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 1. Explain derivatives with the help of their types. (500)
2. Distinguish between Futures & Forward Contract. (500)
1.
The International Monetary Fund defines derivatives as “financial instruments that are linked to a specific
financial instrument or indicator or commodity and through which specific financial risks can be traded in
financial markets in their own right. The value of a financial derivative
derives from the price of an underlying item, such as an asset or index. Unlike debt securities, no principal is
advanced to be repaid and no investment income accrues”.
A derivative is a product whose value is derived from the value of one or more basic variables, called bases
(underlying asset, index, or reference rate), in a contractual manner.
The underlying asset can be equity, forex, commodity, or any other asset. For example, wheat farmers may
wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a
transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which
is the ‘underlying’.
History:
They initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked
derivatives remained the sole form of such products for almost three hundred years. Financial derivatives
came into the spotlight in the Post-1970 period due to growing instability in the financial markets.
The factors generally attributed as the major driving force behind the growth of financial
derivatives are:
Increased volatility in asset prices in Financial Markets.
Increased Integration of national financial markets with the International markets.
Marked Improvement in communication facilities and sharp decline in their costs.
Development of more sophisticated risk management tools, providing economic
agents with a wider choice of risk management strategies, and
Innovations in the derivatives markets, which optimally combine the risks and returns over a large number
of financial assets, leading to higher returns, reduced risk as well as transaction costs as compared to individual
financial assets.
Types:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on
a specific date in the future at today’s pre-agreed price.
Futures: A futures contract is an agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Futures contracts are special types of
forwarding contracts in the sense that the former are standardized exchange-traded
contracts.
Options: Options are of two types – calls and puts. Calls give the buyer the right but not
the obligation to buy a given quantity of the underlying asset, at a given price on or before
a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of
the
underlying asset at a given price on or before a given date.
Warrants: Options generally have lives of up to one year and the majority of options traded on options
exchanges have a maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded over the counter.
LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. These are options having a
maturity of up to three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset
is usually a moving average or a basket of assets. Equity index options are a form of basket
options.
Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a
prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps
are:
Interest rate swaps: These entail swapping only the interest-related cash flows between the parties in the
same currency.
Currency Swaps: These entail swapping both principal and interest between the parties, with the cash
flows in one direction being in a different currency than those in the opposite direction.
Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus, swaptions are an option on a forward swap. Rather than have calls and puts, the swaptions
market has receiver swaptions and payer swaptions A receiver swaption is an option to receive fixed and
pay floating. A payer swaption is an option to pay fixed and receive floating.

(2)

A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the
parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified
future date for a certain specified price. The other party assumes a short position and agrees to sell the asset
on the same date for the same price. Other contract details like delivery date, price, and quantity are
negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the
exchanges. They are customized and called OTC (Over-the-Counter) Contracts.
The salient features of forward contracts are:
They are bilateral contracts and hence exposed to counterparty risk.
Each contract is custom designed, hence is unique in terms of contract size,
expiration date, and asset type and quality.
The contract price is generally not available in the public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same
counterparty, which often results in high prices being charged.
Forward contracts are very useful in hedging and speculation. The classic hedging
application
would be that of an exporter who expects to receive payment in dollars three months later.
He is exposed to the risk of exchange rate fluctuations. By using the currency forward
market to sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly, an importer
who is required to make payment in dollars for two months hence can reduce his exposure to exchange rate
fluctuations by buying dollars forward.
Drawbacks in Forward Contracts-
Lack of centralization of trading,
Illiquidity, and
Counterparty risk
To Avoid the Counter- Party Risk emanating from the forward contracts, Futures are preferred.
Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an
agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But
unlike forward contracts, futures contracts are standardized and exchange-traded. To facilitate liquidity in the
futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract
with a standard underlying instrument, a standard quantity, and quality of the underlying instrument that can
be delivered, (or which can be used for reference purposes in settlement), and a standard timing of such
settlement. The standardized items in a futures contract are:
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
Difference between Futures &Forwards
Trade on an organized exchange whereas forwards are OTC in nature.
Standardised contract terms whereas forwards are Customized contract terms.
Futures are more liquid and Forwards are less liquid.
Futures requires margin payments and Forwards don’t need margin payment.
Futures follows daily settle whereas forwards settlement happens at the end of
period.
Remarks - Please add conclusion.

Qn. Explain various steps and tools of Risk Management. (400 words).

Risk implies future uncertainty about deviation from expected outcome. It is an exposure to a transaction to
loss which can be expected, measured and minimized. It is inherent in some form in every business large and
small. Therefore, its management is incredibly important for financial institutions that typically have thousands
of customers and counterparties and are systemically important to the overall functioning of an economy.
Risk is categorised broadly into three types in banking business: Credit Risk, Market Risk
and Operational Risk.
Steps in Risk Management Process:
▪ Risk analysis: It is defining and understanding the nature of risks to which the bank is exposed to and then try
to quantify their impact on the bank.
▪ Risk Identification: This is in effect an attempt at listing out the risks to which the bank is exposed.
▪ Risk measurement: After identification of risks they have to be quantified in terms of the financial impact
they are likely to have on the bank, if they strike.
▪ Risk Control: Banks have put checks and controls in place to various aspects of Credit Risk, Market Risk and
Operational Risk.
▪ Risk Monitoring: Risk monitoring is evaluating the performance of bank’s risk management strategies in
achieving overall objectives.

Various tools for risk management which is frequently used by banks are:
#1. Capital Adequacy Ratio (CAR): It is the ratio of a bank’s capital in relation to its risk weighted assets. It is
decided by central banks to prevent commercial banks from taking excess leverage and becoming insolvent in
the process. It computed by dividing the capital of the bank with aggregated risk-weighted assets for credit
risk, operational risk, and market risk.
#2. Asset Liability Management (ALM): ALM can be defined as a mechanism to address the risk faced by a bank
due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is
an institution’s ability to meet its liabilities either by borrowing or selling assets. Apart from liquidity, a bank
may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term
and lend long term.
 #3. Prudential Limits: Prudential regulatory model calls for imposing the regulatory capital level to maintain
the health of banks and the soundness of the financial system. The major objective of prudential norms was to
ensure financial safety, soundness, and solvency of banks. These norms strive to ensure that banks conduct
their business activities as prudent entities, i.e., not indulging in excessive risk taking and violating regulations
in pursuit of profit.

#4. Risk Rating: A risk rating model is a key tool for lending decisions and portfolio management. They give
creditors, analysts, and portfolio managers a rather objective way of ranking borrowers or specific securities
based on their creditworthiness and default risk

#5. Risk Pricing: Risk pricing in the credit market refers to the offering of different interest rates and loan terms
to different consumers based on their creditworthiness. Risk pricing looks at factors associated with the ability
of the borrower to pay back the loan, namely a consumer's credit score, adverse credit history, employment
status, income, assets, collateral, the presence of a guarantor, and so on.

#6. Stress Testing: Stress testing is a computer-simulated technique to analyse how banks and investment
portfolios fare in drastic economic scenarios. Stress testing is a risk management technique used to evaluate
the potential effects on an institution's financial condition due to changes in risk factors, corresponding to
exceptional events. Stress testing includes scenario testing and sensitivity testing.

▪ Sensitivity tests are normally used to assess the impact of change in one variable i.e. yield curve, foreign
exchange rate, equity index on the bank’s financial position.
▪ Scenario tests include simultaneous moves in a number of variables i.e. equity prices, oil prices, foreign
exchange rates, interest rates, liquidity etc. based on a single event experienced in the past, and the
assessment of their impact on the bank’s financial position

#7. Maturity Gap Analysis: A maturity gap is the difference between the total market values of interest rate
sensitive assets versus interest rate sensitive liabilities that will mature or be repriced over a given range of
future dates. It provides a measure of the interest rate based repricing risk that a bank faces for a given set of
assets and liabilities of similar maturity dates and the potential impact of changing interest rates on net
interest income. In effect, if interest rates change, interest income and interest expense will change as the
various assets and liabilities are repriced.

#8. RAROC: Risk-adjusted return on capital (RAROC) is a modified return on investment figure that takes
elements of risk into account. In financial analysis, projects and investments with greater risk levels must be
evaluated differently; RAROC thus accounts for changes in an investment’s profile by discounting risky cash
flows against less-risky cash flows.

Banks in the process of financial intermediation are confronted daily with various kinds of financial and non-
financial risk. These risks are highly interdependent and events that affect one area of risk can have
ramifications for a range of other risk categories. Thus, top management of banks should attach considerable
importance to improve the ability to identify, measure, monitor and control the overall level of risks
undertaken.
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What are financial institutions? Explain their roles, features and types in detail. How do these contribute in
economic development?
Financial Institutions are the ones that help individuals and businesses fulfil their monetary or financial
requirements as these institutions are engaged in the business of dealing with financial and monetary
transactions such as deposits, loans, investments and currency exchange. Financial institutions encompass a
broad range of business operations within the financial services sector including banks, trust companies,
insurance companies, brokerage firms and investment dealers.
Roles performed by Financial Institution:
Regulation of Monetary Supply: Is like the Central Bank help in regulating the money supply in the economy
to maintain stability and control inflation. For ex: If the Central Bank applies various measures of contracting or
expanding the money supply.
Banking Services: FIs like commercial banks help their customers by providing savings and deposit services. In
addition, they offer credit facilities like overdraft facilities to the customers who need for short term funds and
extend loans to different types of customers.
Insurance Services: FIs like insurance companies help to mobilize savings and investment in productive
activities. In return, they assure investors against their life or some particular asset at the time of need.
Capital Formation: FIs help in capital formation, i.e., increase in capital stock like the plant, machinery, tools
and equipment, buildings, etc. Moreover, they mobilize the idle savings from individuals in the economy to the
investor through various monetary services.
Act as a government agent for Economic growth: The government regulates financial institutions on a
national level. They act as a government agent and help in growing the nation’s economy. It helps out an ailing
sector, financial institution as per the guidelines from the government, issue a selective credit line with lower
interest rates to help the industries.
Features of Financial Institutions:
It provides a high return to the customers who have invested in the financial institution.
It reduces the cost of financial services provided.
It is considered very important for the development of financial services in the country.
It also advises the customers on dealing with the equity and the other securities bought and sold in the
market.
It helps to improvise decision-making because it follows a systematic approach to calculate all the risks and
rewards.
Types of Financial Institutions: Financial institutions offer a wide range of products and services for individual
and commercial clients. The specific services offered vary widely between 9 types of financial institutions.
Central Banks:These are the financial institutions responsible for the oversight and management of all other
banks and NBFCs. In India, the central bank is the RBI, which is responsible for conducting monetary policy and
supervision and regulation of financial institutions.
Retail & Commercial Banks:A commercial bank is a type of financial institution that accepts deposits, offers
checking account services, makes business, personal and mortgage loans, and offer basic financial products like
certificate of deposits (CDs) and savings accounts to individuals and small businesses.
Traditionally, retail banks offered products to individual consumers while commercial banks worked directly
with businesses.
Internet Banks: A newer entrant to the financial institution market is internet banks, which work similarly to
retail banks. Internet banks offer the same products and services as conventional banks, but they do so through
online platforms instead of brick-and mortar locations. They are of two types : digital banks- these are
online-only platforms affiliated with traditional banks. And, Neo banks- these are pure digital native banks with
no affiliation to any bank but themselves.
 Credit Unions:It is a type of FI providing traditional banking services and is created, owned and operated by
its members. In the recent past, credit unions used to serve a specific demographic as per their field of
membership, such as teachers or members of the military. However, they have loosened the restrictions on
membership and are open to the general public.
Saving & Loan Associations: also referred to as Thrift Institutions. FIs that are mutually owned by their
customers and provide not more than 20% of total lending to businesses fall under the category of savings and
loan associations.
Investment Banks:These are the FIs that provide services and act as an intermediary in complex
transactions-for instance, when a start-up is preparing for an IPO or in mergers. They can also act as a broker
or financial advisor for large institutional clients such as pension funds.
Insurance Companies: FIs that help individuals transfer the risk of loss are known as insurance companies.
Individuals and businesses use insurance companies to protect against financial loss due to death, disability,
accidents and other misfortunes.
Brokerage Firms: These assist individuals and institutions in buying and selling securities among available
investors.
Mortgage Companies: FIs that specialize in originating or funding mortgage loans are mortgage companies.
While most mortgage companies serve the individual consumer market, some specialize in lending options for
commercial real estate only.
Apart from the above mentioned FIs there are several other FIs in economy such as Regulated bodies (SEBI,
NABARD) and Specialized financial Institutions like EXIM and the mutual funds.

Contribution in Economic development:

Development & Introduction of Niche strategies
Motivating the Financial Sector
Financing the Small Scale Sector
Development and Support Services
Micro Finance Credit
Introduction of more Institutions
Mopping up Savings
Trade Facilitation Programme
Availability of Financial services to households & individuals
Capital mobilization
Insurance and financial services
Managing Risk in Financial Institutions
Financial Innovation
Rural Finance
Financial Institutions provide the best way to invest money and earn good returns. It tries to help our nation in
building up economies. They provide a very unique and advanced way to keep money safe. With the lending
and borrowing in the economy it creates money and helps in financing the needy ones which at last helps in
economic growth and development.

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Explain the functions of RBI in detail. Which is the most important function and
why? (800 words)

The origins of Reserve Bank of India can be traced to 1926, when the Hilton Young commission recommended
creation of Central Bank of India for separating currency and credit issue control from the government of India
and augment banking facilities throughout the country. Based on these recommendations, the RBI was
established by RBI Act 1934 and commenced its operations from 1st April 1935. Since its establishment
RBI is playing a dynamic role in ensuring sound financial health of the country, by upgrading and expanding its
purview of functions.
The various functions performed by RBI are as follows-
Monetary management – The RBI is responsible for formulating, implementing and monitoring the
monetary policy of the country. The monetary policy committee was established in the year 2016 , with the
objective of maintaining price stability while keeping in mind the objective of growth. Under section 45ZA of
RBI act, RBI determines the inflation target based on CPI, the target band for 1 April 2021 to 31
March 2026 is 4+/-2%.

Issuer of currency – By deriving power from section 22 of RBI act 1934, the RBI is responsible for design,
production and overall management of currency to ensure adequate supply of clean and genuine notes.
Besides this in consultation with GOI, RBI address security issues and enhances security features of currency to
reduce counterfeiting or forgery of currency notes.
Banker and debt manager to government – As per the RBI act 1934 RBI carries monetary, remittances,
exchange and banking transactions of government of India along with managing its public debt. Besides central
government RBI also acts as banker and debt manager to all state governments(except Sikkim). RBI manages
public debt on behalf of central and state governments, by raising new loans and repaying principle and
interest on behalf of states and center.
Banker to banks – This function is carried out by Deposits Accounts department of RBI, where in banks open
their accounts with RBI to avail the facility of smooth interbank transactions. As lender of last resort RBI
rescues banks from going insolvent in case of temporary liquidity crunches.
Financial Regulation and supervision – The RBI regulates and supervises banks by deriving its powers from
Banking regulation Act 1949, while other entities such as Developmental financial institutions, Non-Banking
financial companies, primary dealers are regulated through RBI act 1934. Through this function, RBI protects
the interest of depositors through effective regulatory framework for appropriate
conduct of banking operations, and maintenance of financial stability through sound policy measures.
Foreign exchange Reserves management – The RBI acts as custodian of Foreign exchange reserves of the
country by deriving its powers from RBI act 1934. This importance of this function is increasing with increased
share of foreign currencies in RBI’s balance sheet and increase in the volatility of currency exchange rates. The
foreign exchange reserves comprise of foreign currency assets, special drawing rights and gold.
Foreign Exchange management – The RBI supervises and manages foreign exchange market of India by
deriving its powers from Foreign exchange management act 1999. RBI promotes the orderly development and
maintenance of foreign exchange markets by sound policies and facilitating external trade and
payments.
Market operations – RBI operationalises the monetary policy through its operations in government
securities, foreign exchange and money markets. For example the open market operation are carried out
through Negotiate dealing system- order matching platform, ,Liquidity adjustment facility auctions, Market
stabilization scheme ,etc.
Payment and settlement systems – The payment and settlement act 2007 provides the authority to RBI to
supervise the payment system in India. The efficient and safe payment system is the pre-requisite for a sound
financial system and hence RBI continuously strives to improve the payment system by introducing various
mechanisms such as check truncation system, electronic clearing system, high value clearing , negotiate
dealing system a screen based trading platform for government security transactions, etc.
 Developmental role – RBI plays an active and direct role in supporting the development of all sectors of
economy by creating institutions to build financial infrastructure, and expanding access to affordable financial
services. Some of the initiatives under this line are Priority sector lending, lead bank scheme, JAM trinity,
etc.
Consumer awareness and protection – RBI launches various awareness campaigns through various media
platforms such as “RBI Kehta h” to educate customers about various financial and cyber related frauds, safety
guidelines for digital banking transactions, and information about the integrated ombudsman scheme to lodge
complaint, etc.
Innovation and Research – RBI has recently launched RBI innovation hub to support innovation and research
in fintech sector to provide an ecosystem for testing of various financial products and services which would
further enhance the financial inclusion.
Although all the functions of RBI are crucial for sound functioning of the financial system and economy, the
role played by RBI in ensuring financial stability is most important. The monetary stability is paramount to the
economic growth of any country. A stable inflation rate ensures price stability, which leads to well informed
consumption and investments by the general public, leading to efficient allocation of resources, thus price
stability preserves integrity and purchasing power of nation’s money. In a stable financial system the resources
are deployed to the productive sectors which further creates new employment opportunities thereby spurring
the economic growth. The RBI controls liquidity of the system by using liquidity adjustment tools and changes
its stance as per the need of the economy. For example during Covid-19 pandemic RBI adopted
accommodative stance where in the repo rate was reduced and special window loan facilities were provided to
those sectors which were hit hard by pandemic to ensure their quick recovery. Similarly during boom period
RBI sucks the excess liquidity from the system to ensure that the inflation remains under control, in this way
RBI maintains the trust of country on financial system by using its dynamic tools.

