Economic and banking_awareness


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Economic and banking_awareness

  1. 1. CONCEPTS IN DEVELOPMENTEconomic Growth: It is defined as long term increase in production potential of theeconomy. It is a quantitative concept.Economic Development: It refers to the economic growth with structural changes infavour of non-agricultural activities. It is a qualitative concept.Sustainable Development: It is that development which takes care of the needs of thepresent generation without compromising the needs of the future generations. It alsoemphasizes on a clean environment.Quality of Life: It simply indicates the better health, welfare freedom of choice and basicliberties in a society.Indicators of GrowthGross Domestic Product (GDP): It is the sum total of the market value of the final goodsand services produced within the geographical boundary of a country during anaccounting 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 foreigncountries; M=Income earned by foreign nationals in a country.]It better indicates the production potential of the nationals as against GDP. In India’scase, GNP is less than GDP. In other words, net factor income is negative in India.Net National Product (NNP): NNP = GNP – DepreciationDepreciation 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 + subsidiesIndicators of DevelopmentHuman Development Index: It was introduced in 1990 by United Nations DevelopmentProgramme (UNDP). It is defined as average of social components, namely, lifeexpectancy at birth, education attainment and standard of living.To define the human development level of a country, this index has been divided on ascale of 1.
  2. 2. 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 lies in the medium developmentgroup. Its rank is 124 out of 172 nations, with a HDI value of 0.577.Quality of Life Index: It is calculated on the basis of six parameters (as defined by notedeconomists, 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 acompany by accessing information concerning the company that is not publicly availableand is of such a nature that it enables the person to make substantial profits in the sharetransaction. This is a punishable offence and SEBI has proposed stringent regulations tocurb it.• Laissez Faire: It is an economic doctrine which emphasis superiority of free marketsover state regulation of individual markets and of the economy in general. Proponents ofLaissez Faire argue that a private enterprise economy will achieve a more efficientallocation and use of scarce economic resources and greater economic growth than will acentrally 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 andhas been promoted jointly by the ICICI and UTI to provide credit rating services to thecorporate sector. Credit rating promotes investors’ interests by providing theminformation on assessed comparative risk of investment in the listed securities of differentcompanies. It also helps companies to raise funds more easily and at relatively cheapercost, if their credit rating is high.
  3. 3. • Non Performing Assets (NPAs): It is a credit facility which ceases to generate incomefor 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 tosubstandard while doubtful are those that remain NPAs for a period beyond 18 monthsand 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 tocalculate 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 economicdevelopment.• Repo or Repurchase Options: Repos were introduced in 1992 in India. They areinstruments of repurchase agreement between the RBI and the commercial banks and thisis used by banks for short-term liquidity management. By selling repos RBI mops uptemporary excess liquidity in the financial market. Their rates are market – determined.• National Bank for Agriculture and Rural Development (NABARD): NABARD was setup in July 1982. It works as the apex body to look after the credit requirements of ruralsector. It provides short-term credit to state cooperative banks (SCBs) medium-termcredit 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 allthe functions it performed in the field of rural credit and agricultural Refuiannce andDevelopment Corporation (ARDC) was also merged with NABARD.• Small Industries Development Bank of India (SIDBI): SIDBI was et up in April 1990 asa wholly owned subsidiary of IDBI. It functions as the principal financial institution forthe promotion, financing and development of industry in the small sector and tocoordinate the functions of institutions engaged in promoting the small units.• Hot Money: Hot money refers to large amounts of short term funds held internationallyby banks, financial institutions and wealthy individuals, which quickly move out of orinto a country, in anticipation of interest rate charges or exchange rate fluctuations. Thisis, therefore, a very volatile source of funds and its flight from a country in terms of crisismay trigger a collapse of the economy.• Agricultural Export Zone (AEZs): The concept AEZs was introduced by the EximPolicy 2001 to give primacy to promotion of agricultural exports and a reorganization ofour export efforts on the basis of specific products and specific geographical areas. The
  4. 4. scheme is already in operation and the exim policy 2002-07 intends to set up 20 moreAEZs.• Scheduled Bank: A bank registered in the second schedule of the RBI Act, 1934 iscalled a scheduled bank and to be included in the schedule it must fulfill the followingcriteria:(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 enjoycertain 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 healthcarefacilities and proper nutrition to the infants and as development takes place, IMR isreduced in the country.• Net Asset Value (NAV): NAV is the net value of the mutual fund’s portfolio, expressedon a per share basis.NAV per share = Total net AssetsTotal Number of Shares outstanding‘Total Net Assets’ is calculated by periodically valuing investments are market prices andother assets are added, while liabilities are deducted. Open-end funds set their sale andrepurchase prices on the basis of their NAVs.• Hard Currency: A currency that is in strong demand, but in short supply on the foreignexchange market. Hard currency status is usually associated with an economically strongcountry which is running a large surplus on its balance of repayments. Demand for thecurrency is high to finance purchases of its exports, but the supply of the currency isrelatively limited because the amount of it being made available through the purchase ofimports is much lower.• Per Capita Income: It is the per head income of the country and can be obtained bydividing the gross national product (GNP) or national income of the country by itspopulation. 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 notindicate 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
