BANKING
1.
The Reserve Bank is constituted under Section 3 of the Reserve Bank of India
Act, 1934 for taking over the management of currency from the Central
government and Carrying on the business of banking in accordance with the
provisions of the Act. Originally, under the RBI Act, the Bank had the
responsibility of;
(i)
regulating the issue of
bank notes.
(ii)
Keeping of reserves for
ensuring monetary stability, and
(iii)
generally to operate
the currency and credit system of the country to its advantage.
2.
The major powers of the Reserve Bank in different roles as Regulator and
Supervisor can be summed up as under:
(i) Power to licence
(ii) Power of appointment and removal of banking Boards/personnel;
(iii) Power to regulate the business of banks;
(iv) Power to give directions;
(v) Power to inspect and supervise banks;
(vi) Power regarding audit of banks;
(vii) Power to collect and furnish credit information;
(viii)
Powers relating to
moratorium, amalgamation and winding up; and
(ix) Power to impose penalties.
3. (A) Banking means
acceptance of deposits of money from the public for lending or investment. Such
deposits may be repayable on demand or may be for a period of time as agreed to
by the banker and the customer and may be repayable by cheque, draft or
otherwise. Apart from banking, banks are authorized to carry on other business
as specified in Section 6 of the Banking Regulation Act. Banks are, however,
prohibited from undertaking any trading activities.
B. Banks fare constituted as
companies registered under the Companies Act, 1956, statutory corporations
constituted under Special or cooperative societies registered under the
Cooperative Societies Act. The extent of applicability of the regulatory
provisions under the Banking Regulation Act and the Reserve Bank of India Act
to a bank depends on the constitution of the bank.
C. Reserve Bank of India India India
4. (A) Organizations of banks are controlled
mainly by Reserve Bank of India
(B) The main concerns of the
Reserve Bank of India
©Stringent requirements of minimum capital adequacy ratio, maximum
voting rights, eligibility for appointment of whole-time and part-time
directors are made by the Reserve Bank of India
(D)The Banking Regulation Act lays down stipulations regarding the
composition of Boards of Directors of Banks to ensure the Boards have required
experience, knowledge and expertise for the financial stability of the banks
and also that all important sectors of the economy are represented.
(E) The Reserve Bank of India
5. (A)Securitization is the
process of purchasing or acquiring the secured loans or advances, classified as
non-performing asset in the books of originating bank or financial institutions
at a negotiable price.
(B)The secured creditor can either:
Ø Take up the management of the borrower, or
Ø Sale
Ø Reschedule the payment of debt, or
Ø Enforce security interest, or
Ø Settle the dues payable, or
Ø Take possession of the secured assets, under the Act.
©All NPA are transferred to SCRC by bonds or debentures repayable in
maximum period of 6 years with interest thereon @ 1.5% (min) over prevalent
bank rate.
(D)The Provisions of SARFAESI Act do not apply when the amount of
secured loan does not exceed 1 lakh rupees and unsecured dues 10 lakh rupees.
(E) Demand notice of a period of 60 days is served to the company for
taking over possession and management of the secured assets and also to appoint
manager to manage the affairs of the company.
(F) Secured creditors have right against the guarantors also.
(G) Penalties are imposed for any
default in compliance of regulations.
6. Bancaassurance
is a packaged service of banking and insurance offered to customer at one place
under one roof at one time. Banks take up Bancassurance to earn fee income
while for insurance industry; banks are source of ready distribution and sales
network thus helping them to increase the market penetration.
But his is full of challenges for both insurance
companies and banks due to wide spread bank employee discontent against
insurance products; few surprises are thrown by IRDA itself, viz., insurance
sellers have to undergo mandatory insurance training and clear the
certification examination conducted by IRDA thus imposing additional burden on
bank employees to undergo the same thus creating additional pressure on bank
employees.
The other issue is that PSU banks need to figure
out ways and means to address the anomalies in the remuneration structure.
7. The
growth of technology has enhanced the
banking business world over during the past two decades and the intense
competition has forced banks to rethink the way they operated the business.
Technology in the form of electronic banking has med it possible to find
alternate banking practices at lower costs and more and more people are using
electronic banking products at lower costs and meet their banking needs. The digital
revolution is currently transforming the society, trade and commerce into an
electronic world and e-commerce is emerging as a global reality that will have
a significant impact on banking. E-Com has been made possible by internet and
World Wide Web and offers enormous opportunities in every sphere of business.
It allows trade at low costs worldwide and offers enterprise and banks a chance
to enter global market at the right time.
The bank’s first use of computers was strictly a
back office affair but rapid improvements in electronic technology and
availability of higher computer power and faster communication technology has
virtually transformed brick and mortar banking to Electronic Banking wherein
customers need not necessarily visit banks to carry out their banking
transactions and delivery of banks’ services to a customer at his office or
home by using Electronic Technology is made available by banks.
Principle types of financial services rendered by
banks in the electronic form include Electronic Payments (systems Branch Teller
Machines, Automatic Teller Machine, Cash dispenser etc). While in Branch Teller
Machine presence of employees of bank is required, the Automatic Teller Machine
can operate without intervention of bank’s staff. An ATM consists of a
processor, a consumer interface panel, card reader, printer, dispenser and
depositor and have various inbuilt security system to check unauthorized use of
the same, ATMs offer a lot of advantage to the customers, ,which include 24
hours, 7 days a week quick and efficient services with privacy in transaction.