From the above mentioned points it is evident that the role of RBI has evolved over the years as per the
changing dynamics of financial and non-financial factors across the country and the globe. The efficient
functioning of RBI is central to ensuring macro and micro level stability of the economy while maintaining the
trust of people on financial system.
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Explain the Importance of the Financial System in the growth and development of the country. Discuss in
detail its components and types. (800 words)

The financial systems of most developing countries are characterized by coexistence and cooperation between
the formal and informal financial sectors. This coexistence of these two sectors is commonly referred to as
“financial dualism”. And the whole financial system is a complex well integrated set of sub-systems of financial
institutions, financial markets, financial instruments and financial services.
The whole financial system is important for the economy and it plays a vital role in growth and development of
the country by:
Savings-Investment relationship: the Financial system efficiently directs the flow of savings and investment
in the economy. Here financial institutions like banks play a major role. They allow depositors invest money in
various deposits like FDs and RDs by offering attractive rate of interest. These savings are then channelized by
the banks to provide credit to different business entities, which are involved in production and distribution.
Helps in Employment Creation: the financial system provides capital to entrepreneurs who want to start a
business. When these businesses come into existence they directly or indirectly require the services of a wide
variety of personnel. As a result, a lot of employment will be generated in the economy.
Aids Infrastructure Development: Financial Markets play a vital role in infrastructure development as well.
As the private sector may face great difficulties in raising large amounts of funds for projects with a high
gestation period. It is the financial markets that provide the liquidity required by the investors.
Helps in fiscal discipline and control of economy: It is through the financial system, that the government can
create a balanced business atmosphere so that neither too much of inflation nor depression is experienced.
The industries should be given suitable protection through the financial system so that their credit
requirements will be met even during difficult period.
Trade Development & Foreign Exchange: The financial system helps in the development of both domestic as
well as foreign trade and also industry and commerce. The financial institutions provide funds to traders
through the financial market, which issue financial instruments like treasury bills and commercial papers. And
further the foreign exchange market helps exporters and importers raise and receive funds for settling
transactions.
These are some of the functions and roles that financial system does in an economy. And this financial system
is of two types: formal and informal.
The informal financial sector is an unorganized, non-institutional and non-regulated system dealing with the
traditional and rural spheres of the economy. It has emerged as a result of the intrinsic dualism of economic
and social structures in developing countries. And it can be individual moneylenders such as neighbours,
relatives, landlords, traders and storeowners.
Formal financial sector is characterized by the presence of an organized, institutional and regulated system
which caters to the financial needs of the modern spheres of economy. And its components are:
1. Financial Institutions
2. Financial markets
Financial Instruments
1. Financial Services
(b)i. Financial Institutions: These are intermediaries that mobilize savings and facilitate the allocation of funds
in an efficient manner. It can be classified as banking and non- banking financial institutions. The banking
institutions are the creators and providers of credit while the nonbanking institutions are providers of credit
and development of economies.
(b)ii. Financial Market: It is a mechanism enabling participants to deal in financial claims. The market also
provides a facility in which their demands and requirements interact to set a price for such claims. It is a type
of market where the funds are transacted between the individual who has a fund surplus and the one who has
a fund deficit. a financial market can be divided into two groups based on the duration of finance

1. Money market- it is a market for short-term funds and the maturity of the instruments is less than one year.
it is called the most liquid market. the money market consists of treasury bills, commercial papers, certificates
of deposits, call and notice money, etc. 2) Capital Market- in this market the fund is mobilizing for a longer
duration. it mobilizes long-term savings and finances long-term investments. further, the capital market is also
classified into the primary and secondary capital markets. the primary market is the market for fresh capital
and here the fresh shares are issued. the secondary market is the market for trading securities that are already
issued.
(b)iii. Financial Instruments: a financial instrument is a claim against a person or institution for payment at a
future date of the sum of money or periodic payment in the form of interest or dividend. Instruments can be
based upon terms (short, medium and long). And it can be based upon primary and secondary securities.
Primary includes equity, preference, debt and various combinations. And Secondary securities includes time
deposits, mutual funds and insurance policies, etc.

(b)iv. Financial Services: these are those that help with borrowing and funding, lending and investing, buying
and selling securities, making and enabling payments and settlements, managing risk exposures in financial
markets. The major categories of financial services are funds intermediation, payments mechanism, provision
of liquidity, risk management and financial engineering.

Financial system with its types and components comprises a major part in the economy and holds different
sectors and segments of the economy by connecting the threads of the economy. So every component of the
types of financial system is important for economic growth and development.

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Discuss the Various Challenges being faced by the Indian Public Sector Banks. (600 words)

Since the time India has got independence, the banking sector has played a pivotal role as a depository of
liquidity, in channelizing surplus funds to financing the productive sectors of economy and has acted has
backbone of payment and settlement system. The growth story of Indian economy is incomplete without
crediting the banking sector for its valuable contribution at all the stages of development. However with
increasing interconnectedness, globalization and increased horizon of services and technology the banking
sector is posed with many challenges. The major challenges faced by banking sector are as follows-

Increased competition and consolidation – The deregulation in interest rates, functional autonomy to banks
in the area of credit disbursement and entry of foreign and private banks has increased the competition for
private sector banks.
Non Performing Assets – The high loan write-offs and NPA issue combined with low asset growth has been
more severe for public sector banks as compared to private sector banks. And the COVID-19 pandemic has
further stressed the situation due to moratoriums and increased in restructured assets, which has deteriorated
asset quality.
Tightening of prudential norms – In some countries doubtful assets whether secured or unsecured are to be
classified as loss assets and are fully provided for but in case of India doubtful assets backed by collateral are
provided only upto 50%.
Risk management system – With increasing complexity of financial system and enhanced scope of risk due
to technology up-gradation banks have to adopt sophisticated technologies such as such as VaR, Duration and
simulation and internal model based approaches , credit modeling ,etc which has added new cost
addition and the need of specialization.
Risk based supervision – As the financial sector is becoming risk oriented and banks are shifting towards
higher computerization levels the need for information audits is also arising.

Corporate governance – Although the Ganguly group has recommended the supervision of boards of banks
there are huge gaps between Indian and international corporate governance standards in terms of risk
management strategies, practices, risk concentration, performance measures, etc. Hence, the disclosure
standards need to be further broad-based in consonance with improvements in the capability of market
players to analyse the information objectively.

Capital to Risk weighted asset Ratio – As per the standing committee on finance chaired by M. Veerappa
Moily, the 9% CRAR requirement for Indian banks as compared to 8% norm under basel III prevents banks from
becoming highly leveraged. As per the committee if CRAR is reduced to 1%, then capital infusion
requirements for banks would reduced along with additional income and loan growth of Rs 50,000 crore
annually.
 Higher number of banks under PCA – During the year 2017, 11 lenders were put under the PCA framework,
due to the stringent norms of PCA frameworks the lending and deposit taking capacities of banks are
hampered, and despite the imposition of PCA framework the growth and recovery rate of these banks have
been stagnant.
Performance of National company Law Tribunal – In the past few years it has been observed that the
recovery of large NPA through IBC is taking longer time than the stipulated time of 270 days, which further
restricts the growth opportunities for banks.
Powers of RBI in case of PSBs - Under the Banking regulation act 1949, RBI does not possess power of
removing and appointing the chairman and MD of PSBs, and superseding the board of directors which comes
in the way of effective governance of PSBs which could be implemented and monitored by RBI.

The above challenges confronting the banking sector calls for a combined effort of Indian banks association,
regulators and banks to upgrade the system as per the increased complexities of banking system and adapt
with the advancements in the systems to ensure a secured system and quality services to customers.
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Comment on the various reforms initiated by RBI in improving the banking sector
and services in India.

The role of the central bank always remains very important for creating resilient banking and financial system
and thereby promoting healthy economy growth of the nation. Following are some of the initiatives taken by
RBI in improving banking sector and services in India;

Digital Banking Units (DBUs): Following the announcement made in the Union Budget 2022-23 to set up 75
DBUs in 75 districts, RBI issued guidelines on establishment of DBUs for SCBs to widen the reach of digital
banking services.
Legal Entity Identifier (LEI): RBI introduced 20 digit LEI code to identify parties to financial transactions
worldwide. It is applicable for all large borrowers of SCBs, UCBs and NBFCs. Non-individual borrowers with
exposure above ₹5 crore to obtain LEI. Borrowers with exposure above ₹25 crores to obtain LEI.
Regulatory Framework for Microfinance Loans: RBI has issued regulatory framework for microfinance loans
effective from April 1, 2022. It includes, no pre-payment penalty no requirement of collateral cap on outflows
on account of repayment obligations of a household as a percentage of household income, simplified pricing
of microfinance loans conduct towards microfinance borrowers.
Retail Direct Scheme : It was launched by RBI in November 2021, which allows individual investors to open a
Retail Direct Gilt (RDG) Account with the RBI to facilitate investing in G- Secs in the primary and secondary
markets..
Reserve Bank - Integrated Ombudsman Scheme (RB-IOS), 2021: It integrates the existing 03 Ombudsman
schemes of RBI—the Banking Ombudsman Scheme, 2006; the Ombudsman Scheme for Non-Banking Financial
Companies, 2018; and the Ombudsman Scheme for Digital Transactions, 2019. The key features of RB-IOS
include; Single point of reference through ‘One Nation - One Ombudsman’ Cental toll-free
number (14448)
A centralised receipt and processing centre (CRPC) has been set up at RBI, Chandigarh- It also includes under
its ambit Non-Scheduled Primary Co-operative Banks with a deposit size of more than Rs 50 crore and CICs.
Complaints involving deficiency in service’ will be admitted under the RB-IOS. 15 days timeline for the REs
to furnish information/documents to the office of Ombudsman
Payments Infrastructure Development Fund (PIDF): PIDF was created in January 2021, to incentivise the
deployment of payment acceptance infrastructure such as physical PoS mPoS, QR codes in Tier-3 to Tier-6
centres and north-eastern states and UTs of Jammu
and Kashmir (J&K) and Ladakh.
It envisages creating 30 lakh new touch points every year for digital payments.
The initial corpus of fund is ₹500 crores, out of which RBI has contributed RS 250 crores remaining
contribution will be from card issuing banks and card networks operating in the country.

Scale Based Regulation for NBFCs : RBI revised the regulatory framework for NBFCs in October 2021 to
introduce scale-based regulation. NBFCs are placed in 04 layers, based on their size, activity, and perceived
riskiness, viz., Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and a possible Top Layer (TL). The
regulations are progressively tighter for the higher layers.

Four-Tier Regulatory Structure for urban cooperative banks (UCBs): RBI prescribed the following regulatory
structure for UCBs; Tier-I: UCBs with deposits of up to Rs100 crore Tier-II: UCBs with deposits of more than
Rs 100 crore and up to Rs 1,000 crore
Tier III: UCBs with deposits of over Rs 1,000 crore and up to Rs 10,000 crore
Tier-IV: UCBs with deposits of over Rs 10,000 crore
Minimum net worth of Rs 2 crore for Tier-I UCBs operating in a single district and Rs 5 crore for all other UCBs
of all tiers.
Small Finance Banks (SFBs) to deal in Forex : RBI has set norms SFBs to become AD Category-I to deal forex
business. As per the RBI’s norms,
1. SFB should be included in the 2 nd Schedule to RBI Act 1934.
2. Minimum net worth of Rs 500 crore.
3. CRAR not be less than 15%.
4. Net NPAs less than 6%, during previous four quarters.
5. In profit in the preceding two years.
Opening of Current Accounts by Banks : RBI revised guidelines for opening of Current Accounts to instil credit
discipline and prevent diversion of funds.
RBI permitted ; (a) borrowers with the aggregate exposure of the banking system less than 5 crore, to open
current accounts and CC/OD accounts without any restrictions; and
(b) borrowers availing CC/OD facilities to maintain current accounts with any one of the banks with which they
have CC/OD facility, provided it has at least 10 per cent of the exposure of the banking system to that
borrower; and to maintain collection accounts with other lending banks.

Fintech Regulations: As fintech adoption picked up in the country, the RBI issued regulations for emerging
areas such as Payments Banks and Small Finance Banks (2014), Account aggregators (2016), Mobile wallets
(2017), Pre-paid instruments (2017), Peer-to-peer (P2P) lending (2017) Trade Receivable and Discounting
System- TReDS) (2018). Regulatory Sandbox (RS)-2019: It was introduced to foster responsible
innovation in financial services. Cohorts under RS are mentioned as under; First cohort = ‘Retail Payment’
Second cohort = ‘Cross Border Payments’ Third cohort = ‘MSME Lending’

RBI Innovation Hub (RBIH): It was established on 24 March 2022 at Bengaluru for creating an ecosystem of
innovation through collaboration with tech innovators and academia for promoting access to financial markets
and financial inclusion. Shri Senapathy (Kris) Gopalakrishnan has been appointed as the Chairman of RBIH.

Deposit Insurance:
The DICGC Act, 1961 was amended w.e.f 1 st September 2021. It includes; The maximum deposit insurance
cover was increased from 2 lakh to 5 lakh. The insured bank to submit its claim within 45 days of imposition of
such restrictions and the Corporation has to get the claims verified within 30 days and pay the depositors
within the next 15 days. It empowers the DICGC to make interim deposit insurance pay-outs to troubled
banks, even if they are under the RBI’s All Inclusive Directions (AID), within 90 days of imposition of such
directions. The limit of insurance premium was raised to 15 paise per ₹100 of deposits.

Central Bank Digital Currency (CBDC): As announced in Union Budget, RBI will introduce CBDC backed by block
chain technology in the year 2022-23.

Bad Bank : As announced in Union Budget, National Asset Reconstruction Company Limited (NARCL), popularly
termed as a “bad bank”, was established to consolidate and take over stressed debt from banks, based on
decided characteristics.

Centralised Payment Systems – Permitting Membership to Non-bank Entities In April 2021, RBI announced that
entities in the payment space fully regulated by it, viz., non- bank prepaid payment instrument (PPI) issuers,
card networks (like Visa and MasterCard),
Trade Receivables Discounting System (TReDS) platform operators and white-label ATM operators can obtain
direct membership in centralised payment systems CPSs for RTGS and NEFT.

Launch of 24x7 RTGS & NEFT: To provide flexibility for businesses for effecting payments, RBI made the RTGS
system available round the clock on all days from
December 14, 2020. The RTGS 24x7x365 was implemented on the back of
operationalizing 24x7 NEFT system a year ago.
Remittances through Indian Payment Systems : NPCI was encouraged to incorporate a wholly owned
subsidiary for international business, viz., NPCI International Payments Limited to strengthen the international
presence of RuPay cards and build inter-regional partnerships to enhance foreign inward remittances to India
using the Unified Payments Interface (UPI).
Launching of Indexes: RBI has launched following two indexes;
1. Digital Payments Index (DPI): It measures deepening and penetration of digital payments. It comprises of 5
parameters; (i) Payment Enablers (weight 25%), (ii) Payment Infrastructure – Demand-side factors (10%), (iii)
Payment Infrastructure – Supply-side factors (15%), (iv) Payment Performance (45%) and (v) Consumer
Centricity (5%).

The RBI-DPI has been constructed with March 2018 as the base period.
1. Financial Inclusion Index: It captures the extent of financial inclusion across the country. It comprises of
three parameters viz., Access (35%), Usage (45%), and Quality (20%).
Rationalization of Knowing Your Customer (KYC) Norms: The RBI has also extended the scope of video KYC
(know-your-customer) or V-CIP (video-based customer identification process) for new categories of customers
such as proprietorship firms, authorised signatories and beneficial owners of legal entities.

Enhancement of the Cap

under e-RUPI : RBI had increased the cap of e-RUPI vouchers issued by the Central government and State
governments from Rs. 10,000 to Rs. 1,00,000 per voucher and permit such e-RUPI vouchers to be used more
than once.
Framework for Facilitating Small Value Digital Payments in Offline Mode:. According to it; Offline payments
can be made in proximity (face to face) mode only, using any channel or instrument like cards, wallets and
mobile devices. No need for Additional Factor of Authentication (AFA).
The upper limit of transaction is Rs 200 with the total limit of Rs 2,000 Replenishment can be done only in
online mode with AFA. Based on the guidelines NPCI has launched UPI123Pay.

Digital Payment Innovations: RBI, through its subsidiary NPCI, has launched following initiatives; UPI123pay
UPI lite , Digisaathi .

Financial literacy Weeks: Since 2016, RBI has started celebrating Financial Literacy week generally in the month
of February through various themes. In 2022, it was observed during 14 to 18 February 2022 under the theme
of “Go Digital, Go Secure “

Priority Sector Lending (PSL) classification : In order to boost lending to NBFCs, RBI approved lending by banks
to NBFCs for ‘on-lending’ to sectors — which contribute significantly to the economic growth in terms of export
and employment” as PSL.

Initiatives of RBI in the backdrop of COVID-19: Consistent accommodative Stance: Since May 2020, the MPC of
RBI maintained status quo on the policy repo rate (4%) with an accommodative monetary policy stance. It was
increased to 4.5% in May 2022 almost after two years. Reduction of Repo Rate: The MPC of RBI has
cumulatively reduced the Repo Rate by 115 basis points.

Thus other key policy rates associates with Repo Rate were also reduced to provide impetus economy.
Liquidity infusion: Through measures like Long Term Repo Operations (LTRO), Targeted LTRO (TLTRO), 100-bps
reduction in Cash Reserve Ratio (CRR) and easier borrowing requirements under the Marginal Standing Facility
(MSF) window, RBI had infused Rs. 3.74 trillion or almost 3.4% of GDP in the market.

G-Sec Acquisition Programme (G-SAP) : RBI had conducted G-SAP 1.0 and G-SAP 2.0 of Rs. 25,000 crore each
through Open Market Operations to infuse liquidity in the market.

Loan Moratoriums: RBI had allowed banks to defer payment of EMIs. It also allowed banks to defer interest on
working capital repayments— a move aimed at addressing the distress among firms as production is down.

