GENERAL AWARENESSBANK:- A bank is a legal entity which accepts deposits from general public and providesloans and advances to his customers according to their demand. The first bank in the world was bank of venice which was setup in Itlay in 1157. The first bank in India was setup in 1770 was bank of Hindustan. Bank of Hindustan gets failed in year 1782. After that bank of Calcutta was established in 1806 Bank of Bombay established in 1840 Bank of madras established in 1843. The three above banks works as presidency banks in India. In the year 1920 these banks were merged and formed Imperial bank of india. In year 1921 the imperial bank of india act was passed.Imperial bank of india gets nationalized in year 1955 with a new name State bank of India. RBI act was passed in year 1934,and RBI started its working in year 1935 as the controller of banks. The first time nationalization of banks takes place after nationalizing the 14 banks in year 1969. Onwords more six banks nationalized in 1980.Below are chart showing the name of nationalized banks with few details.BANK NAME ESTABLISHMENT TAG LINE CHAIRMANIndian Overseas Bank 10th Feb 1937 GOOD PEOPLE TO GROW Shri. M.Narendra WITHAllahabad Bank 1865 A TRADITION OF TRUST Shri J P DuaAndhra Bank 28 November FOR ALL YOUR NEEDS R Ramachandran 1923Bank of Baroda 1908 INDIA’S INTERNATIONAL M D Mallya BANKBank of India 1906 RELATIONSHIP BEYOND Alok Kumar Misra BANKINGBank of Maharashtra 16th Sept 1935 ONE FAMILY ONE BANK SHRI A.S. BHATTACHARYACanara Bank 1906 TOGATHER WE CAN S.RamanCentral Bank of India 21 December CENTRE TO YOU SINCE 1911 1911Dena Bank 1938 YOUR TRUSTED FAMILY Sh D.L.Rawal
BANKCorporation Bank 1906 Prosperity for All Ajai KumarIndian Bank 1907 YOUR TECH-FRIENDLY T.M.Bhasin BANKOriental Bank of 19 February WHERE EVERY INDIVIDUAL Nagesh PydahCommerce 1943 IS COMMITTEDPunjab & Sind 1908 WHERE SERVICE IS A WAY SHRI PARVEENBank(P&SB) OF LIFE KUMAR ANANDPunjab National Bank 1895 THE NAME YOU CAN BANK K.R.Kamath(PNB) UPONSyndicate Bank Ltd. 1925 FAITHFULLY FRIENDLY Basant SethUco Bank 1943 68 YEARS OF EXCELLENCE Shri Arun KaulUnion Bank of India 11 Nov 1919 GOOD PEOPLE TO BANK Mavila Vishwanathan(UBI) WITH NairUnited Bank of India 1950 THE BANK WHICH BEGANS Bhaskar Sen(UBI) WITH “U”Vijaya Bank 1931 A FRIEND YOU CAN BANK Albert Tauro UPONState Bank of India(SBI) 1806,1840,1843 THE NATION BANKS ON Pratip Chaudhuri US…
FUNCTIONS OF RBIFunctions are those functions which every central bank of each nation performs all over theworld. Basically these functions are in line with the objectives with which the bank is set up.It includes fundamental functions of the Central Bank. They comprise the following tasks.Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuingcurrency notes except one rupee note and coins of smaller denomination. These currency notes arelegal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and1,000. The RBI has powers not only to issue and withdraw but even to exchange these currencynotes for other denominations. It issues these notes against the security of gold bullion, foreignsecurities, rupee coins, exchange bills and promissory notes and government of India bonds.Banker to other Banks : The RBI being an apex monitory institution has obligatorypowers to guide, help and direct other commercial banks in the country. The RBI can control thevolumes of banks reserves and allow other banks to create credit in that proportion. Everycommercial bank has to maintain a part of their reserves with its parents viz. the RBI. Similarly inneed or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the lastresort.Banker to the Government : The RBI being the apex monitory body has to workas an agent of the central and state governments. It performs various banking function suchas to accept deposits, taxes and make payments on behalf of the government. It works as arepresentative of the government even at the international level. It maintains governmentaccounts, provides financial advice to the government. It manages government public debtsand maintains foreign exchange reserves on behalf of the government. It provides overdraftfacility to the government when it faces financial crunch.Exchange Rate Management : It is an essential function of the RBI. In order tomaintain stability in the external value of rupee, it has to prepare domestic policies in thatdirection. Also it needs to prepare and implement the foreign exchange rate policy whichwill help in attaining the exchange rate stability. In order to maintain the exchange ratestability it has to bring demand and supply of the foreign currency (U.S Dollar) close to eachother.
Credit Control Function : Commercial bank in the country creates creditaccording to the demand in the economy. But if this credit creation is unchecked orunregulated then it leads the economy into inflationary cycles. On the other credit creationis below the required limit then it harms the growth of the economy. As a central bank ofthe nation the RBI has to look for growth with price stability. Thus it regulates the creditcreation capacity of commercial banks by using various credit control tools.Supervisory Function : The RBI has been endowed with vast powers forsupervising the banking system in the country. It has powers to issue license for setting upnew banks, to open new braches, to decide minimum reserves, to inspect functioning ofcommercial banks in India and abroad, and to guide and direct the commercial banks inIndia. It can have periodical inspections an audit of the commercial banks in India.Promotional Functions of RBI ↓Along with the routine functions, central banks especially in the developing country likeIndia have to perform numerous functions. These functions are country specific functionsand can change according to the requirements of that country. The RBI has been performingas a promoter of the financial system since its inception. Some of the major developmentfunctions of the RBI are maintained below.Development of the Financial System : The financial system comprisesthe financial institutions, financial markets and financial instruments. The sound andefficient financial system is a precondition of the rapid economic development of thenation. The RBI has encouraged establishment of main banking and non-banking institutionsto cater to the credit requirements of diverse sectors of the economy.Development of Agriculture : In an agrarian economy like ours, the RBI hasto provide special attention for the credit need of agriculture and allied activities. It hassuccessfully rendered service in this direction by increasing the flow of credit to this sector.It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look afterthe credit, National Bank for Agriculture and Rural Development (NABARD) and RegionalRural Banks (RRBs).
Provision of Industrial Finance : Rapid industrial growth is the key to fastereconomic development. In this regard, the adequate and timely availability of credit tosmall, medium and large industry is very significant. In this regard the RBI has always beeninstrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIMBANK etc.Provisions of Training : The RBI has always tried to provide essential trainingto the staff of the banking industry. The RBI has set up the bankers training colleges atseveral places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.eBSC and College of Agriculture Banking i.e CAB are few to mention.Collection of Data : Being the apex monetary authority of the country, the RBIcollects process and disseminates statistical data on several topics. It includes interest rate,inflation, savings and investments etc. This data proves to be quite useful for researchersand policy makers.Publication of the Reports : The Reserve Bank has its separate publicationdivision. This division collects and publishes data on several sectors of the economy. Thereports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBIAnnual Report, Report on Trend and Progress of Commercial Banks India., etc. Thisinformation is made available to the public also at cheaper rates.Promotion of Banking Habits : As an apex organization, the RBI always triesto promote the banking habits in the country. It institutionalizes savings and takes measuresfor an expansion of the banking network. It has set up many institutions such as the DepositInsurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. Theseorganizations develop and promote banking habits among the people. During economicreforms it has taken many initiatives for encouraging and promoting banking in India.Promotion of Export through Refinance : The RBI always tries toencourage the facilities for providing finance for foreign trade especially exports from India.The Export-Import Bank of India (EXIM Bank India) and the Export Credit GuaranteeCorporation of India (ECGC) are supported by refinancing their lending for export purpose.