ATMs also provide opportunities to banks to offer extended services to
customers without crowding at bank counters and to have greater penetration in
the market.
KEYWORDS:
1
- Property means immovable property, movable property, any debt or
any right to receive payment of money – whether secured or unsecured,
receivables – whether existing or future, intangible assets (know-how,
patent, trade mark, licence, franchise or any other business or commercial
right of similar nature).
- Hypothecation means a charge in or upon any movable property,
existing or future, created by a borrower in favour of a secured creditor
without delivery of possession of the movable property to such creditor,
as a security for financial assistance, and includes floating charge and
crystallization into fixed charge on movable property.
- Security Interest means right, title and interest of any kind
whatsoever upon property, created in favour of any secured creditor.
- Secured debt means a debt which is secured by ant security
interest.
- A secured creditor means any bank or financial institution or any
consortium or groups of banks or financial institutions and includes:
(i)
Debenture trustee
appointed by bank or financial institution
(ii)
Securitization company
and reconstruction company
(iii)
Any other trustee
holding securities in whose favour security interest is created for due
repayment by any borrower of any financial assistance.
- Non-performing asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI.
- Qualified Institutional buyer means a financial institution ,
insurance company, bank, state financial corporation, state industrial
development corporation, trustee or any other asset management company;
making investment on behalf of mutual fund / provident fund / gratuity
fund / pension fund / a foreign institutional investor registered under
the Securities & Exchange Board of India (SEBI) Act, 1992 or
regulations made there under or any other corporate body as may be
specified by the board.
KEYWORDS:
2
Bond: A debt security in the form of a loan. The
bondholders receive interest at a fixed rate for a fixed period.
Closed-end fund: A type of investment Company that
does not continuously offer its shares for sale but instead sells affixed
number of shares at one time (in the initial public offering) which then typically
trade on a secondary market.
Expense Ratio: The fund’s total annual operating
expenses including management fees, distribution fees (and other expenses)
expressed as a percentage of average net assets.
Front-end load: An upfront sales charge investors
pay when they purchase fund shares, generally used by the fund to compensate
brokers. A front-end load reduces the amount available to purchase fund shares.
Bank-end load: A sales charge )also known as a
‘deferred sales charge’) investors pay when they redeem (or sell) mutual fund
shares, generally used by the fund to compensate brokers.
Market index: A measurement of the performance of a
specific ‘basket of stocks’ considered representing a particular market or
sector of the stock or the economy.
Net Asset Value (NAV): The vale of the fund’s
assets minus its liabilities. SEC rules require funds to calculate the NAV at
least once daily. To calculate the NAV per share, simply subtract the fund’s
liabilities from its assets and then divide the result by the number of shares
outstanding.
Portfolio: An individual’s or entity’s combined
holdings of stocks, bonds, or other securities and assets.
Prospectus: Describes the mutual fund to
prospective investors. Every mutual fund has a prospectus. The prospectus contains
information about the mutual fund’s costs, investment objectives, risks, and
performance. You can get a prospectus from the mutual fund company through its
website (or by phone or mail). Your financial professional or broker can also
provide you with a copy.
Redemption fee: A shareholder fee that some funds
charge when investors redeem or sell mutual fund shares. Redemption fees which
must be paid to the fund are not the same (as and may be in addition to) a
back-end load which is typically paid to a broker).
Hedging: Hedging is a process of protecting mutual
fund assets from foreign currency fluctuations
KEYWORDS:
World Wide Web/Online Catalogue/E-money/Net based
shopping/Cyber laws/Brick and Mortar Banking /SPNS/ Branch Teller
Machine/ATM/Virtual Banking
BENEFITS
OF E-BANKING TO THE CUSTOMER:
(i)
Anywhere banking: No
matter wherever the customer is in the world, he can transact business through
e-banking. E-banking ‘Customers’ can make some of the permitted business
transactions from his home or while traveling through mobile phone. Generates
greater customer satisfaction by offering unlimited access to the bank, not
limited by the walls of the branch.
(ii)
By connecting all the
branches through Wide Area Network WAN) any branch banking can be provided to the
customers.
(iii) Anytime banking: Managing funds in real time and importantly e-banking
provides 24 hours a day, 365 days a year services to the customers of the bank.
(iv)
It inculcates a sense
of financial discipline by recording each and every transaction.
(v)
Convenience acts as a
tremendous psychological benefit all the time. It makes utility payments easier
(vi)
Cash/cards free banking
through PC banking. E-banking expands the domain of access to the banking
services. Lowers the risk and generates higher security to the customers as
they can avoid traveling with cash. Cash withdrawal from any branch/ATM.
(vii) Bring down ‘cost of banking’ to the customer over a period of time.
(viii) On-line purchase of goods and services including on-line payment for the
same benefits to the bank
(ix)
Innovative, secured,
addresses competitive advantage to the bank and helps in establishing better
customer. Any ATM on the relationship and retaining and attracting customer.