Special Liquidity Facility (SLF): RBI had provided support of Rs. 50,000 crore to AIFI under SLF. As a part of it, Rs.
25,000 crore were provided to NABARD, Rs. 15,000 crore were provided to SIDBI and Rs. 10,000 crore were
provided to NHB. RBI had also enhanced the loan limit from Rs. 50 lakh to Rs. 75 lakh per borrower against the
hypothecation of agricultural produce backed by NWRs/(e-NWRs) issued by warehouses registered and
regulated by WDRA.

Relaxation of Overdraft Facility for States: To enable the State governments to better manage their fiscal
situation in terms of their cash flows and market borrowings, the maximum number of days of overdraft (OD)
in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21
days. On-tap Liquidity Facilities for Emergency Health Services and Contact-intensive Sectors of Rs 50,000 crore
and Rs 15,000 crore respectively, were announced during the second wave of the Pandemic.

Voluntary Retention Route (VRR) - Enhancement of Limits : RBI had enhanced the limit for investments under
VRR scheme by Rs1.0 lakh crore from Rs1.5 lakh crore at present to Rs2.5 lakh crore with effect from April 1,
2022. “Banks are the Backbone of the economy while the Central Bank is the brain of the economy.”
Since its inception in 1935, RBI has remained successful and effective in creating a resilient regulatory and
enabling environment for the monetary system in India, which has saved the nation from many external
economic vulnerabilities.
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Functions of SIDBI, NABARD etc.

1. SIDBI (Small industries development bank of India)- It was set up on 2 April 1990 under an act of Indian
Parliament 1990, acts as an Principal financial Institution for promotion, financing and development of Micro,
Small and Medium Enterprise (MSME) sector, as well as for coordination of functions of institutions engaged in
similar activities. It is regulated and supervised by the Reserve Bank of India (RBI).

MISSION:- To facilitate and strengthen credit flow to MSMEs and address both financial and developmental
gaps in the MSME ecosystem.
FUNCTIONS:-
Refinancing loans that are extended to the small scale industries by the financial institutions.
Offering services like leasing, factoring, etc. to the MSMEs.
Promotion and Development- promoting entrepreneurship and handholding, budding entrepreneurs for
holistic development of MSME sector through credit-
plus initiatives.
1. Facilitator- playing a role of facilitator through roles like Nodal Agency for the MSME oriented schemes of
the government.
2. Fund of Funds- boosts entrepreneurship culture by supporting emerging startups through the fund of funds
channel.
3. Indirect lending- based on multiplier effect/ larger reach in financing the MSME sector and is undertaken
through Banks, SFBs, NBFCs, MFIs, and New age Fintechs.
Direct lending- aims to fill the existing credit gaps in the MSME sector and is undertaken through demonstrative
and innovative lending products, which can be further scaled up by credit delivery ecosystem.

1. NABARD( National Bank for Agriculture and Rural Development)- it came into existence on 12 July 1982 by
transferring the agricultural credit functions of RBI and refinance functions of the Agricultural Refinance and
Development Corporation (ARDC).

VISION- Development Bank of the Nation for fostering rural prosperity.

MISSION- Promote sustainable and equitable agriculture and rural development through participative financial
and non- financial interventions, innovations, technology and institutional development for securing
prosperity.
FUNCTIONS-
1. CREDIT FUNCTIONS-
2. Framing policy and guidelines for rural financial institutions.
3. Providing credit facilities to issuing organizations.
Monitoring the flow of ground level rural credit.
1. Preparation of credit plans annually for all districts for identification of credit potential.
2. DEVELOPMENT FUNCTIONS-
Help cooperative and RRBs to prepare development actions plans for themselves.
Monitor implementation of development action plans of banks.
 Provide financial support for the training institutes of cooperative banks, commercial banks and Regional rural
banks.
1. SUPERVISORY FUNCTIONS-
2. Undertakes inspection of Regional Rural Banks (RRBs) and cooperative banks ( other than urban/ primary
cooperative banks) under the provisions of Banking Regulation Act, 1949.
3. Provides recommendations to RBI on issue of licenses to Cooperative banks, opening of new branches by
State Cooperative Banks and RRBs.
4. NHB ( National Housing Bank)- it was set up on July 9, 1988 under NHB act, 1987.
It regulates the housing finance system of the country, extends refinance to different primary lenders and lends
directly in respect of projects undertaken by public housing construction and development of housing related
infrastructure.
VISION- Promoting inclusive expansion with stability in housing finance market.
MISSION- to harness and promote the market potentials to serve the housing needs of all segments of the
population with the focus on low and moderate income housing.
FUNCTIONS-
1. Regulation and supervision of Housing companies operating in India.
2. Raising of funds on large scale and onward refinancing to Housing finance companies, cooperative banks,
and other housing agencies for onward lending to individual and infrastructure companies in housing segment.
Ensure housing finance companies meet regularly capital requirements as required by Basel norms, have
proper risk management framework in place, good governance practices, etc.
1. IRDA ( Insurance Regulatory and development Authority of India)- It is a regulatory body under the
jurisdiction of Ministry of finance, Government of India and is tasked with regulating and licensing the
insurance and re-insurance industries in India. It was constituted by the Insurance Regulatory and development
Authority Act, 1999 .
MISSION- “ to protect the interest of policyholders, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith or incidental thereto”.
FUNCTIONS-
1. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such
registration.
2. Protection of interests of the policyholders in matters concerning assigning of policy, nomination by policy
holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and
conditions of contracts of insurance.
Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance
intermediaries and agents.
1. Promoting efficiency in the conduct of the insurance business.
2. Promoting and regulating professional organisations connected with the insurance and re-insurance
business.
3. Regulating investment of funds by insurance companies.
Regulating maintenance of margin of solvency.
Adjudication of disputes between insurers and intermediaries or insurance intermediaries.

1. PFRDA ( Pension fund regulatory and development authority of India)- the PFRDA act was passed on 19
September, 2013 and the same was notified on 1 February 2014, PFRDA is regulating NPS, subscribed by
employees of Govt. of India, State Governments and by employees of private institutions/ Organizations and
unorganized sectors. The main agenda behind the PFRDA launch was to promote, expand, and regulate the
pension industry in India.
FUNCTIONS-
1. To protect pension fund subscriber’s interest
2. Promote, regulate, and develop pension funds
Tier-I and Tier-II of the National Pension Scheme is governed under PFRDA
1. To promote the purchase of pension schemes in order to cater to senior citizen’s
financial needs.
2. PFRDA helps in educating the citizens about the importance of pensions of old age.
3. Addresses any grievances related to pension schemes
Resolves disputes between various intermediaries.
Train and inform intermediaries about the pension schemes and their functioning.

1. SEBI ( Securities and Exchange Board of India)- It was constituted as a non-statutory body on April 12, 1988
through a resolution of the Government of India. It was established as a statutory body in the year 1992 and
the provisions of the SEBI Act, 1992 came into force on January 30, 1992.
MISSION- “ to protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto”.
FUNCTIONS-
1. PROTECTIVE FUNCTIONS-
2. Prohibit insider trading- It is the act of buying and selling of the securities by the insiders of a company,
which includes the directors, employees and promoters. To prevent such trading SEBI has barred the
companies to purchase their own shares from the secondary market.
3. Check price rigging- it is the act of causing unnatural fluctuations in the price of securities by either
increasing or decreasing the market price of the stocks that leads to unexpected losses for the investors.
SEBI promotes fair trade practice and works towards prohibiting fraudulent activities related to trading of
securities.
1. Regulatory function- it involve establishment of rules and regulations for the financial intermediaries along
with corporates that helps in efficient management of the market.
2. Regulating the process of taking over of a company.
3. Conduct inquiries and audit of stock exchanges.
SEBI has defined the rules and regulations and formed guidelines and code of conduct that should be
followed by the corporates as well as the financial intermediaries.

Keeping all the functions of regulatory bodies in mind, we can conclude that, Regulatory bodies provide
effective and efficient economic system for the overall development of the country.
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Describe the impact of GFC on Indian banking system. How did India respond to that in short term & long
term?

The Global Financial Crisis (also known as “Collapse of Lehman Brothers”)refers to the period of extreme stress
in global financial markets and banking systems between mid- 2007 and early 2009. During the GFC, a
downturn in the US housing market was a catalyst for a financial crisis that spread from the US to the rest of
the world through linkages in the global financial system. Many banks around the world incurred large
losses and relied on government support to avoid bankruptcy.

Mains Causes of the GFC:

1. Excessive risk-taking in a favourable macroeconomic environment.
2. Increased borrowing by banks and investors.
3. Regulation and policy errors.
Impact of the global crisis on India:
The direct effect of the global financial crisis on the Indian banking and financial system was almost negligible.
Thanks to the limited exposure to riskier assets and derivatives. The relatively low presence of foreign banks
also minimised the impact on the domestic currency. And this impact can be addressed by :
Why Has India Been Hit by the Crisis?
This can be explained from two analytical strands:
1. The Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed
institutions. It had very limited off-balance sheet activities or securitized assets. In fact, our banks continue to
remain sound and healthy. So how can India be caught up in a crisis when it has nothing much to do with the
core of the crisis.
2. India’s recent growth had been driven by domestic consumption and domestic investment. External demand
as measured by merchandize exports accounted for less than 15% of our GDP. So why should India be affected
when its reliance on external demand is so limited?
The answer to both of the above causes lies on the globalization.
1. First, India’s integration into the world economy over the decade (199-2001) has been remarkably rapid.
Integration into the world implies more than just exports. India’s two way trade (imports + exports) as a
proportion of GDP increased from 21.2% in 1997-98 to 34.7% in 2007-08.
2. And Indian corporate sector’s access to external funding has markedly increase in the last five years prior to
the crisis. In the five year period 2003-08 the share of corporate investment in India’s GDP rose by 9 percentage
points. So, India has been hit by the crisis, despite mitigating factors is clearly India’s rapid and growing
integration into the global economy.
And this whole thing impacted India’s banking sector:
1. FIIs started to draw out capital of the Indian Economy. And as a result, a large outflow of dollars fast
depreciation of rupee against dollar began.
2. The quantity of rupees outflowing from the banking system has caused in liquidity problem in Indian banking
system which affected credit flow to the industry for financing of working capital and fixed investment projects.
3. Corporates withdrew their investments from domestic money market mutual funds, consequently non-
banking financial companies(NBFCs) where the MFs had invested a significant portion of their funds came
under redemption pressure.
4. RBI’s intervention in the forex market to manage the volatility in the rupee further added to liquidity
tightening and this increased the risk aversion of the financial system and made some banks cautious about
lending.
India’s response to GFC:-
Short term approaches:
Monetary Policy measures by RBI-
The RBI’s response was to target 3 objectives:
(1) To maintain a comfortable rupee liquidity position
(2) To augment Foreign Exchange Liquidity
(3) To maintain a policy framework that would keep credit delivery on track to arrest the moderation in growth.
Steps taken:
Maintain a comfortable local currency (rupee) liquidity position
Augment foreign exchange liquidity and maintain a policy framework that would support credit delivery so as
to stop growth moderation.
Cash reserve ratio was reduced from 9% to 5% by which RBI injected liquidity of Rs. 1,60,000 crores in the
banking system, the repo rate from 9 to 4.75 percent, and reverse repo rate from 6 to 3.25 percentand
reduction of SLR from 25% to 24%.
 Forex liquidity measures included increase in interest rate ceilings on non-resident deposits and easing of
restrictions on external borrowing and on short term trade credits.
Special refinance facility to banks from RBI up to 1% of each bank’s deposits.
Term repo facility under the LAF to enable banks to ease liquidity stress faced by mutual funds and by NBFCs.

Fiscal Stimulus Measures:

India undertook fiscal measures in terms of reduction in central excise duty and additional expenditure.
Stimulus packages announced by the Union Government during Dec 2008-Feb 2009 and the additional
expenditure amounted to 2.4% of GDP
During 2009-10, fiscal stimulus of 1.8% of GDP were announced of which revenue expenditure constituted
around 84%.
NBFCs exclusively involved in financing of the infrastructure sector were permitted to avail of ECBs.
Indian Infrastructure Finance Company (IIFC) was allowed to borrow Rs. 30,000 crores from the market by
issuing tax-free bonds that would be used to assist in funding of projects worth Rs. 75000 crores.
Long term Measures:
Hike in Marginal Standing Facility Rate/Bank rate
Open Market Operation Sales
Maintenance of Minimum daily CRR
Restriction on banks’ access to funds under LAF repo
India embarked on the Fiscal Responsibility framework with the enactment of the

Fiscal Responsibility and Budget Management(FRBM) Act

Increased overseas borrowing limit from 50 to 100% of the unimpaired Tier I capital banks(with the option of
swap with RBI)
Implementation of Basel Norms.
Enactment of Prompt Corrective Action (PCA) framework.
Recapitalization of Public Sector bank by infusing Rs 70,000 crore in PSBs over four years

Although there was no direct relation with the GFC but the Indian banking sector struggled to grow on a
positive note, but with the response from RBI and GoI has helped to survive and grow faster with stronger
note.
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Define a financial market? Explain different types of financial markets & their functions.

“Financial markets are the pulses of economy”. Financial Markets can be defined as a marketplace that
provides an avenue for purchase and sale of financial assets such as equity, stocks, bonds, foreign exchange,
commodities, derivatives, etc.

TYPES OF FINANCIAL MARKETS Broadly financial markets can be divided into two broad
categories;
1. Money Market- It is a market for short-term funds that are meant to use for a period of up to one year is
known as Money Market. Funds are available in this market for periods ranging from a single day up to a year
Some of the common instruments of the money market are Call Money, Commercial Bills, T- Bills, Commercial
Paper, Certificates of Deposits, etc.
1. Capital Market - The capital market is designed to finance the long-term investments. The transactions
taking place in this market will be for periods over a year. Some of the common instruments of a capital
market are debentures, shares, bonds, public deposits, mutual funds, etc.
The capital market allocates capital productively, provides sufficient information to the investors, facilitates
economic growth, makes finance available at a reasonable cost, and makes market operations fair, free,
competitive, and transparent. A capital market is of two types, namely, a. Primary Market: It is the market,
where the securities are sold for the first time. This market contributes directly to the capital formation of a
company, as the company directly goes to investors and uses the funds for investment in machines,
land, building, equipment, etc.

b. Secondary Market: It is a market, where the sale and purchase of newly issued securities and second-hand
securities are made. In this market, a company does not directly issue its securities to the investors. Instead,
the existing investors of the company sell the securities to other investors.

Based on its functions, financial markets can be further divided into the following categories;
1. Credit Market- Credit market is a place where banks, FIs and NBFCs provide short, medium and long-term
loans to corporate and individuals.
2. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the
exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in
this market. This is one of the most developed and integrated market across the globe.
3. Stock Markets- In this kind of Market, an organization makes a listing of its shares which traders and
investors buy and sell. Stock Marketing, through the usage of IPO (Initial Public Offering), allows companies to
increase their capital.
4. Over The Counter Markets- It is a kind of decentralized Market, without fixed geographical locations. Here,
the trade is directly done between two parties instead of an agent/broker. Most stock trading is done through
exchanges.
5. Bond Markets- The kind of securities that allow investors to borrow money from the lender for a certain
period of time, with a fixed interest rate is known as bonds. Bonds are issued to aid financial projects by
different state and central government bodies, municipal corporations, etc. Bonds are usually issued as bills
and notes.
6. Derivative Markets- This is a kind of Market where a contract is signed between two or more parties
depending upon the financial securities or assets. The worth of the derivatives is derived from the primary
source of security to which it is linked, thus making it “secondary security”.

FUNCTIONS OF FINANCIAL MARKETS

1. Puts savings into more productive use: Money in savings account should be put to productive use. Financial
institutions loan it out to individuals and companies that need it. savings as such does not have any meaning; it
is investment that leads capital formation.
2. Determines the price of securities: Once a security is listed, buyers and sellers trade in it, and the traded
price reflects the prospects of the company whose instruments are being traded. This is called price discovery.
Prices of securities are determined in financial markets, which is an important function.
3. Ease of Access: Financial Markets also offer efficient trading since they bring traders to the same Market. As
a result, relevant parties do not have to spend any resource, be it capital or time, to find interest buyers or
sellers. Additionally, it also provides necessary information related to trading, which also reduces the effort
that interested parties must put in to complete their trades.
4. Makes financial assets liquid: Buyers and sellers can decide to trade their securities anytime, provided there
is a counterpart. Financial markets provide this avenue, and that creates liquidity in the security. This imparts
liquidity to investors and incentivizes them to invest.
5. Lowers the cost of transactions: In financial markets, various types of information regarding securities can
be acquired without the need to spend. The Exchanges and market participant associations disseminate
relevant information. The companies also can disseminate information, but they would put forth only what
they want to propagate, not what is useful for investors.
6. Facilitation of the trading, diversification, and management of risk: Financial markets offers various avenues
to the potential investors with respect to their risk taking abilities. It also allows investors to diversify their
investments to hedge risk of entire portfolio. It also facilitates investors to easily enter or exit from the
investments through secondary market mechanism according to the market conditions.
7. Barometer of economic health: Financial markets also serves as a barometer, which indicates overall health
of the economy. If financial market indices are plummeting constantly it shows recession in the economy. At
the same time, any correction or increase in indices indicates expansion of the economy. It functions as a vital
source of information for Foreign Investors i.e. FDIs and FPIs.

Financial markets are an integral part of any economy. Proper functioning of financial markets ensure easy
availability of finance, forex, credit and liquidity in the market. It facilitates exchange of goods and services,
thereby boosting the economic growth of the nation.
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Enlist and define six financial instruments used often in IFS. Also explain the role of financial instruments in
evolving the overall financial system.