Supervisory Functions of RBI ↓The reserve bank also performs many supervisory functions. It has authority to regulate andadminister the entire banking and financial system. Some of its supervisory functions aregiven below.Granting license to banks : The RBI grants license to banks for carrying itsbusiness. License is also given for opening extension counters, new branches, even to closedown existing branches.Bank Inspection : The RBI grants license to banks working as per thedirectives and in a prudent manner without undue risk. In addition to this it can ask forperiodical information from banks on various components of assets and liabilities.Control over NBFIs : The Non-Bank Financial Institutions are not influenced bythe working of a monitory policy. However RBI has a right to issue directives to the NBFIsfrom time to time regarding their functioning. Through periodic inspection, it can controlthe NBFIs.Implementation of the Deposit Insurance Scheme : TheRBI has set up the Deposit Insurance Guarantee Corporation in order to protect the depositsof small depositors. All bank deposits below Rs. One lakh are insured with this corporation.The RBI work to implement the Deposit Insurance Scheme in case of a bank failure. MONETARY POLICYThe actions of a central bank, currency board or other regulatory committee that determinethe size and rate of growth of the money supply, which in turn affects interest rates.Monetary policy is maintained through actions such as increasing the interest rate, orchanging the amount of money banks need to keep in the vault (bank reserves).
MONETARY POLICY 1. VRR-VARIABLR RESERVE RATIO MORAL SAUSION CRR-CASH RESERVE RATIO CREDIT RATIONING SLR – STATUTORY LIQUIDITY RATIO CONSUMER CONTROL 2. LAF – LIQUIDITY ADJUSTMENT FACILITY MARGIN CONTROL BANK RATE PUBLICITY REVERSE REPO RATE REPO RATE 3. OPEN MARKET OPERATIONQUANTITATIVE CONTROL :- Quantitative control means to control thebanks in value terms.CRR :- The reserve requirement (or cash reserve ratio) is a central bank regulation thatsets the minimum reserves each commercial bank must hold (rather than lend out) ofcustomer deposits and notes. It is normally in the form of cash stored physically in a bankvault (vault cash) or deposits made with a central bank.
SLR :- Statutory liquidity ratio is the amount of liquid assets, such as cash, preciousmetals or other approved securities, that a financial institution must maintain as reservesother than the cash with the Central Bank. The statutory liquidity ratio is a term mostcommonly used in India.BANK RATE :- Bank rate is the rate of interest which a central bank charges on theloans and advances that it extends to commercial banks and other financial intermediaries.Changes in the bank rate are often used by central banks to control the money supply.REPO RATE :- Repo rate is the rate at which banks borrow funds from the RBI tomeet the gap between the demand they are facing for money (loans) and how much theyhave on hand to lend. If the RBI wants to make it more expensive for the banks to borrowmoney, it increases the repo rate; similarly, if it wants to make it cheaper for banks toborrow money, it reduces the repo rate.REVERSE REPO RATE :- The rate at which RBI borrows money from the banks(or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this toolwhen it feels there is too much money floating in the banking system If the reverse reporate is increased, it means the RBI will borrow money from the bank and offer them alucrative rate of interest. As a result, banks would prefer to keep their money with the RBI(which is absolutely risk free) instead of lending it out (this option comes with a certainamount of risk).OPEN MARKET OPERATION :- Open market operations (also known asOMO) is the buying and selling of government bonds on the open market by a central bank.It is the primary means of implementing monetary policy by a central bank. The usual aim ofopen market operations is to control the short term interest rate and the supply of basemoney in an economy, and thus indirectly control the total money supply. This involvesmeeting the demand of base money at the target interest rate by buying and sellinggovernment securities, or other financial instruments. Monetary targets such as inflation,interest rates or exchange rates are used to guide this implementation.
QUALITATIVE CONTROL :- A major aspect of quality control is theestablishment of well-defined controls. These controls help standardize both productionand reactions to quality issues. Limiting room for error by specifying which productionactivities are to be completed by which personnel reduces the chance that employees willbe involved in tasks for which they do not have adequate training.MORAL SAUSION :- Often termed simply suasion, it has been used topersuade banks and other financial institutions to keep to official guidelines. The moralaspect comes from the pressure for moral responsibility to operate in a way that isconsistent with furthering the good of the economy.CREDIT RATIONING :- The process of making credit less easily available orsubject to high interest rates or imposing ban on discounting of negotiable instruments.CONSUMER CONTROL :- By this measure reserve bank of india controls thepurchasing power of the customers through banks.MARGIN CONTROL :- By this measure RBI controls the margins of thecommercial banks which effects the number of persons who wants to avail loans from thebank.PUBLICITY :- By this measure RBI provides informations regarding bankinginformations and currencies.
TYPES OF BANKS1. CENTRAL BANK:- Central bank is a controller of banks of every country.in India the Reserve bank is central bank which controls banks and maintain the positions of liquidity.2. COMMERCIAL BANK:- Commercial banks are those banks which maintains the interaction with general public and provides credit facilities to commerce and industries.3. SCHEDULED BANKS:- Scheduled Banks in India are those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.4. NON- SCHEDULED BANKS:- Non scheduled banks are those banks which are not registered under schdule of RBI act, 1934. In india, only Jammu & Kashmir bank is non schduled bank.5. DEVELOPMENT BANKS:- Development banks are those banks which are established for providing credit facilities to a particular sector for their development and promotion.6. SPECIALISED BANK :- Specialised banks are foreign exchange banks, industrial banks, development banks, export-import banks catering to specific needs of these unique activities. These banks provide financial aid to indutries, heavy turnkey projects and foreign trade.7. CO-OPERATIVE BANKS :- Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. Cooperative banking, as discussed here, includes retail banking carried out by credit unions, mutual savings banks, building societies and cooperatives, as well as commercial banking services provided by mutual organizations (such as cooperative federations) to cooperative businesses.8. REGIONAL RURAL BANKS :- The Government of India set up Regional Rural Banks (RRBs) on October 2, 1975. Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank.These are banks which provides finance to rural sectors.9. NATIONALISED BANKS :- Nationalization, also spelled nationalisation, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being transferred to the public sector to be operated by or owned by the state. The opposite of nationalization is usually privatization or de-nationalization, but may also be municipalization.