(x)
E-banking provides
unlimited network to the bank and is not limited to the number of branches. Any
PC connected to modem and telephone having internet connection can provide
banking facility to the customer.
(xi)
By connecting ATMs and
point of sale terminals online, risk of overdraw can be eliminated in case of
ATM, credit and debit cards. ATM can be better monitored and planned by
establishing a centralized data warehouse and using latest data mining tools.
(xii) E-banking reduces customer visits to the branches and thereby human
intervention and the establishment costs for the bank.
(xiii) Inter branch reconciliation becomes easy thereby the chances of frauds
and misappropriation.
(xiv) On-line banking: an effective medium of promotion of various schemes of
the bank and acts as a marketing tool.
(xv) Establishing centralized database can considerably reduce loan on
branches. Integrated customer data paves way for individualized and customized
services.
(xvi) Scope and potential of better profitability increases.
BOTTLENECKS
IN DEVELOPMENT OF E-BANKING:
With so many benefits from electronic banking, let
us see what are the bottlenecks? Some of them are discussed hereunder:
1. Adoption of technology. Old established banks with vast network of
branches and existing work culture/legacy make it difficult for banks to adopt
technology and banks are required to make strenuous efforts for providing
e-banking services to their customers.
2. Customer’s acceptance: The level of acceptance of e-banking channels by
average customers remains low due to certain psychological factors and fear of
technology.
3. Cost of technology: The cost of acquiring a PC , internet connection and
other equipment is also limiting factor in development of e-banking facility as
such facilities remain out of reach of the middle class or even the upper
middle class customers.
4. Lack of preparedness on the part of banks and blissful unawareness of
changes in banking is also one of the bottlenecks.
5. Security issues and cyber laws: Security is one of the major issues
required to be addressed before implementing e-banking solutions. The security
threat may come from unauthorized access/loss or damage of data by hackers,
loss or damage of data by virus, unauthorized access within network. Banks need
to address the threats to reduce the risk of implanting new and advanced
technology. Enactment of proper cyber laws is also required to take care of
cyber crimes in the area of e-banking.
E-COMMERCE
IN BANKING: ISSUES AND CONCERNS FOR BANKERS:
There are three issues and concerns to be addressed
in implementing e-commerce in banking, viz., security, legal issues, and skill
development.
Security:
The risk of loss of security is present when an
organization makes use of the internet for putting through an e-commerce
transaction. For banks, the breach of security in e-commerce related
application could result in the siphoning off of large sums of money by
perpetrators. Banks, therefore, need to put in place computer security related
hardware and software such as fire walls, encryption programmes and virus
protection programmes. These have to be checked and updated regularly so as to
reinforce controls in the computer environment. Following are the important
security issues:
1. Confidentiality: Information should be available only to the authorized
user.
2. Integrity: Information received should be exactly as the information
sent or stored.
3. Availability: Information sent/stored over communications network should
be available whenever required.
4. Authenticity: system should be able to verify about sender of the
message, to the person directed in the message and should be able to prevent
any individual from showing as another individual
5. Non-repudiability: the sender/receiver should not be able to deny having
sent/received the message.
6. Auditability: Recording of data with confidentially for the purpose of
audit.
Legal Issues:
Another area of concern for bank is legal issues
and availability of laws to take care of cyber crimes. In the current Indian
scenario legal issues arising, for example, on account of siphoning off cash
electronically by computer criminals, will pose a major challenge to Indian banks
entering the e-commerce arena. Cyber laws are, therefore, required to take care
of all issues related to Cyber crime/transactions. Information Technology Law
passed by the government of India
Skill Development:
Development of human resources capable of meeting
the requirements of e-commerce is another area of concern for banks in India and therefore, an important step that will
have to be taken by banks in India
**********************
MONETARY
POLICY—BANKING AND OTHER AREAS
You are advised to
go through your College books on the relevant subject. However a brief account is provided for ready
reference for revising before attending an Interview. You must also be thorough with the latest
newspaper reports relating to your subject.
You may also verify updated websites to know the latest information.
1. What is
the Monetary Policy?
The Monetary and Credit Policy is the policy statement,
traditionally announced twice a year, through which the Reserve Bank of India
These factors include - money supply, interest rates and the
inflation. In banking and economic terms money supply is referred to as M3 -
which indicates the level (stock) of legal currency in the economy.
Besides, the RBI also announces norms for the banking and
financial sector and the institutions, which are governed by it. These would be
banks, financial institutions, non-banking financial institutions, Nidhis and
primary dealers (money markets) and dealers in the foreign exchange (forex)
market.
2. When is
the Monetary Policy announced?
Historically, the Monetary Policy is announced twice a year -
a slack season policy (April-September) and a busy season policy
(October-March) in accordance with agricultural cycles. These cycles also
coincide with the halves of the financial year.
Initially, the Reserve Bank of India
However, with the share of credit to agriculture coming down
and credit towards the industry being granted whole year around, the RBI since
1998-99 has moved in for just one policy in April-end. However a review of the
policy does take place later in the year.
3. How is the
Monetary Policy different from the Fiscal Policy?