Financial Instruments are assets that can be traded, or they can also be seen as packages of capital that may be
traded. It can be real or virtual document representing a legal agreement involving any kind of monetary
value. Most types of financial instruments provide efficient flow and transfer of capital all throughout the
world’s investors. These assets can be cash, a contractual right to deliver or receive cash or another type of
financial instrument, or evidence of one’s ownership of an entity. As per IND AS 32 a “financial instrument is
any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of
another entity”.
In India, Financial Instruments are traded in two types of market mainly:
A) Money market- It refers to trading in very short term investments for less than a year. At the wholesale
level, it involves large-volume trades between institutions and traders. And the main financial instruments that
are used are:
1) Treasury Bills- It offers short term investment opportunities, generally up to one year. They are thus useful
in managing short term liquidity. These are raised mainly to meet the gap of revenue receipts and expenditure
of government. At present the GoI issues four types of treasury bills (14-days, 91-days, 182-days, 364-days).
These are available for a minimum amount of Rs. 25000 and in multiples of Rs. 25000. These are issued at a
discount and are redeemed at par. These are fully risk free and are issued by RBI on behalf of GoI.
2) Certificate of Deposits- It is a negotiable, unsecured money market instrument issued by a bank as a Usance
Promissory note against funds deposited at the bank for a maturity period of up to one year. It can be issued
by SCBs, RRBs, Small Finance Banks and the AIFIs that are permitted by RBI. It can be issued only in
dematerialised form and can be held with a depository with SEBI. It can be issued in minimum denomination of
Rs 5 lakh and in multiples of Rs 5 lakhs thereafter.
The tenor of a CD at issuance shall not be less than 7 days and shall not exceed one year.
3) Commercial Paper- It is an unsecured money market instrument issued in the form of a promissory note.
The original tenor of a CP is between seven days to one year. It can be held in a dematerialized form through
any of the depositories and registered with SEBI. Its minimum denomination is of Rs. 5 lakh and multiples
thereof. It can be issued at a discount to face value. Options (call/put) are not permitted on a CP.
There are many other Financial instruments in the money market such as the cash and equivalent instruments,
FDs of less than one year, Commercial Bills, Call/Notice money etc.

B) Capital Market- It is a financial market in which long term debt (over a year) or equity-backed securities are
bought and sold. The instruments that are used are:
1) Equities- It is a type of security that represents the ownership or shareholding of a company. These are
traded in stock markets under the purview of SEBI in the stock exchanges in the primary market as well as
secondary market. These are issued by the company itself for the requirement of working capital.
2) Bonds- These are a type of fixed-income debt instrument. These are issued by the government entities and
private-sector companies those wish to raise capital. And these have a specific interest rate and maturity date
at the time of issue.
3) Mutual Funds- It is a professionally managed investment fund that pools money from many investors to
purchase securities. The money is invested in securities of various type like equities, bonds, money market
instruments and other securities available in the market.

Apart from these instruments there are many other capital market instruments like derivatives, debt
securities, exchanged traded funds, preference shares and etc.
Functions of Financial Instruments:
- These acts as a means of payment.
- It acts as store of value and generates wealth that are larger than from holding money
- It can be used to transfer purchasing power into the future.
- It allows for the transfer of risk.
But all these functions of the instruments have evolved from time to time as per the financial market and its
regulations. Financial Instruments have evolved from the barter system to the cash instruments and then to
various other types through which the whole financial market of the world is now globalised and connected.
Roles of these instruments in evolving the financial system are:

1) Foreign Investment: The instruments like G-Secs, Green Bonds, Masala Bonds and etc. have played an
important role from time to time through which there is FDIs and FIIs in the perspective of the Indian
economy.
2) Capital formation: Financial instruments helps in transforming the savings to investments and then through
which it is processed by financial institutions as per the need of the other customers and through which
interest, profit and dividend are earned and through this it helps in capital formation in the financial system.
3) Diversification: The agents and institutions help the customers to understand the financial instruments
through which there can be diversification of funds that they are going to invest and through this the different
instruments plays different roles in the market based on the need and tenure of the investments.

4) Risk Management: Financial market gives opportunity to hedge the risk of their financial instruments
through call/ put option or through the futures option.
Through this there can be minimum loss with a minimum charge of capital and with maximum profits even in
the negative times.

The financial system has become more complex, more globalized and more intertwined with the real economy,
and risks and leverage continue to mutate. But the several financial instruments that are present in the market
play different roles with the need of the individuals or the groups or the institutions which further helps in
developing and evolving the economy with the growth and financial awareness of the people and economy.
***********************************************************************************
Qn. Comment on the current and future outlook of Indian financial markets considering dynamic external
environment and geopolitical situations at hand (1000 words).

In recent years, India has grown in prominence and has been one of the top destinations for capital flows
amongst global investors. Indian Financial Market has been an outlier in the last two and half years after the
advent of COVID-19. The stock market ballooned to its all time high after eroding nearly half in the initial phase
of COVID-19, the forex kitty with RBI grew with rapid pace until February 2022, the profitability of corporates
grew enormously after a halt in economic activity due to COVID related disruption, FDI inflows grew to all time
high recently and many more indicators which substantiate the outperformance of Indian financial market’s
continuous inflows of capital. The flip side of these inflows is that unlike in the past, Indian markets are now
more integrated with global trends and will be impacted by any contagion, at least over the near term.
The uncertainty created by various geopolitical events is casting a shadow upon the Indian Financial
Market performance in the near term.

The various global events which are causing uncertainty all over the world are:
• The recent sharp rate hikes by Central Banks across globe and forward guidance about further big rate hikes,
even if it entails sacrificing growth in near term, have caused tightening of financial conditions, extreme
volatility and risk aversion.
• The global economy has seen tectonic shifts after the beginning of Russia-Ukraine war, followed by
sanctions and escalating geopolitical tensions.
• Supply disruptions have rattled global commodity and financial markets, given the significant share of the
two economies engaged in war in global production and exports of key commodities like oil and
natural gas; wheat and corn; palladium, aluminium and nickel; edible oils; and fertilisers.
• Global crude oil prices briefly crossed US$ 130 per barrel, touching their highest level since 2008 and remain
volatile at elevated levels, despite some correction.
• Global food prices along with metal and other commodity prices have also hardened significantly and
pushing the inflation in advance economy near double digit, pushing central banks for aggressive rate hike.
• Nervous investor sentiments have triggered a flight to safety which resulted in strengthening US dollar
to a two-decade high. Several advanced and emerging market currencies are facing sharp depreciation
pressures.
• The recent lockdown in China due to emergence of COVID-19 and real estate slowdown is also a big
concern due the economic clout of China.
The current and future outlook of Indian Financial Market in the current volatile environment:
• The world bank slashed its growth estimate for India by one percentage point to 6.5 per cent for FY23, citing
the blowback of the Russia-Ukraine war and ongoing global monetary policy tightening. The World Bank said
private investment growth in India was likely to be dampened by heightened uncertainties and higher
financing costs. This will dampen the investor sentiment to invest in Indian market.
• The World Trade Organization (WTO) on in latest update slashed its forecast for global trade volume growth
to 1 per cent from 3.4 per cent estimated earlier, which could adversely impact exports from India, which
contracted in September for the first time in 19 months. On the other-hand import volume and cost is
increasing widening the CAD which ultimately affects rupees.
• India’s inflation figure hovering around 7% from last few months and according to RBI it will continue to
remain above the 6% for rest of the year. High inflation will put extra pressure on consumers financials
which can lower the demand and consequently lower the growth projection.
• The sharp depreciation in the rupees against USD is going to continue which has already fallen to new
low, as the interest rate differential between and India US has narrowed. This will push the FIIs to pull out their
money from stock market further, risking the domestic currency to depreciate even more and making import
more costly which will aid inflation figure further.
• The recent decision by OPEC+ to cut the supply by around 2 Mn bpd will push already high crude oil price
even further. The high Crude Oil price will further deteriorate India’s current account deficit, which is already
strained.
• The fear of global recession is looming all over the world. This is not a good sign for Indian export, which is
showing sign of slowing down after record export figure last financial year.
• Since Indian exports are very sensitive to global growth, a slowdown in the global economy or a recession in
advanced economies could have disproportionate impact on Indian Financial Market and economy.

Initiative by RBI/Government for containing volatility due to dynamic external

environment:
• The sustained hike in repo rate by 190 bps from May 2022 to contain inflation.
• Introduction of SDF to absorb excess liquidity in the banking system frequently termed as withdrawal of
accommodation by RBI.
• The Reserve Bank of India (RBI) has opted to temporarily authorise banks to raise new FCNR(B) and NRE
deposits without regard to the existing guidelines on interest rates, effective July 7, 2022. RBI announced this
measure to boost foreign exchange inflows, diversify and broaden the sources of foreign exchange funding,
and reduce global
impacts in order to reduce volatility.
• The Reserve Bank of India (RBI) has put in place a mechanism to facilitate international trade in rupees (INR),
with immediate effect. In order to promote growth of global trade with emphasis on exports from India and to
support the increasing interest of global trading community in INR.
• To soften the yield on G-Sec, which is often considered as benchmark for setting interest on loans,
RBI conducted Operation Twist. It is when the central bank uses the proceeds from the sale of short-term
securities to buy long-term government debt papers, leading to easing of interest rates on the long-term
papers.
India is a huge net energy importer; it is enduring a sharp increase in the current account deficit; growth
estimates have been slashed as inflation has taken hold; and the rupee has fallen to new lows. Indian markets
have always seen severe declines when the global economy is in trouble. Policy response would thus
need to be adjusted, including in the area of currency management, to India’s external position and global
trade outlook.
*****************************************************************************

Comment on the current and the future outlook of Indian Financial markets considering dynamic external
environment and geopolitical situations at hand.

Global financial situation has remained nervous for the past six months or so, especially after the outbreak of
Russia and Ukraine war. This was coupled with the high level of inflation in most economies. U.S has been
reeling under the all-time high inflation in 20 years. The effects of these two major occurrences are
multifaceted and far reaching.

While the war has disrupted the global supply chain pushing up the food and energy prices north, U.S has been
grappling with the high inflation of around 9 per cent, which has compelled the U.S Federal to increase the
interest rate time and again. The U.S Fed's increasing the rates have a spill over effect on all the emerging
markets and India is no exception. Though the Indian financial market has been resilient in these tough times,
the geopolitical effects cannot be negated completely in this highly inter connected world.

Let us look at the current as well as the future outlook of the Indian financial markets considering the above
mentioned scenario.

1. Cash Market:

Current outlook: Cash market as we know is also termed as deposit and loan market. As we are aware of the
fact that Inflation in India is well above the MPC target band, RBI is also mirroring the U.S stance to control it.
The interest rate has been increased by 190 basis points since April, which has been instrumental in absorbing
the surplus liquidity. For the first time in past 40 months on September 20, 2022, the bank surplus liquidity
dried up. The credit growth in non -food segment has been around 16 per cent and deposit rate is around 9.5
per cent. Surely, the credit growth is highly supported by the easing pandemic among several other reasons.
This imbalance coupled with the low liquidity has pushed the interest rates high.

Future outlook: The liquidity crunch needs to be addressed with immediate effect so that the credit growth in
the credit market does not get hampered. Retail borrowing will become costly in the coming days due to
increased interest rates. Deposit rates need to price in the effect of the interest rate hikes so that the banks
can sustain their growing credit business and consequently the deposits will increase in the banking business.

2. Equity market:

Current outlook: The U.S Fed hiking interest rates have definitely affected the Indian equity market, compelling
the net flee of the FPIs from India. BSE-SENSEX has declined by 2.5 per cent in H1 2022-23. The venture
funding has slowed down owing to the uncertainty and high inflation , which has affected the start-ups
environment badly.

Future outlook: Though the Indian Equity market has been on a loss, the brighter part is that it has somehow
decoupled itself from the other Ems. MSCI Ems have fallen about 21.8 per cent in the 12 months to 31 Aug,
MSCI India declined just 3.17 per cent. This proves DIIs have been the saviour in this tough time. The future is
not that gloomy for the Indian Equity market owing to the robust domestic demand in the current as well as in
coming months. But India needs to be vigil and take necessary measures to attract FPIs, like RBI has allowed
the exemption of CRR and SLR maintenance on incremental FCNR(B) and NRE account term deposit and
provide higher interest rate.

3. Bond Market:

Current outlook: The U.S interest rate hikes has compelled India to increase the interest rates as well. This has
led to the increase in the bond yield for both the G-sec as well as Corporate bonds. The interest rates in the
bond market has risen significantly. This has led to the decrease in the participation of players, especially the
private ones. Currently, the bond market is dominated by Govt. and big corporates only. Due to the less
competition here, this market has not yet developed to the level of other Ems bond market.

Future outlook: Currently, the talks are going on to include the India G-sec in the Global Indices market of
emerging markets. This might bring more FPIs into India and would also help in bringing down the bond yield. If
this did not happen, the bond market would likely to remain sticky with only G-sec playing some role in it till
the situation get better. This also provides an opportunity to make some rational changes in the bond market
by allowing more participants with better and balance regulation of CRAs.

4. Forex Market:

Current outlook: The rising demand of the green currency has led to the depreciation of Indian currency, which
recently touched 81 mark. As per the latest data of the RBI, the Forex reserve has shrunk to around USD 537
billion in Sep 2022 from USD 647 billion a year ago. The decrease in the forex is owing to the revaluation amid
dollar appreciation and partly due to the selling of dollars by the RBI to stabilize the rupee.

Future outlook: The U.S is not going to halt the interest rates hike in any soon. The soft landing is no more
existent and with this scenario, the rupee has a lot of challenges to grapple with. Also, depreciated rupee will
lead to costly imports and costly debt servicing. The recently announced rupee trade settlement might become
handy in stabilizing the rupee, but the Indian Govt. and RBI needs to come up with more such innovative
guidelines to minimize the volatility around the rupee.

Conclusion:
The challenges in the Indian financial market are hovering around with the fear of recession is also quite
possible. With a collective effort of the Govt. and other regulatory bodies, multi- pronged rationale need to be
formulated to tackle the multi- faceted financial challenges. The Indian financial markets have till now been
more resilient compared to the other Ems, but the agility to adopt newer innovative ways in this ever
changing geopolitical situations would be the key.

COMMENTS - MORE OR LESS ON CORRECT LINES

3. Explain major types of risks involved in financial sector.

Risk is an exposure to a transaction with loss, which occurs with some probability and which can be expected,
measured and minimized. The risk arises due to uncertainties, which in turn arise due to changes
taking place in prevailing economic, social and political environments and lack of availability of
information concerning such changes.

The major types of risks involved in the financial sector are listed as under;
Liquidity Risk: The liquidity risk arises from funding of long-term assets by short-term liabilities, thereby
making the liabilities subject to rollover risk. It is the possibility that an institution may be unable to meet its
maturing commitments or may do so only by borrowing funds at very high costs or by disposing assets at rock-
bottom prices. The liquidity risks can be categorised as under:
a) Funding Risk: It is the risk that arise from inability to obtain funds to meet cash flow obligations.

b) Time Risk: Time risk arises from non-receipt of expected inflows of funds i.e., performing assets
turning into non-performing assets.

c) Call Risk: Call risk arises due to crystallization of contingent liabilities. It may also arise when a bank may not
be able to undertake profitable business opportunities when it arises.

Interest Rate Risk: The risk of an adverse impact on Net Interest Income (NII) due to variations of interest is
called Interest Rate Risk. It is the exposure of a Bank’s financial condition to adverse movements in
interest rates.
The following are the types of Interest Rate Risk –

a) Gap or Mismatch Risk: It arises from holding assets and liabilities with different principal amounts and
maturity dates. It creates exposure to unexpected changes in the level of market interest rates. For example,
an assets maturing in 5 years, funded from a liabilities maturing in 2 years' period.

b) Yield Curve Risk: Banks, in a floating interest scenario, may price their assets and liabilities based on
different benchmarks such as treasury bills’ yields, fixed deposit rates, call market rates, etc. Therefore, any
non-parallel movements in the yield curves of different instruments maturing at different times would
affect the Net Interest Income.

c) Basis Risk: Basis Risk is the risk that arises when the interest rate of different assets, liabilities and off-
balance sheet items may change in different magnitude. For example, in a rising interest rate scenario, asset
interest rate may rise in different magnitude than the interest rate on corresponding liability, thereby
creating variation in net interest income.
d) Embedded Option Risk: Significant changes in market interest rates create the source of risk to banks’
profitability by encouraging exercise of call/put options on bonds/debentures and/ or premature withdrawal
of term deposits before their stated maturities. The faster and higher the magnitude of changes in interest
rate, the greater will be the embedded option risk.

e) Reinvested Risk: It is the risk arising out of uncertainty with regard to interest rate at which the future cash
flows could be reinvested.

f) Net Interest Position Risk: Net Interest Position Risk arises when the market interest rates adjust
downwards and where banks have more earning assets than paying liabilities.

Market Risk: This risk results from adverse movements in the level or volatility of the market prices of interest
rate instruments, equities, commodities, and currencies. It is also referred to as Price Risk. Price risk occurs
when assets are sold before their stated maturities.

The types of market risks are indicated as under;

a) Forex Risk: Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate
movements during a period in which it has an open position either spot or forward, or a combination of the
two, in an individual foreign currency.

b) Market Liquidity Risk: It arises when a bank is unable to conclude a large transaction in a particular
instrument near the current market price. Default or Credit Risk: It the risk that the interest or principal or both
will not be paid as promised. It is the potential of a borrower or counterparty to fail to meet its obligations in
accordance with the agreed terms. It is the most significant risk, more so in the Indian scenario where
the NPA level of the banking system is significantly high. There are two variants of credit risk which are
mentioned
below;
a) Counterparty Risk: It is related to the non-performance of the trading partners due to the counterparty’s
refusal and or inability to perform.

b) Country Risk: This is also a type of credit risk where the non-performance of a borrower or
counterparty arises due to constraints or restrictions imposed by a country. Here, the reason of non-
performance is external factors on which the borrower or the counterparty has no control.

Operational Risk: Basel Committee for Banking Supervision has defined operational risk as ‘the risk of loss
resulting from inadequate or failed internal processes, people and systems or from external events’. Two of
the most common operational risks are discussed below:

a) Transaction Risk: Transaction risk is the risk arising from fraud, both internal and external, failed business
processes and the inability to maintain business continuity and manage information.

b) Compliance Risk: Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation
loss that an institution may suffer as a result of its failure to comply with any or all of the applicable laws,
regulations, codes of conduct and standards of good practice. It is also called integrity risk since reputation is
closely linked to its adherence to principles of integrity and fair dealing.
Other Risks
a) Strategic Risk: It is the risk arising from adverse business decisions, improper implementation of
decisions or lack of responsiveness to industry changes.
b) Reputation Risk: It is the risk arising from negative public opinion. This risk may expose the institution to
litigation, financial loss or decline in customer base.

c) Systemic risk: It is the risk of the collapse of an entire financial system or entire market. It can be defined
as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or
conditions in financial intermediaries".

