under differentiated banking RBI These banks are as.
partially nationalized on July 1, granted in – principle-licenses to
1. Andhra Bank
1955 and it was named as the 11 entities to launch Payments
Bank, out of these 4 have started 2. Punjab and Sindh Bank
State Bank of India.
operations while 3 have 3. New Bank of India (Merged with
 Along with it other 7 banks were
surrendered their license. Likewise PNB)
converted as its associate banks
RBI granted in-principle license to 4. Vijaya Bank
which form what is named as the
10 entities to establish Small 5. Corporation Bank
State Bank Group. Now, all the
Finance Banks, out of which 8 have
associate banks of SBI have been 6. Oriental Bank of Commerce
started their operations.
merged with SBI.  On 4 th September, 1993 the
Nationalization
SBI in the League of Tip 50 Global Government merged the New
 In order to have more control over
Banks bank of India with Punjab National
the banks , 14 large commercial
 State Bank of India, the country’s Bank and as a result of this the
banks whose reserves were more
largest bank merges five of its total number of nationalized bank
than ‘ 50 crore each were
associate banks State Bank of got reduced from 20 to 19.
nationalized on 19th July, 1969 .
Bikaner and Jaipur, State Bank of The nationalized banks are as  After the merger of all associate
Hyderabad, State Bank of Mysore, follows. Banks of State Bank Group with
State Bank of Patial, State Bank State Bank of India at present the
1. The Central Bank of India
of Travancore and Bhartiya Mahila number of public sector banks in
Bank with itself. 2. Bank of India
India is 21 ( 19 nationalised public
3. Punjab National Bank Sector Banks, State Bank of India
 This is the first ever large scale
consolidation in the Indian 4. Canara Bank IDBI Bank.
Thoothukudi 0461 4000970 Tirunelveli 0462 2560123 Ramanathapuram 75503 52916 Madurai 9843110566 1
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Reserve Bank of India issue currency notes of various transferred to NABARD) collecting
 It is the central Bank of the denominations exept one rupee and publishing the economic data,
country. The Reserve Bank of India note. The Reserve Bank acts as the buying and selling of Government
was established in 1935 with a only source of legal tender money securities and trade gills, giving
capita of ‘ 5 crore. This capital of because the one rupee note issued loans to the Government buying
‘ 5 crore was divided into 5 lakh by Ministry of Finance are also and selling of valuable
equity shares of ‘ 100 each. circulated through it. The Reserve commodities etc. It also acts as
Bank has adopted the Minimum the representative of
 In the beginning the ownership of
Reserve System for the note issue. Government in I. M.F . and
almost all the share capital was
Since 1957, it maintains gold and represents the membership of
with the non- government
foreign exchange reserves of ‘ 200 India.
shareholders. In order to prevent
crore, of which at least ‘ 115 crore Printing of Securities and Minting in
the centralization of the equity
should be in gold. India
shares in the hands of a few
people, the Reserves Bank of India Banker to the Government  India Security press (Nasik Road)
was nationalized on January  The second important function of – Postal material, postal Stamps,
1,1949. the Reserve Bank is to act as the Non- postal Stamps, Judicial and
 The general administration and Banker, Agent and Adviser to the Non- judicial Stamps, Cheques,
direction of RBI is managed by a Government. It performs all the Bonds, NSC, Kisa V ikas Patra,
Central Board of Directors banking functions of the State and Securities of State Governments,
consisting of 20 members which Central Government and it also Public Sector Enterprise and
includes 1 Governor, 4 Deputy tenders useful advice of the Financial corporations.
Governor 1 Government official Government on matters related  Security printing press
appointed by the Union to economic and monetary policy. (Hyderabad)- Established in 1982
Government official appointed by It also manages the public debt for for meeting the demand for postal
the Union Government of India to the Government. material by southern States. It
giver representation to important Banker’s Bank also fulfils the demand for Union
states in economic life of the  The Reserve Bank performs the Excise Duty Stamps of the Country.
country Besides, 4 directors are same function for the other banks  Currency Notes Press (Nasik
nominated by the Union as the other banks oridinarily Road) – Since 1991 , this press
Government to represent local perform for their customers. It is prints currency notes of ‘ 1, ‘ 2, ‘
boards. not only a banker to the 5, ‘ 10, ‘ 50 , and ‘ 100. (Earlier
 Apart from the central board commercial banks, but it is the printing of ‘ 50 and ‘ 100 currency
there are 4 local boards also and lender of the last resort. notes was not done here).
their head offices are situated in Controller of Credit  Bank Notes Press (Dewas) –
Mumbai, Chennai, Kolkata and Currency notes of ‘20 , ‘50 , ‘100
 The Reserve bank undertakes the
New Delhi. 5 members of local and ‘500 are printed here.
responsibility of controlling credit
boards are appointed by the Union
created by the commercial banks.  Modernised Currency Notes
Government for a period of 4
To achieve this objective it makes Press – Two new modernisedd
years.
extensive use of quantitative and currency notes press are under
 The local boards work according qualitative techniques to control establishment at Mysore
to the instructions and orders and regulate the credit effectively (Karnataka) and Salboni (West
given by the central Board of in the country. Reserve Bank buys Bengal).
Directors, and from time to and sells the foreign currencies  Security paper Hoshangabad
important matter. The head office and also protects the country’s (Established in 1967-68) makes
of Reserve Bank of India is in foreign exchanges funds. production of bank and Currency
Mumbai.
Other functions notes paper.
Functions of Reserve Bank
 The bank performs a number of  Coins are minted at four places
Issue of Notes other developmental works. – Mumbai, Kolkata, Hyderabad
 The Reserve Bank has the These works include the function and Noida.
monopoly of note issue in the of clearing house arranging credit Coinage Bill 2011
country. It has the sole rights to for agriculture (which has been
 The coinage Bill 2011 was passed certain payments in ‘ 1,000 were branches, nationlised bank
by the Lok Sabha on March 25 , stopped from November 25 , 2016. branches and RRB branches were
2011. The Bill seeks to However, such payments were 23524, 65750, 21465 respectively.
amalgamate the following four allowed to be made in ‘ 500 old  The bank branches, other than
Acts and one ordinance ; note. RRBs, in the public sector consist
1. The Indian Coinage Act, 1906  The Reserve Bank of India has of 19 nationalized bank, SBI and
2. The small Coins (Offences) Act issued new ‘ 500 and ‘ 2,000 notes IDBI Bank branches network in
1971. starting from November 10, 2016 the country as on December 31 ,
 The new ‘ 500 note has a feature 2017.
3. The Metal Toke Act, 1889.
of the Red Fort at the back and  There are 45 representative
4. The Bronze Coin (Legal Tender)
the new ‘ 2,000 note contains the officer of Foreign Banks in India.
Act, 1918.
pictures of Mangalyaan. These 85 branches of Local Area Banks
5. The Currency Ordinance, Act ,
notes have become available in the and 1426 branches of Small
1940.
banking system from November Finance Banks were in operation.
Demonetisation of ‘ 500 and ‘ 1000 10,2016. Number of payment Banks were
Notes : Surgical Strike on Black 128 as on March 2018.
 Demonetisation of currency note
Money
has been done with the following Commercial Banks in India (April 1 ,
 Prime Minister Narendra Modi in objectives. 2018)
his surprise national address on
 Unearch Black Money  Public Sector Bank - 21
November 8 , 2016 at 8.00 pm
 Curb terrorist funding  SBI- 1
announced demonetization of ‘
1,000 and ‘ 500 notes with effect  Curb illegal economic activities  Nationalised - 19
from midnight of that day, making such as smuggling, drug  IDBI Bank -1
these notes invalid in a major trafficking, human trafficking.
 Private secrot Banks - 30
assault on black money, fake  Contain inflation
 Old - 13
currency and corruption. This is  Till March 2016 , ‘ 14 lakh crore
the biggest and the boldest step  New – 9
out of ‘ 16 lakh crore worth
by the government for containing currency issued by the RBI were RBI’s New Bad Loan Rule for Loan
black money. It is like a surgical in the denominations of ‘ 500 and Recovery
strike on black money. ‘1,000 as per the central bank’s  The Reserve Bank of India (RBI)
 Modi in his address said people official data. on February 12 , 2018 came out
holding notes of ‘ 500 and ‘ 1,000  As per a report of RBI, closed to with a revised framework for
can deposit the same in their bank 99.40 % (‘ 15.31 lakh crore) of expeditions resolution of bad
and post office accounts from demonetized currency notes of loans, harmonizing the existing
November 10 till December 30 , 500 and 1000 denominations have guidelines with the norms
2016 . Notes of ‘100 , ‘50, ‘20, been returned from circulation. specified in the insolvency and
‘10, ‘5 , ‘2 and ‘1 remain legal Bankruptcy code (IBC).
 The Report pegged the total
tender and will be unaffected by  The new guidelines have specified
demonetized notes returned from
the decision, the Prime Minister framework for early identification
circulation at ‘ 15.31 lakh crore.
said. and reporting of stressed assets,
Composition of Banking System in
 Initially, it was announced that the The new framework would
India
currency value of up to ‘4,000 can require banks to resolve defaults
be exchanged from any bank or  The Indian banking system consists within 180 days.
post office a day till November 24 of commercial banks both in public
Key points of these guidelines are
by showing a government identity and private sector, Regional Rural
following
card but later on this limit was Banks (RRBs) and cooperative
banks.  In view of the enactment of the
raised to ‘ 4,500. Insolvency and Bankruptcy Code
However, exchange limit reduced  As on December 31 , 2017 ,
 (IBC), 2016 , it has been decided
from ‘ 4,500 per day to ‘2,000 per commercial Banking system in
to substitute the existing
day on November 25,2016, the India consisted of 142400
guidelines with a harmonized and
exchange of demonetized Scheduled commercial Bank
simplified generic frame work for
currency notes has been stopped Branches out of which SBI
resolution of stressed assets.
 From February 23 , 2018 , Banks conduct its first monetary policy the lead bank and the idea is that
must immediately identify the review on October 4 , Urjit Patel’s AMC / AIF would become a market
defaults and make disclosers every first as RBI governor. - maker capable of ensuring fair
Friday to the RBI credit registry.  The experts will serve for four price and case 60 days .
 For accounts with an exposure of ‘ years and are not eligible for re-  The AMC / AIF called steer the
2,000 crore or more, banks will appintment. Ousider members’ turn aroung themselves or engage
have to ensure that a resolution names are recommended by a external parties for mid sized bad
plan is in place within 180 days search committee headed by assets (between ` 50 crore) which
after a ‘default ’. If not Cabinet Secretary, the other are of the similar aggregate sixe
implemented within the time- members being the RBI Governor as of the large ones there will be a
frame, the account must be and Secretary of Economic Affaris purely banks - led resoultion
referred to the insolvency courts GoI. approach under which they would
within 15 days.  The MPC framework replaces the enter into an inter creater
 The RBI has decided to do away current system where the RBI agreement to authorise the lead
with the Joint Lender’s Forum (JLF) governor and his internal team bank to implement it in 180 days.
as an institutional mechanism for have complete control over Co-operative Banks
resolution of stressed accounts monetary policy. While a  Co-operative banks in India also
also stands discontinued . All committee advises RBI on perform fundamental banking
accounts, including those where monetary policy decisions, the activities, but they are different
any of the schemes have been central bank is under no obligation from commercial banks.
invoked but not yet implemented, to accept its recommendations.
 Commercial banks have been
will be governed by the revised Project ‘ Sashakti’ for the Resolution constituted by an Act passed by
framework. for stressed Assets with PSU Banks Parliament while co-operative
 The banks will be required to  The government on July 2, 2018 banks have been constituted by
identify incipient stress in loan announced a banks-led, five – different State under various Acts
accounts, immediately on default pronged, comprehensive plan- related to co-operative societies
by classifying stressed assets as Sashakt – fro the resolution of of various states.
special mention accounts (SMA) stressed assets with public =  Co-operative bank organization in
depending upon the period of sector banks (PSBs). The idea India has there tier set up . State
default. behind project Sashakt is to ensure Co- operative Bank is the apex co-
 Evergreening of loans may no the operational turnaround of the operative institution in the state.
longer be an option with the banks and stressed companies so
 Central or District Co-operative
requirement of weekly reporting that the asset value is retained.
Bank works as district level. At the
in case of accounts above ‘ 500 The plan includes lowest level co-operative set-up is
crore.
 Creation of one or more widely primary credit Agency which
 Existing SDR loans where the held asset management works at village level.
scheme is not yet implemented companies for loans above ‘ 500  Commercial banks have been
will fall into the default category crore. constituted under unitary basis
and would thus require higher
 In case of large stressed accounts and every commercial bank has
provisioning.
– there are over 200 amounting been given authority to seek
RBI’s Monetary Policy Committee to ‘ 3.1 lakh crore with exposure refinance facility from RBI while
Constituted spread across multiple banks – an only State Co-operative Bank has
 Adopting a model followed in alternative investment fund (AIF) been provided this facility under
developed countries like US and would raise funds from co-operative banking structure.
