1. Punjab Technical University started its distance education program in 2001 to provide higher education opportunities to disadvantaged groups and working professionals seeking skill upgrades.
2. The program offers over 60 job-oriented technical courses through over 700 learning centers across India.
3. Key aspects of the distance education program include flexible learning, relaxed entry requirements, comprehensive self-learning materials, and student support services.
The Andhra Pradesh Academy of Rural Development (APARD) has been working relentlessly for over 54 years in building capacities for sustainable development of the rural poor. APARD is an apex training institute in AP for capacity building of rural development officers and panchayat raj officials. We also consistently focus on research that helps us offer high quality consulting services in rural development.
Online Dual Degree MBA+PGDBA from MIT Sde Pune & Jaipur National UniversityEduSamosa
The Post Graduate Diploma in Business Administration (PGDBA+MBA) programme teaches students about different aspects of management. These not only consist of resolving planned, pre-meditated problems, but also taking care of unanticipated problems and creating an opportunity from them. This programme also prepares students and professionals with the necessary skills that are required to meet the tests and threats of the corporate world.
#KIIT - Self Study Report for #NAAC Accreditation of #KIIT College of Engineering, Sohna Road,
Gurgaon (H.R.)
More information visit this site :-
http://kiit.in/wp/wp-content/uploads/2014/08/ssr.pdf
The Andhra Pradesh Academy of Rural Development (APARD) has been working relentlessly for over 54 years in building capacities for sustainable development of the rural poor. APARD is an apex training institute in AP for capacity building of rural development officers and panchayat raj officials. We also consistently focus on research that helps us offer high quality consulting services in rural development.
Online Dual Degree MBA+PGDBA from MIT Sde Pune & Jaipur National UniversityEduSamosa
The Post Graduate Diploma in Business Administration (PGDBA+MBA) programme teaches students about different aspects of management. These not only consist of resolving planned, pre-meditated problems, but also taking care of unanticipated problems and creating an opportunity from them. This programme also prepares students and professionals with the necessary skills that are required to meet the tests and threats of the corporate world.
#KIIT - Self Study Report for #NAAC Accreditation of #KIIT College of Engineering, Sohna Road,
Gurgaon (H.R.)
More information visit this site :-
http://kiit.in/wp/wp-content/uploads/2014/08/ssr.pdf
Recent Innovations in Educational Technology in India for the Delivery of Lif...Anup Kumar Das
Presentation titled "Recent Innovations in Educational Technology in India for the Delivery of Lifelong Learning" was presented in a Webinar on ‘ICT Innovation in Education', organized by Smart Learning Institute of Beijing Normal University, during the "3rd Belt and Road Open Education Learning Week 2018".
Abstract
Youth age group (15-24) is a great asset to a nation, because youth being a working age population if properly trained and prepared for world of work could bring revolution in the economy of a country. Therefore, developed countries give greater emphasis to youth’s training and education to prepare youth for world of work. In develop countries, to prepare youth, especially school leaver’s vocational training schemes were introduced at secondary and high school level. However, in developed countries the ratio of edging population is increasing as compared to the youth working age population, whereas in developing countries including Pakistan the youth population is rapidly increasing. There is a need that we take advantage of this demographic dividend and prepare our youth for world of work. This paper highlights the importance of vocationalization in youth employment. In the paper youth’s employment trend and its relation with education and training were discussed. In the country, causes for failure of past efforts made for vocationalization of general education were examined. Worldwide available different modes for vocational training and effective models were analyzed and suitable model for vocationalization of general education in the country is proposed in this paper.
BHARATHIAR UNIVERSITY
Coimbatore, Tamil Nadu
&
PG & Research Department of Commerce
PERIYAR E.V.R. COLLEGE
Tiruchirappalli – 620023, Tamil Nadu
In Collaboration with
Ministry of Consumer Affairs
Government of India
Organizing
Two Days Online Workshop On EMPOWERING RURAL CONSUMERS
on
19 & 20 November, 2021
Indian Institute of Technology - [IITBBS], Bhubaneshwarchegg india
It was founded in 2008 by MHRD The Indian Institute of Technology, Bhubaneshwar is a technical and public university that is located situated in Bhubaneshwar, Orrisa. It is a public institution. IIT Bhubaneswar was established as a co-educational institution of study, only to be recognized for its excellent alumni. The purpose of the college is to foster an academic environment and to facilitate study across many disciplines. The institution is focused on fostering creativity through design, innovation and imagination, and has created an extensive and flexible curriculum to support this. This is why the institute receives its recognition for its role in the creation of beneficial innovations in the engineering field.Read more
https://www.cheggindia.com/university/indian-institute-of-technology-iitbbs-bhubaneshwar-10970/
Recent Innovations in Educational Technology in India for the Delivery of Lif...Anup Kumar Das
Presentation titled "Recent Innovations in Educational Technology in India for the Delivery of Lifelong Learning" was presented in a Webinar on ‘ICT Innovation in Education', organized by Smart Learning Institute of Beijing Normal University, during the "3rd Belt and Road Open Education Learning Week 2018".
Abstract
Youth age group (15-24) is a great asset to a nation, because youth being a working age population if properly trained and prepared for world of work could bring revolution in the economy of a country. Therefore, developed countries give greater emphasis to youth’s training and education to prepare youth for world of work. In develop countries, to prepare youth, especially school leaver’s vocational training schemes were introduced at secondary and high school level. However, in developed countries the ratio of edging population is increasing as compared to the youth working age population, whereas in developing countries including Pakistan the youth population is rapidly increasing. There is a need that we take advantage of this demographic dividend and prepare our youth for world of work. This paper highlights the importance of vocationalization in youth employment. In the paper youth’s employment trend and its relation with education and training were discussed. In the country, causes for failure of past efforts made for vocationalization of general education were examined. Worldwide available different modes for vocational training and effective models were analyzed and suitable model for vocationalization of general education in the country is proposed in this paper.