Two important tools of macroeconomic policy are Monetary
Policy and Fiscal Policy.
The Monetary Policy regulates the supply of money and the
cost and availability of credit in the economy. It deals with both the lending
and borrowing rates of interest for commercial banks.
The Monetary Policy aims to maintain price stability, full
employment and economic growth.
The Reserve Bank of India
The Monetary Policy is different from Fiscal Policy as the former brings about a change in the
economy by changing money supply and interest rate, whereas fiscal policy is a
broader tool with the government.
The Fiscal Policy can be used to overcome recession and control inflation. It may be
defined as a deliberate change in government revenue and expenditure to
influence the level of national output and prices.
For instance, at the time of recession the government can
increase expenditures or cut taxes in order to generate demand.
On the other hand, the government can reduce its expenditures
or raise taxes during inflationary times. Fiscal policy aims at changing
aggregate demand by suitable changes in government spending and taxes.
The annual Union Budget showcases the government's Fiscal
Policy.
4. What are
the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure
adequate flow of credit to the productive sectors of the economy.
Stability for the national currency (after looking at
prevailing economic conditions), growth in employment and income are also
looked into. The monetary policy affects the real sector through long and
variable periods while the financial markets are also impacted through
short-term implications.
There are four main 'channels' which the RBI looks at:
- Quantum channel:
money supply and credit (affects real output and price level through
changes in reserves money, money supply and credit aggregates).
- Interest rate
channel.
- Exchange rate
channel (linked to the currency).
- Asset price.
5. All this
is more linked to the banking sector. How does the Monetary Policy impact the
individual?
In recent years, the policy had gained in importance due to
announcements in the interest rates.
Earlier, depending on the rates announced by the RBI, the
interest costs of banks would immediately either increase or decrease.
A reduction in interest rates would force banks to lower
their lending rates and borrowing rates. So if you want to place a deposit with
a bank or take a loan, it would offer it at a lower rate of interest.
On the other hand, if there were to be an increase in
interest rates, banks would immediately increase their lending and borrowing
rates. Since the rates of interest affect the borrowing costs of corporates and
as a result, their bottom lines (profits), the monetary policy is important for
them also.
Being the central bank, however, the RBI would have a say and
determine direction on interest rates as it is an important tool to control
inflation.
The bank rate is a tool used by RBI for this purpose as it
refinances banks at the this rate. In other words, the bank rate is the rate at
which banks borrow from the RBI.
6. How was
the scenario prior to recent liberalisation?
Prior to recent liberalisation, the RBI resorted to direct
instruments like interest rates regulation, selective credit control and CRR
(cash reserve ratio) as monetary instruments.
One of the risks emerging in the past 5-7 years (through the
capital flows and liberalisation of the financial sector) is that potential
risk has increased for institutions. Thus, financial stability has become
crucial and there are concerns relating to credit flows to the agricultural
sector and small-scale industries.
7. What do
the terms CRR and SLR mean?
CRR, or cash reserve ratio, refers to a portion of deposits
(as cash) which banks have to keep/maintain with the RBI. This serves two
purposes. It ensures that a portion of bank deposits is totally risk-free and
secondly it enables that RBI control liquidity in the system, and thereby,
inflation.
Besides the CRR, banks are required to invest a portion of
their deposits in government securities as a part of their statutory liquidity
ratio (SLR) requirements.
The government securities (also known as gilt-edged
securities or gilts) are bonds issued by the Central government to meet its
revenue requirements. Although the bonds are long-term in nature, they are
liquid as they can be traded in the secondary market.
Since 1991, as the economy has recovered and sector reforms
increased, the CRR has fallen from 15 per cent in March 1991 to 4 per cent in
December 2014. The SLR has fallen from 38.5 per cent to 22 per cent over the
past decade. (verify about current rate)
8. What
impact does a cut in CRR have on interest rates?
From time to time, RBI prescribes a CRR or the minimum amount
of cash that banks have to maintain with it. The CRR is fixed as a percentage
of total deposits. As more money chases the same number of borrowers, interest
rates come down.
9. Does a
change in SLR and gilts products impact interest rates?
SLR reduction is not so relevant in the present context for
two reasons:
First, as part of the reforms process, the government has
begun borrowing at market-related rates. Therefore, banks get better interest
rates compared to earlier for their statutory investments in government
securities.
Second, banks are still the main source of funds for the
government.
This means that despite a lower SLR requirement, banks'
investment in government securities will go up as government borrowing rises.
As a result, bank investment in gilts continues to be high despite the RBI
bringing down the minimum SLR to 25 per cent a couple of years ago.
Therefore, for the purpose of determining the interest rates,
it is not the SLR requirement that is important but the size of the
government's borrowing programme. As government borrowing increases, interest
rates, too, rise.
Besides, gilts also provide another tool for the RBI to
manage interest rates. The RBI conducts open market operations (OMO) by
offering to buy or sell gilts.
If it feels interest rates are too high, it may bring them
down by offering to buy securities at a lower yield than what is available in
the market.
10. How does
the Monetary Policy affect the domestic industry and exporters in particular?
Exporters look forward to the monetary policy since the
central bank always makes an announcement on export refinance, or the rate at
which the RBI will lend to banks which have advanced pre-shipment credit to
exporters.