UK, the union government has institutional investors.  Commercial bank can establish its
constituted Monetary Policy  Banks also have an option to invest branches in any district/ state of
Committee (MPC) of the Reserve in the fund if the wish to the country while, contrary to it,
Bank of India in which three participate in the upside. co-operative bank can operate its
outside experts have been activities only within limited area.
 In case these high-value assets are
nominated as members. The six –
to be sold, the price discovery  For example, District Co-operative
member MPC – the other three
would be through open auction by Bank can perform banking
members are from RBI- will
activities within the boundaries of sector. Minimum 10 persons of a Regional Rural Banks
the concerned district. village (or area) can form a  Regional Rural Banks (RRBs) were
 Similarly, Primary Credit Societies primary credit society. These PCSs established since 1975 under the
can perform banking services are also called Primary provision of the RRB Act 1976 with
within concerned villages. Agriculture Credit societies. a view to developing the rural
 Co operative banks cannot open  These societies grant short- term economy as well as to creating an
their branches in foreign countries loans (generally one year period) alternative channel to ‘Co-
while commercial banks can do for productive activities but this operative Credit Structure’ in
that. period can be extended upto 3 order to ensure sufficient
years under special institutional credit for rural and
 Banking Regulation Act, 1949 is
circumstances. agricultural sector.
fully applicable to all commercial
banks while it is partially applicable District Central Co-operative Bank  In other words, Regional Rural
to co-operative banks. In other (DCCB) Banks (RRBs) were established to
words, RBI has partial control on take the banking services to the
 The working area of these banks
co-operative banks. door steps of rural masses,
is limited to one district only. especially in remote rural areas
 Co-operative banks work on Central co-operative Bank can be with no access to banking services.
principles of co-operation while divided into two parts.
commercial banks adopt pure  These banks provide institutional
1. Co-operative Banking Union credit to the weaker sections of
commercial principles in their
operation . That is the reason why 2. Mixed Central Co-operative Bank the society at concessional rate of
Co-operative banks succeed in  The membership of co-operative interest.
getting financial assistance from Banking Union is given to Co-  These banks were also intended
RBI on concessional rate. operative Societies only, while the to mobilise rural savings and
 As per the recommendations of membership of mixed Central Co- channelize for supporting the
the Task Force on Reviving the Co- operative Bank can be granted to productive activities in the rural
operative Credit Structure both Co-operative societies and area. On October 2 , 1975 , initially
(Chairman : Prof . Vaidyanathan), individuals. 5 RRBs were established at
Government has finalized actions Moradabad (U.P.) and Gorakhpur
 Generally all states in India are
with regard to shortterm co- (U.P.), Bhiwani (Haryana), Jaipur
having Central Co-operative banks
operative credit structure (Rajasthan) and Malda (West
with mixed membership and are
Government’s share of the total Bangal).
providing sufficient financial
financial package has been assistance to both PCSs and  As on March 31 , 2018 ; 56 RRBs
increased from 53 % to 68 % on an individuals. with 21667 branches are working
aggregate basis. in India.
State Co-operative Bank (SCB)
Urban Co-operative Banks Damodaran Committee submits
 It is the apex Co-operative Bank
 The Urban Co-operative Banks Report on Reforms in Banking
of the state. It grants loans to
(UCB) sector has emerged Services
Central Co-operative Banks and
financially stronger since 2005 ,  Damodaran Committee on
regulates their activities.
when the Reserve Bank conceived reforms in banking services has
a Vision Document for the revival  State Co-operative Bank gets submitted its report to Reserve
of this sector. loans from RBI. Hence, SCB acts Bank of India. The reforms in
as a link between RBI and Central banking services, suggested by the
 Through the Document, the
Co-operative Banks. committee are as follows:
Reserve bank laid down a
multilayered regulatory and  State Co-operative Bank raises its  There should be no restriction of
supervisory approach aimed at current capital by shares and loans maintaining minimum balance in
the merger / amalgamation of RBI generally provides loans to the account for obtaining facilities
viable UCBs and the exit of SCB on interest rate, one or two of cheque book and ATM card.
unviable UCBs. per cent lower than bank rate.  Fixed deposits should not
Primary Credit Societies  At the end of March 2017, 33 State automatically be renewed
 These societies provide short – Co-operative Banks are working in without written permission/
term credit facilities to agriculture the country. request of the depositor.
 The present limit of insurance Constitution) to legislate on capita of NABARD stood at ‘2000
cover of ‘ 1 lakh for deposits in matters relating to the regulation crore as on March 31 , 2010
savings account should be raised and supervision of cooperative  NABARD was established with the
to ‘5 lakh. societies carrying on financial aim for providing credit for
 Home loan customers should not services. promotion of agriculture, small
be penalized on closing their  All regulators will have an scale industries, cottage and
account before maturity period if empowered board. The village industries, handcrafts and
they succeed in getting home loan commission has drafted a precise other allied economic activities in
at a lower interest rate from some selection – cum- search process rural areas with a view to
other bank or financial institution. for the appointment of all promote integrated rural
 All documents kept against members. development and securing
granting home loans should be  At present, relgulations are not prosperity in rural areas.
returned to the customer within15 subject to judicial review. The  As an apex institution in rural
days from the date of full payment commission engvisages an credit structure, NABARD provides
of loan. important process of judicial refinance facilities to various such
Report of Financial Sector Legislative review of regulations. financial institutions which
Reforms Commission  The Commission envisages a single provide loans to promote
financial Data Management productive activities in rural areas.
 Finance Minister GoI announced
in Union Budget 2010-11 the Centre’ . All financial firms will  To meet its loan requirements,
setting up of a Financial Sector Submit regular information filings NABARD obtains funds from
Legislative Reforms Commission electronically to this single facility. Government of India, World Bank
with view to rewriting and  The Commission proposes a and other agencies.It also
cleaning up the financial sector financial regulatory architecture mobilizes resources by issuing
laws to bring them in tune with featuring seven agencies. bonds and debentures
the ongoing process of financial guaranteed by Union
 The existing RBI will continue to
sector reforms and requirements Government. Besides, it also
exist, through with modified
of the economy. utilizes the funds of National Rural
functions.
Credit Fund.
 Accordingly the financial sector  The existing SEBI, FMC, IRDA and
Legislative Reforms Commission Rural Infrastructure Development
PFRDA will be merged into a new
(FSLRC) was set up under the Fund
unified agency.
Chairmanship of justice (Tetd).  All domestic scheduled
 The existing Securities Appellate
B.N. Srikrishna on March 24 , commercial banks are required to
Tribunal (SAT) will be subsumed
2011. lend 40% of their net credit to
into the FSAT.
 The FSLRC submitted its report to priority sector with sub-target to
 The Existing Deposit Insurance
the government on March 22 , priority sector with sub-target to
and Credit Guarantee Corporation
2013. 18 % for lending to 18 % for lending
of India (DICGC) will be subsumed
to agriculture.
 The commission envisioned nine into the Resolution Corporation.
core areas of financial sector  Banks having shortfall in lending
National Bank for Agriculture and
namely – consumer’s protection, to priority / agriculture sector are
Rural Development (NABARD)
microprudential regulation. required to contribute to Rural
 It is the apex banking institution Infrastructure Development Fund
 At present, many public sector
providing finance for agriculture (RIDF) which was established on
financial forms e.g., Life Insurance
and rural development. NABARD April 1 , 1995 to assist State
Corporation of India (LIC), State
was established on July 12 , 1982 Governments / State owned
Bank of India (SBI) are tooted in a
with the paid – up capita of ‘ 100 Corporations in quick completion
specific law.
crore having 50 : 50 contribution of ongoing projects relating to
 The commission recommends that of Indian Government and RBI. medium and minor irrigation, soil
they be converted into companies NABARD (Amendment) Bill 2000 conservation watershed
under the companies Act ,. 1956. was accepted by the President in management, and other forms of
 State Governments should accept January 2001. The authorised rural infrastructure.
the authority of Parliament capital has been raised from ‘2000
Now the scope of RIDF has been

(under Article 252 of the crore to ‘30000 crore. The paid up
enlarged by including
development projects  Domestic commercial banks  The main objective of the Fund is
implemented by Gram Panchayats contribute to the Fund to the to provide loans to State
Self – help groups and NGOs/ extent of their shortfall in Governments and State- owned
 The Fund is maintained by the stipulated priority sector lending corporations to enable them to
National Bank for agriculture and to agricultures. complete ongoing rural
Rural Development (NABARD). infrastructure projects.
BANKING IN INDIA
Introduction
making loans and advances, (NBFC-D), and
 The sense in which we today use leasing, hire purchase, etc. ii) non- deposit taking NBFCs
the term banking has its origin in
 They can not have certain (NBFC-ND).
the western world. It was
activities as their principal business  It is mandatory for a NBFC to get
introduced in India by the British
– agricultural, industrial and sale- itself registered with the RBI as a
rulers, way back in the 17 th
purchase or construction of deposit taking company.
century.
immovable property.
 Since then, enough water has  For registration they need to be a
 They raise funds from the public, company (incorporated under the
flown and today Indian banks are
directly or indirectly, and lend Companies Act, 1956) and should
considered among the best banks
them to ultimate spenders. They have a minimum NOF (net owned
in the developing world and its
advance loans to the various fund)2 Rs. 2 crore.
attempts to emerge among the
wholesale and retail traders,
best in the world is going on.  Presently, there are 11,781 NBFCs
small-scale industries and self-
NBFCs registered with the RBI, out of
employed persons.
which 212 are NBFCs-D and
 Bank is a financial institution  Thus, they have broadened and 11,569 are NBFCs-ND.
engaged primarily in mobilizing diversified the range of products
deposits and forwarding loans The  They account for 14.8 per cent of
and services offered by a financial
deposits and loans are highly the assets and 0.3 per cent of the
sector. Gradually, they are being
differentiated in nature. Banks are deposits of the SCBs (Schedule
recognized as complementary to
regulated by the Central bank of Commercial Banks), respectively.
the banking sector due to their.
the country – in case of India, the Important regulations relating to
i) Customer – oriented services;
RBI(Reserve Bank of India). acceptance of deposits
ii) Simplified procedures ;
 The another category of financial  Allowed to accept and / or renew
iii) Attractive rates of return on public deposits for a minimum
institution – the non-bank – is
deposits ; and period of 12 months and
almost similar in its functions but
main difference (though, highly iv) Flexibility and timeliness in maximum period of 60 months.
simplified) being that it does not meeting the credit needs of  Cannot accept demand deposits
allow its depositors to withdraw specified sectors. (i.e., the saving and current
money from their accounts.  RBI, the regulator of the NBFCs, accounts).
 NBFCs (Non- Banking Financial has gives a very wide definition of  Cannot offer interest rates higher
Companies) are fast emerging as such companies (a kind of than the ceiling rate prescribed by
an important segment of Indian ‘umbrella’ definition)- “a financial the RBI.
financial system. institution formed as a company
 Cannot offer gifts, incentives or
involved in receiving deposits or
 It is an heterogeneous group of any other additional benefit to
lending in any manner.
institutions (other than the depositors.
commercial and co-operative  Based on their liability structure,
 Should have minimum investment
banks) performing financial they have been classified into two
grade credit rating.
intermediation in a variety of broad categories;
 Their deposits are not insured.
ways, like accepting deposits, i) Deposit – taking NBFCs
 The repayment of deposits by officially open autonomy for the  The rate has direct impact on
NBFCs is not guaranteed by RBI. RBI, we have learnt enough by long-term lending activities of the
 Need to maintain Capital now and are better off today. concerned lending bodies
Adequacy Ratio (CAR) norm as  RBI uses many instruments / tools operating in the Indian financial
prescribed by the RBI. to put in place the required kind system. The rate was realigned
Types of credit and monetary policy such with the MSF (Marginal Standing
as- CRR, SLR, Bank Rate, Repo & Facility) by the RBI in Februrary
 Asset Finance Company (AFC)
Reverse Rates, MSF Rate, OMOs, 2012.
 Investment Company (IC) and
etc. on which it has regulatory Repo Rate
 Loan Company (LC) controls.  The rate of interest the RBI
Credit and Monetary policy  The cash reserve ratio (CRR) is the charges from its clients on their
 The policy by which the desired ratio (fixed by the RBI) of the total short – term borrowing is the repo
level of money flow and its deposits of a bank in India which is rate in India. Basically , this is an
demand is regulated is known as kept with the RBI in the form of abbreviated form of the ‘rate of
the credit and monetary policy. cash. This was fixed to be in the repurchase’ and in western
 All over the world it is announced range of 3 to 15 per cent. economies it is known as the ‘rate
by the central banking body of the  A recent Amendment (2007) has of discount’.
country – as the RBI announces it removed the 3 per cent floor and  The practice it is not called an
in India. In India there has been a provided a free hand to the RBI in interest rate but considered a
tradition of announcing it twice in fixing the CRR. discount on the dated government
a financial year – before the  At present it is 4 per cent and a 1 securities, which are deposited by
starting of the busy and the slack per cent change in it today affects institution to borrow for the short
seasons. the economy with Rs. 96,000 term.