  5. 5. current liabilities are repayable within a year. Hence working capital is that portion ofcurrent assets which is financed by long-term funds such as loans, share capital andretained earnings.• Equity Shares: Equity shares represent ownership interest is a company and the claim ofequity share holders on earnings and on assets in the event of liquidation, follow allothers. Only equity shareholders are generally entitled to vote at the Annual GeneralMeetings (AGM) which depend upon the number of shares which they hold. They takethe maximum risks and also have the possibility of highest gains. They are entitled to anynet profits made by their company after all expenses have been paid and they receive it inthe form of dividend.• Microcredit: It is the credit extended to small and needy borrowers who are outside thedomain of commercial banks. The scope of microcredit is immune, considering thenumber of such individuals who may undertake productive activities. It has emerged as aviable alternative credit channel to the poor as their access to conventional collateral andhigh transaction costs. Self help Group (SHG) Bank Lineage Programme propagated byNABARD, for last 10 years, has been recognized as the largest and fastest growingmicro-finance programme in the world.• Depression: It is an economic condition that is characterized by a severe contraction ineconomic activity, which is manifested in numerous business shut down, widespreadunemployment and declining investment in plant and equipment on account of fallingsales.• Commodity Futures: A standardized contract guaranteeing delivery of a certain quantityof a commodity (such as wheat, sugar, soybeans etc.) on a specified future date, at a priceagrees to, at the time of transaction. These contracts are standardized in terms of quantity,quality and delivery months for different commodities. Contracts on certain commoditiesare already traded in India.• London Inter Bank Offer Rate (LIBOR): LIBOR is an average of interest rates at whichleading 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 thebanks as a basis for determining the interest rates charged on dollar and foreign currencyloans to business customers.• Treasury Bill: A short-term debt instrument of the Government of India. This securitybears no default risk and has a high degree of liquidity and low interest rate risk in viewto its short term. The instrument is negotiable and is issued at a discount from the facevalue. At the maturity, the investor receives the face value and hence the increment
  6. 6. constitutes the interest earned.• Over the country Exchange of India (OTCEI): OTCEI is a floorless national securitiesexchange with a screen-based system of trading. This modern market characterized byfully computerized operations, was promoted by UTI, ICICI and SBI Capital MarketsLtd., among others, in order to overcome problems such as the lack of transparency,delays in settlements and prohibitive cost of a public issue through conventional route. Itbegan operations in 1992 and its network consists of inter-linked counters located all overthe country.• Debt Trap: It is a financial crisis in which an individual or country raises further loansin order to fulfill its obligations of interest payment and repayment of principal during atime period. So the country or individuals is caught in a vicious circle of debt where itraises more debt in order to retire its earlier debts and finds it difficult to get out of thistrap.• American Depository Receipts (ADRs): ADRs are instruments traded at US exchangerepresenting a fixed number of shares of a foreign company that is traded in the foreigncountry. By trading in ADRs, US investors manage to avoid some of the problems ofdealing in foreign securities markets. The ADR route enables companies to raise funds inthe US financial markets.• 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 becauseof their novelty are rate as especially high-risk projects, and as such would not normallyattract conventional finance.• EEFC Account: This refers to the Exchange Earners’ Foreign Currency Account, ascheme introduced in 1992 for exporters and residents receiving foreign exchange. Acertain percentage of the earnings may be maintained in this account in order to limitexchange rate risk in case of future imports or for other specified purposes.• Regional Rural Banks (RRBs): The banks sponsored by public sector banks to caterexclusively to rural areas. The target segments of RRBs loans are small and marginalfarmers, agricultural labourers, agricultural cooperative societies, artisans and smallentrepreneurs among others. The sponsoring bank, besides subscribing to the sharecapital, provides managerial and financial assistance to its RRB. There are 196 RRBs inIndia, established from 1975.
  7. 7. • Export Promotion Capital Goods Scheme (EPCG Scheme): It has been started to permitthe exporters to import capital goods on concessional import duties. Under exim polity1997-2002 exporters of goods and services could import capital goods by paying only10% 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., whichhas been playing a crucial role by providing credit insurance cover for exports from thecountry. There is great potential for project exports from India with our exporterswinning bids against intense international competition. In order to enable ECGC toprovide adequate underwriting support to such projects, the Government has decided, in2003-04 Budget, to increase its share capital to Rs. 80 crore.• 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 activatingthe secondary market as well as developing their primary market for money marketinstruments. (SBI has a major 32% stake in DFHI). It was set up on the recommendationof Vaghul Committee. From April 1992, it began dealing in dated securities andaccredited 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 forfruits, vegetables and their products rice, wheat floricultures, processed fruits and juicesand several other miscellaneous agricultural products. It is a promotional agency anddoes not undertake direct exports of any products on its own account.Overseas Banking Units (OBUs): The exim policy 2002-07 permitted registered IndianBanks to set up OBUs in the SEZs. Through these OBUs exporters in SEZs will haveaccess to finances at international costs. This is because OBUs would be exempted fromCRR, SLR and priority sector lending requirements which would permit them to operateat par with their overseas branches. These units have been permitted to accept funds fromNRIs and individuals and so they can raise foreign currency funds from internationalmarkets at global interest rate. These banks should have a minimum capital of $10million, to set up OBUs. Recently SBI opened the first OBU in Mumbai.