A lowering of these rates would mean lower borrowing costs
for the exporter.
11. The stock
markets and money move similarly, in some ways. Why?
Most people attribute the link between the amount of money in
the economy and movements in stock markets to the amount of liquidity in the
system. This is not entirely true.
The factor connecting money and stocks is interest rates.
People save to get returns on their savings. In true market conditions, this
made bank deposits or bonds (whose returns are linked to interest rates) and
stocks (whose returns are linked to capital gains), competitors for people's
savings.
A hike in interest rates would tend to suck money out of
shares into bonds or deposits; a fall would have the opposite effect. This
argument has survived econometric tests and practical experience.
12. What are
the measures to regulate money supply?
The RBI uses the interest rate, OMO, changes in banks' CRR
and primary placements of government debt to control the money supply. OMO,
primary placements and changes in the CRR are the most popular instruments
used.
Under the OMO, the RBI buys or sells government bonds in the
secondary market. By absorbing bonds, it drives up bond yields and injects
money into the market. When it sells bonds, it does so to suck money out of the
system.
The changes in CRR affect the amount of free cash that banks
can use to lend - reducing the amount of money for lending cuts into overall
liquidity, driving interest rates up, lowering inflation and sucking money out
of markets.
Primary deals in government bonds are a method to intervene
directly in markets, followed by the RBI. By directly buying new bonds from the
government at lower than market rates, the RBI tries to limit the rise in
interest rates that higher government borrowings would lead to.
13. Considering
that interest rates are now tweaked looking at market conditions, is the
Monetary Policy losing its importance?
Governor of RBI has said he would make the Credit Policy a
'non-event' and would use the policy only to review developments in the banking
industry and money markets. Interest rate announcements since 1998-99 were
based on economic and market developments.
The policy now concentrates mostly on structural issues in
the banking industry.
Some Monetary Policy terms:
14. Bank Rate
Bank rate is the minimum rate at which the central bank
provides loans to the commercial banks. It is also called the discount rate. (9%) (26.12.2014)
Usually, an increase in bank rate results in commercial banks
increasing their lending rates. Changes in bank rate affect credit creation by
banks through altering the cost of credit.
15. Cash
Reserve Ratio
All commercial banks are required to keep a certain amount of
its deposits in cash with RBI. This percentage is called the cash reserve
ratio. The current CRR requirement is 4 per cent.(26.12.2014)
16. Inflation
Inflation refers to a persistent rise in prices. Simply put,
it is a situation of too much money and too few goods. Thus, due to scarcity of
goods and the presence of many buyers, the prices are pushed up.
The converse of inflation, that is, deflation, is the
persistent falling of prices. RBI can reduce the supply of money or increase
interest rates to reduce inflation.
17. Money
Supply (M3)
This refers to the total volume of money circulating in the
economy, and conventionally comprises currency with the public and demand
deposits (current account + savings account) with the public.
The RBI has adopted four concepts of measuring money supply.
The first one is M1, which equals the sum of currency with the public, demand
deposits with the public and other deposits with the public. Simply put M1
includes all coins and notes in circulation, and personal current accounts.
The second, M2, is a measure of money, supply, including M1,
plus personal deposit accounts - plus government deposits and deposits in
currencies other than rupee.
The third concept M3 or the broad money concept, as it is
also known, is quite popular. M3 includes net time deposits (fixed deposits),
savings deposits with post office saving banks and all the components of M1.
18. Statutory
Liquidity Ratio
Banks in India are required to maintain 22 per cent of their
demand and time liabilities in government securities and certain approved
securities.
These are collectively known as SLR securities. The buying
and selling of these securities laid the foundations of the 1992 Harshad Mehta
scam.
19. Repo
A repurchase agreement or ready forward deal is a secured
short-term (usually 15 days) loan by one bank to another against government
securities. Present repo rate is 8% (26.12.2014)
Legally, the borrower sells the securities to the lending
bank for cash, with the stipulation that at the end of the borrowing term, it
will buy back the securities at a slightly higher price, the difference in
price representing the interest.
20. Open Market
Operations
An important instrument of credit control, the Reserve Bank
of India
In times of inflation, RBI sells securities to mop up the
excess money in the market. Similarly, to increase the supply of money, RBI
purchases securities.
CONCEPTS IN DEVELOPMENT
Economic Growth: It is defined as long term increase in production potential of the
economy. It is a quantitative concept.
Economic Development: It refers to the economic growth with structural changes in favour of
non-agricultural activities. It is a
qualitative concept.
Sustainable Development: It is that development which takes care of the needs of the present
generation without compromising the needs of the future generations. It also emphasizes on a clean environment.
Quality of Life: It simply indicates the better health, welfare freedom of choice and
basic liberties in a society.
Indicators of Growth
Gross Domestic Product (GDP): It is the sum total of the market value of the final goods and services
produced within the geographical boundary of a country during an accounting
year.
Gross National Product (GNP): GNP = GDP + Net factor income from abroad.
Net factor income = X – M, [X = Income earned and received by nationals
in foreign countries; M=Income earned by foreign nationals in a country.]