BHARATHIAR UNIVERSITY
Coimbatore, Tamil Nadu
&
PG & Research Department of Commerce
PERIYAR E.V.R. COLLEGE
Tiruchirappalli – 620023, Tamil Nadu
In Collaboration with
Ministry of Consumer Affairs
Government of India
Organizing
Two Days Online Workshop On EMPOWERING RURAL CONSUMERS
on
19 & 20 November, 2021
Indian Institute of Technology - [IITBBS], Bhubaneshwarchegg india
It was founded in 2008 by MHRD The Indian Institute of Technology, Bhubaneshwar is a technical and public university that is located situated in Bhubaneshwar, Orrisa. It is a public institution. IIT Bhubaneswar was established as a co-educational institution of study, only to be recognized for its excellent alumni. The purpose of the college is to foster an academic environment and to facilitate study across many disciplines. The institution is focused on fostering creativity through design, innovation and imagination, and has created an extensive and flexible curriculum to support this. This is why the institute receives its recognition for its role in the creation of beneficial innovations in the engineering field.Read more
https://www.cheggindia.com/university/indian-institute-of-technology-iitbbs-bhubaneshwar-10970/
Mega drought in a mega city at a continental scale: São Paulo, BrazilErick Fernandes
Can local communities be empowered to establish a "Green Wall" for sustainable livelihoods by protecting the vulnerable Amazon Forest and the agricultural and industrial heartlands of Brazil?
India's Most Prominent Distance Learning Institutes Making Education Easy.pdftheknowledgereview1
This edition features a handful of business India's Most Prominent Distance Learning Institutes Making Education Easy that are at the forefront of leading us into a digital future
Conventional methods of training to teacher and its impact in higher educationRAVICHANDIRANG
Higher education in India viewed in Internationals
prospective with multi national approach. Our educational
system has been frequently restructuring and evaluated
with different yardsticks. A teacher is not only a person already well
educated but also he/she should be a active learner throughout
his/her service though formal training such as orientation, refresher
programmes. Hence, there training programme must be activity
based with the help of modern educational technology. In this
context this article provides how the conventional training
methodology help to teachers and its impact in the educational
system, evaluation system, quality of education, altitude of the
academician and what would be the new models of training required
to the teachers particularly in Higher education and also highlights
the career oriented training required to both teacher and students in
the present scenario.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
1. Punjab Technical University
World over distance Education is fast growing mode of education because of the unique benefits
it provides to the learners. Universities are now able to reach the community which has for so
long been deprived or higher education due to various reasons including social, economic and
geographical considerations. Distance Education provides them a second chance to upgrade their
technical skills and qualifications.
Some of the important considerations in initiating distance education in a country like India, has
been the concern of the government in increasing access and reach of higher education to a larger
student community. As such, only 6-8% of students in India take up higher education and more
than 92% drop out before reaching 10+2 level. Further, avenues for upgrading qualifications,
while at work, is limited and also modular programs for gaining latest skills through continuing
education programs is extremely poor. In such a system, distance education programs provide
the much needed avenue for:
z Increasing access and reach of higher education;
z Equity and affordability of higher education to weaker and disadvantaged sections of the
society;
z Increased opportunity for upgrading, retraining and personal enrichment of latest
knowledge and know-how;
z Capacity building for national interests.
One of use important aspects of any distance education program is the learning resources.
Learning material provided to the learner must be innovative, thought provoking,
comprehensive and must be tailor-made for self-learning. It has been a continuous process for the
University in improving the quality of the learning material through well designed course
materials in the SIM format (self-instructional material). While designing the material, the
university has researched the methods and process of some of the best institutions in the world
imparting distance education.
About the University
Punjab Technical University (PTU) was set up by the Government of Punjab in 1997 through a
state Legislative ACT. PTU started with a modest beginning in 1997, when University had only
nine Engineering and thirteen Management colleges affiliated to it. PTU now has affiliated
2. 43 Engineering colleges, 56 colleges imparting Management and Computer Application courses,
20 institutions imparting pharmacy education, 6 Architecture institutions, 2 Hotel Management
and 12 Regional Centres for imparting M. Tech and Ph. D Programs in different branches of
Engineering and Management. During a short span of nine years, the University has undertaken
many innovative programs. The major development during this period is that University has
restructured its degree program and upgraded syllabi of the course in such a way as to increase
the employability of the student and also to make them self-reliant by imparting Higher
Technical Education. We at Punjab Technical University are propelled by the vision and wisdom
of our leaders and are striving hard to discharge our duties for the overall improvement of
quality of education that we provide.
During a short span of nine years, the University has faced various challenges but has always
kept the interest of students as the paramount concern. During the past couple of years, the
University has undertaken many new initiatives to revitalize the educational programs imparted
with the colleges and Regional centers.
Though knowledge and skills are the key factors in increasing the employability and competitive
edge of students in the emerging global environment, an environment of economic growth and
opportunity is necessary to promote the demand for such trained and professional manpower.
The University is participating in the process of technological growth and development in
shaping the human resource for economic development of the nation.