TOTAL DEPOSITS OF BANK TOTAL DEPOSITS OF BANK TERM DEPOSITS TERM DEPOSITS DEMAND DEPOSITS DEMAND DEPOSITS FIXED ACCOUNT RECURRING SAVING SAVING CURRENT CURRENT FIXED ACCOUNT RECURRING ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNTTERM DEPOSITE:- The deposits which we kept with banks for a specific time period areknown as term deposits. a) FIXED ACCOUNT :- when a person deposits his specific amount for a specific time period is known as fixed deposits and the account in which these deposits are maintained are called fixed account. b) RECURRING ACCOUNT :- when a person deposits his amount for a specific time period in periodic installments is known as recurring deposits and the account in which these deposits are maintained are called recurring account.DEMAND DEPOSITS :- The deposits which are accepted and refunded by banks according tothe demands of their customers are known as demand deposits. a) SAVING ACCOUNT :- It is a type of facility which is given by the banks to his customers in which a customer can save his part of income and can withdraws according to his needs.They get interests on their savings. b) CURRENT ACCOUNT :- It is a type of facility which is given by the banks to big businessmen,companies,and institutions since there are limited transactions in saving account so that account is not suitable for them. They need a account which have
unlimited transactions so, current account is suitable as there is no limitation of transactions in this account.. It means short-term funds which fly from centre to centre in the world to secure higher interest rate or to avoid political or other risks. BANKING TERMSHOT MONEY :- It means short-term funds which fly from centre to centre in the world tosecure higher interest rate or to avoid political or other risks.CHEAP MONEY :- Credit available at low interest rates (but not lower borrowerqualifications). When governments want to encourage business activity to generateemployment, they lower the reserve requirements for banks who are able to increase theirlending at lower rates and without loss of profit. Also called easy money, it is the opposite oftight money. See also free money.FAIT MONEY :- Fiat money is money that has value only because of government regulationor law. The term derives from the Latin fiat, meaning "let it be done", as such money isestablished by government decree. Where fiat money is used as currency, the term fiatcurrency is used.FIAT MONEY :- Non cash but liquid assets (such as gilt edged securities) that can be easilyconverted into cash but are not used as a medium of exchange in everyday transactions.Depending on its type, a near money may or may not be included in a definition of moneysupply.DEAR MONEY :- money which has to be borrowed at a high interest rate, and so restrictsexpenditure by companies.NON-PERFORMING ASSETS :- Non-performing assets means an assets or account ofborrower ,which has been classified by a bank or financial institution as substandard,doubtful or loss assets,in accordance with the directions or guidelines relating toasset classification issued by the Reserve Bank of India.BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION(BIFR) :- The Board ofexperts named the Board for Industrial and Financial Reconstruction (BIFR) was Set up inJanuary, 1987 and functional with effect from 15th May 1987. The Appellate Authority for
Industrial and Financial Reconstruction (AAIRFR) was constituted in April 1987. Governmentcompanies were brought under the purview of SICA in 1991 when extensive changes were made inthe Act including, inter-alia, changes in the criteria for determining industrial sickness.NATIONAL ELECTRONIC FUND TRANSFER(NEFT) is a nation-wide system thatfacilitates individuals, firms and corporates to electronically transfer funds from any bankbranch to any individual, firm or corporate having an account with any other bank branch inthe country. For being part of the NEFT funds transfer network, a bank branch has to beNEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101 banks in thecountry (out of around 82,400 bank branches) are NEFT-enabled. Steps are being taken tofurther widen the coverage both in terms of banks and branches / offices.REAL TIME GROSS SETTLEMENT (RTGS) are funds transfer systems where transferof money or securities takes place from one bank to another on a "real time" and on "gross"basis. Settlement in "real time" means payment transaction is not subjected to any waitingperiod. The transactions are settled as soon as they are processed. "Gross settlement"means the transaction is settled on one to one basis without bunching or netting with anyother transaction. Once processed, payments are final and irrevocable.INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS):- are principles-basedStandards, Interpretations and the Framework (1989) adopted by the InternationalAccounting Standards Board (IASB). Many of the standards forming part of IFRS are knownby the older name of International Accounting Standards (IAS). IAS were issued between1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).On 1 April 2001, the new IASB took over from the IASC the responsibility for settingInternational Accounting Standards. During its first meeting the new Board adopted existingIAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.BASEL COMMITTEE ON BANKING SUPERVISION(BCBS) :-is a committee of bankingsupervisory authorities that was established by the central bank governors of the Group ofTen countries in 1975. It provides a forum for regular cooperation on banking supervisorymatters. Its objective is to enhance understanding of key supervisory issues and improve thequality of banking supervision worldwide. The Committee also frames guidelines andstandards in different areas - some of the better known among them are the internationalstandards on capital adequacy, the Core Principles for Effective Banking Supervision and theConcordat on cross-border banking supervision.
CORE BANKING :- is normally defined as the business conducted by a banking institutionwith its retail and small business customers. Many banks treat the retail customers as theircore banking customers, and have a separate line of business to manage small businesses.Larger businesses are managed via the corporate banking division of the institution. Corebanking basically is depositing and lending of money. CORE:- Centralized Online Real-TimeExchange (banking).PURCHASING POWER PARITY (PPP) :- is a measure of long-term equilibrium exchangerates based on relative price levels of two countries. The idea originated with the School ofSalamanca in the 16th century and was developed in its modern form by Gustav Cassel in1918. The concept is founded on the law of one price, the idea that in absence oftransaction costs and official barriers to trade, identical goods will have the same price indifferent markets when the prices are expressed in terms of one currency.UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANISATION(UNIDO),French/Spanish acronym ONUDI, is a specialized agency in the United Nations system,headquartered in Vienna, Austria. The Organizations primary objective is the promotionand acceleration of industrial development in developing countries and countries witheconomies in transition and the promotion of international industrial cooperation. It is alsoa member of the United Nations Development Group.CAPITAL FUNDS :- Equity contribution of owners. The basic approach of capital adequacyframework is that a bank should have sufficient capital to provide a stable resource to absorb anylosses arising from the risks in its business. Capital is divided into different tiers according to thecharacteristics / qualities of each qualifying instrument. For supervisory purposes capital is splitinto two categories: Tier I and Tier II.TIER I CAPITAL :- A term used to refer to one of the components of regulatory capital. Itconsists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I itemsare deemed to be of the highest quality because they are fully available to cover lossesHence it is also termed as core capital.TIER II CAPITAL :- Refers to one of the components of regulatory capital. Also known assupplementary capital, it consists of certain reserves and certain types of subordinated
debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorblosses arising from a banks activities. Tier IIs capital loss absorption capacity is lower thanthat of Tier I capital.BASEL CAPITAL ACCORD :- The BASEL Capital Accord is an Agreement concluded amongcountry representatives in 1988 to develop standardised risk-based capital requirements forbanks across countries. The Accord was replaced with a new capital adequacy framework(BASEL II), published in June 2004. BASEL II is based on three mutually reinforcing pillars hatallow banks and supervisors to evaluate properly the various risks that banks face. Thesethree pillars are: 1. Minimum capital requirements, which seek to refine the present measurement framework 2. supervisory review of an institutions capital adequacy and internal assessment process; 3. market discipline through effective disclosure to encourage safe and sound banking practicesRISK WEIGHTED ASSETS :- The notional amount of the asset is multiplied by the riskweight assigned to the asset to arrive at the risk weighted asset number. Risk weight fordifferent assets vary e.g. 0% on a Government Dated Security and 20% on a AAA ratedforeign bank etc.CRAR(CAPITAL TO RISK WEIGHTED ASSETS RATIO) :- Capital to risk weighted assetsratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets forcredit risk, market risk and operational risk. The higher the CRAR of a bank the bettercapitalized it is.CREDIT RISK :- The risk that a party to a contractual agreement or transaction will beunable to meet its obligations or will default on commitments. Credit risk can beassociated with almost any financial transaction. BASEL-II provides two options formeasurement of capital charge for credit risk1.standardised approach (SA) - Under the SA, the banks use a risk-weighting schedulefor measuring the credit risk of its assets by assigning risk weights based on the ratingassigned by the external credit rating agencies.2. Internal rating based approach (IRB) - The IRB approach, on the other hand, allowsbanks to use their own internal ratings of counterparties and exposures, which permit