It refers to the risks imposed by inter linkages and interdependencies in a system or market, where the failure
of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring
down the entire system or market.
Example: Lehman bankruptcy in 2008 led to collapse of entire financial system.

Thus, from the above mentioned types of risks, it is evident that any institution in the financial system is
exposed to various risks irrespective of its size of business. Therefore, it is utmost important to hedge risks
and make adequate provisions against such risks for perpetual succession and profitability of the business.
******************************************************************************************

Write a note on Revised PCA framework. (500 words)

The Reserve Bank of India being the supervisory and regulatory authority of banking system in India is
entrusted with ensuring the sound financial health of Indian banking institutions. To fulfill this objective, RBI
introduced Prompt Corrective Action in the year 2002 as an early intervention mechanism for those bank
which are undercapitalized with poor asset quality or are vulnerable to financial losses. The objective of PCA
framework is to enable supervisor intervention by regulator at appropriate time and implement remedial
measures in timely manner to ensure the sound financial health of banking institutions.

The PCA framework was reviewed in the year 2017 based on the recommendations of working group of
Financial stability and development council and the revised PCA framework is applicable to all Schedule
commercial banks including foreign bank branches operating in India except small fiancé banks , payment
banks and regional rural banks from January 1, 2022.

The key areas to monitored under revised PCA framework are Capital, asset quality and leverage
ratio and the indicators to be tracked are CRAR/ Common equity tier 1 ratio, Net NPA ratio and Tier
1 Leverage ratio respectively, excluding the earlier criteria of return on assets.
The PCA framework will be triggered in case of breach of any of the following parameters-
Parameter – Capital (Breach of either CRAR or CET 1 ratio)
Indicator - RAR - Minimum regulatory prescription for Capital to Risk Assets Ratio + applicable
Capital Conservation Buffer (CCB) and/or Regulatory Pre-Specified Trigger of Common Equity Tier 1 Ratio (CET
1 ) + applicable Capital Conservation Buffer (CCB).

Threshold 1 - Upto 250 bps below the Indicator ( CRAR) / Upto 162.50 bps below the Indicator
(CET 1).
Threshold 2 - More than 250 bps but not exceeding 400 bps below the Indicator (CRAR )/ More
than 162.50 bps below but not exceeding 312.50 bps below the Indicator (CET1).
Threshold 3 - In excess of 400 bps below the Indicator (CRAR) / In excess of 312.50 bps below the
Indicator (CET -1).
Indicator 2 - Asset Quality – Checking based on Net non performing Assets Ratio –
Threshold 1 – >=6.0% but <9.0%
Threshold 2 - >=9.0% but < 12.0%
Threshold 3 - >=12.0%
Indicator 3 - Leverage ratio based on Regulatory minimum Tier 1 Leverage Ratio.
Threshold 1 - Upto 50 bps below the regulatory minimum
Threshold 2 - More than 50 bps but not exceeding 100 bps below the regulatory minimum
Threshold 3 - More than 100 bps below the regulatory minimum.
Mandatory actions by RBI in case of bank breaching any of the 3 thresholds-
i. on breaching Threshold 1 - Restriction on dividend distribution/remittance of profits.
ii. Promoters/Owners/Parent (in the case of foreign banks) to bring in capital.
On breaching Threshold 2-
In addition to mandatory actions of Threshold 1,
Restriction on branch expansion; domestic and/or overseas

On breaching Threshold 3
In addition to mandatory actions of Threshold 1 & 2,
Appropriate restrictions on capital expenditure, other than for technological upgradation
within Board approved limits.

Discretionary Actions –
i. Special Supervisory Actions
ii. Strategy related
iii. Governance related
iv. Capital related
v. Credit risk related
vi. Market risk related
vii. HR related
viii. Profitability related
ix. Operations/Business related
x. Any other

Exit from PCA and Withdrawal of Restrictions under PCA - Once a bank is placed under PCA, taking the bank out
of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a)
if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly
financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by
RBI); and
b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the
bank.
Given the importance of banking institutions in development of an economy, the PCA framework acts as an
important tool in saving banks from severe financial losses. The timely revision and appropriate intervention by
RBI in implementing PCA framework is the step in right direction by RBI to ensure financial stability of the
economy.
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Describe the evolution of BASEL norms by explaining the provisions in detail. Also explain the
implementation of recent Basel norms in India. How have these norms benefitted India over the years?

The Bank for International supervision is an international organization established for fostering international
financial and monetary cooperation and serve as central bank of banks. The Basel committee was established
in 1974, to promote and monitor principals of banking supervision and to provide level playing field to all
banks across the countries by establishing uniform set of regulations.

The Basel committee on banking supervision prepared framework to secure international convergence
on supervisory regulations governing capital adequacy of international banks. This framework was
finalized in 1988 and is known as Basel accord I.
The objectives of Basel I are as follows-
1) Strengthen the soundness and stability of international banking system.
2) to do away with the competitive inequality among international banks.

The main focus of this accord was credit risk and it included 3 main components are measuring indicators –
Capital, risk weighting system and target ratio. The capital was further bifurcated into 2 components , Tier 1
and Tier 2 capital where former could absorb the losses without ceasing the operation of bank, whereas tier 2
could act as shock absorbent during winding up.

Components of tier 1 capital –

Paid up capital, statutory reserve, share premium
Capital reserve and free disclosed reserve excluding equity investment in its subsidiaries, and intangible
assets

Components of tier 2 capital –

Undisclosed reserves and fully paid up cumulative perpetual preference shares
Revaluation reserves
General provision and loss reserve
Hybrid capital instruments and fully paid up subordinate debt without any restrictions.

Principals of capital adequacy in Basel I-

The risk weighted method adopted by banks in which capital is weighted according to broad categories of
relative riskiness.
The 5 weights recommended are 0, 10, 20 50 and 100% .
The risk assigned to government bonds of member countries of OCED – 0%.
Short term and long term interbank loans for banks head quartered in OCED countries – 20%.
Home mortgages – 50% risk weightage.
Other loans – 100% risk weightage.

Banks must hold an equity capital of at least at 8% of its assets when multiplied with appropriate risk weights.
When the capital falls below the stipulated level, these banks are subject to disciplinary actions by regulatory
authorities. The Basel I helped the banks in arresting capital erosion, however the rigidities in Basel I, non-
addressing of other type of risk, economic crisis in south east asian economies called for a more
comprehensive framework, which gave rise to formulation of Basel II accord.

The objectives of Basel II norms are as follows –

1) promotion of safety and soundness of financial system.
2) enhancement of competitive equality,
3) A more comprehensive approach to address risk.

The pillars of Basel accord II -

Minimum capital requirement, with refinement in framework of 1988.
Supervisory review of capital adequacy and internal assessment process.
Market discipline through effective disclosure.

1 ) Pillar 1 , Capital adequacy - Under this accord banks are required to compute individual
capital adequacy for market risk, credit risk and operational risk.
For credit risk measurement there are 2 approaches –
Standardized approach – uses external credit rating agencies to categorise credit.
Advance internal risk based approach – Banks with more complex risk management capabilities employ this
approach where in banks use internal assessment of borrower’s creditworthiness to estimate the risk.

For operational risk 3 approaches were devised which are Basic indicator, standardized and advanced
measurement approach.

Pillar 2 – Supervisory review – Under this pillar banks need to develop sound internal process to assess the
capital adequacy based on thorough evaluation of risks and targets for capital.

Pillar 3 – Market Discipline – It emphasis on the need of enhanced disclosures by the banks in areas such as
capital adequacy , risk assessment, to allow implementation of transparent assessment methods and flow of
appropriate information to market participants.

The Basel III accord is a set of financial reforms that was developed by the Basel Committee on Banking
Supervision (BCBS), with the aim of strengthening regulation, supervision, and risk management within the
banking industry. Due to the impact of the 2008 Global Financial Crisis on banks, Basel III was introduced to
improve the banks’ ability to handle shocks from financial stress and to strengthen their transparency and
disclosure.
Basel III builds on the previous accords, Basel I and II, and is part of a continuous process to enhance
regulation in the banking industry. The accord aims to prevent banks from hurting the economy by taking more
risks than they can handle.

The Basel III rule introduced the following measures to strengthen the capital requirement and introduced
more capital buffers:
Capital Conservation Buffer is designed to absorb losses during periods of financial and economic stress.
Financial institutions will be required to hold a capital conservation buffer of 2.5% to withstand future periods
of stress, bringing the total common equity requirement to 7% (4.5% common equity requirement and
the 2.5% capital conservation buffer). The capital conservation buffer must be met exclusively with common
equity. Financial institutions that do not maintain the capital conservation buffer faces restrictions on payouts
of dividends, share buybacks, and bonuses.

Countercyclical Capital Buffer is a countercyclical buffer within a range of 0% and 2.5% of common equity or
other fully loss absorbing capital is implemented according to national circumstances. This buffer serves as an
extension to the capital conservation buffer.
Higher Common Equity Tier 1 (CET1) constitutes an increase from 2% to 4.5%.
The ratio is set at:
o 3.5% from 1 January 2013
o 4% from 1 January 2014
o 4.5% from 1 January 2015

Minimum Total Capital Ratio remains at 8%. The addition of the capital conservation buffer increases the total
amount of capital a financial institution must hold to 10.5% of risk-weighted assets, of which 8.5% must be tier
1 capital. Tier 2 capital instruments are harmonized and tier 3 capital is abolished.

Leverage ratio
Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by
the bank's average total consolidated assets; the banks were expected to maintain a leverage ratio in excess of
3% under Basel III.
Liquidity requirements
Basel III introduced two required liquidity ratios:
Liquidity Coverage Ratio (LCR) ensures that sufficient levels of high-quality
liquid assets are available for one-month survival in a severe stress scenario.
Net Stable Funding Ratio (NSFR) promotes resilience over long-term time horizons by creating more incentives
for financial institutions to fund their activities with more stable sources of funding on an ongoing structural
basis.

Implementation of Basel norms in India-

RBI adopted a phased approach of implementing Basel norms in India in 1992.
RBI directed banks to maintain CRAR of 8%, the banks with branches in abroad has to comply by 1994 while
other banks were required to comply by march 1996.
The committee on banking sector reforms (1998) suggested further tightening of CRAR to 9%, which had to be
achieved by 2000.
From March 2006 banks in India are required to maintain capital charge for market risk also on their available
for sale and held for trading category.
For implementation of Basel II, RBI released revised draft guidelines for implementation in March 2007.
Foreign banks in India and Indian banks operating outside had to migrate to standardized approach for credit
risk and basic indicator approach for operational risk with effect from March 31 2008.
All other SCBs had align with Basel II approach by not later than 31 March 2009.
From 1 st Jan 2013, RBI started implementation of Basel III in India in calibrated manner, with CRAR
requirement to be 9%, of which 7% has to be tier 1 capital with 5.5% to be CET 1 and 1.5% to be additional tier
1 capital and teir 2 capital to be 2%.
Banks are required to maintain capital conservation buffer of 2.5% of common equity capital , with a total
CRAR of 11.5% by March 2020.
The banks are required to maintain counter-cyclical buffer between 0 to 2.5% to avoid excessive credit
growth.
RBI implemented the concept of Domestically systematically important banks from 2019, where in the
minimum leverage ratio requirement for them is 4%, and they have to maintain CAR beyond 11.5%.
In October 2021, RBI has mandated All India financial institutions to comply with Basel III provision.
 However the onset of COVID-19 pandemic and geo-political events have caused headwinds for banks and
financial institutions in adoption of Basel III guidelines in timely manner.

Benefits of Basel Norms in India –

With the implementation of Basel norms the financial health of banking sector has improved in terms of
profitability, asset quality , productivity and capital adequacy.
During the Global financial crisis of 2008 , due to sound implementation of Basel accords Indian banking
sector stood firm and emerged as efficient sector.
Despite the stiff competition from private banks and external environment headwinds the PSBs are
registering higher profits and low NPAs.
With the technological transformation of banking sector over the past years, the provisions of higher
supervision has aided banks in smooth transition while maintaining high operational efficiency.
As per a study by RBI, the stock markets has responded positively to the implementation of Basel accords, and
the banks have witnessed higher transparency, efficiency and corporate governance.
As banks are central in the overall financial system, their increased efficiency has resulted in higher
penetration formal credit system, higher flow of credit to productive and underserved sector, and increase in
financial inclusion , which has resulted in higher overall development of the economy.
A higher trust by investors and depositors has ensured increased flow of savings to investments and thereby
enhancing the overall liquidity in the system.

With the changing global scenario, advent of newer technologies, and higher global interconnectedness the
functions of banks have expanded from taking deposits and lending to financial intermediation and risk
mitigation. With these development developments effective implementation of Basel norms is paramount to
insulate banks from domestic and global shocks and to ensure their smooth functioning, higher
transparency, and efficient corporate structure. The 2022 Noble price laureates in economics have also
emphasized on the importance of banking sector in global financial stability, hence sound functioning of
banking sector by effective risk management is paramount to the overall economic growth.
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Qn. Define financial inclusion. Enlist a few initiatives of GoI & RBI taken in this regard.

The Committee on Financial Inclusion has defined financial inclusion as “the process of ensuring access to
financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections
and low-income groups at an affordable cost”.

Financial inclusion is the delivery of financial services which include bank accounts for savings and
transactional purposes, low-cost credit for productive, personal and other purposes, financial advisory
services, remittance, pension and insurance facilities etc. at affordable costs to vast sections of
disadvantaged and low-income groups.

Importance of Financial Inclusion:

▪ Financial inclusion broadens the resource base of the financial system by developing a culture of savings
among large segments of rural population and plays its own role in the process of economic development.
▪ Financial inclusion is increasingly being recognized as a key driver of economic growth
and poverty alleviation the world over.
▪ Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase
investments in human capital.
▪ Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by
facilitating easy access to formal credit.
▪ By bringing low-income groups within the perimeter of formal banking sector; financial inclusion protects
their financial wealth and other resources in exigency.

Major policy initiatives of GoI and RBI taken for Financial Inclusion:
The Government of India and the Reserve Bank of India have been making concerted efforts to
promote financial inclusion as one of the important national objectives of the country. Some of
the major efforts are:

#1. Basic Savings Bank Deposit Accounts:

The Basic Savings Bank Deposit (BSBD) Account has been designed as a savings account which will offer certain
minimum facilities, free of charge, to the holders of such accounts. RBI advised all banks to open BSBD
accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at
bank branch and ATMs, receipt/ credit of money through electronic payment channels, facility of
providing ATM card, etc.

#2. Pradhan Mantri Jan Dhan Yojana (PMJDY)

▪ Launched in August 2014, it was a watershed in the financial inclusion movement in the country. More
than 46.25 crore beneficiaries banked under PMJDY since inception, amounting to Rs. 1,73,954 crores.
▪ Pradhan Mantri Jan Dhan Yojana (PMJDY) is the National Mission for Financial Inclusion.
▪ It ensures access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance,
Credit, Insurance, Pension in an affordable manner.
▪ PMJDY has been the foundation stone for people-centric economic initiatives. Whether

it is Direct Benefit Transer (DBT), Covid-19 financial assistance, PM-KISAN, increased wages under Mahatma
Gandhi National Rural Employment Guarantee Scheme (MGNREGA), life and health insurance cover, the first
step of all these initiatives is to provide every adult with a bank account, which PMJDY has nearly completed.

#3. Jan Suraksha Schemes

To ensure that the people from the unorganised section of the country are financially secure, the Government
launched two insurance schemes: PMJJBY and PMSBY; and introduced APY to cover the exigencies in old age.
These schemes were launched by the Prime Minister in May 2015.

#4. The Lead Bank Scheme

It is a scheme that aims at providing adequate banking and credit in rural areas through a ‘service area
approach’, with one bank assigned for one area. It was introduced in 1969 on the recommendation of
the Gadgil Study Group and Banker’s Committee and introduced by RBI. As per the studies by the committee,
it was found that the rural areas were not able to enjoy the benefits of banking. Also, that the commercial
banks did not have an adequate presence in rural areas and also lacked the required rural orientation which
was hindering the growth of rural areas. To address this issue it was decided that some areas or sectors will be
given to the banks whether private or public in which that bank had to play a lead role in providing financial
services to the people, making them aware about.

#5. Financial Literacy Centres (FLCs)

Financial Literacy Centres provide financial knowledge and the ability to use it for taking sound financial
actions and decisions so as to help masses to access banking products and its services.
RBI is making extra-ordinary efforts for eradicating financial illiteracy and in this direction, a project
called “Project Financial Literacy” was been implemented.

#6. Micro Finance Institution

MFI is an organization that offers financial services to low-income populations. These services include
microloans, microsavings and microinsurance. MFIs are financial companies that provide small loans to
people who do not have any access to banking facilities. Microfinance has been a huge success in India, wit
over 50 million customers who are mostly women and total estimated at Rs. 2 trillion. These include branches
of SCBs and RRBs directly dispensing micro credit and through their BCs, SHGs linked to bank branches,
MFIs. Basically, it is an issue of reaching out to low-income earning segment and underprivileged sections
of the society.

Some of the other initiatives are 75 Digital Banking Units (DBU), Priority Sector Lending (PSL), DAY-NRLM, DAY-
NULM, Bank Licencing to for targeted benefits to SFBs and PBs, PIDF, Digital payment through UPI, QR Codes,
BBPS, etc.

For the success of financial inclusion in India, there has to be a multidimensional approach through
which existing digital platforms, infrastructure, human resources, and policy frameworks are strengthened
and new technological innovations should be promoted. If adequate measures are taken to tide over the
existing problems, financial inclusion has the potential to amplify the benefits of economic growth to the poor.
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Discuss various delivery mechanisms of microfinance sector. How has microfinance aided financial inclusion
in India?