Keeping the above facts in mind Punjab Technical University, initiated the distance education
program and started offering various job oriented technical courses in disciplines like information
technology, management, Hotel Management, paramedical, Media Technologies and Fashion
Technology since July 2001. The program was initiated with the aim of fulfilling the mandate of
the ACT for providing continuing education to the disadvantaged economically backward
sections of society as well as working professionals for skill up-gradation.
The University has over the years initiated various quality improvement initiatives in running its
distance education program to deliver quality education with a flexible approach of education
delivery. This program also takes care of the overall personality development of the students.
Presently, PTU has more than 60 courses under distance education stream in more than 700
learning centers across the country.
3. About Distance Education Program of PTU
Over the past few years, the distance education program of PTU has gained wide publicity and
acceptance due to certain quality features which were introduced to increase the effectiveness of
learning methodologies. The last comprehensive syllabus review was carried out in the year 2004-
05 and the new revised syllabus was implemented from September 2005. The syllabus once
reviewed is frozen for a period of 3 years and changes, if any, shall be taken up in the year 2008.
Various innovative initiatives have been taken, which has increased the popularity of the
program. Some of these initiatives are enumerated below:
1. Making a pyramid system for almost all courses, in which a student gets flexibility of
continuing higher education in his own pace and per his convenience. Suitable credits are
imparted for courses taken during re-entry into the pyramid as a lateral entry student.
2. Relaxed entry qualifications ensure that students get enough freedom to choose their
course and the basics necessary for completing the course is taught at the first semester
level.
3. A comprehensive course on „Communications and Soft Skills‰ is compulsory for all
students, which ensures that students learn some basic skills for increasing their
employability and competing in the globalized environment.
4. Learning materials and books have been remodeled in the self-Instructional Material
format, which ensures easy dissemination of skills and self-learning. These SIMs are given
in addition to the class notes, work modules and weekly quizzes.
5. Students are allowed to take a minimum of 240 hours of instruction during the semester,
which includes small group interaction with faculty and teaching practical skills in a
personalized manner.
6. Minimum standards have been laid out for the learning centers, and a full time counselor
and core faculty is available to help the student anytime.
7. There is a wide network of Regional Learning and Facilitation Centers (RLFC) catering to
each zone, which is available for student queries, placement support, examination related
queries and day-to-day logistic support. Students need not visit the University for any of
their problems and they can approach the RLFC for taking care of their needs.
8. Various facilities like Free Waiver for physically challenged students, Scholarship scheme
by the government for SC/ST candidates, free bus passes for PRTC buses are available to
students of the University.
The university continuously aims for higher objectives to achieve and the success always gears us
for achieving the improbable. The PTU distance education fraternity has grown more than 200%
during the past two years and the students have now started moving all across the country and
abroad after completing their skill training with us.
We wish you a marvelous learning experience in the next few years of association with us!
DR. R. P. SINGH
Dean
Distance Education
4. Dr. S. K. Salwan
Vice Chancellor
Dr. S. K. Salwan is an eminent scientist, visionary and an experienced administrator. He is a
doctorate in mechanical engineering from the IIT, Mumbai. Dr. Salwan brings with him 14 years
of teaching and research experience. He is credited with establishing the Department of Design
Engineering at the institute of Armament Technology, Pune. He was the founder-member of the
integrated guided missile programme of defence research under His Excellency Honorable Dr.
A.P.J. Abdul Kalam. He also established the high technology missile center, RCI at Hyderabad.
He has been instrumental in implementing the Rs 1000-crore National Range for Testing Missiles
and Weapon Systems at Chandipore, Balance in a record time of three years. He was director of
the Armament Research and Development Establishment, Pune. Dr. Salwan has been part of
many high level defence delegations to various countries. He was Advisor (Strategic project) and
Emeritus Scientist at the DRDO. Dr. Salwan has won various awards, including the Scientist of
the Year 1994; the Rajiv Ratan Award, 1995, and a Vashisht Sewa Medal 1996, the Technology
Assimilation and Transfer Trophy, 1997 and the Punj Pani Award in Punjab for 2006.
Dr. R.P. Singh
Dean, Distance Education
Dr. R.P. Singh is a doctorate in physics from Canada and has been a gold medallist of Banaras
Hindu University in M.Sc. Dr. Singh took over the Department of Distance Education in
November 2004 and since then the University has embarked on various innovations in Distance
Education.
Due to combined efforts of the department, the RLFCÊs and Centers, and with active support of
the Distance Education Council headed by Dr. O.P. Bajpai, Director University College of
Engineering Kurukshetra University the distance education program of PTU is now a structured
system which empowers the learner with requisite skills and knowledge which can enhance their
employability in the global market. Dr. R. P. Singh is promoting distance education at the
national level also and is a founder member of Education Promotion Society of India and is
member of various committees which explores innovative ways of learning for the disadvantages
sections of society. The basic aim of the distance education programs has been to assimilate all
sections of society including women by increasing the access. Reach, equity and affordability of
higher education in the country.
5. MANAGEMENT OF
FINANCIAL INSTITUTIONS
MBA-513
This SIM has been prepared exclusively under the guidance of Punjab Technical University (PTU)
and reviewed by experts and approved by the concerned statutory Board of Studies (BOS). It
conforms to the syllabi and contents as approved by the BOS of PTU.
7. PTU DEP SYLLABI-BOOK MAPPING TABLE
MBA-513 MANAGEMENT OF FINANCIAL INSTITUTIONS
Syllabi Mapping in Book
Section I
Section II
Section III
Unit 1: Indian Financial System
and Financial Institutions
(Page 3-23)
Unit 2: Commercial Banks
(Page 25-44)
Unit 5: Mutual Funds in India
(Page 87-129)
Unit 6: Deposits Guarantee
(Page 131-134)
Financial Institutions: Definition, Types, and Role of
Financial Institution in Economic Development.