a finer differentiation of risk for various exposures and hence delivers capitalrequirements that are better aligned to the degree of risks. The IRB approaches are oftwo types:a) Foundation IRB (FIRB): The bank estimates the Probability of Default (PD)associated with each borrower, and the supervisor supplies other inputs such as LossGiven Default (LGD) and Exposure At Default (EAD).b) Advanced IRB (AIRB): In addition to Probability of Default (PD), the bank estimatesother inputs such as EAD and LGD. The requirements for this approach are moreexacting. The adoption of advanced approaches would require the banks to meetminimum requirements relating to internal ratings at the outset and on an ongoingbasis such as those relating to the design of the rating system, operations, controls,corporate governance, and estimation and validation of credit risk components, viz.,PD for both FIRB and AIRB and LGD and EAD for AIRB. The banks should have, at theminimum, PD data for five years and LGD and EAD data for seven years. In India,banks have been advised to compute capital requirements for credit risk adopting theSA.MARKET RISK :- Market risk is defined as the risk of loss arising from movements inmarket prices or rates away from the rates or prices set out in a transaction oragreement. The capital charge for market risk was introduced by the BASELCommittee on Banking Supervision through the Market Risk Amendment of January1996 to the capital accord of 1988 (BASEL I Framework). There are two methodologiesavailable to estimate the capital requirement to cover market risks:1) The Standardised Measurement Method: This method, currently implemented bythe Reserve Bank, adopts a ‘building block’ approach for interest-rate related andequity instruments which differentiate capital requirements for ‘specific risk’ fromthose of ‘general market risk’. The ‘specific risk charge’ is designed to protect againstan adverse movement in the price of an individual security due to factors related tothe individual issuer. The ‘general market risk charge’ is designed to protect againstthe interest rate risk in the portfolio.2) The Internal Models Approach (IMA): This method enables banks to use theirproprietary in-house method which must meet the qualitative and quantitative
criteria set out by the BCBS and is subject to the explicit approval of the supervisoryauthority.OPERATIONAL RISK :- The revised BASEL II framework offers the following threeapproaches for estimating capital charges for operational risk:1) The Basic Indicator Approach (BIA): This approach sets a charge for operational riskas a fixed percentage ("alpha factor") of a single indicator, which serves as a proxy forthe bank’s risk exposure.2) The Standardised Approach (SA): This approach requires that the institutionseparate its operations into eight standard business lines, and the capital charge foreach business line is calculated by multiplying gross income of that business line by afactor (denoted beta) assigned to that business line.3) Advanced Measurement Approach (AMA): Under this approach, the regulatorycapital requirement will equal the risk measure generated by the banks’ internaloperational risk measurement system. In India, the banks have been advised to adoptthe BIA to estimate the capital charge for operational risk and 15% of average grossincome of last.INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS(ICAAP) :- In termsof the guidelines on BASEL II, the banks are required to have a board-approved policy on internal capital adequacy assessment process (ICAAP) toassess the capital requirement as per ICAAP at the solo as well asconsolidated level. The ICAAP is required to form an integral part of themanagement and decision-making culture of a bank. ICAAP document isrequired to clearly demarcate the quantifiable and qualitatively assessedrisks. The ICAAP is also required to include stress tests and scenarioanalyses, to be conducted periodically, particularly in respect of the bank’smaterial risk exposures, in order to evaluate the potential vulnerability ofthe bank to some unlikely but plausible events or movements in the marketconditions that could have an adverse impact on the bank’s capital.
Supervisory Review Process (SRP):- Supervisory review process envisagesthe establishment of suitable risk management systems in banks and their review by thesupervisory authority. The objective of the SRP is to ensure that the banks have adequatecapital to support all the risks in their business as also to encourage them to develop anduse better risk management techniques for monitoring and managing their risks.Market Discipline :- Market Discipline seeks to achieve increased transparencythrough expanded disclosure requirements for banks.Credit risk mitigation :- Techniques used to mitigate the credit risks throughexposure being collateralised in whole or in part with cash or securities or guaranteed by athird party.Mortgage Back Security :- A bond-type security in which the collateral is providedby a pool of mortgages. Income from the underlying mortgages is used to meet interestand principal repayments.Derivative :- A derivative instrument derives its value from an underlying product.There are basically three derivativesa) Forward Contract- A forward contract is an agreement between two parties to buy orsell an agreed amount of a commodity or financial instrument at an agreed price, fordelivery on an agreed future date. Future Contract- Is a standardized exchange tradableforward contract executed at an exchange. In contrast to a futures contract, a forwardcontract is not transferable or exchange tradable, its terms are not standardized and nomargin is exchanged. The buyer of the forward contract is said to be long on the contractand the seller is said to be short on the contract.b) Options- An option is a contract which grants the buyer the right, but not the obligation,to buy (call option) or sell (put option) an asset, commodity, currency or financialinstrument at an agreed rate (exercise price) on or before an agreed date (expiry orsettlement date). The buyer pays the seller an amount called the premium in exchange forthis right. This premium is the price of the option.c) Swaps- Is an agreement to exchange future cash flow at pre-specified Intervals.Typically one cash flow is based on a variable price and other on affixed one.Duration :- Duration (Macaulay duration) measures the price volatility of fixed incomesecurities. It is often used in the comparison of interest rate risk between securities withdifferent coupons and different maturities. It is defined as the weighted average time tocash flows of a bond where the weights are nothing but the present value of the cash flows
themselves. It is expressed in years. The duration of a fixed income security is alwaysshorter than its term to maturity, except in the case of zero coupon securities where theyare the same.Modified Duration :- Modified Duration = Macaulay Duration/ (1+y/m), where „y‟ isthe yield (%), „m‟ is the number of times compounding occurs in a year. For example ifinterest is paid twice a year m=2. Modified Duration is a measure of the percentagechange in price of a bond for a 1% change in yield.Net NPA :- Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claimsreceived and held pending adjustment + Part payment received and kept in suspenseaccount + Total provisions held).Coverage Ratio :- Equity minus net NPA divided by total assets minus intangibleassets.Slippage Ratio :- (Fresh accretion of NPAs during the year/Total standard assets atthe beginning of the year)*100Restructuring :- A restructured account is one where the bank, grants to theborrower concessions that the bank would not otherwise consider. Restructuring wouldnormally involve modification of terms of the advances/securities, which would generallyinclude, among others, alteration of repayment period/ repayable amount/ the amount ofinstallments and rate of interest. It is a mechanism to nurture an otherwise viable unit,which has been adversely impacted, back to health.Substandard Assets :- A substandard asset would be one, which has remained NPAfor a period less than or equal to 12 months. Such an asset will have well defined creditweaknesses that jeopardize the liquidation of the debt and are characterised by the distinctpossibility that the banks will sustain some loss, if deficiencies are not corrected.Doubtful Asset :- An asset would be classified as doubtful if it has remained in thesubstandard category for a period of 12 months. A loan classified as doubtful has all theweaknesses inherent in assets that were classified as substandard, with the addedcharacteristic that the weaknesses make collection or liquidation in full, - on the basis ofcurrently known facts, conditions and values - highly questionable and improbable.