When microfinance activities gained prominence in the 1990s, RBI recognized it as a new paradigm with
immense potential and has been very supportive of its growth. When the need for regulating the MFIs was felt
in early 2000s, a view was taken that MFIs are significantly different from other financial institutions - both in
terms of institutional structure and product portfolio and needed to be regulated differently. Since then, our
approach has been to carve out a distinct regulatory regime for these institutions in alignment with the specific
nuances of the sector without diluting the principles of prudence, financial stability and customer interest.
Microfinance is a category of financial services targeting individuals and small businesses who lack access to
conventional banking and related services. Microfinance includes microcredit, the provision of small loans to
poor clients, savings and checking accounts, microinsurance and payment systems among other services.
Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly
socially marginalized or geographically more isolated, and to help self-sufficient. Different models of
Microfinance in India.

A. Associations Model: The target community forms an ‘association’ through which microfinance (and other)
activities are initiated. Such activities may include savings. These associations or groups can form of a
youth, women. It is also formed around political/religious/cultural issues.

B. Banking System through the SHGs under SHG-Bank Linkage Programme (SHG-BLP): It is the most popular
mode of providing microfinance. It was launched by NABARD in February 1992 with the support of RBI. In this
small groups of the poor are encouraged to pool their savings regularly and from this pool, small interest-
bearing loans are made to members as well as bank credit is also made available to the group to augment its
resources for lending to its members.

NABARD operates 3 models under this program:

a. Model I: NABARD-Bank-SHG: SHGs are formed and financed by banks. There is no NGO intervention.
NABARD supports banks and banks support SHG in return.
b. Model II: NABARD-Bank-SHG (with NGO as a facilitating agency): The NGOs will promote SHGs and link with
banks. SHGs formed by NGOs are directly financed by banks.
c. Model III: NABARD-Bank-NGO-SHG (with NGO as the financial intermediary): Funds flow from NABARD to
banks and from banks to NGOs. The SHGs are financed by banks through NGOs.
C. Micro Finance Institution Model: It is characterized by a diversity of institutional and legal forms. MFIs in
India exist in a variety of forms like trusts , societies, co- operatives and non-banking financial companies
(NBFC-MFIs) which are registered under Companies Act, 2013 or NBFCs registered with the RBI. These
MFIs are scattered across the country and due to multiplicity of registering authorities.

D. Conventional Weaker-section Lending by Banks: It is a straight forward credit lending model where
microloans are given directly to the borrower. The individual banking model is a shift from the group-based
model. The MFI gives loans to an individual based on his or her creditworthiness. It also assists in skill
development and outreach programs. Co-operative banks, commercial banks and RRBs mostly
adopt this model to give loans to the farming and non-farming organized sector.

Similarly, even commercial banks are required to provide microfinance under PSL guidelines.
Microfinance role in Financial Inclusion:
A. Microfinance has emerged as one of the most important financial tools to foster financial inclusion. It
enables the poor and low-income households to increase their income levels, improve their overall standards
of living and thereby come out of poverty. It also has a potential to become a vehicle to achieve national
policies that target poverty reduction, women empowerment, assistance to vulnerable groups and
community development.

B. Over time, the bouquet of services under microfinance fold has expanded from only credit and thrift
products to include micro-insurance, micro pension, micro remittances, digital payments amongst others. This
development suggests a recognition of the importance of other financial services and the industry
orientation, moving from lending to lower-income groups to pursuing the double objectives of social benefits
and financial viability.

C. Indian microfinance sector has witnessed phenomenal growth over past two decades in terms of increase in
both- the number of institutions providing micro finance as also the quantum of credit made available to micro
finance customers.

D. Increases income levels- Fund borrowed from sources like MFIs and SHGs increases the income level as the
don’t have to provide any assets as collateral if they have any they can utilize it for further income generation,
when the standard of living increase people tend to prefer more financially inclusive.

Microfinance is one of the crucial components of the financial system as it majorly focuses on the excluded
group of market that does not get valuable means of funding and microfinance helps directly or indirectly to
increase their standard of living which helps the economy to improve the economic development.
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What is Corporate Governance? Explain factors affecting it. Also explain various mechanisms of Corp Gov
and recent regulatory changes in the field of Corp Gov. (800 words)

According to Sir Adrian Cadbury, “Corporate Governance is concerned with holding the balance between
economic and social goals and between individual and communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of individuals,
corporations, and society.”
Factors affecting corporate governance
-
1. Competence of Board of Directors- If the board of directors does not understand the business then they will
not be able to fulfill their duties to the extent required. In such a case the management would be able to
take decisions in their own interest rather than in the interest of the shareholders.
2. Management Culture and practices- Management is responsible for a variety of tasks like objective setting,
implementing sound business planning, encouraging business risk assessment, establishing
performance measures etc. Corporate governance stems from management practices and culture of the
organisation.
3. Board independence- Board independence is necessary to ensure that there are no actual or perceived
conflicts of interest. The board acts as the watchdog for the company’s policies, decisions and performance. It
prevents the management from engaging in the malpractices.
4. Ownership Structure- This has a major role to play in corporate governance. If the ownership is
concentrated in few hands, then dominant shareholders will be able to take decisions at their will.
5. Globalisation- Markets are global and connected as never before; natural boundaries and limits that
existed before globalisation no longer exist, so problems can reach and spread far wider than in earlier times.
6. Societal Obligations- Volumes and densities of populations everywhere have increased dramatically since
1900s. Where corporate scandals and disasters happen, it not only impacts the organisation but society at
large.
7. Political System- The type of political system and government in operation in a country play a vital role in
shaping society and this can also influence the likelihood of sound corporate governance practices.
Mechanisms of Corporate Governance According to Hill & Jones, corporate governance mechanisms are the
systems that make a better coordination between the agent and principal relationship.
Internal Mechanism
1. Monitoring by board of directors- Board of Directors are legally accountable for the decisions they make on
behalf of their firm and therefore monitor and control the corporate governance of the company.
2. Board committees- People with no special relationship with the company and who are highly independent
are appointed as members of board committees to enhance the supervisory function of the company’s
business management, and its transparency and objectivity.
3. Financial Statements and auditors- Financial Statements are the information that contains the company
data and transactions. On the basis of financial statements, stakeholders create their statements of
action towards the firm.
The financial reports on the quarterly and annual basis are checked by the auditors. The real picture presented
by the auditors reveals the true financial position of the firm.
4. Proper Balance of power-A separation of powers and responsibilities between management groups
ensures that there’s a proper system of checks and balances is in place.
5. Stock-based compensation- To eradicate the principal and agent costs issue, the best solution is to provide
shareholders interest on time and proper compensation to the employees. Stock-based compensation helps
the shareholders in motivating the internal managers for achieving the long-term objectives of the company.
External Mechanism
1. The Financial Markets- A well-developed financial market act as a place where companies with bad
corporate governance can be overtaken by better companies. This results in replacement of bad managers.
So, in this way bad corporate governance is punished.
2. The Markets of goods and services- If the society does not like the products and services offered by a
business firm, then it becomes natural that the business starts declining. Thus, company needs to adopt
timely researchers and survey in order to tap the resources in accordance with the market requirements

3. Monitoring and enforcement agencies- No matter how much the regulations and laws are made, there will
always be defaulters. We as humans has a tendency of not complying with the regulations till the time, they
are enforced through implementing agencies which instill fear of being exposed.

4. Media and Society pressure-Any wrongdoing is highlighted in media and prevent people from indulging in
wrong practices. Society can make sure that bad corporate governance is badly rejected through rejection
of the products of that group, people resigning from jobs of that company etc.

Recent regulatory changes

• Business Responsibility and Sustainability reporting (BRSR)- The global shift towards, and increase in investor
focus on ESG has seen greater consciousness of the boards on the issues of climate change,
social responsibility and governance. In 2021, SEBI issued a new framework for sustainability reporting called
BRSR. The BRSR is applicable to the top 1000 listed companies by market capitalisation from FY 2021-22.

• Digital Adoption- Companies have had to drastically evolve to keep up with the sudden changes due to
COVID-19 pandemic. This included quick adoption of digital operations to survive and evolving plans for
long-term human resource management. This has also spurred digital adoption in the enforcement space.

• Empowerment of independent directors- A SEBI notification in August 2021 has amended the LODR
regulations on provisions pertaining to the selection, appointment, and removal of IDs. The
amendment applicable from January 2022 has made the process of selection of IDs transparent. This is a
favourable step towards better corporate governance as it reduces the influence of promoters in the
appointment and removal of IDs.

• Mandatory cooling-off period- In order to uphold the independence of auditors, the CLC has recommended
the insertion of a mandatory one year cooling off period from the date of cessation of office, only after
which an auditor or an ID may be permitted to hold the position of an MD, WTD or manager in the company or
its subsidiaries.

Conclusion
-
Corporate governance safeguards not only the management but also the interests of stakeholders and fosters
the economic progress of India in the roaring economies of the world. A company that has good corporate
governance experiences much higher level of confidence amongst the shareholders associated with that
company.
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Define Inflation and it's types, Recent trends of inflation, Consequences of high inflation and
measures to be taken to control inflation. (1000 words).

Inflation is defined as general rise in the prices of goods and services. When there’s a rise in the prices
of goods and services the purchasing power of currency erodes, which results in buying of fewer goods
for the same amount of currency. The inflation is classified into different types based on its causes,
effects and nature. Based on these factors the various types of inflation are as follows-

Demand pull inflation - This type of inflation is caused due to mismatch in the demand and supply
forces. When the demand of goods is higher than the supply of goods or for the same level of demand
when the supply of goods is reduced the demand pull inflation takes place in an economy.
Cost push inflation - This type of inflation is caused due to increase in the price of input factors such
as increase in the cost of raw materials, labour, transportation, etc. which leads to increase the prices of
goods and services .

Low inflation – This type of inflation is slow and is on predictable lines which is gradual in nature.
This inflation takes place in a longer period and usually increases in single digit ,this type of inflation is
also called as creeping inflation.

Galloping inflation- Galloping inflation is very high inflation running in the range of double or triple
digits. This type of inflation Is witnessed by countries like Argentina, Brazil and Chile during 1970s
and 1980s when inflation ranged from 50 to 700%.

Hyperinflation – This form of inflation is characterized by large and accelerating inflation which might
have the annual rates in millions or trillions. Hyperinflation was seen post first World war in Germany,
when prices increased to 36 billion times in a span of only 2 years.

Bottleneck inflation - This inflation takes place when the supply falls drastically and the demand
remains at the same level.

Core inflation – This type of inflation takes into account the price rise of all goods and services except
that of energy and food items. Core inflation is mostly used as a measure in developed economies.
Stagflation – It is a situation of higher inflation rates accompanied by higher unemployment rates.

Recent trends in inflation –

The Indian and global economy are grappling with higher inflation levels onus to the factors such as
Russia- Ukraine war, rise in oil prices, supply chain disruptions, etc. The inflation in India is measured
using 2 indexes the Consumer price Index and Wholesale price Index. As per the CPI ( retail inflation
measure ) data from Ministry of statistics and program implementation the inflation level in India has
remained above the upper band of RBI’s acceptable range of 2 to 6%, since January 2022 the inflation
the CPI has remained more than 6% in all the following months. As per the September MPC statement
of RBI the inflation has increased to 7% in August from 6.7% in the month of July. This higher
inflation is driven by higher food prices such as that of cereals, vegetables, pulses and milk. However
the Fuel inflation moderated with reduction in kerosene ( prices, though it remained in double digits.
Core CPI inflation remained sticky at heightened levels, with upside pressures across various
constituent goods and services. In the MPC’s view, inflation is likely to be above the upper tolerance
level of 6 per cent through the first three quarters of 2022-23, with core inflation remaining high. The
outlook is fraught with considerable uncertainty, given the volatile geopolitical situation, global
financial market volatility and supply disruptions.
Consequences of high inflation –
 Higher inflation level leads to erosion of purchasing power, due to which with the same amount
of salary the consumers are able to buy fewer goods thereby leading to a reduced overall demand
for goods and services.
 Higher inflation leads to drop in the value of currency, which makes the import of goods and
services expensive, whereas the exports of a country might increase.
 Higher level of inflation is also responsible for increasing the income inequality, because the
lower income households are forced to spend major chunk of their income on fulfilling the basic
needs which further deteriorates their standard of living.
 Sometimes higher inflation may lead to higher investment, as due to the fear of rise in general
price levels and interest rate in future, the households tend to hoard more commodities in present
times, and some businesses make higher investment in current times due to the fear of higher
interest rates in future. However in long run the rate of investments is reduced due to rise in the
interest rates with the intent of curbing inflation.
 Inflation leads to short term higher growth in the economy, as the inflation is caused by
increased money supply the higher money leads to higher spending by consumer thereby
contributing to economic growth.
 The higher inflation rate, further leads to a spiral of inflation , because due to current higher
inflation rates the expectation of higher inflation in future rises leading the workers to demand
higher wages which further increases the cost of production thereby increasing the overall price
levels of goods.
 The cost of debt service for borrowers reduces with rise in inflation.
 The higher inflation rates in long run pose a risk of recession in the economy.
 The rise in interest rates puts higher yield pressure on bonds, thereby impairing the value of
bonds and declining current value of income from it.

Measures taken to control inflation –

1. Monetary measures-
Contractionary monetary policy - The aim of this policy is to reduce money supply in the economy by
increasing the interest rate, which makes the credit more expensive thereby reducing the consumer spending
and investment by businesses, this technique helps in controlling the money supply in the economy thereby
reducing the inflation.
Open market operations – It is the process under which the central banks buy and sells the government
securities in the open market to control the supply of money in the market. The OMOs influence the short
term, long term and foreign exchange rates.
Changing reserve ratios - The central bank controls the credit creation capacity by increasing the reserve
amount rates. The central bank can increase the cash reserve ratio , which makes the bank to keep higher
amount in the reserve thereby reducing their credit creation capacity.
2. Fiscal measures – These measures are taken by government to control the inflationary
pressure in the economy. The government does so by either increasing the tax rates which
lowers the private spending or decreasing the government expenditures. However raising the
tax rate is more appropriate method as decreasing the government spending may act as
impediment in the progress of important regional and national projects.
3. Price control method – Under this method the upper limit for prices essential of goods and services is fixed
by the government , and anyone charging higher amount than this limit are
 punished legally. However this measure is difficult to administer and is not sustainable in long run.
4. Rationing – It aims at distributing the scarce goods at reasonable prices so as to make them
available to large number of consumers.

From the above mentioned points it is evident that higher level of inflation are harmful for an economy as it
leads to increase in the cost of living and increase in income inequality. However as per some economist a small
amount of inflation may help in driving the economic growth. Therefore, for any economy to grow adequately
controlling inflation in the acceptable range is paramount to the stable economic growth.
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What is E-Governance and it’s Benefits? Explain different models of E- Governance. (500 Words)

E-Governance is the use of information and communication technology (ICT) to provide government services,
information exchange, transactions, and the integration of previously existing services and information
portals.
Hence e-Governance is basically a move towards SMART governance implying: simple, moral, accountable,
responsive and transparent governance.
Benefits of e-governance
Inclusive government: E-governance helps in building trust between government and citizens by using
internet-based strategies to involve citizens in the policy process.
Easy implementation: E-governance has reduced paperwork and made it simple to share information between
all government departments to build one mega database.
Speedy process: Technology makes communication swifter. Internet, smartphones have enabled instant
transmission of high volumes of data all over the world.
Saving costs: Paper-based communication requires lots of stationery, printers, computers, etc. which calls for
continuous heavy expenditure.
Transparency: ICT improves the transparency of the governance process. The government's entire information
would be available on the internet. The citizens have access to the information at any time.
Simplicity and Accountability: Application of ICT to governance combined with detailed business process
reengineering would lead to weeding out of redundant processes, simplification in structures and changes in
statutes and regulations.

Models of e-governance
G2G (Government to Government):
-In this case, ICT is being used not just to restructure government procedures but also to boost the flow of
information and services within and between different entities.
-This interaction might be horizontal, i.e. between different government agencies and functional areas within
an organization, or vertical, i.e. between national, provincial, and local government agencies and levels within
an organization. -Examples: Khajane Project in Karnataka

G2C (Government to Citizens)

In this case, an interface is created between the government and citizens which enables the citizens to benefit
from efficient delivery of a large range of public services.
-On the one hand, this increases the availability and accessibility of public services while also improving the
quality of such services.
-Examples: e-Courts, India Portal, Project FRIENDS in Kerala G2B (Government to Business)
– Here, e-Governance tools are used to aid the business community to seamlessly interact with the
government.
-The objective is to cut red tape, save time, and reduce operational costs when dealing with the government.
The G2B initiatives can be transactional, such as in licensing, permits, procurement and revenue collection.
They can also be promotional and facilitative, such as in trade, tourism and investment.
Examples: GeM
G2E (Government to Employees)
Government is by far the biggest employer and like any organisation, it has to interact with its employees on a
regular basis.
On the one hand, using ICT tools makes these interactions faster and more efficient, while on the other hand,
it increases employee satisfaction.
Examples: HRMS portals, Appraisal portals

Conclusion:
E-Governance initiatives have been carried out in India with varying degrees of success as well as the diversity
of conditions in the country. Ultimately, the success of an e-Governance initiative lies in how efficiently it has
enhanced people’s participation in government functioning through wide ICT access.
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2. How E-Governance helps in tackling Corruption and Inefficiency? (500 Words)

According to World Bank: “E-governance refers to the use by Government agencies of information technologies
(such as Wide Area Networks, the Internet, and mobile computing) that have the ability to transform relations
with citizens, businesses, and other arms of Government.”
It can improve the delivery of government services and create significant cost-savings. E-governance can make
governments more efficient and more effective in the following ways:
1. Eliminate Favouritism and nepotism Since most of the government business is conducted online with
minimum human interference, e-governance can help in eliminating favouritism and nepotism. For example,
Coal block allocation via e-auction.
2. Minimizes Human Interference E-governance minimizes if not eliminated direct interaction with the officials
which indirectly reduces the scope of corruption. For example, earlier, you might need to bribe the district
administration and the office staff to get a certificate but now through online services like DigiLocker, you can
get the required certificates anywhere anytime.
3. Helps in Prioritizing Task
All pending actions are chronologically reminded and force officers to finish works on “first come first served”
basis and thus helps in prioritizing task and indirectly eliminates scope of manipulation. For example, IRCTC
Tatkal Ticket booking.
4. E-Governance brings in Transparency
E-Governance brings transparency in transaction with Govt and its staff. All questions and answers are
recorded. There is no differentiation between persons or companies in extending a favour or penalty.
5. E-Governance reduced the role of Money
Since E-Governance brings in the use of ICT, it makes all procedures online and equal for everyone and thus
role of money power gets diluted.
6. E-Governance help in accessing permanent record
Transactions cannot be deleted by anybody. Reports cannot be cooked up to boost one's performance or score
or rating. Moreover, records can be accessed from anywhere anytime which eliminates the role of corruption.
E-Governance can transform citizen service, provide access to information to empower citizens, enable their
participation in government and enhance citizen economic and social opportunities, so that they can make
better lives, for themselves and for the next generation. But for a diverse country like India, Technology should
be used in a humane way so that it is more a friend and less a foe.