Commercial Banks: Evolution, Management and
Organizational setup, Assets & Liabilities, Theories of
Liquidity Management, Management of Primary &
Secondary Reserve, Management of Loans.
Reserve Bank of India: Organisation, Management, Role
& Functions, Credit Control.
Development Banks in India: Types, functions, growth,
structure & working of development banks.
Unit 3: Reserve Bank
of India
(Page 47-55)
Unit 4: Development
Banks in India
(Page 57-83)
Mutual Funds: Evaluation, SEBI regulations, & different
types of schemes.
Deposit Insurance: Concept & working of Deposit
Insurance Introduction to DICGC
8.
9. Contents
Section-I
UNIT 1 INDIAN FINANCIAL SYSTEM AND FINANCIAL INSTITUTIONS 3
Introduction
Functions of Financial Institutions
Scope of Financial Services
Corporate Advisory Services by Financial Institutions
Development Banking
Commodity Trading – A New Avenue for Commercial Banks
Role of Financial Institutions in Economic Development
Summary
Keywords
· Review Questions
· Further Readings
UNIT 2 COMMERCIAL BANKS 25
Introduction
Evolution of Commercial Banking
Functions of Commercial Bank
Risk Management
Types of Risk
RBI Guidelines for Risk Management
Risk Management Systems
Functions of Bank Capital
Classification of Capital of Banks
Norms for Capital Adequacy
New Capital Adequacy Framework, 1999
CRR and SLR on Interbank Deposits
Management of Loans in a Commercial Bank
Summary
Keywords
Review Questions
Further Readings
Section-II
UNIT 3 RESERVE BANK OF INDIA 47
Introduction
Organisation and Management of RBI
Reserve Bank Objectives
Traditional Functions
Objectives of Credit Control
Other Controls
10. Monetary Policy and Economic Variables
Bank Rate and Interest Rates
Interest Rate Policy in India
Refinance Rates
Importance of Bank Rate
Impact of Bank Rate Policy
Limitations of Bank Rate Policy
Efficacy of Bank Rate Policy in India
Open Market Operations (OMO)
Control of Credit by the Reserve Bank of India
Summary
Keywords
Review Questions
Further Readings
UNIT 4 DEVELOPMENT BANKS IN INDIA 57
Introduction
Nature of Development Banking
Development Banks in India
Functions of Development Banks in India
Term Loans from Development Banks
Development Finance Institutions
Fee-Based Services
ICICI
Industrial Reconstruction Corporation of India
Summary of SIDBI Performance
Promotional and Development Role of SIDBI
Enterprise Promotion
Information Dissemination
Small Industrial Development Corporation
Summary
Keywords
Review Questions
Further Readings
Section-III
UNIT 5 MUTUAL FUNDS IN INDIA 87
Introduction
Mutual Funds in India
Mutual Fund Organisation
The Structure Consists of Mutual Funds
Net Asset Value
Phases of Mutual Funds in India
Advantages of Mutual Funds
SEBI Regulations Relating to Mutual Funds
11. Types of Mutual Fund Schemes
Asset Management Company Profile
Types of Fund Schemes
Magnum Index Fund
UTI Mutual Funds
Reliance
Types of Reliance Mutual Funds
GAIL India
Investment Strategy and Risk Control adapted by AMC
Analysis of Mutual Funds Schemes
Findings
Summary
Keywords
Review Questions
Further Readings
UNIT 6 DEPOSITS GUARANTEE 131
Introduction
Deposits Guarantee
Summary
Keywords
Review Questions
Further Readings
12. SECTION-I
Unit 1
Indian Financial System and Financial Institutions
Unit 2
Commercial Banks
13. Indian Financial System and
Financial Institutions
Notes
Punjab Technical University 3
Unit 1 Indian Financial
System and
Financial
Institutions
Unit Structure
• Introduction
• Functions of Financial Institutions
• Scope of Financial Services
• Corporate Advisory Services by Financial Institutions
• Development Banking
• Commodity Trading – A New Avenue for Commercial Banks
• Role of Financial Institutions in Economic Development
• Summary
• Keywords
• Review Questions
• Further Readings
Learning Objectives
At the conclusion of this unit you should be able to:
• The structure of Indian financial system, itÊs components, classification and functions of
the participants and the regulatory role of constitutional bodies, agencies and the
government with the responsibility of establishing systems, procedures and pursuers to
create a sound financial system
• Role of Financial Institutions and their functions as agents of transfer of money from
suppliers to users/business to create wealth and as agents of credit creators and assets
and liability managers
Introduction
The financial system is concerned about money, credit and finance. Money refers to
the current medium of exchange or means of payment. Where as credit or loan refers
to sum of money along with interest payable; In other words it refers to debt of
economic unit. Finance is monetary resources comprising debt and ownership funds
of the state, company or person.
Financial Institutions are business organizations that act as mobilizes and depositories
of savings and as purveyors of credit or finance. They also provide various financial
services to the society.
The financial institutions offer a variety of specialized to traditional services to the
business and act as mediators and agents of transfer of funds to create wealth to the
society at some charge for the service, which would be their source of revenue.
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They have the obligation of creating a qualitative Financial System and should
cooperate with the regulatory bodies engaged with various measures to discipline the
economic system.
The financial sector of any country consists of:
1. Specialised and non specialized financial institutions
2. Organised and unorganized Financial Markets
3. Financial instruments to facilitate transfer of funds
Procedures and practices adopted in the markets and inter relationships among
the participants.