 But in the reform period, this crore – an increase sucks this  The Call Money Market of India
tradition has been broken. Now amount from the economy, while (inter – bank market) operates at
the RBI keeps modifying this as a decrease injects this amount into this rate and banks use this route
per the requirement of the the economy. for overnight borrowings.
economy, though the practice of  The statutory liquidity ratio (SLR)  This rate has direct relation with
the two policy announcements a is the ratio ( fixed by the RBI) of the interest rates banks charge on
year still continues. the total deposits of a bank which the loans they offer ( as it affects
 In India, a debate regarding is to be maintained by the blank the operational cost of the banks).
autonomy to the RBI regarding with itself in non- cash form
 It is the rate of interest the RBI
announcement of the policy prescribed by the government to
pays to its clients who offer short-
starged when the Narasimham be in the range of 25 to 40 per
term loan to it. At present the rate
Committee – I recommended on cent.
is at 5.75 per cent.
these lines.  The Government of India has
 It is reverse of the repo rate and
 As the Governor RBI it was Bimal removed the 25 per cent floor for
this was started in November 1996
Jalan who vocally supported the the SLR by an Amendment (2007)
as part of liquidity Adjustment
idea. No such move came from providing the RBI a free hand in
Facility ( LAF) by the RBI.
the governments officially, but it fixing it. It is 20.50 per cent.
is believed that the RBI has been  In practice, financial institutions
Bank Rate
given almost working autonomy in operating in India park their
 The interest rate which the RBI surplus funds with the RBI for
this area.
charges on its long- term lendings short-term period and earn
 In most of the developed is known as the Bank Rate . The money. It has direct bearing on
economies, the central bank clients who borrow through this the interest rates charged by the
functions with autonomous route are the Government of banks and the financial
powers in this area (bifurcation of India, state governments, banks institutions on their different
politics from the economics). financial institutions, co-operative forms of loans.
Though we lack such kind of banks, NBFCs, etc.
 This tool was utilized by the RBI in  In recent times, several changes  The mobilized cash is held in a
the wake of over money supply have been introduced by the RBI separate government account
with the Indian banks and lower in the market . with the Reserve Bank. The
loan disbursal to serve twin  By April 2016, banks were allowed instrument thus has features of
purposes of cutting down banks to borrow only 1 per cent of their both, SLR and CRR.
losses and the prevailing interest NDTL (net demand and time Base Rate
rate. liabilities, I.e., total deposit of the  Base Rate is the interest rate
 It has emerged as a very important banks, in layman term) under below which Scheduled
tool in direction of following cheap overnight facility at repo rate. Commercial Banks (SCBs) will lend
interest regime – the general  Open Market Operations no loans to its customers – its
policy of the RBI since reform (OMOs): are conducted by the RBI means it is like prime lending rate
process started. via the sale/ purchase of (PLR) and the benchmark prime
Marginal Standing Facility (MSF) government securities (G-Sec) to lending Rate (BPLR) of the past
/ from the market with the primary and is basically a floor rate of
 MSF is a new scheme announced
aim of modulating rupee liquidity interest. It replaced the existing
by the RBI in its Monetary Policy,
conditions in the market. idea of BPLR on 1 July, 2010.
2011-12 which came into effect
from May, 2011.  OMOs are an effective  The BPLR system (While the
quantitative policy tool in the existing system was of PLR),
 Under this scheme, banks can
armoury of the RBI, but are introduced in 2003 , fell short of
borrow overnight upto 1 per cent
constrained by the stock of its original objective of bringing
of their net demand and time
government securities available transparency to lending rates.
liabilities (NDTL) from the RBI, at
with it at a point in time.  This was mainly because under
the interest rate 1 per cent ( 100
basis points) higher than the  Other than the institutions, now this system, banks could lend
current repo rate. individuals will also be able to below BPLR. This made a
participate in this market. bargaining by the borrower with
 In an attempt to strengthen rupee
 Liquidity Adjustment Facility bank-ultimately one borrower
and checking its falling exchange
(LAF) : The LAF is the key element getting cheaper loan than the
rate, the RBI increased the gap
in the monetary policy operating other, and blurred the attempts
between ‘repo’ and MSF to 3 per
framework of the RBI . of bringing in transparency in the
cent.
lending business.
 On daily basis, the RBI stands
Other Tools
ready to lend to or borrow money  The Base Rate system is aimed at
 Call Money Market : The call enhancing transparency in lending
from the banking system, as per
money market is an important the need of the time, at fixed rates of banks and enabling better
segment of the money market interest rates (repo and reverse assessment of transmission of
where borrowing and lending of repo rates. monetary policy.
funds take place on over night  By the fiscal 2015 – 16 , Several
 Together with moderating the
basis. new initiatives were taken by the
fund – mismatches of the banks,
 Participants in the call money LAF operations help the RBI to RBI in the area of credit and
market in India currently include effectively transmit interest rate monetary policy management –
scheduled commercial banks signals to the market. major ones are being given below.
(SCBs) – excluding regional rural  Transition to a bi-monthly
 Market Stabilisation Scheme
banks), cooperative banks (other monetary policy cycle.
(MSS) : This instrument for
than land development banks),
monetary management was  Under it , the CPI( C ) is used
insurance. Prudential limits, in introduced in 2004. by the RBI as the “Headline
respect of both outstanding
Surplus liquidity of a more
 inflation” for monetary
borrowing and lending management.
enduring nature arising from large
transactions in the call money
capital inflows is absorbed through  The RBI is to ‘target inflation’
market for each of the the entities,
sale of short – dated government at 4 per cent with a variations
are specified by the RBI.
securities and treasury bills. of 2 per cent. It means, the
‘range of inflation’ is to be a) Average cost of funds, assumptions which are basic to the
between 2 to 6 per cent ( of b) Marginal cost of funds, or banking industry.
the CPI – C).  The recommendations of the CFS
c) Blended cost of funds
 Besides the existing repo (liabilities). (Narasimham Committee I) were
route, term repos have been aimed at :
 As per the RBI, the MCLR will bring
introduced for three set of i) Ensuring a degree of operational
in the following benefits.
tenors – 7 , 14 and 28 days. flexibility;
 transmission of policy rate into the
 RBI is progressively reducing ii) Internal autonomy for public
lending rates of banks to improve;
banks’ access to overnight
sector banks (PSBs) in their
liquidity, and encouraging the  Computation of the interest rates
decision making process; and
banks to increase their by banks will get more
transparent; iii) Greater degree of professionalism
dependency on the term
repos. in banking operation.
 Cost of loan will be fairer to the
 By March 2016 , banks were borrowers as well as the banks. Recommendation of CFS
allowed to borrow only up to 1 per  It will help the banks to become  The CFS recommendation could be
cent of their NDTL from the Call more competitive and enhance summed up under five sub –titles.
money Market – 0.25 per cent their long-run value. 1. On Directed Investment
through repo and the rest of 0.75  The present MCLR of banks is  The RBI was advised not to use the
per cent through term repo. 7.75-8.20 per cent. CRR as a principal instrument fo
 As per the union Budget, 2016 – monetary and credit control, in
Financial Sector Reforms
17 , individuals will also be allowed place it should rely on open
 The process of economic reforms
by the RBI to participate in the market operations (OMOs)
initiated in 1991 had redefined the
government security market. increasingly. Two proposals
role of government in the
MCLR advised regarding the CR.
economy – in coming times the
 From the financial year 2016-17, economy will be dependent on the i) CRR should be progressively
banks in the country have shifted greater private participation for reduced from the present high
to a new methodology to its development. level of 15 per cent to 3 to 5 per
compute their lending rate. The cent ; and
 Such a changed view to
new methodology – MCLR – which ii) RBI should pay interest on the CRR
development required an
was articulated by the RBI in
overhauling in the investment of banks above the basic minimum
December 2015. The main
structure of the economy. at a rate of interest equal to the
features of the MCLR are -
level of banks, one year deposit.
 It will be a tenor linked internal  Now the private sector was going
to demand high investible capital  Concerning the SLR it was advised
benchmark, to be reset on
out of the financial system. Thus, to cut it to the minimum level (i.e.,
annual basis.
an emergent need was felt to 25 per cent) from the present high
 actual lending rates will be level of 38.5 per cent in the next 5
restructure the whole financial
fixed by adding a spread to the years (it was cut down to 25 per
system of India.
MCLR. cent in October 1997).
 A high level committee on
 to be reviewed every month
Financial System (CFS) was set up 2. On Directed Credit Programme
on a pre- announced date.
on 14 August, 1991 to examine all  Under this sub-title the
 existing borrowers will have
aspects relating to structure, suggestions revolved around the
the option to move to it.
organization, function and compulsion of priority sector
 banks will continue to review procedures of the financial system- lending (PSL) by the banks.
and publish ‘Base Rate’ as based on its recommendations, a i)
Directed credit programme
hitherto. comprehensive reform of the should be phased out gradually. As
 By now, banks have been using banking system was introduced in per the committee, agriculture
either of the following three the fiscal 1992-93. and small scale industries (SSIs)
methods to compute their Base
 The CFS based its had already grown to a mature
Rate :
recommendations on certain stage and they did not require any
special support; two decades of banking operations. and were opposed by the bank
interest subsidy were enough. ii) Dual control of RBI and Banking unions and the leftist political
Therefore, Concessional rates of Division (of the Ministry of parties.
interest could be dispensed with. Finance) should go immediately 6. Other major suggestions
ii) Directed credit should not be a and RBI to be made the primary i) Opening of new private sector
regular programme – it should be agency for the regulation of the banks permitted in 1993 ;
a case of extraordinary support to banking system.
ii) Prudential norms relating to
certain weak sections – besides, it iii) The PSBs to be made free and income recognition, asset
should be temporary, not a autonomous ; classification and provisioning by
permanent one.
iv) The RBI to examine all the banks on the basis of objective
iii) Concept of PSL should be redefined guidelines and directions issued to criteria laid down by the RBI ;
to include only the weakest the banking system in the context iii) Introduction of capital adequacy
sections of the rural community of the independence and norms with international standard
such as marginal farmers, rural
autonomy of the banks. started.
artisans, village and cottage
industries, tiny sector, etc. v) Every PSB to go for a radical iv) Simplification in the banking
change in work technology and refulation (i.r. via board for
iv) The “redefined PSL” should have
culture, so as to become financial supervision in 1994) ; etc.
10 per cent fixed of the aggregate
competitive internally and to be
bank credit. Banking sector Reforms
at par with the wide range of
v) The composition of the PSL should  The government commenced a
innovations taking place abroad;
be reviewed after every 3 years. comprehensive reform process in
and
On the Structure of Interest Rates the financial system in 1992-93
vi) Finally, the appointment of the
after the recommendation of the
 The major recommendation on Chief Executive of Bank (CMD)
CFS in 1991.
the structure of interest rates are; was suggested not to be no
 In December 1997 the
i) Interest rates to be broadly political considerations but on
government did set up another
determined by market forces professionalism and intergrity. an
committee on the banking sector
ii) All controls of interest rates on independent pand of experts was
reform under the chairmanship of
deposits and lending to be suggested which should
M. Narasimham.
withdrawn; recommend and finalise the
suitable candidates for this post.  The Narasimham Committee – II
iii) Concessional rates of interest for
(popularly called by the
PSL of small sizes to be phased out 5. Asset Reconstruction
Government of India ) handed over
and subsidies on the IRDP loans to Companies/ Fund
its reports in April 1998 , which
be withdrawn;  To tackle the menace of the
included the following major
iv) Bank rate to be the anchor rate higher non- performing assets
suggestions.
and all other interest rates to be (NPAs) of banks and financial
i) Need for a stronger banking
closely linked to it ; and institutions, the committee
system for which mergers of the
v) The RBI to be the sole authority suggested setting up of asset
PSBs
to simplify the structure of interest reconstruction companies / funds
ii) A 3 – tier banking structure was
rates.  The Committee directly blamed
suggested after mergers ;
4. On structural Reorganisation of the Government of India and the
Ministry of Finance for the sad a. Tier – 1 to have 2 to 3 banks of
the Bank
state of affairs of the PSBs. international orientation.
 For the structural reorganization
 These banks were used and b. Tier – 2 to have 8 to 10 banks of
of banks some major suggestions
abused by the GoI, the officials, national orientation ; and
were given :
the banks employees and the c. Tier – 3 to have large number of
i) Substantial reduction in the
trade unions, the report adds. local banks.
number of the PSBs through
mergers and acquisitions – to  The recommendation were iii) Higher norms of Capita – to – Risk
bring about greater efficiency in revolutionary in many respects – Weighted Adequacy Ratio
(CRAR) suggested – increased to other weaker sections of society. as ’90 day’ overdue norm.