Loss Asset :- A loss asset is one where loss has been identified by the bank or internalor external auditors or the RBI inspection but the amount has not been written off wholly.In other words, such an asset is considered uncollectible and of such little value that itscontinuance as a bankable asset is not warranted although there may be some salvage orrecovery value.Off Balance Sheet Exposure :- Off-Balance Sheet exposures refer to thebusiness activities of a bank that generally do not involve booking assets (loans) and takingdeposits. Off-balance sheet activities normally generate fees, but produce liabilities orassets that are deferred or contingent and thus, do not appear on the institutions balancesheet until and unless they become actual assets or liabilities.Current Exposure Method :- The credit equivalent amount of a market related off-balance sheet transaction is calculated using the current exposure method by adding the currentcredit exposure to the potential future credit exposure of these contracts. Current credit exposureis defined as the sum of the positive mark to market value of a contract. The Current ExposureMethod requires periodical calculation of the current credit exposure by marking the contracts tomarket, thus capturing the current credit exposure. Potential future credit exposure is determinedby multiplying the notional principal amount of each of these contracts irrespective of whether thecontract has a zero, positive or negative mark-to-market value by the relevant add-on factorprescribed by RBI, according to the nature and residual maturity of the instrument.Cost income ratio (Efficiency ratio) :- The cost income ratio reflects theextent to which non-interest expenses of a bank make a charge on the net total income(total income – interest expense). The lower the ratio, the more efficient is the bank.Formula: Non interest expenditure / Net Total Income.CASA Deposit :- Deposit in bank in current and Savings account.Liquid Assets :- Liquid assets consists of: cash, balances with RBI, balances incurrent accounts with banks, money at call and short notice, inter-bank placements duewithin 30 days and securities under “held for trading” and “available for sale” categoriesexcluding securities that do not have ready market.Market Liability Ratio :- Inter-bank and money market deposit liabilities toAverage Total Assets.
ALM :- Asset Liability Management (ALM) is concerned with strategic balance sheetmanagement involving all market risks. It also deals with liquidity management, fundsmanagement, trading and capital planning.ALCO :- Asset-Liability Management Committee (ALCO) is a strategic decision makingbody, formulating and overseeing the function of asset liability management (ALM) of abank.Foreign Currency Convertible Bond :- A bond issued in foreign currencyabroad giving the investor the option to convert the bond into equity at a fixed conversionprice or as per a pre-determined pricing formula.CRR :- Cash reserve ratio is the cash parked by the banks in their specified currentaccount maintained with RBI.SLR :- Statutory liquidity ratio is in the form of cash (book value), gold (current marketvalue) and balances in unencumbered approved securities.LIBOR :- London Inter Bank Offered Rate. The interest rate at which banks offer tolend funds in the interbank market.Basis Point :- Is one hundredth of one percent. 1 basis point means 0.01%. Used formeasuring change in interest rate/yield.
INTERNATIONAL ORGANISATIONSWORLD BANK :- The World Bank is a vital source of financial and technical assistance todeveloping countries around the world. Our mission is to fight poverty with passion andprofessionalism for lasting results and to help people help themselves and their environment byproviding resources, sharing knowledge, building capacity and forging partnerships in the publicand private sectors.TAG LINE OF WORLD BANK :- WORKING FOR A WORLD FREE OF POVERTYREPORT OF WORLD BANK :- WORLD DEVELOPMENT REPORT WORLD BANK ESTABLISHED IN MEMBER COUNTRIES 1945 193 IDA IFC IBRD MIGA ICSID IDA INTERNATIONAL DEVELOPMENT ASSOCIATION IFC INTERNATIONAL FINANCE ORGANISATION IBRD INTERNATIONAL BANK FOR RESEARCH AND DEVELOPMENT MIGA MULTILATERAL INVESTMENT GURANTEE AGENCY ICSID INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DESPUTES
IDA :- The International Development Asso- ciation (IDA) is the part of the World Bankthat helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty byproviding interest-free credits and grants for programs that boost economic growth, reduceinequalities and improve people’s living conditions.IFC :- IFC is a dynamic organization, constantly adjusting to the evolving needs of ourclients in emerging markets. We are no longer defined predominantly by our role inproviding project finance to companies in developing countries.IBRD :- The International Bank for Reconstruction and Development (IBRD) aims toreduce poverty in middle-income and creditworthy poorer countries by promotingsustainable development through loans, guarantees, risk management products, andanalytical and advisory services. Established in 1944 as the original institution of the WorldBank Group, IBRD is structured like a cooperative that is owned and operated for the benefitof its 187 member countries.MIGA :- MIGA is a member of the World Bank Group. Our mission is to promote foreigndirect investment (FDI) into developing countries to help support economic growth, reducepoverty, and improve peoples lives.ICSID :- ICSID is an autonomous international institution established under theConvention on the Settlement of Investment Disputes between States and Nationals ofOther States with over one hundred and forty member States. The Convention sets forthICSIDs mandate, organization and core functions. The primary purpose of ICSID is to providefacilities for conciliation and arbitration of international investment disputes.IMF (INTERNATIONAL MONETARY FUND) :- The International MonetaryFund (IMF) is an organization of 187 countries, working to foster global monetarycooperation, secure financial stability, facilitate international trade, promote highemployment and sustainable economic growth, and reduce poverty around the world.REPORT OF IMF :- WORLD ECONOMIC OUTLOOK
SDR (SPECIAL DRAWING RIGHTS) :- The special drawing right (SDR) is aninternational reserve asset, created by the IMF in 1969 to supplement the existing officialreserves of member countries. Countries can exchange SDRs for hard currency at the IMF.The SDR also serves as the unit of account of the IMF and some other internationalorganisations. Its value is based on a basket of key international currencies.ADB (ASIAN DEVELOPMENT BANK) :- Established in 1966, we are a majorsource of development financing for the Asia and Pacific region. With more than $17.5billion in approved financing, and 2,800 employees from 67 countries, ADB - in partnershipwith member governments, independent specialists and other financial institutions - isfocused on delivering projects that create economic and development impact.TAG LINE OF ADB :- FIGHTING POVERTY IN ASIA AND THE PACIFICREPORT OF IMF :- ASIAN DEVELOPMENT REPORTINFLATION :- The rate at which the general level of prices for goods and servicesis rising, and, subsequently, purchasing power is falling. Central banks attempt to stopsevere inflation, along with severe deflation, in an attempt to keep the excessivegrowth of prices to a minimum.CONTROLLING INFLATION :- There are broadly two ways of controlling inflationin an economy – Monetary measures and fiscal measures.There are broadly two ways of controlling inflation in an economy:1). Monetary measures and2). Fiscal measuresI).Monetary MeasuresThe most important and commonly used method to control inflation is monetary policy ofthe Central Bank. Most central banks use high interest rates as the traditional way to fight orprevent inflation.
Monetary measures used to control inflation include:(i) bank rate policy(ii) cash reserve ratio and(iii) open market operations.Bank rate policy is used as the main instrument of monetary control during the period ofinflation. When the central bank raises the bank rate, it is said to have adopted a dearmoney policy. The increase in bank rate increases the cost of borrowing which reducescommercial banks borrowing from the central bank. Consequently, the flow of money fromthe commercial banks to the public gets reduced. Therefore, inflation is controlled to theextent it is caused by the bank credit.Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR whichreduces the lending capacity of the commercial banks. Consequently, flow of money fromcommercial banks to public decreases. In the process, it halts the rise in prices to the extentit is caused by banks credits to the public.Open Market Operations: Open market operations refer to sale and purchase ofgovernment securities and bonds by the central bank. To control inflation, central bank sellsthe government securities to the public through the banks. This results in transfer of a partof bank deposits to central bank account and reduces credit creation capacity of thecommercial banks.II). Fiscal MeasuresFiscal measures to control inflation include taxation, government expenditure and publicborrowings. The government can also take some protectionist measures (such as banningthe export of essential items such as pulses, cereals and oils to support the domesticconsumption, encourage imports by lowering duties on import items etc.).DEFLATION :- A general decline in prices, often caused by a reduction in the supply ofmoney or credit. Deflation can be caused also by a decrease in government, personal orinvestment spending. The opposite of inflation, deflation has the side effect of increasedunemployment since there is a lower level of demand in the economy, which can lead to aneconomic depression. Central banks attempt to stop severe deflation, along with severeinflation, in an attempt to keep the excessive drop in prices to a minimum.