Financial Institutions are business organizations that act as mobilizes and depositories
of savings and as purveyors of credit or finance. They also provide various financial
services to the society.
The financial institutions offer a variety of specialized to traditional services to the
business and act as mediators and agents of transfer of funds to create wealth to the
society at some charge for the service, which would be their source of revenue.
They have the obligation of creating a qualitative Financial System and should
cooperate with the regulatory bodies engaged with various measures to discipline the
economic system.
The health and strength of a financial system depends on:
1. Competency of the Regulatory Bodies having enough teeth to monitor in a
rational, acceptable transparent and following the international and national
economic trends and their implications.
2. The existence of well structured and well defined financial markets and capable to
sustain with troubles of global and national political and economic events and
poised to grow and expand.
3. The size of the market and no of players and quantum of transactions with
adequate liquidity of credit.
4. Cost of entry and exit into the market are the least if not free will make more
efficient market to operate.
5. Convertibility of currency and least regulatory mechanism with free entry and
exit of currency into the market.
6. Deep well defined horizontal and vertically integrated financial Market.
7. The financial instruments are infinitely divisible.
8. The investors are rational act prudent.
9. The propensity of the people to save and invest in wealth creating investment
opportunities on a rational selective basis.
10. Capability of the political Government to regulate inflationary trends, monetary
policies, Trade policies, Employment programmes, Commodity pricing and
regulated commodity price index to keep the prices of goods under control.
11. Control on non-plan spending and control on deficit financing and controlling the
money supply and strengthening the quality of financial system.
12. Stringent norms to control illegal transactions and black money and Control of
fake currency too contribute towards the efficiency of the system.
15. Indian Financial System and
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Indicators of Financial Development of an Economy
1. Finance ratio (FR) – The ratio of total issues to the National Income to explain
about the percentage or fraction of investments in capital markets.
2. The primary investor and his participation contribute new issue ratio- the ratio of
primary issues to the physical capital assets to explain to what extent the capital
formation.
3. Intermediation ratio.
4. The ratio of Money to National Income.
5. The proportion of current account deficit, which is financed by market, related
flows.
6. Fully integrated finance sector-domestic and international.
7. Greater openness of the economy.
8. The market forces freely determine interest rates.
9. Specialised and non specialized financial institutions.
10. Organised and unorganized Financial Markets.
11. Financial instruments to facilitate transfer of funds.
Procedures and practices adopted in the markets and inter-relationships among the
participants.
Functions of Financial Institutions
Major Functions
1. Capital Market Intermediation
2. Money Market Intermediation
Scope of Financial Services
1. Fund Based Activities
Underwriting, Dealing in Secondary Markets,
Money in Market Operations,
Commercial Paper, CDs, Treasury Bills,
Bill Discounting Equipment Leasing,
Hire purchasing, Venture Capital, Seed Capital,
Forex Market Activities
2. Non-Fund Based Activities
Managing the Capital Issues (Pre & Post issue Activities) placement of Capital and
Debt Instruments with FIS
Arrangement of Funds from FIS for Pricing of Issues,
Post Issue Mgmt,
Under Writing,
As Managers-Consultants to Public issue Portfolio Mgmt,
Advisory to the Clients Projects Preparations
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Feasibility Study
Cost Planning or WC Requirements Analysis
Assisting in the Process of getting all Govt. Clearing Rendering Project Advisory
Services
Capital Structures and Restructuring
Merchant Banking Services;
Corporate Counseling
Project Counseling
Loan Syndication,
Issue Management; Lead Managers to issue and Market Makers, Public issue
through
Prospectus Marketing,
Services Relating to Mergers Acquisitions,
Take over,
Off Shore Finance
Venture Capital Financing
Development of Debt Market
Securitisation Services- Derivative Security
Development of Debt Market
Corporate Restructuring
Leasing Financial, Operational, Leverage
Off Shore, Sale and Lease Back, Securities
Hire Purchasing and Cross Border Lease
Bill Discounting
Exports Invoices Custodial Services
Asset Management-Credit Risk Mgmt
Forex Operations
Hire Purchasing (Hire Purchase Act, 1972)
Venture Capital
Mutual Funds Assert Mgmt, Trustee to MF
Derivatives Market Creation and Trading
Commodity Futures & Options.
Corporate Advisory Services by Financial
Institutions
1. Formation of the company
2. Making of public issue and issue management
3. Loan syndication
4. Capital structuring and restructuring
17. Indian Financial System and
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5. Project report preparation and appraisal
6. Liaison with foreign collaborators and making preparation for joint ventures
7. Making valuation and revaluation of assets
8. Mergers and acquisitions
9. Help in management decisions
10. Expert staff placement and HRD help
11. Financial reengineering
12. Entrepreneur training and development
13. Technical assistance
14. Raising foreign currency loans, euro issues, FCCBS etc.
15. Quality control and product policy and planning.
Tax Planning
A brief description of commercial and development banking services which have left
an immense effect on the economy are explained below.
Where as a detailed explanation about other services is given in the following
chapters.
Development Finance Institutions (DFIs) or development banks starting with the
Industrial Finance Corporation of India and the State Finance Corporation to assist
the promotion and financing of fixed assets of industrial units have been in existence
since 1948.
Now, at the all India level, there are the Industrial Development Bank of India,
Industrial Investment Bank of India Ltd. (IIBI), Industrial Development Finance
Company Ltd. and Small Industries Development Bank of India.
There are specialized institutions, IVCT, ICICI Venture and TFCT. At the state level,
there are State Financial Corporations (SFCs) and State Industrial Development
Corporations.