10 per cent.  In its new guidelines of March  For agriculture loans the periods
iv) Legal framework of loan recovery 2015, the RBI added ‘ medium is tied with the period of the
should be strengthened (the enterprise, sanitation and concerned crops – ranging from
government passed the SARFAESI renewable energy’ under it . two crop seasons to one year
(Act, 2002).  The PSL target must be met by the overdue norm.
v) Net NPAs for all banks suggested banks operating in India in the NPAs were classified into three types
to be cut down to below 5 per cent following way. a) Sub – standard : remaining NPAs
by 2000 and 3 per cent by 2002.  Indian Banks : Need to lend 40 for less than or equal to 18
vi) Rationalisation of branches and per cent to the priority sector months.
staffs of the PSBs suggested. every year (public sector as well b) Doubtful : remaining NPAs for
vii) Licencing to new private banks as private sector banks, both) of more than 18 months ; and
(domestic as well as foreign) was their total lending.
c) Loss assets : where the loss has
suggested to continue with. Sub - target also - 18 percen of the been identified by the bank or
viii) Banks boards should be total internal / external auditors or the
depoliticized under RBI  There is a lending must go to RBI inspection, but the amount
supervision. agriculture and 0 per cent of the has not been written off.
ix) Board for financial Regulation and total lending or 25 per cent of the  After the RBI conducted and AQR
Supervisions (BFRS) should be set priority sector lending (whichever (Asset Quality Revie) , which was
up for the whole banking, financial be higher) must be lent out to the completed in March 2016 , the
and the NBFCs in India . weaker sections. NPAs of the banks increased much
DRI  Other areas of the priority sector higher.
to be covered in the left amount,  It was 9.1 per cent of total
 The differential rate of interest
i.e., 12 per cent of the total loans by September 2016 , double
(DRI) is a lending programme
lending. their year ago level. Equally
launched by the government in
April 1972 which makes it  Foreign Banks :(having less than strikling was the concentration of
obligatory upon all the public 20 branches ) have to fulfil only 32 these bad loans.
sector banks in India to lend 1 per per cent PSL target which has  More than 80 per cent of the
cent of the total lending of the sub=-targets for the exports ( 12 NPAs were in the PSBs (public
preceding year to ‘the poorest per cent) and small and medium sector banks), where the NPA ratio
among the poor’ at an interest enterprises (10 per cent). had reached almost 12 per cent.
rate of 4 per cent per annum.  It means they need to disburse  Meanwhile, on the corporate
Priority Sector Lending other areas of the PSL from the side around 40 per cent of the
remaining 10 per cent of their corporate debt was owed by
 All India banks have to follow the
total lending. companies which had an interest
compulsory target of priority
sector lending (PSL). The priority Non – performing Assets coverage ratio ( ICR) less than 1 (
sector in India are at present the  Non – performing Assets (NPAs) it means that these companies did
sectors- agriculture, small and are the bad loans of the banks. The not earn enough to pay even the
medium enterprises (SMEs), road criteria to identify such assets have interest on their loans.
and water transport, retail trade, been changing over the time.  At its current level, India’s NPA
small business, small housing loans  In order to following international ratio is higher than any other
(not more than Rs. 10 lakhs), best practices and to ensure major emerging market (except
software industries, self help greater transparency, the RBI Russia’s 9.2 per cent)), higher even
groups (SHGs), agro- processing, shifted to the current policy in than the peak levels seen in Korea
small and marginal farmers, 2004. ( of 8.9 per cent ) during the East
artisans distressed urban poor and  Under it , a loan is considered NPA Asian crisis of mid – 1990 s.
indebted non- institutional if it has not been serviced for one  The main reasons for
debtors besides the SCs, STs and term (i.e., 90 days). This is known unprecedented increase in the
NPAs of the banks have been as interest burden, which they found independent agency is hired by the
given below. difficult to repay, forcing banks to banks which decided as how much
i) Switchover to system – based extend additional loans. of the stressed debt of a company
identification of NPAs ; 2. ARCs (Asset Reconstruction is ‘sustainable’.
ii) Current macro – economic Companies)  The rest (‘unsustainable’) is
situation in the country ;  AFCs were introduced to India converted into equity and
under the SARFAESI Act ( 2002), preference shares. Unlike the SDR
iii) Increased interest rates in the
recent past ; as specialists to resolve the burden arrangement, this involves no
of NPAs. But the ARCs ( most are change in the ownership of the
iv) Lower economic growth ; and
privately – owned) finding it company.
v) Aggressive lending by banks in the difficult to resolve the NPAs they SARFAESI Act, 2002
past. Especially during good purchased, are today only willing
times.  GoI finally cracked down on the
to purchase such loans at low
willful defaulters by passing the
Resolution of the NPAs prices.
securitization and Reconstruction
 At one hand, while the RBI tried  As a result, banks have been of Financial Assets and
to check the NPAs from rising by unwilling to sell them loans on a Enforcement of Security Interest
announcing new guidelines for the large scale. Since (2014) the fee (SARFAESI) Act, 2002.
banks, on the other hand, it has structure of the ARCs was
also taken several steps to ‘resolve’  The Act gives far reaching powers
modified purchases of NPAs by
the problems. to the banks / FIs concerning NPA
them have slowed down further –
:
 By February 2017 (since 2014- 15) only about 5 per cent of total NPAs
, the RBI has implemented a were sold during 2014-15 and  Banks / FIs having 75 per cent of
number of schemes to facilitate 2015-16 the dues owed by the borrower
resolution of the NPAs problem of can collectively proceed on the
3. SDR (Strategic Debt
the banks – briefly discussed following in the event of the
Restructuring)
below. account becoming NPA.
 In June 2015 , RBI came up with
1. 5/ 25 Refinancing i) Issue notice of default to
the SDR scheme provide an
borrowers asking to clear dues
 This scheme offered a large opportunity to banks to convert
within 60 days.
window for revival of stressed debt of companies. (whose
assets in the infrastructure sectors stressed assets were restructured ii) On the borrower’s failure to repay
and 8 core industries. but which could not finally fulfil the ;
conditions attached to such a) Take possession of security and /
 Under this scheme lenders were
restructuring) to 51 per cent or
allowed to extend the tenure of
equity and sell them to the highest b) Take over the management of the
loans to 25 years with interest
bidders – ownership change takes borrowing concern and / or
rates adjusted every 5 years, so
place in it.
tenure of the loans matches the c) Appoint a person to manage the
long gestation period in the 4. AQR (Asset Quality Review) : concern.
sectors.  Resolution of the problem of bad iii) If the case is already before the
 The scheme thus aimed to improve assets requires sound recognition BIFR, the proceedings can be
the credit profile and liquidity of such assets. stalled if banks/ FIs having 75 per
position of borrowers, while  Therefore, the RBI emphasized cent share in the dues have taken
allowing banks to treat these AQR, to verify that banks were any steps to recover the dues
loans as standard in their balance assessing loans in line with RBI under the provisions of the
sheets, reducing provisioning loan classification rules. Any ordinance.
costs against NPAs. deviations from such rules were to
 The banks / FIs can also sell the
be rectified by March 2016.
 However, with amortization security to a securitization or Asset
spread out over a longer period, S4A (Scheme for Sustainable Reconstruction Company (ARC),
this arrangement also meant that Structuring of Stressed Assets) established under the provision of
the companies faced a higher  Introduced in June 2016 , in it, an the Ordinance.
Wilful Defaulter banking facilities and to access i) The provision of keepin a cash
 There are many people and financial institutions for five years ratio of total deposits mobilized by
entities who borrow money from for the purpose of starting a new the banks ( known as the CRR in
lending institutions but fail to venture. India );
repay. iii) The lenders can initiate the ii) The provision of maintaining some
 However, not all of them are process of recovery with full vigour assets of the deposits mobilized by
called willful defaulters. As is and can even initiate criminal the banks with the banks
embedded in the name, a willful proceedings, it required. themselves in non – cash form
defaulter is one who does not iv) The lending institutions may not (known as the SLR in India) ; and
repay a loan or liability, but apart allow any person related to the iii) The provisions of the capita
from this there are other things defaulting company to become a adequacy ratio (CAR) norm.
that define a willful defaulter. board member of any other  The capital adequacy ratio (CAR)
 According to the RBI, a willful company as well. norm has been the last provision
defaulter is one who – Capital Adequacy Ratio to emerge in the area of
i) Is financially capable to repay and  At first sight bank is a business or regulating the banks in such a way
yet does not do so ; industry a segment of the service that they can sustain the probable
sector in any economy. But the risks and uncertainties of lending.
ii) Or one who diverts the funds for
failure of the bank may have far It was in 1988 that the central
purposes other than what the fund
greater damaging impact on an banking bodies of the developed
was availed for ;
economy than any other kind of economies agreed upon such a
iii) Or with whom funds are not
business or commercial activity. provisions, the CAR – also known
available in the form of assets as
as the Basel Accord.
funds have been siphoned off ;  Healthy functioning of banks is
today essential for the proper  The accord was agreed upon at
iv) Or who has sold or disposed the
functioning of an economy. Basel, Switzerland at a meeting
property that was used as a
of the Bank for International
security to obtain the loan.  As credit creation (i.e., loan
settlements. It was at this time
 However, a lending institution disbursals) of banks are highly risky
that the Basel – I norms of the
cannot term an entity or an business, the depositor’s money
capital adequacy ratio were
individual a willful defaulter for a depends on the banks’ quality of
agreed upon – a requirement was
one-off case of default and needs lending.
imposed upon the banks to
to take into account the  In the banking business risks are
maintain a certain amount of free
repayment track record. always there and cannot be made
capita (i.e., ratio) to their assets.
 The default should be established ‘zero’-as any loan forwarded to
 In 1988, this ratio capital was
to be international and the any individual or firm (irrespective
decided to be 8 per cent. It means
defaulter should be informed of their credit – worthiness) has
that if the total investments and
about the same. the risk of turning out to be a bad
loans forwarded by a bank
debt (i.e., NPA in India) – the
 The defaulter should also be given amounts to Rs. 100 , the bank
probability of this being 50 per
a chance to clarify his stand on the needs to maintain a free capita of
cent. But banks must function so
issue. Also, the default amount Rs. 8 at that particular time.
that economies can functions.
needs to be at least Rs. 25 lakh to  CAR, a measure of a bank’s capital,
be included in the category of  Finally, the central banks of the
world started devising tools to is expressed as a percentage of a
willful defaults. bank’s risk weighted credit
minimize the risks of banking at
 If an entity’s or individual’s name exposures.
one hand and providing cushions
figures in the list of willful  CAR = Total of the Ties I & Tier 2
(shock – absorbers to banks at
defaulters, the following capitals  Risk Weighted Assetss
the other hand so that banks
restrictions get in action on them.
donot go bust after becoming  Also known as ‘Capital to Risk
i) Barred from participating in the bankr rupt providing cushion / Weighted Assets Ratio (CRAR);
capital market. shock absorbers to banks has seen this ratio is used to protect
ii) Barred from availing any further There major develpments. depositors and promote the
stability and efficiency financial per cent. would be unable to pay dividends,
systems around the world.  The basic question which comes though they will not be forced to
 Two types of capital were to mind is as to why do the banks raise cash.
measured as per the Basel II need to hold capital in the form of  The new norms are based on
norms : Tier I capita , which can CAR norms? Two reasons have renewed focus of central bankers
absorb losses without a bank being been generally forwarded for the on ‘ macro-prudential stability’.
required to cease trading, and Tier same. The global financial crisis following
2 capital, which can absorb losses i) Bank capital helps to prevent bank the crisis in the US sub-prime
in the event of a winding – up and failure, which arises in case the market has prompted this change
so provides a lesser degree of bank cannot satisfy its obligations in approach.
protection to depositors. The new to pay the depositors and other  The previous set of guidelines,
norms (Basel III) has devised a creditors. The low capital bank has popularly known as Basel II
third category of capital , i.e., Tier a negative new worth after the focused on ‘macro- prudential
3 capital. loss in its business. In other words, regulation’. In other words, global
 The RBI introduced the capital-to- it turns into insolvent capital, regulators are now focusing on
risk weighted assets ratio (CRAR) therefore, acts as a cushion to financial stability of the system as
system for the banks operating in lessen the chance of the bank a whole, rather than micro
India in 1992 in accordance with turning insolvent. regulation of any individual bank.
the standards of the BIS – as part ii) The amount of capital affects BASEL III Compliance of the PSBs &
of the financial sector reforms. In returns for the owners (equity RRBs
the coming years the Basel norms holders) of the bank .  In order to make the PSBs and
were extended to term – lending
Basel III provisions RRBs compliant to the Basel III
institutions, primary dealers and
 The new provisions have defined norms, the government has been
non-banking financial companies
the capital of the banks in different following a recapitalization
(NBFCs), too.
way. They consider common programme for them since 2011
 Meanwhile, the BIS came up with – 12. A High Level Committee on
equity and retained earnings as
another set of CAR norms, the since 2011-12. A High Level
the predominant component of
popularly known as Basel – II. The Committee on the issue was also
capita ( as the past), but they
RBI guidelines regarding the CAR set up by the government which
restrict inclusion of items such as
norms in India have been as given has suggested the idea of ‘non-
deferred tax assets, mortgage-
below. operating holding company’
servicing rights and investments in
i) Basel - I norms of the CAR was to financial institutions to no more (HoldCO) under a special Act of
be achieved by the Indian banks than 15 per cent of the common Parliament.
by March 1997. equity component. These rules  Meanwhile, the government has
ii) The CAR norm was raised to 9 per aim to improve the quantity and infused three tranches of capital
cent with effect from March 31 quality of the capital . into the banks (infused funds go to
2000 (Narasimham Committee –  While the key capital ratio has the RRBs, too through the PSBs
II had recommended to raise it to been raised to 7 per cent of risky under whom they fall) upto March
10 per cent in 1998). assets, according to the new 2015.
iii) Foreign banks as well as Indian norms, Tier-I capital that includes i) Rs. 12,000 crore infused during
banks with foreign presence to common equity and perpetual 2012-13 in seven PSBs.
follow Basel – II norms, w.e.f. 31 preferred stock will be raised from ii) Rs. 12,517 crore infused in 2013-
March, 2008 while other 2 to 4.5 per cent starting in phases 14 in 18 PSBs.
scheduled commercial banks to from January 2013 to be iii) In 2014-15, the PSBs were
follow it not later than 31 March , completed by January 2015. revapitalised with Rs. 6,990 crore.