Comment on the role, potential and impact of fintech in extending the boundaries of digital
financial system in India. (800 words)

As per World Bank Fintech (Financial technology) is creation of new opportunities and challenges for the
financial sectors from consumers to financial institutions to new entrants to the regulators. In simple terms
Fintech refers to the adoption of technology and innovative methods in delivering financial products and
services efficiently, transparently and on timely manner. In the recent years, India has witnessed a rapid
progress in financial services sector. With more than 46 crore Jan Dhan accounts, 134 crore adhar enrollments
and 120 crore mobile connections, India is becoming the flag bearer of financial innovations in the globe.

The fintech has played following roles in improving financial system and enhancing financial
inclusion in India –

Taking financial services to the farthest corners of the economy - With growing internet penetration in India,
the fintech services are increasing the reach of financial services and government programs to the underserved
and remote areas of the country, thereby providing the opportunity to low income groups to manage their
financial resources efficiently.

Increasing access to credit – In contrast to traditional credit disbursement setup, the credit services by fintech
requires very minimal paper work and the integration with AI helps in quick risk profile assessment of the
borrower, thereby increasing the ease of credit access with hassle free and timely processing.

Innovation with speed and compliance – The compliance norms for fintech companies are a bit on lighter side
as compared to their physical counterparts. Along with this the support provided by RBI in the form of
regulatory sandbox provides the fintech firms a platform for fintech companies to rollout the financial products
in speedy manner while ensuring the adherence to compliance norms and security of all the stakeholders
involved.

Promoting cashless economy - The fintech innovations enable fast, secure , and flexible payments on timely
manner which further incentivizes people to switch towards cashless economy. In India the UPI transactions
have grown by 427% from March 2020 to August 2022.

Growth of MSMEs- Innovative business models have enabled fintechs as catalyst for the growth of
MSME sector, as per Mckinsey more than half of the fintech service providers are focusing on increasing retail
banking, lending, and wealth management services for MSME sector which has a positive impact on the credit
accessibility and growth of MSMEs.

From the above points it is evident that fintech sector is playing a crucial role in the era of digitization, with the
constant innovations and regulatory support the fintech industry has huge potential in the following domains –
 The fintech funding in India has increased by 3 times in 2021 and it is expected to reach to a revenue of $200
billion by 2030 and the fintech market is expected to grow by $515 billion in book size by 2030.
The Buy now pay later option has spurred the growth in both B2C and B2B sectors significantly.
The growth in fintech market is acting as a driving force in bringing up new wealth and investment
management services, which will further push the investor base in the country.
With the integration of technology in insurance sector the the insuretech market is expected to grow by $88
billion by 2030.
Several fintech startups are coming forward to increase the fintech penetration in the agriculture sector as
well, besides this the digitization of agri finance by initiatives like disbursement of KCC loans in paperless and
hassle free manner by RBI and RBIH is a welcome step for the growth of agriculture and allied sector.
The tech enable Account Aggregator framework by RBI has the potential to of empowering millions of
underserved consumers to share their financial data seamlessly across various financial institutions in secure
and efficient manner which would enable them in accessing varieties of financial products such as credit,
insurance services, investment services, for their own benefit.
The MSME sector provides employment to more than 100 million citizens, hence the availability of timely
credit to MSME will further boost employment and export opportunities therby further fueling the economic
growth.
The fintech sector enables the ease of cross border payments, which would further boost the remittances
and export domains.
The adoption of Indian UPI system by various countries such as Japan, Thailand, Nepal, Philippines is a
gateway for Indian fintech sector to expand its business globally.
India has more than 40 crore feature phone users and the initiatives like UPI123 has a huge potential to
increase financial inclusion for all sections of the society.

Impact of Fintech sector on India economy –

The number of UPI enabled payment acceptance points has increased by 9 crore reaching to 20 crore in July
2022 reflecting the growing acceptance of contactless payments.
There are more than 20 unicorns in fintech sector of India reflecting the vision , growth potential and
expansion of fintech sector.
During COVID-19 pandemic the fintech sector has played a crucial role in smooth flow of retail payments,
and cashless transfers.
The insurance sector in India is witnessing higher penetration onus to the integration of various insurance
and banking services due to digital interference, availability of app based insurance services and hassle free
premium payment services.
The investment sector in India is also witnessing higher growth due to innovative investment products and
services offered by fintech sector, which would further boost the growth of economy.

From the above mentioned points it can be concluded that the Indian fintech market is well positioned in the
global fintech space due to the support system provided by government and financial sector regulators and
amazing talent base that India have. The advent of 5G services in India would further increase the pace of
financial inclusion in India. The sustainable fintech ecosystem is the way forward for Indian economy to
achieve higher milestones of economic growth and once again securing the position of global superpower.

**************************************************************************************
“Inflation is harmful rather than helpful to growth”. Justify? (500 Words)
Inflation measures the change in prices of a basket of goods and services over
the course of a year. A small but positive inflation rate is economically useful, while high inflation tends to
feed on itself and impair the economy’s long-term performance. If left unchecked, inflation could spike, which
would likely cause the economy to slow down quickly and unemployment to increase. The combination of
rising inflation and unemployment is called “stagflation,” and is feared by economists and central bankers.
Inflation can be harmful to the economy in the following ways-
1. Erodes purchasing power- An individual’s true income is the purchasing power of his income money. In
other words, Real Income=Money income/Price level. An overall rise in prices over time reduces the
purchasing power of consumers, since a fixed amount of money will afford progressively less consumption.
2. Income redistribution- Higher inflation has a regressive effect on lower-income families in society. This
happens when price of food and domestic utilities such as water and heating rises at a rapid rate. Therefore,
they have a less of a cushion against the loss of purchasing power inherent in inflation.
3. Business uncertainty- High and volatile inflation is not good for business confidence partly because they
cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower
level of capital investment spending
4. Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising
inflation leads to a fall in real incomes.
5. Increased speculative investment- With a rise in inflation, people are unsure how prices will rise in the
coming months or weeks.
consequently many people begin speculative investments in such cases. This is done with the intention of
making quick money. Such investments do not contribute to the creation of productive capital in the
economy.
6. Lenders will sustain losses- Lenders are at a risk of losing money during high inflation. This is due to the fact
that they receive a sum with less purchasing power than the amount loaned.
7. Negative impacts on Capital Accumulation: When rising prices become a recurring feature of an economy,
the general desire to save begins to wane because the real value of money will fall in the future. So the
amount of money available for further investment would also decline. As a result, the overall impact on the
economy's capital accumulation is negative because it is dependent on investment growth.
8. Export earnings suffer- Since the prices of raw materials and factors of production rise during inflation, the
prices of export items rise as well. overall impact on the economy's capital accumulation is negative because
it is dependent on investment growth. Though the rupee depreciates, lack of demand due to high prices
nullifies the exchange rate benefit.

Continued inflation is a cause of concern and policymakers may need to act tough and take steps to lower the
inflation rate in the economy. At present, the Indian economy is gripped with unprecedented inflation. The
government has taken a series of steps to cool prices and cushion the impact on the common man.
***************************************************************************************

. Explain at least 03most recent and most talked about initiatives/developments introduced by the RBI. (400
words each)

Answer:
1) RISK BASED INTERNAL AUDIT (RBIA) FRAMEWORK (Regulatory initiative)
In the terms of initiatives launched by RBI, the most important and effective decision is to look after the
maximum governance in the organizations to maintain transparency among the authorities and the processes.
The internal audit function needs to have enough power, independence, stature, and resources within the
bank to guarantee that internal auditors carry out their tasks objectively, according to a directive from the
Reserve Bank of India to banks.

Additionally, RBI highlighted that this task cannot be outsourced. These guidelines attempt to improve the
governance structure for banks within the context of risk-based internal audit.

Features of RBIA framework-

i) Internal auditing duties cannot be contracted out. However, experts, including former employees, might be
engaged on a contractual basis, when necessary, provided the Audit Committee of the Board (ACB) had
assurances that such competence did not already exist inside the bank's audit function.

ii) Any conflict of interest in these areas must be acknowledged and resolved effectively. In all circumstances,
regular employees of the internal audit function shall be the owners of audit reports.

iii) The risk-based internal audit framework used by banks must encompass all important criteria and principles
appropriate for their organisational structure, business model, and risks. Banks must assure this and prove it
through appropriate documentation.

RBI's direction to Banks were provided under following heads-

1) AUTORITY, STATURE, AND INDEPENDENCE
In line with this, the central bank has mandated that internal audit should have enough power, stature,
independence, and resources within the bank to allow internal auditors to complete their tasks impartially.

In addition, the bank's central office stated that the internal audit department's director must be a senior bank
executive with independent judgement.
2) COMPETENCE
The RBI emphasised the need of each internal auditor having the necessary professional competence,
knowledge, and experience for the bank's internal audit function. Information technology, accounting, data
analytics, banking operations, and forensic investigation are just a few examples of the knowledge and
experience that are preferred.

3) STAFF ROTATION
The Board should impose a minimum term of service for employees working in the internal audit function, with
the exception of companies where the function is a specialised one and is run by professional internal auditors.
In order to ensure that the staff working in the internal audit function has the necessary skills, the Board may
also investigate the viability of requiring staff members with specialised knowledge useful for the audit function
but posted in other departments to serve for at least one stint in that function.

4) TENOR FOR INTERNAL AUDIT HEAD APPOINTEMENT

The Head of Internal Audit (HIA) shall be appointed for a reasonable length of time, preferably for a minimum
of three years, with the exception of entities where the internal audit function is a specialised role and
supervised by career internal auditors.

5) REPORTING LINE
In the event that the board of directors decides to allow the MD, CEO, or a Whole-Time Director to serve as the
Head of Internal Audit's reporting authority, the board's audit committee will have the responsibility of
examining the HIA's work, and the board will also have the decision-making authority in regards to approving or
rejecting the HIA's performance evaluation.

In addition, the Audit Committee of the Board shall meet with the HIA in such circumstances at least once every
three months without the participation of senior management, including the MD, the CEO, or the Whole-Time
Director.

6) REMUNERATION
If the compensation of internal audit professionals is based on the financial performance of the business lines
for which they execute audit obligations, the independence and impartiality of the internal audit function may
be compromised. Therefore, the structure of the compensation plans should be such that it prevents the
emergence of conflicts of interest and undermines the independence and objectivity of the audit.

2) DIGITAL PAYMENT INITIATIVES at Global Fintech Fest 2022

The chairman of the National Payments Corporation of India (NPCI), Mr. Mahapatra, and the governor of the
Reserve Bank of India (RBI), Mr. Shaktikanta Das, launched three major initiatives from the podium of the
Global Fintech Fest 2022 held in Mumbai, Maharashtra in September 2022 that will advance India's digital
payments development: the RuPay Credit Card on UPI, UPI LITE, and Bharat BillPay Cross-Border Bill
Payments.

Scope and Importance of this payment initiative:

i) Customers will profit from the increased opportunities to use their credit cards, and merchants will gain from
the rise in consumption by being a member of the credit ecosystem and accepting credit cards using resources
like QR codes.
ii) By immediately enabling safe and secure payment transactions, RuPay Credit Cards will be connected to a
Virtual Payment Address (VPA), also known as a UPI ID. The focus of the initial operationalization phase will be
on identifying takeaways that can be applied to improving the proposition later on as usage is scaled up.
iii) Users will have a practical option with UPI Lite for quick and easy low-value transactions. India currently
thrives on low-value UPI payments, with 50% of all UPI transactions taking place below 200 rupees. Users of the
BHIM App will be able to conduct low-value transactions almost entirely offline once UPI Lite is enabled.
iv) By lowering the debit strain on the primary banking system, UPI Lite will increase transaction success rates.
v) Will improve user experience and bring the UPI platform one step closer to executing a billion transactions
per day.

On the same occasion, Bharat BillPay Cross-Border Bill Payments was introduced, making bill payments simpler
for those who live outside of India but keep a home there.
>With over 30 million Indians living overseas, India is one of the top 5 countries that receive remittances from
abroad.
>The Bharat BillPay Cross-Border Bill Payments system enabled Non-Resident Indians (NRIs) the capacity and
ability to handle utility, water, and telephone bill payments on behalf of their families in India.
>The first company to offer Bharat BillPay cross-border bill payments was Federal Bank with the Lulu Exchange
in the United Arab Emirates.

The RuPay Credit Card on UPI, UPI LITE, and Bharat BillPay Cross-Border Bill Payments initiatives have the
power to transform the digital payments ecosystem, expand the reach of digital payments to a large number of
new users both inside and outside of India, and support the process of onboarding the following 300 million
consumers to digital payments. This is one of the most revolutionary developments in the arena of digital
payments as through this initiative, the remote population could participate and become confident

3) REGULATIONS REVIEW AUTHORITY 2.0

The regulatory guidelines and return requirements have changed throughout time in line with the growth of
the financial sector and its institutions. As the Indian financial system expanded into various company models,
product lines, and geographical regions, the regulatory perimeter also grew. This would eventually result in a
proliferation of instructions on related topics, a duplication of return components, and possibly even complex
compliance procedures that would place an unnecessary burden on the regulated firms. In order to
streamline/rationalize and improve the effectiveness of the regulatory instructions and compliance
procedures, it is helpful to conduct frequent assessments.

Background of RRA-
>The Reserve Bank established the Regulations Review Authority (RRA 1.0) in April 1999 as part of the initial
exercise to review the regulations, circulars, and reporting systems based on comments from the general
public, banks, and financial institutions.
>The RRA 1.0's proposals made it possible to streamline and improve a number of processes, streamline
regulatory prescriptions, lessen the reporting requirements placed on regulated firms, and pave the way for
the consolidation of regulatory guidelines on a given topic into Master Circulars.

Initiation of RRA 2.0-

The evolution of the regulatory landscape and changes to the Reserve Bank's regulatory duties over the past
20 years made it necessary to conduct a comparable evaluation of the Reserve Bank's rules and compliance
requirements. As a result, on April 15, 2021, the Reserve Bank of India established the Regulations Examine
Authority (RRA 2.0)9 to review the regulatory requirements both internally and by soliciting feedback from the
REs and other stakeholders on how to make them simpler and easier to implement. The Regulations Review
Authority was designated as Shri M. Rajeshwar Rao, Deputy Governor. The RRA 2.0 was established for a year
beginning on May 1, 2021.

RRA 2.0 has the following objectives:

>to improve the effectiveness of regulatory and supervisory directives by eliminating any repetitions or
redundancies.
>to simplify the reporting process, revoke out-of-date instructions when needed, and, whenever practicable,
eliminate paper-based return submission in order to lessen the
compliance burden on regulated firms.
>to get input from regulated firms on how to make compliance simpler and easier by simplifying processes.
>to assess and recommend any necessary adjustments to the way RBI circulars and instructions are
disseminated (this includes ideas for the distribution of circulars, their updating, and internet links); and
>to determine any other matter that is relevant to the topic.

Recommendations of RRA 2.0-

i) The website's regulatory guidelines should be posted with an emphasis on simplicity of use.
ii) For convenience of access by various stakeholders, regulatory directives may also be categorised on the RBI
website according to function, subject, and category of regulated firms.
iii) The RBI website's search functionality could be strengthened by allowing users to do searches using a
variety of parameters, including keywords, date, subject, and the department issuing the instructions. For ease
of navigation, search inside search results should also be enabled.
iv) The information displayed on the RBI website must always be current, and it should be periodically
reviewed (not more frequently than every quarter) to ensure that it is still relevant.
v) To prevent confusion among the REs and the general public regarding their applicability, the regulatory
instructions that have been repealed or revoked must be appropriately archived/stamped.
vi) The landing page for an instruction on the website must include the necessary interlinkages with the related
content. The relevant content must be changed at the same time as any instruction that is repealed, revised,
or modified.

Skill development for regulatory drafting-

Under the authority granted to it by a variety of statutes, the Reserve Bank has been enacting subordinate
legislation. In order for RBI's directives to pass legal scrutiny, they must be within the parameters of the
statutory mandate, clear in wording, rational, reasonable, and proportionate. To make the rule easier to read
and to make the policy easier to comprehend, a consistent writing style is crucial. The current proficiency in
the drafting of regulatory directives given by the RBI must therefore be further developed.

Way Forward-
>With the intention of conducting a new analysis of the regulatory requirements and reporting systems with a
view to streamlining/rationalizing them and improving their effectiveness, Regulations Review Authority 2.0
was established.
>Regulatory directives that had become superfluous or obsolete were identified and advised for withdrawal in
four tranches of interim recommendations from RRA.
>Additionally, the RRA has recommended that 65 regulatory returns be merged, discontinued, or converted to
online filing, as well as the creation of a separate web page called "Regulatory Reporting" on the RBI website to
centralise information about regulatory reporting and return submission by the REs.
>Clarity, simplification, ease of accessibility, and rationalisation in regulatory instructions and returns are
expected as a result of the RRA exercise.
>It ought to improve compliance simplicity and lighten the load on REs in terms of compliance. All stakeholders
would benefit from this, notably the REs, who would find life easier.

4) PAYMENT VISION 2025

The Payments Vision 2025 document was published in June 2022 by the Reserve Bank of India's Department of
Payment and Settlement Systems. The document discusses the accomplishment of the objectives outlined in
the payments vision for 2019–21 and presents the payments vision for 2025, building on the earlier vision and
offering a strategic direction and execution plan for the growth of the payment ecosystem.