Apart from DFIs, there are all-India-investment institutions, like the Unit Trust of
India, Life Insurance Corporations of India and General Insurance Corporation of
India and its subsidiaries.
Development Banking
Development banking is the financing of projects assessed on the basis of their
viability to generate cash flows to meet the interest and repayment obligation. They
have an in-built promotional aspect, because projects have to fall within the overall
national industrial priorities, located preferably in backward areas and promoted by
entrepreneurs. In the late forties, right after the Second World War there was a
paradigm shift in the approach to lending for industrial projects from security for the
loan to income or cash flow from the project. This required a new set of institutions
providing finance on a medium and long-term basis from 5 to 7 or even 10 years.
Their approach to appraisal had to take into account the time value of money, which
involved the use of discounted cash flow techniques. The projects represented income
streams and their viability was assessed on that basis and not on the basis of any
security provided for the loan. Until the emergence of a vibrant capital market in the
90s, development banks for almost four decades played a vital role in promoting an
industrial structure conforming to national priorities, located in backward areas and
encouraging entrepreneurs.
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Venture Capital Financing
Venture capital is a growing business of recent origin in the area of industrial
financing in India. The various financial institutions set-up in India to promote
industries have done commendable work. However, these institutions do not come
up to the benefit of risky ventures when new or relatively unknown entrepreneurs
undertake them. They contend to give debt finance, mostly in the form of term loans
to the promoters and their functioning has been more akin to that of commercial
banks. The financial institutions have devised schemes such as seed capital scheme,
Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects
and extend financial assistance they follow the criteria such as safety, security,
liquidity and profitability and not potentiality. The capital market with its
conventional financial instruments/schemes does not come much to the benefit or
risky venture. New institutions such as mutual funds, leasing and hire purchase of
companies have been established as another source of finance to industries. These
institutions also do not mitigate the problems of new entrepreneurs who undertake
risky and innovative ventures.
India is poised for a technological revolution with the emergence of new breed of
entrepreneurs with required professional temperament and technical know how. To
make the innovative technology of the entrepreneurs a successful business venture,
support in all respects and more particularly in the form of financial assistance is all
the more essential. This has necessitated the setting up of venture capital financing
Division/companies during the latter part of eighties.
Venture Capital Financing Institutions
The term ÂVenture CapitalÊ is understood in many ways. In a narrow sense, it refers
to, investment in new and tried enterprises that are lacking a stable record of growth.
In a broader sense, venture capital refers to the commitment of capital as
shareholding, for the formulation and setting up of small firms specializing in new
ideas or new technologies. It is not merely an injection of funds in to a new firm, it is a
simultaneous input of skill needed to set up the firm, design its marketing strategy
and organise and manage it. It is an association with successive stages of firmÊs
development with distinctive types of financing appropriate to each stage of
development.
Meaning of Venture Capital
Venture capital is long-term risk capital to finance high technology projects, which
involve risk, but at the same time has strong potential for growth. Venture capitalist
pools their resources including managerial abilities to assist new entrepreneurs in the
early years of the project. Once the project reaches the stage of profitability, they sell
their equity holdings at high premium.
Definition of a Venture Capital Company
A venture capital company is defined as „a financing institution, which joins an
entrepreneur as a co-promoter in a project and shares the risks and rewards of the
enterprise.‰
Essential Features of Venture Capital
Some of the features of venture capital financing are as under:
1. Venture capital is usually in the form of equity participation. It may also take the
form of convertible debt or long-term loan.
19. Indian Financial System and
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2. Investment is made only in high risk but high growth potential projects.
3. Venture capital is available only for commercialization of new ideas or new
technologies and not for enterprises, which are engaged in trading, booking,
financial services, agency, liaison work or research and development.
4. Venture capitalist joins the entrepreneur as a co-promoter in projects and shares
the risks and rewards of the enterprise.
5. There is continuous involvement in business after making an investment by the
investor.
6. Once the venture has reached the full potential the venture capitalist disinvests
his holdings either to the promoters or in the market. The basic objective of
investment is not profit but capital appreciation at the time of disinvestments.
7. Venture capital is not just injection of money but also an input needed to set-up
the firm, design its marketing strategy and organize and manage it.
Investment is usually made in small and medium scale enterprises.
Commodity Trading – A New Avenue for
Commercial Banks
India has a deep in grained knowledge in commodity trading (and particularly
forward trading in commodities), especially in the interior heartland. For last 40 years
or so, such forward (future) trading was banned in the country for a variety of reasons
and it is being revived now. The ban has meant that two generations have last touch
with the trading skills and the related knowledge levels in the commodity space.
Fortunately much of the skill sets have migrated to stock exchanges.
In these intervening years, some regional exchange specializing in specific
commodities, where the bans were lifted, have carried on the baton. Also large
informal trading, primarily by the speculative segment of the universe of market
participants has remained. This has led to a mindset in the common man in the
country that commodity exchanges are purely speculative in nature. The hedging and
price discovery functions that they perform are largely ignored today by the cross
section of the population.
We need our exchanges to reach in the producers, end-users. And even the retail
investors, at gross roots level. Education and awareness has a key role to pay in
achieving this vision.
Through commodity futures were introduced in 1998 in India, but still the Indian
commodity traders have not started their participation in full enthusiasm. They are
apprehensive about the unfamiliar instrument. Lack of awareness and understanding
futures trading could be one of the reasons for the failure of the commodity futures.
So, there is need to bridge this knowledge gap among the traders community.
There are about 26 commodity exchanges in India. But only a few of them are active.