2008 while other scheduled  In addition, banks will have to set This capital infusion was based on
commercial banks to follow it not aside another 2.5 per cent as a some new criteria- asset quality,
later than 31 March, 2009. The contingency for future stress. efficiency and strength of the
Basel – II norm for the CAR is 12 Banks that fail to meet the buffer banks.
iv) During 2015-16 , the government foreign and local currencies set up by ONIDA finance ( a
released Rs. 19,950 crore to 13 barring Fitch and S &P which have private sector finance company in
PSBs (Economic Survey 2015-16). put its foreign currency in 1995 to rate credit-worthiness of
v) For the year 2016-17, the ‘negative’ category. non- corporate consumer and
government has announced a sum Credit Rating their debt instruments, I.e., credit
of Rs. 25,000 crore for the purpose cards, hire-purchase, housing
 To assess the credit worthiness
of recapitalizing the PSBs. finance, rental agreements and
(credit record, integrity,
bank finance.
 Given the deterioration in asset Capability) of a prospective ( would
quality and gradual be_ borrower to meet debt v) SMERA (small and Medium
implementation of Basel III norms, obligations is credit rating. Enterprises Rating Agency) was
PSBs will have to improve their set up in September 2005 , to rate
 Today it is done in the cases of
capital positions to meet the overall strength of small and
individuals, companies and even
unforeseen losses in future. medium enterprises (SMEs) – the
countries. There are some world-
erstwhile SSIs. It is not a credit
 The estimated capital renowned agencies such as the
rating agency precisely, but its
requirement excluding internal Moody’s S&P.
ratings are used for this purpose,
generated profit) for the next four  The concept was first introduced
too. A joint venture of SIDBI(the
years up to 2018-19 is likely to be by John Mood in the USA (1909).
largest shareholder with 22 per
about Rs. 1,80,000 crore. Usually equity share is not rated
cent stake), SBI, ICICI Bank, Dun
 Of this total requirement, the here primarily, ratings are an
& Bradstree ( an international
Government of India proposes to investor service.
credit information company), five
make Rs. 70,000 crore available  Credit rating was introduced in public sector banks (PNB, BOB,
out of budgetary allocations India is 1988 by the ICICI and UTI, BOI, Canara Bank, UBI with 28 per
during 2016-17 and 2017-18. jointly. The major credit rating cent stake together) and CIBIL.
Credit counselling agencies of India are.
Non – Resident Indian Deposits
 Advising borrowers to overcome i) CRISIL (Credit Rating information
 Foreign Exchange Management
their debt burden and improve of India Ltd). Was jointly promoted
(Deposit) Regulations, 2000
money management skills is credit by ICICI and UTI with share capital
permits Non- Resident Indians
counselling. The first such well- coming from SBI , LIC, United India
(NRIs) to have deposit accounts
known agency was created in the Insurance Company Ltd. To rate
with authorized dealers and with
USA when credit granters created debt instrument – debenture. In
banks authorized by the Reserve
National Foundation for Credit April 2005 its 51 per cent equity
Bank of India (RBI) which include.
Counselling (NFCC)in 1951. was acquired by the US credit
i) Foreign currency Non-Resident
 India’s sovereign debt is usually rating agency S &P – a McGraw
(Bank) Account (FCNR(B) Account)
rated by six major sovereign credit Hill Group of Companies.
ii) Non- Resident External Account
rating agencies (SCRAs) of the ii) ICRA ( Investment Information and
Credit Rating Agency of India Ltd.) (NRE Account)
world which are
was set up In 1991 by IFCI, LIC, SBI iii) Non- Resident Ordinary Rupee
i) Fitch Ratings,
and select banks as well as Account (NRO Account).
ii) Moody’s Investors Service,
financial institutions to rate debt  FCNR(B) accounts can be opened
iii) Standard and Poor’s (S &P) instruments. by NRIs and Overseas Corporate
iv) Dominion Bond Rating Service iii) CARE(Credit Analyses and Bodies (OCBs) with an authorized
(DBRS), Research Ltd.) was set up in 1993 dealer. The accounts can be
v) Japanese Credit Rating Agency by IDBI, other financial opened in the form of term
(JCRA), and institutions, nationalized banks deposits. Deposits of funds are
vi) Rating and Investment and private sector finance allowed in pound Sterling. US
Information Inc., Tokyo (R &I). companies to rate all types of debt Dollar, Japanese Yen and Euro.
instruments. Rate of interest applicable to
 As on 15 January, 2013 most of
these accounts are in accordance
these rating agencies have put iv) ONICRA (Onida Individual Credit
Rating Agency of India Ltd). Was with the directives issued by RBI
India under ‘stable’ category in
from time to time. iv) Minimum voting equity capital and viable and should address how
 NRE accounts can be opened by requirement for banks and the bank proposes to achieve
NRIs and OCBs with authorized shareholding: by NOFHC : the financial inclusion.
dealers and with banks authorized initial minimum paid up voting xi) Other conditions for the bank :
by RBI. These can be in the form equity capital for a bank shall be
a. To open at least 25 per cent of its
of savings, current, recurring or Rs. 5 billion. The NOFHC shall
branches in unbanked rural
fixed deposit accounts. Deposits initially hold a minimum of 40 per
centres (with population of upto
are allowed in any permitted cent of the paid – up voting equity
9,999 as per the latest census).
currency. Rate of interest capital of the bank which shall be
b. To comply with the priority sector
applicable to these accounts are locked in for a period of five years
lending targets applicable to the
in accordance with the directives and which shall be brought down
existing domestic banks.
issued by RBI from time to time. to 15 per cent within 12 years.
Bank’s shares to be listed on the c. Banks promote by groups having
 NRO accounts can be opened by 40 per cent or more assets /
stock exchanges within three
any person resident outside India income from non-financial
years of the business
with an authorized bank for business will require RBI’s prior
commencement.
collecting their funds from local approval for raising paid-u[ voting
v) Regulatory framework : The bank
bonafide transactions in India equity capital beyond Rs. 10
to be regulated by the relevant
Rupees. When a resident becomes billion.
Acts/ Statutes Directives, issued
an NRI, his existing Rupee d. Any non- compliance of terms and
by the RBI and other regulators.
accounts are designated as NRO. conditions will attract penal
The NOFHC shall be registered as
These accounts can be in the form measures including cancellation of
an NBFC with the RBI and will be
of current, savings, recurring or licence of the bank.
governed by a separate set of
fixed deposit accounts.
directions issued by the RBI. Two new banks get licence
Guidelines for licensing of new Banks
vi) Foreigh shareholding in the  The RBI by early April, 2014
 The RBI on February 22 , 2013 bank : foreign shareholding upto granted ‘in-principle’ approval to
released the Guidelines for 49 per cent for the first 5 years two applicants, IDFC Limited and
‘Licensing of New Bnks in the after which it will be as per the Bandhan Financial Services Private
private sector’ . Key features of extant policy. Limited, to set up banks-‘ in-
the guidelines are. principle’ approval granted will be
vii) Corporate governance of
i) Eligible promoters : A private NOFHC : At least 50 per cent of valid for 18 months during which
sector/ public sector / NBFc/ the Directors of the NOFHC should the applicants have to comply
Entity/ group eligible to set up a be independent directors. The with the requirements and fulfil
bank through a wholly-owned corporate structure should not other conditions.
“Non-Operative Financial Holding impede effective supervision of  Both are leading non-banking
Company (NOFHC)”. the bank and the NOFHC by RBI. finance companies, while IDFC
ii) Fit and proper’ criteria : A past viii) Prudential norms for the NOFHC deals in infrastructure finance,
record of sound credentials, : The prudential norms will be Bandhan is in microfinance
integrity and sound financial applied to NOFHC on similar lines business.
background with a successful track as that of the bank.  A High level Advisory Committee
record of 10 years will be ix) Exposure norms : The Bank/ headed by former RBI Governor
required. NOFHC allowed no exposure to Bimal Jalan recommended these
iii) Corporate structure of the the promoter Group – the bank two applicants out of a list of 25
NOFHC : The NOFHC to be wholly shall not invest in the equity/ debt applications. The case of India post
owned by the promoter/ capital instruments of any will be decided by the RBI in
promoter group which shall hold financial entities held by the consultation with the Government
the bank as well as all the other NOFHC. of India.
financial services entities of the x) Business plan for the bank : The  As per the RBI, those applicants
group. business plan should be realistic who have been denied licences
can apply for the ‘differentiated machines. These entities have a  Even though Nidhis are regulated
licences’ (Once RBI invites mandate to deploy, 67 per cent of by the provisions of the companies
applications for it) – some of them ATMs in rural locations. (Tier III – Act, 1956 , they are exmpted from
may be better off applying for a VI) and 33 per cent in urban certain provisions of the Act, as
differentiated licence rather that locations. applicable to other companies due
for a full licence. The so-called  The Tata communications to limiting their operations within
differentiated banks will be payment solutions became the members.
specialized institutions such as the first such firm to get permission of  Nidhis are also included in the
‘payment banks’ suggested by an the RBI (by mid – 2013) to set up definition of NBFCs, which operate
RBI panel (headed by Nachiket such ATMs-its brand name is mainly in the unorganized money
Mor) on financial inclusion, to ‘Indicash’. market. However, since 1997,
widen the spread of payment NBFCs have been brought
NIDHI
services and deposit products to increasingly under the regulatory
 Nidhi in the Indian context means
small businesses and low-income ambit of the RBI. Non-banking
‘treasure’. However, in the Indian
households. financial entities partially or
financial sector it refers to any
Labels of ATM wholly regulated by the RBI
mutual benefit society notified by
 The automated teller machine include.
the Central/Union Government as
(ATM) entered India by late 1980s a Nidhi Company. i) NBFCs comprising equipment
and have evolved into three of its leasing (EL), hire purchase finance
 They are created mainly for
typed by now. (HP), loan (LC), investment (IC)
cultivating the habit of thrift and
i) Bank’s own ATMs: These are (including primary dealers (PDs)
savings amongst its member. The
owned and operated by the and residuary non-banking
companies doing Nidhi business,
concerned bank and carry the companies (RNBCs);
viz., borrowing from members and
bank’s ‘logo’, They are the lending to members only, are ii) Mutual benefit financial company
costliest way to provide such known under different names such (MBFC, i.e., nidhi company ;
service to bank’s customers. as Nidhi, permanent fund, Benefit iii) Mutual benefit company (MBC),
ii) Brown label ATMs(BLAs) : These funds, Mutual Benefit funds and i.e., potential nidhi company; i.e.,
are owned by third part (a non- Mutual Benefit company. a company which is working on
banking firm). The concerned  Nidhis are more popular in south the lines of a Nidhi Company, but
banks only handle part of the India and are highly localized has not yet been so declared by
process that is ‘cash handling’ and single office institutions. They are the Central Government ; has
‘back-end server’ connectivity. mutual benefit societies, because minimum new owned fund (NOF)
They carry ‘logo’ of the bank which their dealings are restricted only of Rs. 10 lakh, has applied to the
outsourced their service. to the members ; and membership RBI for certificate of registration
iii) White Label ATMs (WLAs) : These is limited to individuals. and also to the Department of
are ‘owned’ and ‘operated’ by a Company Affairs (DCA) for being
 The principal source of funds is the
third party (a non- banking firm). notified as a Nidhi Company and
contribution from the members.