CONTROLLING DEFLATION :- To fight deflation, attempts must be made to raisethe volume of aggregate effective demand. It will output, income and employment in theeconomy, Effective demand can be increased partly by consumption expenditure and partlyby increasing investment expenditure. Various measures to increase consumption andinvestment expenditures in the economy.1. Reduction in Taxation: The government should reduce the number and burden ofvarious taxes levied on commodities. This will increase the purchasing power of the people. As a result,the demand for goods and services will increase. Moreover, sufficient tax relief should be given tobusinessmen to encourage investment.2. Redistribution of Income: Marginal propensity to consume can be raised by aredistribution of income and wealth from the rich to the poor. Since the marginal propensity toconsume of the poor is high and that of the rich is low, such a measure will help increasing theaggregate demand in the economy.3. Repayment of Public Debt: During deflation period, the government can repay the oldpublic debts. This will increase the purchasing power of the people and push up effective demand.4. Subsidies: The government should give subsidies to induce the businessmen to increaseinvestment.5. Public Works Programme: The government should also directly undertake public worksprogramme and thus increase expenditure in public sector. Care should, however, be taken that thepublic works policy of the government does not adversely affect investment in the private sector; itshould supplement, and not supplant, private investment. For this, it is important that only thoseprojects should be selected for the governments public works policy, which is either too big or not soprofitable to attract private investment.6. Deficit Financing: In order to have significant expansionary effects, the governmentspublic works schemes should be financed by the method of deficit financing, i.e,, by printing newmoney. The government should adopt a budgetary deficit (excess of government expenditure over itsrevenue) and cover this deficit through deficit financing. Deficit financing makes available to thegovernment sufficient resources for its developmental programmes without adversely affectinginvestment in the private sector.7. Reduction in Interest Rate: By adopting a cheap money policy, the monetaryauthority of a country reduced the interest rate, which stimulates investment and thereby expandseconomic activity in the economy.8. Credit Expansion: The central bank and the commercial banks should adopt a policyof credit expansion to promote business and industry in the country. Bank credit should be made easilyavailable to the entrepreneurs for productive purposes.
9. Foreign Trade Policy: To control deflation, the government should adopt such a foreigntrade policy that, on the one hand, increases exports, and, on the other hand, reduces imports. Thiskind of policy will go a long way in solving the problem of overproduction, and help overcomingdeflation.10. Regulation of Production: Production in the economy should be regulated in such away that the problem of over-production does not arise. Attempts should be made to adjust productionwith the existing demand to avoid over-production. In short, fiscal policy alone or monetary policyalone is not sufficient to check deflation in an economy. A proper co- ordination of fiscal, monetary andother measures is essential to effectively deal with the deflation ary situation.NATIONAL INCOME :- The total net value of all goods and services produced within anation over a specified period of time, representing the sum of wages, profits, rents, interest, andpension payments to residents of the nation.GDP (GROSS DOMESTIC PRODUCT) :- A measure of the value of thetotal production in a country, usually in a given year. Gross domestic product is calculated by addingtogether total consumer spending, total government spending, total business spending, and the value ofnet exports. GDP is considered one of the leader indicators of the health of a nations economy. GDPgrowth is considered desirable and represents the fact that businesses are producing and thatconsumers and the government are buying. It is often used as a way to measure a countrys standard ofliving. See also: GNP.GNP (GROSS NATIONAL PRODUCT) :- A measure of the value of what acountrys citizens produce in a given year, whether or not the production occurred in that country. Tocalculate GNP, one takes the GDP and adds to it all earnings made by domestic citizens in a differentcountry. One then subtracts from this quantity all earnings made in the home country by non-citizens.GNP is less commonly used now because it has become a less accurate tool for calculating what adomestic economy produces, as more countries have citizens working abroad.GDP at factor cost = GDP at factor cost + net national income from abroad – net income earned byforeigner.NNP (NET NATIONAL PRODUCT) :- The monetary value of finished goodsand services produced by a countrys citizens, whether overseas or resident, in the time period beingmeasured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchasenew goods to maintain existing stock (i.e., depreciation).NNP at factor cost = GNP at factor cost – DEPRECIATION.NNP at factor cost = NNP at market price - indirect taxes + subsidies.
MEASUREMENT OF NATIONAL INCOME1. OUTPUT OR PRODUCTION METHOD :- The output approachfocuses on finding the total output of a nation by directly finding the total value of all goods andservices a nation produces. Because of the complication of the multiple stages in the production of agood or service, only the final value of a good or service is included in total output. This avoids anissue often called double counting, wherein the total value of a good is included several times innational output, by counting it repeatedly in several stages of production.2. INCOME METHOD :- The income approach equates the total output of anation to the total factor income received by residents of the nation. The main types of factorincome are: 1. Employee compensation (= wages + cost of fringe benefits, including unemployment, health, and retirement benefits); 2. Interest received net of interest paid; 3. Rental income (mainly for the use of real estate) net of expenses of landlords; 4. Royalties paid for the use of intellectual property and extractable natural resources. All remaining value added generated by firms is called the residual or profit. If a firm has stockholders, they own the residual, some of which they receive as dividends. Profit includes the income of the entrepreneur - the businessman who combines factor inputs to produce a good or service. NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated firms + Income from self-employment. National income = NDP at factor cost + NFIA (net factor income from abroad). 3. EXPENDITURE METHOD :- The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable, because like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output combines all the different areas in which money is spent within the region, and then combining them to find the total output. GDP = C + I + G + (X - M) WHERE : C = household consumption expenditures / personal consumption expenditures I = gross private domestic investment G = government consumption and gross investment expenditures X = gross exports of goods and services M = gross imports of goods and services Note: (X - M) is often written as XN, which stands for "net exports"
BUDGET :- The dictionary meaning of budget is a systematic plan for the expenditure of ausually fixed resource during a given period. Thus, Union Budget, which is a yearly affair, is acomprehensive display of the Government’s finances. It is the most significant economic and financialevent in India. The Finance Minister puts down a report that contains Government of India’s revenueand expenditure for one fiscal year. The fiscal year runs from April 01 to March 31.REVENUE BUDGET :- The revenue budget consists of revenue receipts of thegovernment (revenues from tax and other sources) and the expenditure met from these revenues.Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such asincome tax, corporate tax, excise, customs and other duties which the government levies. Non-taxrevenue consist of interest and dividend on investments made by government, fees and other receiptsfor services rendered by Government.CAPITAL BUDGET :- It consists of capital receipts and payments. The main items ofcapital receipts are loans raised by Government from public which are called Market Loans, borrowingsby Government from Reserve Bank and other parties through sale of Treasury Bills, loans received fromforeign Governments and bodies and recoveries of loans granted by Central Government to State andUnion Territory Governments and other parties.CAPITAL EXPENDITURE :- Funds used by a company to acquire or upgrade physicalassets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintainor increase the scope of their operations. These expenditures can include everything from repairing a roof tobuilding a brand new factory.INDIRECT TAXES :- These are the taxes paid by consumers when they buy goods andservices. These include excise and customs duties. Customs duty is the charge levied when goods areimported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by themanufacturer on items manufactured within the country. These charges are passed on to the consumer.DIRECT TAXES :- These are the taxes that are levied on the income of individuals ororganisations. Income tax, corporate tax, inheritance tax are some examples of direct taxation. Incometax is the tax levied on individual income from various sources like salaries, investments, interest etc.Corporate tax is the tax paid by companies or firms on the incomes they earn.PLANNED EXPENDITURE :- plan expenditures are estimated after discussionsbetween each of the ministries concerned and the Planning Commission. Plan expenditure forms asizeable proportion of the total expenditure of the Central Government. The Demands for Grants of thevarious Ministries show the Plan expenditure under each head separately from the Non-Planexpenditure.NON - PLANNED EXPENDITURE :- Non-plan revenue expenditure is accountedfor by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments togovernment employees, grants to States and Union Territories governments, pensions, police, economic