About 24 of them do not have modern communication facilities. This is a serous
problem of concern, necessary steps is taken to bring out commodity exchange with
the required infrastructure, employees and sophisticated technology.
Student Activity
Develop regular habit of reading business columns of any business news paper
like- Business Line, Business Standard, Economic Times to gain more insight
into the business or trade related developments
20. Management of
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Asset Management Company
Custodian, who is registered with SEBI, holds the securities of various schemes of the
fund in its custody.
MF Sponsor
Sponsor is the person who acting alone or in combination with another body
corporate establishes a mutual fund.
NAV is computed using a formula:
(Market value)*unit value/scheme size
Open-end Funds
An open-end fund is one that is available for subscription all through the year.
Closed-end Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period.
The Futures Market is primarily intended for Hedging and Speculation. Organized
traders exchange in which standardized, graded products are bought and sold.
Role of Financial Institutions in
Economic Development
There are the following major institutions which are playing their crucial role in the
economic development of India.
1. Central bank
2. Commercial banks
3. Credit rating agencies
4. Credit Reporting and Debt Collection
5. Financial authorities
6. Insurance companies
7. Merchant banks
8. Mutual Funds
9. Specialised financial institutions
10. Venture capitalists
Central Bank
IndiaÊs central bank is the Reserve Bank of India. It has branches in- Delhi, Gujarat,
Madhya Pradesh, Maharashtra & Goa, West Bengal, Tamil Nadu, Karnataka, Orissa,
Punjab, Assam, Andhra Pradesh, Rajasthan, Jammu & Kashmir, State of Uttar
Pradesh, Kerala and Bihar. It is the banker of all other banks in India. It plays a crucial
role in the economic development of India. In this context, we quote Dr. Y. V. Reddy,
Governor of the Reserve Bank of India.
(Speech by Dr Y V Reddy, Governor of the Reserve Bank of India, on the occasion of
the Foundation Day of the Institute of Development Studies, Jaipur, 30 June 2007.)
21. Indian Financial System and
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Evolving Role of RBI
The Reserve Bank, established through the Reserve Bank of India Act, 1934
commenced its operations in 1935. It draws its powers and responsibilities through
other legislations also such as the Banking Regulation Act, 1949. The RBI has over the
years been responding to changing economic circumstances and these organisational
developments have been documented in a recent Report on Currency and Finance for
the year 2004-05, the theme of which was „The Evolution of Central Banking in
India‰. Today, I would like to highlight some recent developments and discuss certain
issues of contemporary relevance relating to the evolving role of RBI.
First, compared with several countries which introduced rapid reforms in central
banking law and governance in the last about two decades, the Indian experience
reflects an evolution or adaptation of central banking to new economic realities. These
changes were brought about both through some legislative measures and changes in
operating procedures.
Second, this evolution has inter alia contributed to imparting some autonomy to the
central bank, de facto, particularly in the areas of monetary management and financial
regulation.
Third, in sharp contrast to the situation before 1991, since then, apart from a
transparent communications policy and a broad based consultative approach to
policy making, GovernorsÊ speeches and appearances on the electronic media and the
press have been substantial, having significant influence on markets and opinions. In
the process, the RBI has gained reputational bonus and public credibility.
Fourth, thanks to related developments in the last 15 years, financial and external
sectors in India have also become relatively more efficient and resilient.
Fifth, while the effectiveness of monetary policy has improved significantly to meet
the evolving demands, some constraints are persisting, which impact the choice and
effectiveness of our policy framework.
In reviewing the evolving role of RBI, it is necessary to distinguish between an
exclusive monetary authority and a generic central bank, which performs not only
monetary functions, but also other functions, in particular, banking supervision. A
recent survey by the Bank for International Settlements (BIS) has shown that over
sixty per cent of central banks across developed and developing countries have
banking supervisorÊs role exercised by a central bank. India has adopted a middle
path. Banking Supervision continues to be with RBI, but it has been accorded a
distinct semi-independent status. A Board for Financial Supervision (BFS), a
Committee of the Central Board of RBI, was set up in 1994 and meets at least once a
month to guide and oversee the RBI's supervisory functions. The BFS includes four
independent members drawn from the Central Board of Directors of RBI with
relevant professional background and experience.
While it is true that globally the general tendency recently has been to stress the
independence or autonomy of central banks in general and monetary management in
particular, this has been brought about by different countries in a variety of means:
constitutional changes, legal amendments, treaty, obligations, policy reorientation or
by changes in practices, procedures and overall environment of public policy.
Evolution, thus, does not exclude legislative changes to meet the challenges of
globalisation and new economic realities, though in India most changes have thus far
been effected within the basic structure of the original legislation in terms of mandate,
governance procedures and instruments. A notable legislative measure in the recent
past (The Reserve Bank of India Amendment Act, 2006) nevertheless relates to greater
flexibility to RBI in regard to cash reserve requirements, deployment of forex reserves,
and clarity in regulation over money, forex and government securities markets.
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The independence of a central bank sometimes is rigidly associated with a single
objective, such as price stability. But, in practice, there are many instances of dual or
multiple objectives with equal or different weights and there are many cases of
hierarchy of objectives for a central bank. In the overall context of its policy and
operations, the RBI in practice is subject to the current legal framework and operates
as a monetary authority with multiple objectives and multiple functions assigned to it.
Within such a mandate, efforts are made to (a) articulate the hierarchy of objectives in
a given context; (b) impart transparency through enhanced communication,
emphasise participative nature of decision making in its activities, including
monetary management, through advisory committees; and (c) move towards greater
autonomy in operations relating to monetary policy while ensuring harmony in
macro policies in coordination with the government.