They do not bear ‘logo’ of the has not contravened directions /
The loans are given to the
banks they serve (that is why such regulations of RBI / DCA.
members as relatively reasonable
a name). In place, they carry logo rates for purposes, such ashouse iv) Miscellaneous non- banking
of the firm which own them. construction or repairs and are company (MNBC), i.e., chit fund
 They serve customers of all generally secured. The deposits company.
banks and are interconnected mobilized by Nidhis are not much  Since Nidhis come under once class
with the entire ATM network in when compared to the organized of NBFCs, RBI is empowered to
the country. The role of the banking sector. issue directions to them in matters
concerned bank is only limited to relating to their deposit
 Nidhis are companies registered
provide account information and acceptance activities.
under the companies Act, 1956
back- end money transfers to the and are regulated by the Ministry  However, in recognition of the fact
third parties managing these ATM of Corporate Affairs (MCA). that these Nidhis deal with their
shareholder-members only, RBI of news after the Kolkata- based Functionall, chit fund are included
has exempted the notified Nidhis Saradha Chit fund scam came to in the definition of NBFCs by the
from the core provisions of the RBI light. Most of the media people RBI under the sub-head
Act and other directions were themselves not very clear miscellaneous non- banking
applicable to NBFCs. about the ‘finer’ points related to company (MNBC). But RBI has not
 As on date RBI does not have any the idea of ‘chits’ in India, but they laid out any separate regulatory
specified regulatory framework kept on highlighting chits as they framework for them.
for Nidhis. needed to report on the scam. Let Small & payment Banks
 The Central Government in March us try understand what ‘chits’ are
 By mid – July 2014, the RBI issued
2000 constituted a committee to and some other similar concepts
the draft guidelines for setting up
examine the various aspects of the in India.
small banks and payment banks.
functioning of Nidhi Companies.  Chit funds (also known by their The guidelines said that both are
There was no government other names, such as, Chitty, Kuri, ‘niche’ or ‘differentiated’ banks
notification defining the world. Miscellaneous Non- Banking with the common objective of
‘Nidhi’. Taking into consideration Company ) are essentially saving furthering financial inclusion.
the manner of functioning of institutions. They are of various
 It is in pursuance of the
Nidhis and the recommendations forms and lack and standardised
announcement made in the union
of the P. Sabanayagam committee form.
Budget 2014-15 . the details
in its report and also to prevent  Chit funds have regular members regarding the provisions to set up
unscrupulous persons using the who make periodical subscriptions such banks and their operational
word ‘Nidhi’ in their name without to the fund. The periodic criteria are as given below.
being incorporated by the collection is given to some
The guidelines to set up both the
Department of Company Affairs member of the chit funds selected
banks are same
(DCA) and yet doing Nidhi on the basis of previously agreed
business, the committee  The minimum capita requirement
criterion.
suggested the following definition would be Rs. 100 crore.
 The beneficiary is selected usually
for Nidhis (a prt of this definition is  Promoter contribution would be
on the basis of bids or by draw of
appearing in the new companies at least 40 per cent for the first
lots or in some cases by auction or five years. Excess shareholding
bill 2012 (section 406). by tender. In any case, each should be brought down to 40 per
 “Nidhis is a company formed with member of the chit fund is assured cent by the end of fifth year, to 30
the exclusive object of cultivating of his turn before the second per cent by the end of 10th year
the habit of thrift, savings and round starts and any member and to 26 per cent in 12 years form
functioning for the mutual benefit becomes entitled to get periodic the date of commencement of
of members by receiving deposits collection again. business.
only from individuals enrolled as  Chit funds are the Indian versions  Foreign shareholding in these
members and by lending only to of ‘Rotating Savings and ‘Credit banks will be as per current FDIO
individuals, also enrolled as Associations’ found across the policy.
members, and which functions as globe.
per Notification and Guidelines  Voting rights to be line with the
 Chit fund business is regulated existing guideline for private
prescribed by the DCA.
under the Central Chit Funds Act, banks.
 The word Nidhi shall not reform 1982 and the rules framed under
part of the name of any company,  Entities other than promoters will
this Act by the various state
firm or individual engaged in not be permitted to have
government for this purpose.
borrowing and lending money shareholding in excess of 10 per
 The Central Government has not cent.
without incorporation by DCA and
framed any rules of operation for
such contravention will attract  The bank should comply with the
them. Thus, registration and
penal action. corporate governance guidelines,
regulation of chit funds are carried
Chit fund including’ fit and proper’ criteria
out by state government under
for Directors as issued by RBI.
 Recently , chit fund was in centre the rules framed by them .
 Operations of the bank should be and non-financial services can take equity in payments Bank.
fully networked and technology activities, if any, should be  Payments Banks can accept
driven from the beginning. distinctly ring-fenced and not co- demand deposits (only current
Small Banks mingled with banking business. account and savings accounts).
 The purpose of the small banks will vi) A robust risk management They would initially be restricted
be to provide a whole suite of basic framework is required and the to holding a maximum balance of
banking products such as deposits banks would be subject to all Rs. 100,000 per customer. Based
and supply of credit, but in a prudential norms and RBI on performance, the RBI could
limited area of operations. regulations that apply to existing enhance this limit.
commercial banks, including  The banks can offer payments and
 The objective of the small banks
maintenance of CRR and SLR. remittance services, issuance of
to increase financial inclusion by
provision of savings vehicles to vii) In view of concentration of area prepaid payment instruments,
under – served and unserved of operations, the Small Bank internet banking,. Functioning as
sections of the population, supply would need a diversified portfolio business correspondent for other
of credit to small farmers, micro of loans, spread over it area of banks.
and small industries, and other operations.  Payments Banks cannot set up
unorganized sector entities viii) The maximum loan size and subsidiaries to undertake NBFC
through high technology low-cost investment limit exposure to business.
operations. single/ group borrowers / issuers  As in the case of small banks, other
 Other features of the small banks would be restricted to 15 per cent financial and non0 financial
are as follows : of capital funds. services ring-fenced.
i) Resident individuals with 10 years ix) Loans and advances of up to Rs 25  The payments Banks would be
of experience in banking and lakhs, primarily to micro required to use the word
finance, companies and Societies enterprises, should constitute at ‘Payments’ in its name to
will be eligible as promoters to set least 50 per cent of the loan differentiate it from other banks.
up small banks. NFBCs, portfolio.
 No credit lending is allowed for
microfinance institutions (MFIs), x) For the first three years, 25 per payments Banks.
and Local Area Banks (LABs) can cent of branches should be in
 The float funds can be parked only
convert their operations into unbanked rural areas.
in less than one year G-Secs.
those of a small banks. Local focus Payment Banks
Financial inclusion
and ability to serve smaller
 The objective of payments banks
customers will be a key criterion  Financial inclusion is an important
Is to increase financial inclusion by
in licensing such banks. priority of the government. The
providing small savings accounts,
objective is to ensure the excluded
ii) For the initial three years, prior payment/ remittance services to
sections, i.e., weaker sections and
approval will be required for migrant labour, low income
low income groups, access to
branch expansion households, small businesses,
various financial services such as a
iii) The area of operations would other unorganised sector entities
basic savings bank account, need-
normally be restricted o and other users by enabling high
based credit, remittance facility,
contiguous districts in a boulume – low value transactions
insurance and pension.
homogenous cluster of states or in deposits and payments /
Pradhan Mantri Jan- Dhan Yojana
union territories so that the Small remittance services in a secured
Bank has a ‘local feel’ and culture. technology – driven environment.  To achieve the objective of
financial inclusion by extending
iv) The bank shall primarily undertake  Those who can promote a
financial services to the large
basic banking activities of payments banks can be a non-
accepting deposits and lending to hitherto unserved population of
bank PPIs, NBFCs, Corporate’s,
small farmers, small businesses, the country and to unlock its
mobile telephone companies,
micro and small industries, and growth potential, of the country
super market chins, real sector
unorganized sector entities. and to unlock its grown potential,
cooperatives companies and
the Pradhan Mantri Jan-Dhan
v) The promoters’ other financial public sector entities. Even banks
Yojana ( PMJDY) was launched on of the GoI in rupees an medium and long term deposits.
28 August 2014. The Yojana denominated in grams of gold and  The difference between the
envisages – restricted for sale to the resident current borrowing cost for the
i) Universal access to banking India entities only, both in demat government and the interest rate
facilities with at least one basic and paper form. The minimum paid by the gocernment under the
banking account for every and mazimum investmtne limits medium / long term deposit will
household. are two grams and 500 grams of be credited to the Gold Reserve
gold per person per fiscal year, fund.
ii) Financial literacy, access to credit
respectively.
and insurance. MUDRA Bank
 The rate of interest for the yea r
iii) The beneficiaries will receive a  As per the Government of India,
2015 – 16 was 2.75 per cent per
Rupay Debit Card having inbuilt large industries provide
annum payable on a half yearly
accident insurance cover of Rs.1 employment to only 1.25 crore
basis . The tenor of the Bond is for
lakh. people.
a period of 8 years with exit option
iv) In addition there is a life insurance  There is a need to focus on these
from 5th year onward.
cover of Rs. 30,000 to those who 5.75 crore self – employed people
 KYC norms are the sme as that for
opened their bank accounts for the (owners of the micro units) who
gold. Exemption from capital gains
first time between 15 August 2014 use funds of Rs. 11 lakh crore.
tax is also available. Redemption
and 26 January 2015 and meet With an average per unit debt of
is made in the rupee value
other eligibility conditions of the merely Rs. 17,000.
equivalent to the price of gold at
Yojana.  Capital is the key to the small
the time of maturity.
 The Yojana has entered the entrepreneurs. These
Gold Monetisation Scheme
Guinness World Records for entrepreneurs depend heavily on
opening most bank accounts  In this scheme, BIS (Bureau of the local money lenders for their
during the week starting 23 Indian Standards) certified fund requirements.
August, 2014 as part of the CPTCs(Collection, Purity Testing
 Looking at the importance of thse
financial campaign . As on 28 Centres) collect the gold from the
enterprises, the Government of
January 2015 , 12.31 crore bank customer of behalf of the banks.
India launched (April 2015) the
accounts have been opened, of The minimum quantity of gold
Micro Units Development and
which 7.36 crore are in rural areas (bullion or jewellery) which can be
Refinance Agency Bank (MUDRA
and 4.95 crore inurban areas. deposited is 30 grams and there is
Bank) with the aim of funding
Under the PMJDY, 67.5 per cent no limit for maximum deposit.
these unfunded non- corporate
of the accounts as on January 28 ,  Gold Saving Account can be enterprises.
2015 are with zero balance. opened with any of the designated
 This was launched as the PMMY
Gold Investment Schemes bank and denomination in grams
(Prime Minister Mudra Yojana).
of gold for short-term period of 1-
 Two new gold investment Important features of the MUDRA
3 years, a medium – term period
schemes were launched by the Bank are as given below.
of 5-7 years and a long term
Government of India by November  Under this banking mode, the
period of 12-15 years.
2015 – the Sovereign Gold Bonds micro units can avail up to Rs. 1
and Gold Monetisation Schemes.  The CPTCs transfer the gold to the
lakh loan through refinance route
The schemes are aimed at twin refiners. The banks will have a
(through the Public and private
objectives. tripartite/ bipartite legal
sector banks), NBFCs. MFIs, RRBs,
agreement with refiners and
i) Reducing the demand for physical District Banks, etc.
CPTCs.
gold ; and  The products designed under it are
 For the year 2015-16 interest
ii) Shifting a part of the gold imported categorized into three buckets of
rates was fixed as 2.25 per cent
every year for investment finance named Shishu (loan up to
and 2.5 per cent for the medium
purposes into financial savings. Rs. 50,000), Kishor (Rs. 50,000 to
and long-term, respectively.
Sovereign Gold Bonds Rs. 5 lakh) and Tarun (Rs. 5 lakh to
Redemption is made in cash/ gold
Rs. 10 lakh).
 These are issued by RBI on behalf for short term and in cash for
 Though the scheme covers the Government of India, presently, risk involved in the enterprises
traders of fruits and vegetables, banks are charging the interest seeking loans. There is no general
in general, it does not refinance rates between Base Rate plus one subsidy offered on interest rates
the agriculture sector. per cent to 7 per cent per annum. except if the loan is linked to some
 There is no fixed interest rate in  Interest rates on the loans are other government scheme.
this scheme. As per the supposed to vary according the
Security Market in India

Definition
the stock exchanges. known as The Native Share and
 The segment of a financial market Stock Brokers’ Association was set
Stock Exchange
of an economy from long –term up in 1870 (under a tree).
capital is raised via instruments  A physically existing
institutionalized set-up where  Top five larges stock exchange (on
such as shares, securities, bongs,
instruments of security stock the basis of market capitalization
debentures, mutual funds, and is
market (shares, bonds, of the world in their decreasing
known as the security market of
debentures, securities, etc.) are order are.
that economy.
traded. It serves the following 1. The New York stock Exchange
 A security market has components
major functions. 2. The NASDAQ, the Tokyo stock
such as a security regulator (SEBI
in India), stock exchanges  Makes a floor available to the Exchange
different share indices, brokers, buyers and sellers of stocks and 3. The London Stock Exchange and
FIIs, jobbers, etc. Thers are liquidity comes to the stocks. It is the Bombay Stock Exchange
different kinds of transactions the single most important
 Trading in the stock exchanges
which take place in a security institution in the secondary
takes place via the mediators
market such as badla, reverse market for securities.
known as the brokers, the jobbers,
badla, future trading, insider  Makes available the prices of the market-maker (dicussed later
trading (not allowed), private trading as an important piece of in this chapter).
placement, etc. information to the investors.