services in various sectors, other general services such as tax collection, social services, and grants toforeign governments.CENTRAL PLAN OUTLAY :- It is the division of monetary resources among thedifferent sectors in the economy and the ministries of the government.FISCAL POLICY :- This is the gap between the government`s total spending and the sum ofits revenue receipts and non-debt capital receipts. It represents the total amount of borrowed fundsrequired by the government to completely meet its expenditure.FINANCE BILL :- The proposals of the Government for levy of new taxes, modification ofthe existing tax structure or continuance of the existing tax structure beyond the period approved byParliament are submitted to Parliament through the Finance Bill.The Budget documents presented in terms of the Constitution have to fulfil certain legaland procedural requirements and hence may not by themselves give a clear indication ofthe major features of the Budget.To facilitate an easy comprehension of the Budget, certain explanatory documents arepresented along with the Budget.AD-VALOREM DUTIES :- An ad valorem tax is typically imposed at the time of atransaction (a sales tax or value-added tax [VAT]), but it may be imposed on an annual basis (real orpersonal property tax) or in connection with another significant event (inheritance tax, surrenderingcitizenship,or tariffs).APPROPRIATION BILL: - the Budget proposals and Voting on Demands for Grantshave been completed, Government introduces the Appropriation Bill. The Appropriation Bill isintended to give authority to Government to incur expenditure from and out of the Consolidated Fundof India. The procedure for passing this Bill is the same as in the case of other money Bills.BUDGET DEFICIT :- A financial situation that occurs when an entity has more moneygoing out than coming in. The term "budget deficit" is most commonly used to refer to governmentspending rather than business or individual spending. When it refers to federal government spending, abudget deficit is also known as the "national debt." The opposite of a budget deficit is a budget surplus,and when inflows are equal to outflows, the budget is said to be balanced.COUNTERVAILING DUTIES :- A duty placed on imported goods that are beingsubsidized by the importing government. This helps to even the playing field between the domesticproducers and the foreign producers receiving subsidies.CONSOLIDATED FUND :- Treasurys current account with the central bank throughwith all or almost all of a governments expenditures and receipts pass.CONTINGENCY FUND :- An amount kept in reserve to guard against possible losses. tmay be used for urgent expenditure in anticipation that the money will be approved by Parliament, or
for small payments that were not included in the years budget estimates. The Contingencies Fund Act1974 sets the size of the fund as two percent of the amount of the government budget in the precedingyear.CENVAT :- The definition of Capital Goods, Exempted Goods, Final products and the inputs hasbeen provided in Rule 2 of CENVAT Credit Rules, 2002. It also included the list of items eligible forCapital Goods as well as for the inputs.CURRENT ACCOUNT DEFICIT :- A substantial current account deficit is notnecessarily a bad thing for certain countries. Developing counties may run a current account deficit inthe short term to increase local productivity and exports in the future.CUSTOM DUTIES :- Customs is an authority or agency in a country responsible forcollecting and safeguarding customs duties and for controlling the flow of goods including animals,transports, personal effects and hazardous items in and out of a country. Depending on local legislationand regulations, the import or export of some goods may be restricted or forbidden, and the customsagency enforces these rules.DISINVESTMENTS :- A company or government organization will divest an asset orsubsidiary as a strategic move for the company, planning to put the proceeds from the divestiture tobetter use that garners a higher return on investment.EXCISE DUTIES :- An excise or excise tax (sometimes called a duty of excise special tax) iscommonly referred to as an inland tax on the sale, or production for sale, of specific goods; or, morenarrowly, as a tax on a good produced for sale, or sold, within a country or licenses for specificactivities. Excises are distinguished from customs duties, which are taxes on importation. Excises areinland taxes, whereas customs duties are border taxes.FISCAL DEFICIT :- A fiscal deficit is regarded by some as a positive economic event. Forexample, economist John Maynard Keynes believed that deficits help countries climb out of economicrecession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor ofa balanced budget policy.MONETISED DEFICIT :- It is amount by which fiscal deficit is going to be financed byprinting of currency.NATIONAL DEBT :- The total outstanding borrowings of the central governmentExchequer. It is the debt owed by the government as a result of earlier borrowing to finance budgetdeficits.MIR :- Maximum Information Rate (MIR) in reference to Broadband Wireless refers to maximumbandwidth the Subscriber Unit will be delivered from the wireless access point in kbit/s.PERFORMANCE BUDGET :- Decisions made on these types of budgets focus moreon outputs or outcomes of services than on decisions made based on inputs. In other words, allocation
of funds and resources are based on their potential results. Performance budgets place priority onemployees commitment to produce positive results, particularly in the public sector.PRIMARY DEFICIT :- Amount by which a governments total expenditure exceeds itstotal revenue, excluding interest payments on its debt. CALL MONEY MARKET
CAPITAL MARKET :- A capital market is a market for securities (debt or equity), wherebusiness enterprises and government can raise long-term funds. It is defined as a market in whichmoney is provided for periods longer than a year, as the raising of short-term funds takes place on othermarkets (e.g., the money market). The capital market is characterized by a large variety of financialinstruments: equity and preference shares, fully convertible debentures (FCDs), non-convertibledebentures (NCDs) and partly convertible debentures (PCDs) currently dominate the capital market,however new instruments are being introduced such as debentures bundled with warrants,participating preference shares, zero-coupon bonds, secured premium notes, etc.INSTRUMENTS OF CAPITAL MARKET1. SECURED PREMIUM NOTES :-SPN is a secured debenture redeemable at premium issued along with a detachable warrant, redeemable aftera notice period, say four to seven years. The warrants attached to SPN gives the holder the right to apply andget allotted equity shares; provided the SPN is fully paid.2. DEEP DISCOUNT BONDS :-A bond that sells at a significant discount from par value and has no coupon rate or lower coupon rate thanthe prevailing rates of fixed-income securities with a similar risk profile. They are designed to meet the longterm funds requirements of the issuer and investors who are not looking for immediate return and can be soldwith a long maturity of 25-30 years at a deep discount on the face value of debentures.3. EQUITY SHARES WITH DETACHABLE WARRANTS :-A warrant is a security issued by company entitling the holder to buy a given number of shares of stock at astipulated price during a specified period. These warrants are separately registered with the stock exchangesand traded separately. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowingthe issuer to pay lower interest rates or dividends.4. FULLY CONVERTIBLE DEBENTURES WITH INTEREST :-This is a debt instrument that is fully converted over a specified period into equity shares. The conversioncan be in one or several phases. When the instrument is a pure debt instrument, interest is paid to theinvestor. After conversion, interest payments cease on the portion that is converted. If project finance israised through an FCD issue, the investor can earn interest even when the project is under implementation.Once the project is operational, the investor can participate in the profits through share price appreciation anddividend payments.5. EQUIPREFThey are fully convertible cumulative preference shares. This instrument is divided into 2 parts namely PartA & Part B. Part A is convertible into equity shares automatically/compulsorily on date of allotment withoutany application by the allottee.6. SWEAT EQUITY SHARESThe phrase `sweat equity refers to equity shares given to the companys employees on favorable terms, inrecognition of their work. Sweat equity usually takes the form of giving options to employees to buy sharesof the company, so they become part owners & participate in the profits, apart from earning salary. Thisgives a boost to the sentiments of employees & motivates them to work harder towards the goals of thecompany.