It better indicates the production potential of the nationals as against
GDP. In India India
Net National Product (NNP): NNP = GNP – Depreciation
Depreciation is consumption of fixed capital in the process of
production.
National Income: When NNP is calculated at factor cost, it is known as National
Income. In other words, it can be
represented as,
National Income = NNP at market prices – Indirect taxes + subsidies
Indicators of Development
Human Development Index: It was
introduced in 1990 by United Nations Development Programme (UNDP). It is defined as average of social
components, namely, life expectancy at birth, education attainment and standard
of living.
To define the human development level of a country, this index has been
divided on a scale of 1.
High human development = HDI value is greater than 0.8.
Medium human development = HDI value is between 0.5 and 0.8.
Low human development = HDI value is below 0.5.
In the UN Human Development Report 2002 India
Quality of Life Index: It is calculated on the basis of six parameters (as defined by noted
economists, Dasgupta and Weale).
1. Per capita income in Purchasing Power Party (PPP) in dollars.
2. Life expectancy at birth.
3. Infant mortality rate.
4. Adult literacy rate.
5. Index of political rights.
6. Index of civil rights.
By one view of economists, it is considered as a more comprehensive
indicator than HDI.
Explain the
following terms.
·
Insider Trading: It is a term used to explain the purchase and sale of shares of a
company by accessing information concerning the company that is not publicly
available and is of such a nature that
it enables the person to make substantial profits in the share transaction.
This is a punishable offence and SEBI has proposed stringent regulations to
curb it.
·
Laissez Faire: It is an economic doctrine which emphasis superiority of free markets
over state regulation of individual markets and of the economy in general.
Proponents of Laissez Faire argue that a private enterprise economy will
achieve a more efficient allocation and use of scarce economic resources and
greater economic growth than will a centrally planned economy where the
government owns and directs the use of resources.
·
Credit Rating
Information Services of India Ltd., (CRISIL):
It was set up in 1988 and has been promoted jointly by the ICICI and UTI to
provide credit rating services to the corporate sector. Credit rating promotes
investors’ interests by providing them information on assessed comparative risk
of investment in the listed securities of different companies. It also helps
companies to raise funds more easily and at relatively cheaper cost, if their
credit rating is high.
·
Non Performing Assets
(NPAs): It is a credit facility which ceases to generate
income for a bank. Generally it is one on which interest or principal to be
received has remained “past due” for a period of 180 days. NPAs consist of
assets under 3 categories. Standard, doubtful and loss. Assets classified as
NPAs for a period upto 18 months belong to substandard while doubtful are those
that remain NPAs for a period beyond 18 months and loss assets are those
identified as such and have not been written off.
·
Birth Rate: Birth rate is the number of live births per 1000 of the population in
a place, state or country, in a year. The difference between this rate and the
death rate is used to calculate the rate of growth of population of the country
over a certain period of time. The birth rate tends to decline as the country
attains higher levels of economic development.
·
Repo or Repurchase
Options: Repos were introduced in 1992 in India
·
National Bank for
Agriculture and Rural Development (NABARD):
NABARD was set up in July 1982. It works as the apex body to look after the
credit requirements of rural sector. It provides short-term credit to state
cooperative banks (SCBs) medium-term credit to SCBs and RRBs and long-term
credit SCB, LDBs, RRBs and commercial banks. It also promotes research in
agriculture and rural development. It took over from RBI all the functions it
performed in the field of rural credit and agricultural Refuiannce and
Development Corporation (ARDC) was also merged with NABARD.
·
Small Industries
Development Bank of India
·
Hot Money: Hot money refers to large amounts of short term funds held
internationally by banks, financial institutions and wealthy individuals, which
quickly move out of or into a country, in anticipation of interest rate charges
or exchange rate fluctuations. This is, therefore, a very volatile source of
funds and its flight from a country in terms of crisis may trigger a collapse
of the economy.
·
Agricultural Export
Zone (AEZs): The concept AEZs was introduced
by the Exim Policy 2001 to give primacy to promotion of agricultural exports
and a reorganization of our export efforts on the basis of specific products
and specific geographical areas. The scheme is already in operation and the
exim policy 2002-07 intends to set up 20 more AEZs.
·
Scheduled Bank: A bank registered in the second schedule of the RBI Act, 1934 is
called a scheduled bank and to be included in the schedule it must fulfill the
following criteria:
(i) Paid up capital and reserves must be at least RS. 5 lakh
(ii) Its conduct must not be to the detriment of its depositors.
These scheduled banks are required to maintain cash
reserves with RBI and they enjoy certain privileges such as borrowing
facilities from the RBI.
·
Infant Mortality Rate
(IMR): It is the number of deaths of infants, upto one
year of age, per thousand live births. IMR is high in les developed countries
due to lack of healthcare facilities and proper nutrition to the infants and as
development takes place, IMR is reduced in the country.
·
Net Asset Value (NAV): NAV is the net value of the mutual fund’s portfolio, expressed on a
per share basis.
NAV per share = Total net Assets
Total Number of Shares outstanding
‘Total Net Assets’ is calculated by periodically
valuing investments are market prices and other assets are added, while
liabilities are deducted. Open-end funds set their sale and repurchase prices
on the basis of their NAVs.