 As per the latest information,
Primary and Secondary markets  By following institutionalized rules presently, there are a total
 Every security market has two and procedures, it ensures that number of 26 stock exchanges
complementary markets – the participants in the stock operating in India – 7 at the
primary and the secondary. The market live up to their national level and rest 19 at the
market in which the instruments commitments. regional level (one of it,
of security market are traded  Passes updated informations to Coimbatore Stock Exchange
(procured) directly between the the enlisted companies about recently sought for withdrawal of
capital raiser and the instrument their present stockholders (so that recognition, the matter is sub-
purchaser is known as the primary they can pass on dividends etc., to judice under SEBI). A brief account
market. them ). of the ‘national level stock
 As for example, a share being  By publishing its ‘Index’, it fulfils exchanges’ is given below.
directly purchased by anybody the purpose of projecting the NSE
from the issuer which may be the moods of the stock market.  The National Stock Exchange of
company itself. The person is  World’s first stock exchange was India Ltd. (NSE) was set up in 1992
known as the primary shareholder. established in Antwerp, Belgium and became operationalised in
 The market where the (then part of the Netherlands in 1994. The sponsors of the
instruments of security market are 1631, the London Stock Exchange exchange are financial
traded among the primary opened in 1773 and then institutions, including IDBI, LIC
instrument holders is known as the Philadelphia stock Exchange ( the and GIC with IDBI as its promoter.
secondary market. Such first in the New World) opened in  It has a 50 share index and a 500
transactions need an 1790. share index known as S &P CNX –
institutionalized floor for their  The first stock exchange in India, 50 (Nifty Fifty) and S&P CNX – 500
trading which is made available by the Bombay Stock Exchange , respectively.
OTCEI stocks being quoted nationwide having any exchange of national

 Thought the Over the Counter (Bombay, Delhi, Kolkata, etc.) was status – better say there was no
Exchange of India Ltd (OTCEI) was developed to give broader / wider Indian stock market, but stock
set up in 1989, it could commence representation of the stock markets showing only regional
trading only in 1992. India’s first market since the Sensex consists pictures. Besides, the national
fully computerized stock exchange of only 30 stocks. stock exchanges did solve some
was promoted by the UTI, ICICI, Indo Next major problems of stock market,
SBI Cap among other, in order to we may also call their arrivals as
 A new stock exchange to promote
overcome problems such as lack part of the stock market reforms
liquidity to the stocks of the small
of transparency and delays in in India.
enterprises (SMEs) was launched
settlements prevalent in the older in 2005 jointly and medium the BSE  The common features of these
stock exchanges. and the FISE (Federation of Indian exchanges are :
ISE Stock Exchange, representing 18  all are situated in Mumbai ;
 The Interconnected Stock regional stock exchanges.  all do screen – based trading
Exchange of India (ISE) is basically  It is better known as the BSE indo (SBT);
a single floor of India’s 15 regional Next . It was also an effort to  all have their trading terminals in
stock exchanges (RSEs), set up in rejuvenate the RSEs which were the major cities of the country;
1998 . The RSEs were provided facing falling volumes of trading
 all are web-enabled;
increased reach through this. It is on their floors. Due to absence fo
a web-based exchange. trading at the RSEs, the stocks of  all are limited liability companies ;
BSE the SME, has become illiquid.  the brokers registered here have
SME Exchange no say in either the ownership or
 The Bombay Stock Exchange Ltd.
the management of the
(BSE), earlier a regional stock  SME exchange is a stock exchange
exchanges. ;
exchange, converted into a dedicated for trading the shares
national one in 2002. The biggest of small and medium scale  all are counted among the best
in India, it accounts for almost 75 enterprises (SMEs) who, and the most technology-
per cent of total stocks traded in otherwise, find it difficult to get equipped stock exchange in the
India and is the fifth largest in the listed in the main exchanges. world.
world ( on the basis of market  The concept originated from the Players in the Stock exchanges
capitalization). difficulties faced by SMEs in Broker
There are at present four indices gaining visibility or attracting  Broker is a registered member of
connected with the BSE sufficient trading volumes when a stock exchange who buys or sells
 Sensex : The Sensitive index (i.e., listed along with other stocks in shares / securities on his client’s
Sensex) is a 30 stocks index of the the main exchanges. behalf and charges a commission
BSE which was enlarged to include  To be listed on the SME exchange, on the gross value of the deal –
50 stocks in 2000 but soon was cut the post-issue paid – up capital of such brokers are also known as
down to the original level. This the company should not exceed commission brokers.
index represents the Indian stock Rs. 25 crores.  Brokers who offer services such as
market.  This means that the SME exchange investment advice, client’s
 BSE – 200 : This is a 200 stock is not limited to the small and portfolio planning, credit when a
share index of the BSE (including medium scale enterprises (which client is buying on margin other
the 30 stocks of the Sensex) which are defined under the ‘Micro, than their traditional commission
has its Dollar version too- the Small and Medium Enterprises job are known as full service
Dollex. Development Act, 2006’ as brokers.
 BSE – 500 : In mid – 1999 , the BSE enterprises where the investment Jobber
came up with a 500 – stock index in plant and machinery does not  A jobber is a broker’s broker or one
representing major industries and exceed Rs. 10 crores. who specialises in specific
many sub- sectors of the economy Common facts about the National securities catering to the need of
with information technology stock Exchanges other brokers- in India also known
getting a significant weightage.  Before the arrival of national level as ‘Travaniwallah’ (in the BSE). A
 National Index : An index of 100 stock exchange, India was not jobber is located at a particular
trading post on the floor of the  Levying various fees and other for trading of commodities.
stock exchange and does buying charges(as I per cent of the issue  The main objective of the
and selling for small price amount of every company issuing exchange is to protect the
differences, called the spread He shares are kept by it as a caution participants for adverse
has no contact with the investing money in the concerned stock movement in prices by facilitating
public. exchange where the company is futures trading in commodities.
Market – marker enlisted).
 Let us take a very simple example
 Functions as an intermediary in  Promoting investor education. to understand low trading on
the market ready to buy and sell  Inspection and audit of stock commodity exchanges help
securities. He stimultaneously exchanges and various industry participants. A farmer
quotes two-way rates – like a intermediaries. who is producing wheat can sell ‘
jobber basically with the only  Performing other concerned wheat futures’ on a commodity
difference that he quotes two – functions as may be prescribed exchange.
way rates, for buying and selling from time to time.  This will help him lock in a sale
at the same time. price of a specified quantity of
Commodity Trading
 On the floor of India’s OTCEI , only wheat at a future date.
 Commodity trading happens
market- makers are allowed to  Hence the farmer would now be
similar to ‘stocks’ (shares,
play. In the money market of India, able to get an assured price for his
securities debentures, bonds)
the Discount and finance House of produce in future and any decline
trading in the stock market.
India (DFHI) is the chief market- in the price of wheat would not
However, commodities are actual
maker. impact his earnings.
physical goods such a corn, silver,
SEBI gold, crude oil, etc. Futures are  On the other hand, a user industry
 The regulator of Indian stock contracts for commodities that (e.g., the exchange. Hence the
market, set up under the security are traded at a futures exchange flour mill would now be able to fix
and exchange Board of India Act, like the Chicago Board of Trade its future purchase cost for a
1992 ( as a non- statutory body set (CBOT). specified quantity of wheat.
on 12 April , 1988 through a  Futures contracts have expanded  Therefore, any increase in the
government resolution in an effort beyond just commodities, now price of wheat in future would not
to give the Indian stock market an there are futures contracts on impact its cost of production.
organized structure) with its head financial markets like foreign FMC
office in Mumbai. currencies, interest rates, etc.
 The forward Markets Commission
 Its initial paid-up capital was Rs.  Commodity futures serve a great is a statutory body set up under
50 crore provided by the purpose in any economy. As we the forward contracts
promoters – the IDBI, the IFCI and see in the case of agricultural (Regulation) Act, 1952.
the ICICI. commodity-their prices play a key
 It functions under the
 The Board of SEBI comprises nine role in determining the fortune of
administrative control of the
members excluding the chairman- the agriculture and food
Department of Consumer Affairs,
one member each from the processing industry in India.
Ministry of Consumer Affairs, Food
ministries of finance and Law, one  These prices undergo a large & Public Distribution.
member from the RBI and two degree of fluctuation. Reasons for
 In 2014 , the commission was
other members appointed by the price fluctuation are crop failure,
central government. It has four transferred to the Ministry of
bad weather, demand-supply
full-time members (including the Finance. Headquartered at
imbalance, etc, This fluctuation,.
chairman). Mumbai with one regional office
In turn, leads to a ‘price risk’.
at Kolkata, the commission
Main functions / powers of the  This price risk is largely borne by comprises a Chairman, and two
Board as per the SEBI Act, 1992 are the farmer and the industries members.
 Registering and stock exchanges, where agricultural commodities
 The commission provides
merchant banks, mutual funds, are used as raw material.
regulatory oversight in order to
underwriters, registrars to the  Commodity exchanges are ensure –
issues, brokers, sub-brokers, association that determine and
transfer agents and other. i) Financial integrity (i.e., to prevent
enforce rule, and set procedures
systematic risk of default by one  This market segment functions like Marketing Federation of India
major operator or group of the equity segment in the main Limited (NAFED).
operators) ; stock exchanges. Alternatively, ii) NCDEX Spot Exchange Ltd
ii) Market integrity (i.e., to ensure this can be considered as a (Established in October 2006 by
that futures prices are truly guaranteed direct marketing by NSE).
aligned with the prospective sellers of the commodities.
iii) Reliance Spot Exchange Ltd. (R-
demand and supply conditions),  Spit Exchange leverage on the Next).
and latest technology available in the
iv) Indian Bullion Spot Exchange Ltd.
iii) Protection and promotion of the stock exchange framework for the
(an online over the counter spot
interest of consumers/ non- trading of goods.
exchange).
members.  This is an innovative Indian
Advantages of spot Exchanges
 After assessing the market experiment in the trading of goods
and is distinct from what is  Efficient price determination as
situation and taking into account
price is determined by a wider
the recommendations made by commonly known as ‘commodity
the Board of Directors of the cross – section of people from
exchanges’ which trade in futures
Commodity Exchange, the across the country, unlike the
contracts in commodities.
commission approves the rules traditions ‘mandis’ where price
 Spot exchange has been defined
and regulations of the Commodity discovery for commodities used to
by the Warehousing Development
Exchanges in accordance with happen only through local
and Regulatory Authority
which trading is to be conducted. participation.
(Electronic Warehouse Receipts)
 At present, 113 commodities are Regulations, 2011 as “a body  Ensure transparency in price
notified for future trading and corporate incorporated under the discovery .
there are 21 commodity Companies Act, 1956 and  Ensures participation in large
exchanges in India including three engaged in assisting, regulating or numbers by farmers, traders and
‘national level’ exchange (other controlling the business of trading processors across the country.
being regional) recognized for in electronic warehouse receipts.  It brings in some best practices in
conducting futures / forward  However, present day spot commodity trading like, system of
trading. The three national grading for quality, creating
exchange deals not just with
exchanges are. network of warehouses with
warehouse receipts-this is an
i) Multi – commodity exchange of electronic market where a farmer assaying facilities.
India Ltd.(MCX), Mumbai. The or a trader can discover the prices  Bank finance available against the
FTIL, its main promoter, has been of commodities on a national level goods in the warehouse on easier
asked by the FMC to exit its and can buy or sell goods terms improves holding capacity.
ownership in it after the firm was immediately (i.e., on the ‘spot’) to  Since the trades are guaranteed
found involved in financial anyone across the country. All (by the exchange), Counter party
irregularities mid – 2013 (it has 24 contracts on the exchange are risk is avoided.
per cent stake in MCX). compulsory delivery contracts – it
Rising Capital in the Primary Market
ii) National Commodity and means that all outstanding
Derivatives Exchange Ltd. positions at the end of the day are  There are three ways in which a
(NCDEX), Mumbai. marked for delivery. Which implies company raises capital in the
iii) National Multi – commodity that seller has to give delivery and primary market.
Exchange of India Ltd. (NNCE), buyer has to take the delivery. Public Issue
Ahmedabad. Spot Exchanges in India  A public offer is open for all Indian
Spot Exchanges  At present, there are four spot Citizens the most broad – based
 In India, Spot Exchange refer to exchanges operating in the county method of raising capital and the
electronic trading platforms which : most prestigious, too.
facilitate purchase and sale of The National Spot Exchange Ltd. Rights Issue
i)
specified commodities, including (NSEL), set up in 2008 , is a national  Raising capital from the existing
agricultural commodities, metal level commodity spot exchange shareholders of a company, it
and bullion by providing spot promoted by the Financial means it is a preferential kind of
delivery contracts in these Technologies India Ltd (FTIL) and issue restricted to a certain
commodities. National Agricultural Cooperative category of the public only.
Private placement buying and selling prices of a share company issuing shares for the first
 Raising capital by selling shares to is called spread. Higher the time is allowed to sell some
a select group of investors, usually liquidity of a share lower its spread additional shares to the public –
financial institutions (FIs) but may and vice versa. Also known as usually 15 per cent, is also known
be to individuals also. This is done Jobber’s Turn or Margin or Hair as over-allotment provision.
through a process of direct cut. Penny Stocks
negotiations. The advantage of Kerb Dealings  The share which remains low-
this route is the substantial saving  The transactions of stocks which priced at a stock exchange for a
a share issuing company makes on take place outside the stock comparatively longer period.
marketing expenses. exchanges – unofficially and take Speculators may start hoarding
Important Terms of Stock Market place after the normal trading them for hefty margins, this was
Scrip Share hours. seen in India in mid – 2006.