7. TRACKING STOCKSA tracking stock is a security issued by a parent company to track the results of one of its subsidiaries or linesof business; without having claim on the assets of the division or the parent company. It is also known as"designer stock". When a parent company issues a tracking stock, all revenues and expenses of the applicabledivision are separated from the parent companys financial statements and bound to the tracking stock.8. DISASTER BONDSAlso known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt instrument that is usuallyinsurance linked and meant to raise money in case of a catastrophe. It has a special condition that states thatif the issuer (insurance or Reinsurance Company) suffers a loss from a particular pre-defined catastrophe,then the issuers obligation to pay interest and/or repay the principal is either deferred or completely forgiven.9. MORTGAGE BACKED SECURITIES(MBS)MBS is a type of asset-backed security, basically a debt obligation that represents a claim on the cash flowsfrom mortgage loans, most commonly on residential property. Mortgagebacked securities represent claimsand derive their ultimate values from the principal and payments on the loans in the pool. These paymentscan be further broken down into different classes of securities, depending on the riskiness of differentmortgages as they are classified under the MBS.10. GLOBAL DEPOSITORY RECEIPTS/ AMERICAN DEPOSITORYRECEIPTSA negotiable certificate held in the bank of one country (depository) representing a specific number of sharesof a stock traded on an exchange of another country. GDR facilitate trade of shares, and are commonly usedto invest in companies from developing or emerging markets. GDR prices are often close to values of relatedshares, but they are traded and settled independently of the underlying share.11. FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs)A convertible bond is a mix between a debt and equity instrument. It is a bond having regular coupon andprincipal payments, but these bonds also give the bondholder the option to convert the bond into stock.FCCB is issued in a currency different than the issuers domestic currency.12. DERIVATIVESA derivative is a financial instrument whose characteristics and value depend upon the characteristics andvalue of some underlying asset typically commodity, bond, equity, currency, index, event etc. Advancedinvestors sometimes purchase or sell derivatives to manage the risk associated with the underlying security,to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are oftenleveraged, such that a small movement in the underlying value can cause a large difference in the value of thederivative.13. PARTICIPATORY NOTESAlso referred to as "P-Notes" Financial instruments used by investors or hedge funds that are not registeredwith the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buyIndia-based securities and then issue participatory notes to foreign investors. Any dividends or capital gainscollected from the underlying securities go back to the investors. These are issued by FIIs to entities thatwant to invest in the Indian stock market but do not want to register themselves with the SEBI.
14. HEDGE FUNDA hedge fund is an investment fund open to a limited range of investors that undertakes a wider range ofinvestment and trading activities in both domestic and international markets, and that, in general, pays aperformance fee to its investment manager. Every hedge fund has its own investment strategy that determinesthe type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in abroad range of investments including shares, debt and commodities.15. FUND OF FUNDSA "fund of funds" (FoF) is an investment strategy of holding a portfolio of other investment funds rather thaninvesting directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment. A fund of funds allows investors to achieve a broad diversification and an appropriateasset allocation with investments in a variety of fund categories that are all wrapped up into one fund.16. EXCHANGE TRADED FUNDSAn exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. AnETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value ofits underlying assets over the course of the trading day.17. GOLD ETFA gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose value depends onthe price of gold. In most cases, the price of one unit of a gold ETF approximately reflects the price of 1gram of gold. As the price of gold rises, the price of the ETF is also expected to rise by the same amount.Gold exchange-traded funds are traded on the major stock exchanges including Zurich, Mumbai, London,Paris and New York There are also closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim totrack the gold price.MONEY MARKET :- Money market means market where money or its equivalent can betraded. Money is synonym of liquidity. Money market consists of financial institutions and dealers inmoney or credit who wish to generate liquidity. It is better known as a place where large institutionsand government manage their short term cash needs. For generation of liquidity, short termborrowing and lending is done by these financial institutions and dealers. Money Market is part offinancial market where instruments with high liquidity and very short term maturities are traded.Due to highly liquid nature of securities and their short term maturities, money market is treated as asafe place. Hence, money market is a market where short term obligations such as treasury bills,commercial papers and banker’s acceptances are bought and sold.Money Market Instruments: Investment in money market is done through moneymarket instruments. Money market instrument meets short term requirements of the borrowers andprovides liquidity to the lenders. Common Money Market Instruments are as follows: Treasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, areshort term borrowing instruments of the Central Government of the Country issued through theCentral Bank (RBI in India). They are zero risk instruments, and hence the returns are not soattractive. It is available both in primary market as well as secondary market. It is a promise to pay asaid sum after a specified period. T-bills are short-term securities that mature in one year or lessfrom their issue date. They are issued with three-month, six-month and one-year maturity periods.
The Central Government issues T- Bills at a price less than their face value (par value). They areissued with a promise to pay full face value on maturity. Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo aretransactions or short term loans in which two parties agree to sell and repurchase the same security.They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done onlybetween the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities,T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sellsspecified securities with an agreement to repurchase the same at a mutually decided future date andprice. Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is ashort term unsecured promissory note issued by corporates and financial institutions at a discountedvalue on face value. They are usually issued with fixed maturity between one to 270 days and forfinancing of accounts receivables, inventories and meeting short term liabilities. Say, for example, acompany has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate itsreceivables before 6 months. The company is in need of funds. It can issue commercial papers in formof unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6months. Certificate of Deposit: It is a short term borrowing more like a bank term depositaccount. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receiveinterest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issuedin any denomination. They are stamped and transferred by endorsement. Its term generally rangesfrom three months to five years and restricts the holders to withdraw funds on demand. Banker’s Acceptance: It is a short term credit investment created by a non financialfirm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person andaccepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at certain date.The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral.The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will notbe tradable. The most common term for these instruments is 90 days. However, they can very from 30days to180 days.
Money Market Account: It can be opened at any bank in the similar fashion as a savingsaccount. However, it is less liquid as compared to regular savings account. It is a low risk accountwhere the money parked by the investor is used by the bank for investing in money marketinstruments and interest is earned by the account holder for allowing bank to make suchinvestment. Interest is usually compounded daily and paid monthly. There are two types ofmoney market accounts: Money Market Transactional Account: By opening such type of account, the accountholder can enter into transactions also besides investments, although the numbers oftransactions are limited. Money Market Investor Account: By opening such type of account, the accountholder can only do the investments with no transactions.Money Market Index: To decide how much and where to invest in money market an investorwill refer to the Money Market Index. It provides information about the prevailing market rates.There are various methods of identifying Money Market Index like: Smart Money Market Index- It is a composite index based on intra day price patternof the money market instruments. Salomon Smith Barney’s World Money Market Index- Money market instruments areevaluated in various world currencies and a weighted average is calculated. Thishelps in determining the index. Banker’s Acceptance Rate- As discussed above, Banker’s Acceptance is a money
market instrument. The prevailing market rate of this instrument i.e. the rate at whichthe banker’s acceptance is traded in secondary market, is also used as a moneymarket index. LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Ratealso serves as good money market index. This is the interest rate at which banksborrow funds from other banks.