·
Hard Currency: A currency that is in strong demand, but in short supply on the
foreign exchange market. Hard currency status is usually associated with an
economically strong country which is running a large surplus on its balance of
repayments. Demand for the currency is high to finance purchases of its
exports, but the supply of the currency is relatively limited because the
amount of it being made available through the purchase of imports is much
lower.
·
Per Capita Income: It is the per head income of the country and can be obtained by
dividing the gross national product (GNP) or national income of the country by
its population. It can be measured either at current prices of at constant
(base year) prices. Per capita income as a measure of people’s standard of
living is flawed as it does not indicate the distribution of income and the non
monetary elements of lifestyle.
·
Working Capital: The funds deployed by a company in the form of cash, investories,
accounts receivable and other current assets. The term “working capital”
generally means “Net Working Capital” i.e. the excess of current assets over
current liabilities. These current liabilities are repayable within a year.
Hence working capital is that portion of current assets which is financed by
long-term funds such as loans, share capital and retained earnings.
·
Equity Shares: Equity shares represent ownership interest is a company and the claim
of equity share holders on earnings and on assets in the event of liquidation,
follow all others. Only equity shareholders are generally entitled to vote at
the Annual General Meetings (AGM) which depend upon the number of shares which
they hold. They take the maximum risks and also have the possibility of highest
gains. They are entitled to any net profits made by their company after all
expenses have been paid and they receive it in the form of dividend.
·
Microcredit: It is the credit extended to small and needy borrowers who are outside
the domain of commercial banks. The scope of microcredit is immune, considering
the number of such individuals who may undertake productive activities. It has
emerged as a viable alternative credit channel to the poor as their access to
conventional collateral and high transaction costs. Self help Group (SHG) Bank
Lineage Programme propagated by NABARD, for last 10 years, has been recognized
as the largest and fastest growing micro-finance programme in the world.
·
Depression: It is an economic condition that is characterized by a severe
contraction in economic activity, which is manifested in numerous business shut
down, widespread unemployment and declining investment in plant and equipment
on account of falling sales.
·
Commodity Futures: A standardized contract guaranteeing delivery of a certain quantity of
a commodity (such as wheat, sugar, soybeans etc.) on a specified future date,
at a price agrees to, at the time of transaction. These contracts are
standardized in terms of quantity, quality and delivery months for different
commodities. Contracts on certain commodities are already traded in India
·
London Inter Bank Offer
Rate (LIBOR): LIBOR is an average of interest
rates at which leading international banks are prepared to offer term
Eurodollar deposits to each other. These rates reflect market conditions for
international funds and are widely used by the banks as a basis for determining
the interest rates charged on dollar and foreign currency loans to business
customers.
·
Treasury Bill: A short-term debt instrument of the Government of India. This security
bears no default risk and has a high degree of liquidity and low interest rate
risk in view to its short term. The instrument is negotiable and is issued at a
discount from the face value. At the maturity, the investor receives the face
value and hence the increment constitutes the interest earned.
·
Over the country
Exchange of India
·
Debt Trap: It is a financial crisis in which an individual or country raises
further loans in order to fulfill its obligations of interest payment and
repayment of principal during a time period. So the country or individuals is
caught in a vicious circle of debt where it raises more debt in order to retire
its earlier debts and finds it difficult to get out of this trap.
·
American Depository
Receipts (ADRs): ADRs are instruments traded at US
exchange representing a fixed number of shares of a foreign company that is
traded in the foreign country. By trading in ADRs, US investors manage to avoid
some of the problems of dealing in foreign securities markets. The ADR route
enables companies to raise funds in the US
·
Venture Capital: It is any share capital or loans subscribed to a firm financial
specialists (for example, the venture capital arms of commercial banks and
insurance companies), thus enabling the form to undertake investment in
processes and products which because of their novelty are rate as especially
high-risk projects, and as such would not normally attract conventional
finance.
·
EEFC Account: This refers to the Exchange Earners’ Foreign Currency Account, a
scheme introduced in 1992 for exporters and residents receiving foreign
exchange. A certain percentage of the earnings may be maintained in this
account in order to limit exchange rate risk in case of future imports or for
other specified purposes.
·
Regional Rural Banks
(RRBs): The banks sponsored by public sector banks to
cater exclusively to rural areas. The target segments of RRBs loans are small
and marginal farmers, agricultural labourers, agricultural cooperative
societies, artisans and small entrepreneurs among others. The sponsoring bank,
besides subscribing to the share capital, provides managerial and financial
assistance to its RRB. There are 196 RRBs in India
·
Export Promotion
Capital Goods Scheme (EPCG Scheme): It has been
started to permit the exporters to import capital goods on concessional import
duties. Under exim polity 1997-2002 exporters of goods and services could
import capital goods by paying only 10% import duty but they had to export
goods worth four times to CIF value with 5 years. This has not only been
retained but made more flexible in the exim policy 2002-07.