Objectives-
i) To improve the payment systems so that they can provide consumers with convenient, cost-effective
payment choices that are available whenever and wherever they choose.
ii) To make it possible to geotag digital payment infrastructure and transactions, as well as to review the rules
for prepaid payment instruments (PPIs), including closed system PPIs.
iii) Regulating all main payment ecosystem intermediaries and connecting UPI to credit cards and financial
products' credit components.
iv) To improve Cheque Truncation System (CTS), including the clearing and settlement perspective of One
Nation One Grid and the development of a payment system for processing online merchant payments via
internet and mobile banking.
v) Big-Tech and FinTech regulation in the payments sector.
vi) BNPL (Book Now Pay Later) payment mechanisms are examined, and relevant rules for BNPL payments are
investigated.

The vision statement highlights:

FOUR Es—e-payments for everyone, everywhere, every time—along with the FIVE Is—integrity, inclusivity,
innovation, institutionalization, and internationalization— that guide the payment systems.
This theme is based on the six characteristics of rapid, convenient, affordable, safe, and secure payment
methods that were mentioned in the previous vision.

FOCAL AREAS OF THE PAYMENT VISION 2025-

1) Cross-border Payments
> Two-factor authentication (2FA) for cross-border card transactions.
> Global outreach of RTGS, NEFT, UPI and Rupay cards.
> Bringing further efficiencies in payment processing and settlements on introduction of Central Bank Digital
Currency (CBDC)-domestic and cross-border.

2) Domestic payment and transaction processing

> The RBI is exploring the possibility of processing payment transactions within India that currently can be
processed abroad.
> It shall take necessary steps to migrate the existing RBI-operated payment system messages that currently do
not use the ISO 20022 standard such as NEFT to the ISO 20022 standard. > Create a payment system for
processing online merchant payments using
internet/mobile banking
> Review needs for multiple payment identifiers

3) Payment policies and guidelines

> Constitute Payments Advisory Council (PAC) to assist the Board for Regulation and supervision of Payment
and Settlement systems (BPSS)
>Revisit guidelines for prepaid payment instruments (PPIs)

4) Bringing no-bank entities/players within the regulatory ambit

> Attempt regulation of Big-Techs and fintechs in the payment space
> Consider a framework for regulation of all significant intermediaries in the payment ecosystem.

5) Fraud mitigation
> Leverage the online dispute resolution (ODR) system for fraud monitoring and reporting.
> Weave in alternative authentication mechanisms for digital payment transactions

Goals of Payment Vision 2025-

i) Less than 0.25 percent of all retail payments are made using checks.
ii) A threefold increase in digital payment transactions.
iii) UPI would have average annualised growth of 50%, compared to 20% for IMPS and NEFT.
iv) an increase in payment transaction volume relative to GDP of 8.
v) 20% more debit card purchases were made at the point of sale.
vi) Use of debit cards will eventually outpace that of credit cards.
vii) PPI transactions to be increased by 150%.
viii) Increase in infrastructure for accepting cards to 250 lakh.
ix) 50% CAGR growth in the number of customers who have enrolled for mobile-based
transactions.
x) Reduction in Cash in circulation (CIC) expressed as a proportion of GDP.

This payment initiative will be an opportunity for India to showcase its achievements at teh international level.
Increased participation in dialogues of international standard-setting bodies will be encouraged, along with
interlinking with fast payment systems of other countries with a focus on adjacent corridors; this is anticipated
to improve trade and commerce and cut down on the cost and time of remittances.
The use of cash or near-cash substitutes is predicted to result in lower costs as digital payments become more
widely used and less cash is used as a result. This would increase the proportion of digital payments in the GDP
and help to increase transaction transparency.
***************************************************************************************

2. Explain at least 05 recent and most talked about financial instruments launched by the RBI in last two
years. (400 words each)

Answer:
STANDING DEPOSIT FACILITY (SDF)
The Monetary Policy Committee's (MPC) decision to introduce the Standing Deposit Facility (SDF) as the floor
in the Liquidity Adjustment Facility (LAF) corridor in the month of April was one of the most important steps to
counter inflation and efficient liquidity management.
The "Expert Committee to Revise and Strengthen the Monetary Policy Framework" (Chairman Urjit R. Patel)
advocated the SDF as a liquidity management tool in January 2014. The RBI was given the authority to issue
this instrument in 2022 after Section 17 of the RBI Act of 1934 was revised in 2018.

As the floor of the corridor for the liquidity adjustment facility, the SDF will take the place of the fixed rate
reverse repo (FRRR). The MSF (marginal standing facility) and the SDF will both be open every day of the week
and throughout the entire year.

Purpose of SDF-
SDF's primary goals are to eliminate the system's excess liquidity of Rs 8.5 lakh crore and to manage inflation.

Since then, the Reserve Bank has developed the SDF, a new mechanism for absorbing liquidity devoid of
collateral. The SDF improves the monetary policy's operational structure by abolishing the RBI's mandatory
collateral restriction. In addition to its function in managing liquidity, the SDF also serves as a tool for financial
stability and liquidity management.

Features of SDF-
(1) It replaces the previous fixed rate reverse repo as the floor of the LAF corridor.
(2) It is a tool of monetary policy that is used to absorb liquidity without any collateral
(collateral in this case is often in the form of government securities).
(3) It is run overnight and has the ability to absorb liquidity for extended tenors with proper pricing.
(4) Deposits made under the SDF are suitable assets for the statutory liquidity ratio (SLR) under Section 24 of
the Banking Regulation Act of 1949 but are not balances eligible for the maintenance of the cash reserve ratio
(CRR) under Section 42 of the RBI Act, 1934.

Working of SDF-
SDF is intended to absorb excess liquidity, which is of a temporary character as evidenced by the rise in
government deposits with the RBI.
Absorbing excess liquidity
>This increase in advance tax collections, the unexpected rise in public provident fund and small savings
receipts, and the temporary deferral of some expenditures are the main causes of this surplus liquidity.
>Being a non-collateralized instrument, SDF allows for greater flexibility in managing
excess liquidity because it frees the RBI from the "binding constraint" of having to hold government securities
on its balance sheet.
>SDF will comprise the RBI's assets. Using the composition and sources of Reserve Money, this feature is
explained (RM). RM is a "stylized portrayal of the Reserve Bank's balance sheet," claims the RBI Annual Report
2021.

In the end, additionally, usage of SDF to absorb durable liquidity should be supplemented by market-related
instruments like OMO, MSS, and CMBs during periods of significant capital net inflows. The Urjit Patel
Committee advised against replacing these mechanisms with the institution of SDF.

This will serve the objectives of monetary and fiscal coordination the best since only then will operations for
managing liquidity, particularly those involving sizable amounts of durable liquidity, be in line with market
conditions.

TARGETED LONG-TERM REPO OPERATIONS

The Reserve Bank of India introduced on-tap targeted long-term operations to ensure effective management
of liquidity conditions in the economic system. Basically, the LTRO is a tool that allows the central bank to lend
money to banks for one to three years at the current repo rate in exchange for collateralized government
assets with a similar or longer term.

What distinguishes it from MSF and LAF?

The LTRO provides banks with liquidity for their one- to three-year needs, in contrast to the RBI's present
windows of liquidity adjustment facility (LAF) and marginal standing facility (MSF), which provide funds for
their short-term needs of 1-28 days. LTRO operations are designed to stop the market's short-term interest
rates from diverging significantly from the repo rate, which serves as the policy rate.

Why TLTRO was needed?

Investors significantly reduced their holdings in the domestic equities, bond, and FX markets in the wake of
COVID-19. Higher yields or liquidity premia have resulted as a result for products including corporate bonds,
commercial paper, and debentures. The RBI supplied funding to banks at a reduced rate and for a longer term
so that the banks may invest these funds in corporate bonds in order to fight the high-cost trend in
corporate fund mobilisation.

The RBI will auction funds to commercial banks under TLTROs up to a predetermined
amount based on the repo rate. As part of the TLTRO implementation, the RBI conducted auctions of targeted
term repos of up to three years tenor of appropriate sizes for a total amount of up to Rs 100,000 crore
at a floating rate linked to the policy repo rate. Four tranches of TLTRO were auctioned by the RBI; each with
an auction amount of Rs 25000 crore. On April 17 2020, the RBI also conducted TLTRO 2.0 worth an initial
amount of Rs 50,000 crore.

Importance of TLTRO
The TLTRO "on tap" programme is crucial because it gives banks quick access to inexpensive cash from the
central bank, which they may then use to make investment- grade corporate bond loans to other companies
and industries. Although the RBI cannot directly stimulate the nation's economy, it assures a continual flow of
capital by giving access to less expensive capital. The cash crisis that many industries are experiencing is
lessened because these monies can also be used to give bank loans and advances to the
struggling sector. Government securities' prices rise as a result of the banks' requirement to pledge them as
collateral in order to get capital.

Ultimately, TLTRO rounds were fructified as per the perception and intention of RBI; it fulfilled the very sole
purpose of liquidity management in the times of stress.

VOLUNTARY RETENTION ROUTE for FOREIGN PORTFOLIO INVESTMENTS

In order to allow FPIs to engage in India's debt markets, the Reserve Bank, in together with the Government of
India and the Securities and Exchange Board of India (SEBI), proposes a distinct route known as the "Voluntary
Retention Route" (VRR). If FPIs agree to voluntarily commit to keeping a specified minimum percentage of
their assets in India for a period of time, investments made through the Route will generally be exempted from
the macro-prudential and other regulatory rules applicable to FPI investments in debt markets. The use of this
Route will only be done at the participant's discretion.
Any FPI registered with SEBI is eligible to participate through this Route. Participation through this Route shall
be voluntary.
Categories mentioned under VRR:
>Voluntary Retention Route for FPI Investment in Corporate Debt Instruments is referred to as "VRR-Corp."
>Voluntary Retention Route for FPI Investment in Government Securities is referred to as "VRR-Govt."
>Voluntary Retention Route for FPI Investment in Instruments Eligible Under Both VRR- Govt and VRR-Corp
shall be referred to as "VRR-Combined."

Eligible instruments under this route-

i) FPIs will be permitted to invest in any government securities under VRR-Govt, including State Development
Loans, Treasury Bills, and Central Government Dated Securities (G-Secs) (SDLs). Any instrument on Schedule 1
of the Foreign Exchange Management (Debt Instruments) Regulations, 2019, is eligible for investment by FPIs
under VRR-Corp.

ii) Transactions involving repo and reverse repo.

Features of VRR
i) Investments made via this route must exceed the general investment cap. Investments made through this
mechanism are limited to Rs.2,50,000 crore or more, with the remaining funds being divided among VRR-Govt,
VRR-Corp, and VRR-Combined according to the Reserve Bank's current discretion. The investment cap will be
made available in a tranche or several tranches.
ii) The investment amount will be distributed to FPIs under this Route either on tap or through auctions.
iii) Prior to allocation, the Reserve Bank shall declare the mode of allocation, allocation to the VRR-Govt, VRR-
Corp, and VRR-Combined categories, and the minimum retention term.
iv) If there is a demand for more than 100% of the amount offered, no FPI (including its linked FPIs) shall be
given an investment limit larger than 50% of the amount offered for each allocation by tap or auction.
v) Three years, or as determined by RBI, shall be the minimum retention duration for each tap or auction
allocation.
vi) Subject to the following relaxations, FPIs must invest the allotted sum, known as the Committed Portfolio
Size (CPS), in the pertinent debt instruments and maintain their investment throughout the voluntary
retention period:

>An FPI must invest a least of 75% of the CPS during the retention term (the ability to vary investments
between 75% and 100% of CPS is meant to allow FPIs to modify the size of their portfolio in accordance with
their investing philosophies).
>On a daily basis, the required investment amount must be met. Cash balances in the Rupee accounts used for
this Route count as investments for this purpose.
>FPIs are free to transfer any investments they made under the General Investment Limit to the VRR
programme.

Management of a portfolio
>Within three months of the date of allocation, successful allottees must invest at least 75% of their CPS. The
retention term will start on the day the limit was allocated.

>If an FPI chooses, it may continue making investments through this Route for an extra similar retention period
until the committed retention period expires. In that scenario, it must inform its custodian of this choice.

>The following options are available to an FPI if it decides not to continue under VRR at the end of the
retention period: (a) liquidate its portfolio and leave; (b) move its investments to the "General Investment
Limit," subject to any available limits under the
"General Investment Limit"; or (c) hold its investments until its date of maturity or until it is sold, whichever is
earlier.

>Selling their interests to another FPI or FPIs enables FPIs to fully or partially exit their investments made
under the Route before the retention period expires. The FPI (or FPIs) purchasing the investment, however,
must adhere to all terms and restrictions that apply to the FPI selling the investment under the Route.

>Regulations must be enforced against any FPI violations, as assessed by SEBI. Minor infractions may be
rectified by FPIs with the custodian's consent immediately after notice and, in any case, within five working
days of the violation. Custodians are required to notify SEBI of any non-minor infractions and minor violations
that have not been abrogated.

Basically, the objective of the VRR channel is to attract long-term and stable FPI investments into debt markets
while providing FPIs with operational flexibility to manage their investments.
As the amount borrowed or lent via a repo cannot exceed 10% of an FPI's investment under a VRR, otherwise
they will not be allowed to engage in repos for liquidity management. The holdings cannot fall below 67% of
the CPS due to securities sold under a repo. Securities purchased through repossessions will not count toward
maintaining the required 67% of CPS.

To offset their interest rate or currency risk, FPIs will be permitted to participate in any OTC or exchange
traded derivative currency and interest rate instrument.

LIQUIDITY ADJUSTMENT FACILITY (LAF) & MARGINAL STANDING FACILITY (MSF) FOR REGIONAL RURAL BANKS
(RRBs)

What is a liquidity adjustment facility?

The liquidity adjustment facility (LAF) of the Reserve Bank of India assists banks in adjusting their daily liquidity
discrepancies. Repo (repurchase agreement) and reverse repo are the two aspects of a LAF. Banks use repo to
borrow money from the RBI when they need liquidity to satisfy their daily requirements. The repo rate is the
price at which they borrow money. Banks can park with the RBI using the reverse repo process at the
reverse repo rate when they have plenty of cash.

What is a marginal standing facility?

When interbank liquidity runs out completely, banks can borrow money from the Reserve Bank of India
through the marginal standing facility. Under the liquidity adjustment facility, or LAF, banks borrow from the
central bank by pledging government assets at a rate higher than the repo rate.

RRB's scenario-
In order to improve the RRB's lending ability and to manage their liquidity, the Reserve Bank of India (RBI) in
December 2020 gave regional rural banks (RRBs) access to the liquidity adjustment facility (LAF), marginal
standing facility (MSF), and call or notice money market.
Following are the components of LAF which is now available for RRB's under certain criteria, terms and
conditions and these will be extended to selected RRB's which will fulfil all the eligibility norms. RRB's can
participate in following auctions -
>Repo (Overnight fixed repo or the 'popular' repo)
>Reverse repo (Overnight fixed reverse repo or the 'popular' reverse repo)
>Term repo (auction)
>Overnight variable rate repo (auction)
>Overnight variable rate reverse repo (auction).

RBI has taken this decision for RRBs in order to facilitate more efficient liquidity management by RRBs at
competitive rates while assuring orderly market conditions. RRBs can participate as both; borrowers as well as
lenders.

GOVERNMENT SECURITIES ACQUISITION PROGRAMME (G-SAP)

The G-Sec Acquisition Programme (G-SAP) is essentially a much bigger and more unconditional Open Market
Operation (OMO).
The G-SAP is an OMO with a "unique character," according to RBI. The term "unconditional" in this context
means that RBI has promised up front that it will purchase G-Securities regardless of the state of the market.
The idea is to give a comfort to the bond markets.
Purpose and significance of such OMOs:
To regulate the amount of liquidity in the economy and to achieve a stable and orderly evolution of the yield
curve. The G-SAP will mostly benefit the government. The RBI boosts the amount of money in the economy by
buying G-secs, which lowers the government's borrowing costs by maintaining a low yield. With its extensive
borrowing programme (such as the National Infrastructure Pipeline Project), the Indian government can now
sigh with satisfaction as long-term borrowing costs decline.

Working of OMOs and G-secs:

>One of the quantitative (to regulate or control the total volume of money) monetary policy tools used by the
central bank of a nation to manage the money supply in the economy is known as open market operations
(OMO).
>The RBI uses OMOs to modify the state of the money supply by selling or buying government securities (g-
secs).
>In order to replenish the system with liquidity, the central bank sells G-secs and then buys them again.
>These activities are frequently carried out on a daily basis in a way that keeps inflation in
check while assisting banks in continuing to lend.
>RBI works with the public indirectly through commercial banks to implement the OMO.

G-SAP 1.0-
>On April 15, 2021, the RBI formally carried out the first stage of G-SAP 1.0 operations.
>It started with the acquisition of five dated securities for a total of Rs 25,000 crore.
>The multiple pricing technique was used for the first stage of the G-SAP procurement, and bidders were
required to pay at the prices they had specified in their bids.
>Four securities with various maturities were notified by the RBI for the G-Sec acquisition.
>Along with implementing the G-SAP strategy, the RBI also carried out routine activities.
>The LAF, longer-term repo/reverse repo auctions, foreign exchange operations, and open market operations,
including special OMOs, were all covered by this. This was done to make sure that the evolution of the liquidity
conditions matched the stance of monetary policy.

G-SAP 2.0-
>The Reserve Bank of India (RBI) conducted an open market purchase of government securities of ₹25,000
crore on August 26,2021 under the G-sec Acquisition Programme (G-SAP 2.0).

So basically, banks and long-term investors, such as investment funds, insurance funds, and retirement funds,
are the main participants in the global G-Sec market, which is primarily an institutional market. The G-Sec
market is essential to the RBI's capacity to effectively carry out its many roles as a monetary policy authority,
manager of systemic liquidity, manager of government debt, regulator of interest rate and foreign exchange
markets, regulator of payment and settlement system, and overseer of financial stability.