 A share given to the existing NSCC ESOP
shareholders without any charge  The National Securities Clearing  The Employee Stock Ownership
_____ also known as bonus share. Corporation (NSCC), a public plan (ESOP) enables a foreign
Sweat share sector company set up in 1996 company to offer its shares to
takes the counter party risk of all employees overseas. It was
 A share given to the employees of
transactions done at the NSE just allowed in India (February 2005 )
the company without any charge.
as an intermediary guarantees all provided that the MNC has
Rolling Settlement
trades. minimum 51 per cent holding in
Badla its Indian company.
Authorised Capital
 When the buyers want SBT
 The limits upto which share can
postponement of the transaction-
be issued by a company- also  Screen Based Trading (SBT) is
in western world called Contango
known as the nominal or trading of stock based on the
Undha Badla registered capital. This is fixed in electronic medium, i.e., with the
 When the sellers want the Memorandum of Association help of computer monitor,
postponement of the transaction- (MoA) and the article of internet, etc.
also known as the reverse badla association (AoA) of a company as Debentures
or backwardation. required by the companies Act
 Debentures are the debt
Futures (Law).
instruments which may be issued
 A trading allowed in shares where Paid –up Capital by a listed or non- listed from to
a future price is quoted for the  The part of the authorized capital raise funds in a security market.
shares and the payment and of a company that has actually  In case of ‘fully convertilble
delivery takes place on the pre- been paid by shareholders. A debentures’ an option’ ( that is
determined dates. difference may arise because all why the name OFCDs, i.e.,
Depositories shares authorized might not be Optionally fully Covertible
issued or issued shares are only Debentures) is given to the
 Started in 1996 under which stocks
partly paid-up. debenture- holders who may wish
are converted into ‘paperless
form’ (dematerialisation of shares Subscribed Capital to convert their OFCDs into shares.
shortly known as the ‘demat’). At  The amount actually paid by the Derivatives
present, two public sector shareholders or have been  Derivative is a product whose
depositaries (Mumbai) are committed by them for value is derived from the value of
functioning in India set up under contribution. one or more basic variables, called
the Depositories Act, 1996. Issued Capital bases (underlying asset, index or
i) NSDL (National Securities  The amount which is sought by a reference rate) , in a contractual
Depositorier Ltd). company to be raised by issuing manner.
ii) CDSL (Central Depositories shares which cannot exceed the  The underlying asset can be
Services Ltd). authorised capital of the company. equity, forex, commodity or any
Spread Greenshoe Option other asset. For example, wheat
farmers may wish to sell their
 The difference between the  A provision under which a
harvest at a future date to  FIIs and long-term investors equity markets.

eliminate the risk of a change in investment limit in Government  Taking the scheme forward, as
prices by that date. Such a Securities. announced in Budget 2012 – 13 ,
transaction is an example of a  Investment limit in corporate QFIs have also been permitted to
derivative. The price of this bonds by the above-given entities invest in corporate debt securities
derivative is driven by the spot enhances by $5 billion (to $50 (CDSs) and MF debt schemes.
price of wheat which is the billion). Participatory Notes (PNs )
‘underlying’.
 The RBI also relaxed some  A Participatory Note (PN or P-
Indian Depository Receipts (IDRs) investment rules by removing the Note) in the Indian context, in
 IDR is an instrument in the form maturity restrictions for first time essence, is a derivative instrument
of a depository receipt created by foreign in investors on dated G- issued in foreign jurisdictions, by
the Indian depository in India Secs. a SEBI registered FII, against
against the underlying equity Foreign investors restricted from
 Indian securities – the Indian
shares of the issuing company.
investing in the ‘money market’ security instrument may be
 In an IDR, foreign companies instrument –certificates of equity, debt, derivatives or may
would issue shares, to an Indian deposits (CDs) and commercial even be an index.
depository (say the National paper (CPs).  PNs are also known as Overseas
Security Depository Limited
 Rules requiring FIIS to hold Derivative Instruments, Equity
(NSDL), which would in trun issue
infrastructure debt for at least Linked Notes, Capped Return
depository receipts to investors in
one year has been abolished. Notes, and participating Return
India.
 The qualified foreign investors Notes, etc.
Foreign Financial Investors
(QFIs) would continue to be eligible  The investor in PN does not own
 Through the portfolio Investment to invest in corporate debt the underlying Indian security,
Scheme (PIS), the foreign financial securities. which is held by the FII who issueds
investors (FIIs) were allowed to the PN. Thus, the investors in PNs
Angel investor
invest in the Indian stock market derive the economic benefits of
– the FIIs having good track record  A new term in India’s financial
investing in the security without
register with SEBI as brokers. market, introduced in the union
actually holding it.
Budget 2013-14 which announced
 FIIs make investments in markets
that SEBI will soon prescribe the  They benefit from fluctuations in
on the basis of their perceptions
provisions by which the angel the price of the underlying
of expected returns from such
investor can be recognized as security since the value of the PN
markets.
category I AIF venture capital is linked with the value of the
 Their perceptions among other underlying Indian security.
funds.
things are influenced by
 Angel investor is an investor who  The PN holder also does not enjoy
i) The prevailing macro- economic and voting rights in relation to
provides financial backing to
environment ; security / shares referenced by the
entrepreneurs for ‘starting their
ii) The growth potential of the business’. Angel investors are PN.
economy ; and usually found among an Reasons for the popularity of PNs
iii) The corporate performance in entrepreneur’s family and friends  One of the primary reasons for the
competing countries. but they may be from outside also. emergence of the PN is the
 At the end of December 2012 , QFIs Scheme restrictions on foreign
1,759 FIIS were registered with investments. For example, a
 In the Budget 2011-12 , the
SEBI with their net FII flows to foreign investor intending to
government, for the first time ,
Indian at US$ 31.01 billion. make portfolio investments in
permitted qualified foreign
New Rules for Foreign Investment investors (QFIs), who meet the India was required to seek FII
 To promote the flow of foreign know-your-customer (KYC) norms, registration for which he is
funds into the economy the RBI, to invest directly in Indian mutual required to meet certain eligibility
on 24 January, 2013, further funds. criteria.
liberalized, the provisions of In January 2012 , the government 
 However, since January 2012 , the
investment in India’s security expanded this scheme to allow Indian government has taken a
market – QFIs to directly invest in India decision to give direct access to
such prospective ‘ foreign ban the issue of PNs. However,  These entities are originally
individual investors’ who were they can regulated, as SEBI does- incorporated in well- regulated
hitherto banned to invest in equity when a PN is traded on an and developed jurisdictions like
of Indian companies. overseas exchange, the regulator the US, UK, etc. Further, these
 The off – shore derivative market in that jurisdiction would be the entities also possess the financial
allows investors to gain exposure authority to regulate that trade. wherewithal to issue PNs,
to the local shares without According to the SEBI Regulating complemented by skilled
incurring the time and costs 2004 personnel who are adept at risk
involved in investing directly. In management and financial
 PNs can be issued only to those
return the foreign investor pays engineering activities.
entities which are regulated by
the PN issuer a certain basis the relevant regulatory authority International situation
point(s) of the value of PNs traded in countries of their incorporation  PN like products are not
by him as costs. and are subject to compliance of necessarily used to invest in
 For instance, directly investing in ‘known your client’ (KYC) norms. restricted markets, but also
the Indian securities markets as an  Down- stream issuance or transfer reported to be available in the
FII, has significant cost and time of the instruments can also be open developed / advanced
implications for the foreign made only to a regulated entity. economies like Japan, Hong Kong,
investor. Apart from seeking FII Singapore, Australia, the USA and
 Further, the FIIs who issue PNs
registration, he is required to UK.
against underlying Indian
establish a domestic broker  Other Asian countries like Hong
securities are required to report
relationship, a custodian bank Kong, Singapore and Japan have
the issued and outstanding PNs to
relationship, a custodian bank reportedly ‘no restrictions’ or
SEBI in a prescribed format.
relationship, deal in foreign requirement s on PNs.
exchange and bear exchange rate  In addition, SEBI can call for any
information from FIIs concerning  Malaysia, Indonesia and
fluctuation risk, pay domestic
off-shore derivative instruments Philippines which are restricted
taxes and / or filing tax return
(ODIs) issued by it. markets though, are having no
obtain or maintain an investment
reporting requirements in this
identity, etc. The concerns related to PNs
regard.
 Besides reducing transactions  There are also concerns that some
Hedge Fund
costs. PNs also provide customized of the money coming into the
tools to manage risk, lower market via PNs could be the  This term has come up from
financing costs and enhance ‘unaccounted wealth’ another term hedging, a process
portfolio yields. For instance, PNs camouflaged under the guise of FII by which businesses insulate
can also be designed for longer investment. themselves from the risk of price
maturities then are generally changes.
 However, this has not been proved
available for exchange-traded so far. SEBI has indeed been  Hedge funds are the lot of
derivative. successful in taking action against investible (free floating capital)
 PNs also offer an important the FIIs who were non-compliant capital which move very swiftly
hedging tool to a foreign investor and those who had misreported towards the more profitable
already registered as an FII. offshore derivatives (as happened sectors of an economy.
 Potential investors who would like when SEBI took actions against Short Selling
to take direct Indian exposure in two FIIs – Barclays in December  Sale of a share which is not owned.
future, may make initial 2009 and Societe Generale in This is done by someone after
investments through the PN route January 2010). borrowing shares from
so as to get a flavor of future  At present, PNs are issued by large stockbrokers promising to replace
anticipated returns financial sector conglomerates them at a future date on the hope
Regulation of PNs which not only have strong (speculation) that the price will fall
presence in the global investment by then.
PNs are market
banking arena but also have asset  He fetches profit if price of the
 PNs are market instruments that management arms which invest share really fell down by the future
are created and traded overseas. across a number of securities date of replacement and sustains
Hence, Indian regulators cannot markets globally. a loss if the price increased.
Bear and Bull approval route . The high level are i) To strengthen and institutionalize
 A person who speculates share considered on case - by case basis the mechanism for maintaining
prices to fall in future and so sells by the committee on ECB took a financial stability.
his shares and earns profit is a bear. number of decisions in September ii) To enhance inter-regulatory
Ge earns profit out of a falling 2011 to expand the scope of ECBs coordination and
market. Basically, here he is short RGESS iii) To promote financial – sector
selling the shares.  On 23 November, 2012 , the development.
 Opposite to bear, bull is a person government notified a new tax  The council is chaired by the
who speculates share prices to go saving scheme called the Rajiv finance Minister and has heads of
up in future so either stops selling Gandhi Equity Savings Scheme financial – sector regulatory
the select group of shares for that (RGESS), exclusively for first – time authorities, the Finance Secretary
time to be reached. retail investors in the securities and / or Secretary of the
 Thus, a bear increases the number market. Department of Economic Affairs,
of shares in a stock market  This scheme provides 50 per cent Secretary of the Department of
activating a general fall inn the deduction of the amount invested Financial Services, and the Chief
index – a bearish market. from taxable income for that year Economic Adviser as members.
 Opposite to it, a bull creates a to new investors who invest up to  without projecdive to the
scarcity of shares in the stock Rs. 50,000 and whose annual autonomy of regulotors they
market activating a general rise income is below Rs. 10 lakh. council monitors. macro-
in the share prices and the index-  The Rajiv Gandhi Equity Saving prudential supervision of of the
a bullish market. Scheme (RGESS) will give tax economy, including functioning of
IPO benefits to new investors whose large financial conglomerates,
annual income is up to Rs. 10 lakh  inter – regulatory coordination
 Initial Public Offer (IPO) is an even
for investments up to a maximum and financial – sector
of share issuing when a company
of Rs. 50,000. development issues, and
comes up with its share/ securities
issued for the first time.  The investor will get 50 per cent  Financial literacy and financial
deduction of the amount invested inclusion.
Price Band
from taxable income for that year.
 A process of public issue where the Financial Action Task Force (FATF)
CPSE ETF
company gives a price range  The FATF is an inter- governmental
(known as price band) and it is left Financial Stability Development policy making body that has a
upon the share applicants to quote Council (FSDC) ministerial mandate to establish
their prices on it.  An apex level body , the FSDC, was international, standards for
ECB Policy set up by the GoI in December combating money laundering and
2010. It was in line with the G-20 terrorist financing. Indian joined
 A prospective borrower can access
initiative which came in wake of the FATF as its 34th member in June
external commercial borrowings
the financial crises among the 2010.
(ECBs) under two routes, ECBS not
western economies triggered by  At present, the FATF has 36
covered under the automic route
the 2007 – 08 ‘sub-prime’ crisis of members comprising 34 countries
RBI under the approval route .
the USA, the Council has the and two organizations (European
ECBs not covered under the
following objectives. Union and Gulf Cooperation
automic route RBI under the
Council).

Money & Banking: Different Stages of The Development of Indian Banking

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MONEY & BANKING

Security Market in India

OTCEI stocks being quoted nationwide having any exchange of national

harvest at a future date to  FIIs and long-term investors equity markets.

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