·
ECGC: It is an acronym for Export credit Guarantee Corporation of India
Ltd., which has been playing a crucial role by providing credit insurance cover
for exports from the country. There is great potential for project exports from
India
·
Discount and Finance
House of India Ltd., (DFHI): An institution
promoted by RBI, public sector banks and financial institutions to meet the
long-felt and need of activating the secondary market as well as developing
their primary market for money market instruments. (SBI has a major 32% stake
in DFHI). It was set up on the recommendation of Vaghul Committee. From April
1992, it began dealing in dated securities and accredited as a primary dealer
in the February 1996.
·
Agricultural and
Processed Food Products Export Development Authority (APEDA): APEDA is a body engaged in the export promotion and development of
markets for fruits, vegetables and their products rice, wheat floricultures,
processed fruits and juices and several other miscellaneous agricultural
products. It is a promotional agency and does not undertake direct exports of
any products on its own account.
Overseas Banking Units (OBUs):
The exim policy 2002-07 permitted registered Indian Banks to set up OBUs in the
SEZs. Through these OBUs exporters in SEZs will have access to finances at
international costs. This is because OBUs would be exempted from CRR, SLR and
priority sector lending requirements which would permit them to operate at par
with their overseas branches. These units have been permitted to accept funds
from NRIs and individuals and so they can raise foreign currency funds from
international markets at global interest rate. These banks should have a
minimum capital of $10 million, to set up OBUs. Recently SBI opened the first
OBU in Mumbai.
ECONOMICS -- TERMS
Hyperinflation: Exceptionally high inflation rates. While there are no had and fast
guidelines, an annual inflation rate of 20% or more is likely to create
hyperinflation.
Money
Laundering: The attempt to conceal or disguise
the ownership or source of the proceeds of criminal activity and to integrate
them into the legitimate financial systems in such a way that they cannot be
distinguished from assets acquired by legitimate means. Typically this involves
the conversion of cash-based proceeds into account-based forms of money.
A
Pigouvian tax: It is a tax levied on an agent
causing an environmental externality (environmental damage) as an incentive to
avert or mitigate such damage.
Portfolio
investment: It is the category of
international investment that covers investment in equity and debt securities,
excluding any such instruments that are classified as direct investment or
reserve assets.
Poverty
Reduction And Growth Facility: An IMF facility
known until November 1999 as the enhanced Structural Adjustment Facility
(ESAF). The PRGF is available to those countries that are facing protracted
balance of payments problems and are eligible to borrow on concessional terms
under the International Development Association
Purchasing
Power Parities (PPPs): The rates of currency
conversion that equalize the purchasing power of different currencies by
eliminating the differences in price levels between countries. In their
simplest form, PPPs are simply price relatives which show the ration of the
prices fin national currencies of the same good or service in different
countries.
Inflation
Gap: An inflationary gap, also termed an expansionary
gap associated with a business cycle expansion, especially the latter stages of
an expansion. This is one of two alternative output gaps that can occur when
short-run production differs from full employment. The other is a recessionary
gap.
Quantitative
Restrictions: Specific limits on the quantity or
value of goods that can be import4ed (or exported) during a specific time
period.
Insider
Trading: The buying and selling of corporate stock or other
financial instruments based on knowledge that is not widely available to the
general public. Insider trading is most often undertaken by corporate
executives or directors using information that they have acquired by working
“inside” the company. Insider trading is illegal because it gives an unfair
advantage to those on the inside.
Refinancing: It refers to the extension of a new loan to enable the repayment of all
or part of the amounts outstanding on earlier borrowing, possible including
amounts not yet due.
Re-exports; Are foreign goods exported in the same state as previously imported,
from the free circulation area, premises for inward processing of industrial
free zones, directly to the rest of the world and from premises for customs
warehousing or commercial free zones, to the rest of the world.
Reverse
investment: Refers to the acquisition by a
direct investment enterprises of a financial claim on its direct investor.
Because direct investment is recorded on a directional basis, capital invested
by the direct investor as an offset to capital invested in the direct
investment enterprises by a direct investor and its related enterprises, except
in instances when the equity participations are at least 10 percent in both
directions.
Revolving
credit: Refers to credit with a clause for automatic
renewal under certain conditions.
Risk-weighted
assets: Refer to a concept developed by the BCBS for the
capital adequacy ratio. Assets are weighed by factors representing their
riskness and potential for default.
A
real-time gross settlement system (RTGS):
It is a settlement system in which processing and settlement take place on an
order-by-order basis (without netting ) in real time (continuously).
Rules
of origin: Laws, regulations and administrative procedures
which determine a product’s country of origin. A decision by a customs
authority on origin can determine whether a shipment falls within a quota
limitations, qualifies for a tariff preference or is affected by an
anti-dumping duty. These rules can vary from country to country.
A
forward exchange rate: It is the exchange
rate in contract for receipt of and payment for foreign currency at a specified
date usually for 30 days, 90 days or 180 days in the future, at a stipulated
current or ‘spot’ price.
Abnormal
Returns: Used in the context of stock returns; abnormal
returns means the return to a portfolio in excess of the return to a market
portfolio. Abnormal returns can be negative.
Philips
Curve: The Philips curve is a relation between inflation
and unemployment follows from William Philips’ 1958 work on the relation
between unemployment and the rate of change of money wage rates in the United Kingdom