RBI Autonomy: de jure versus de factor
The RBI was established under the Reserve Bank of India Act, 1934 on April 1, 1935 as
a private shareholders' bank, but since its nationalization in 1949, is fully owned by
the Government of India. The RBI is placed under the Entry 38 of List 1 of Schedule
VII of the Constitution of India, which is the Union List.
The Preamble to the RBI Act describes the basic objective as "to regulate the issue of
Bank notes and keeping of reserves with a view to securing monetary stability in
India and generally, to operate the currency and credit system of the country to its
advantage". Thus, there is no explicit mandate for price-stability or formal inflation
targeting. The twin objectives of monetary policy in India have evolved over the years
as those of maintaining price stability and ensuring adequate flow of credit to
facilitate the growth process. The relative emphasis between the twin objectives is
modulated as per the prevailing circumstances and is articulated in the policy
statements. Consideration of macroeconomic and financial stability is also subsumed
in the articulation of policy.
The RBI is also entrusted with the management of foreign exchange reserves, which
are reflected in its balance sheet. While RBI is essentially a monetary authority, its
founding statute mandates it to be the manager of public debt of the Government of
India and banker to the Government. In terms of Section 20 of the RBI Act 1934, RBI
has the obligation to undertake the receipts and payments of the Central Government
and to carry out the exchange, remittance and other banking operations, including the
management of the public debt of the Union. In the recent past, a functional
separation of monetary and debt management was debated and the Union Budget for
2007-08 has announced a proposal to setting up of an autonomous Debt Management
Office to keep the debt management distinct from monetary management. Further, as
per Section 21 of the said Act, RBI has the right to transact Government business of
the Union in India.
While, as per statute, RBI is the monetary authority of the country, the RBI has also
been entrusted with the work relating to Banking and Supervision by an enactment in
1949. The RBI exercised a tight regime of exchange control particularly under the
Foreign Exchange Regulation Act (FERA), 1973; but, a qualitative change was brought
about in the legal framework to enable liberalization by the enactment of the Foreign
Exchange Management Act (FEMA) in June 2000 replacing the earlier FERA. With
this, the objectives of regulation have been redefined as facilitating trade and
payments as well as orderly development and functioning of foreign exchange market
in India.
It is significant to note that the RBI Act, Section 19 precludes RBI from performing
certain business which protects the integrity of the institution, such as trading or
taking any direct interest in commercial, industrial or other undertaking, purchasing
shares or giving loans against shares, and advancing money on security of immovable
23. Indian Financial System and
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property, drawing or accepting bills payable otherwise than on demand. Because of
the last provision, the RBI evolved the Market Stabilization Scheme through an MoU
with the Government, for undertaking stabilization operations.
On practical considerations, central bank independence may be viewed as related
broadly to three areas, viz., management including personnel matters; financial
aspects; and conduct of policy. Managerial independence refers to the procedures for
appointment, term of office and dismissal procedures of top central bank officials and
the governing board. It also includes the extent and nature of representation of the
Government in the governing body of the central bank and GovernmentÊs powers to
issue directions. Financial independence relates to the freedom of the central bank to
decide the extent to which Government expenditure is either directly or indirectly
financed via central bank credits. Direct or automatic access of Government to central
bank credits would naturally imply that monetary policy is subordinated to fiscal
policy. Finally, policy independence is related to the flexibility given to the central
bank in the formulation and execution of monetary policy, under a given mandate.
While the Central Government may give such directions to the RBI after consulting
the Governor as it may consider necessary in the public interest, the overall
management of the BankÊs affairs and business rests with the Central Board of
Directors. The Governor is appointed by the Central Government and may be
removed from office without specifying any reason. All Deputy Governors are also
appointed by the Central Government and may be similarly removed. All Directors of
the Central Board are nominated by the Central
Government with one Government official as a participant in the Board deliberations.
The Directors hold office during the pleasure of the Central Government which can
also supersede the RBIÊs Central Board.
The staffing pattern is left to the RBI, but rules governing their service conditions and
compensation are not out of alignment with public sector in general and banking
sector in particular. There is legal protection to the Bank and also to its officers for
actions taken in good faith. There have been no noticeable changes in the recent past
in the relationship between the Government and RBI on managerial/personnel
matters.
On financial aspects of RBI vis-à-vis Government, however, there have been several
positive developments. Since the 1990s, as the case for according greater operational
flexibility to the RBI in the conduct of monetary policy and regulation of the financial
system became stronger, the practice of automatic monetisation of the GovernmentÊs
fiscal deficit through the issue of ad hoc treasury bills came under severe criticism
(Rangarajan, 1993). In subsequent years, the phasing out of automatic monetisation of
fiscal deficits by 1997 and the enactment of FRBM legislation in 2003 are two
important milestones in the direction of providing safeguards to monetary policy
from the consequences of expansionary fiscal policy and ensuring a degree of de facto
autonomy of the RBI.
It is interesting to note that the above autonomy in financial matters was obtained by
the RBI through exchange of letters and agreements whereby automatic monetisation
through ad hoc Treasury Bills was discontinued since April 1997. The Fiscal
Responsibility and Budget Management (FRBM) Act, 2003, further strengthened the
position by prohibiting the RBI from participating in primary issuances of all
government securities.
The RBI has gradually withdrawn from the practice of providing concessional finance
or refinance for specified sectors such as agriculture, industry and export, though the
legal provisions continue to enable it. In the same view, as part of strengthening
monetary management, only notional provisions are made out of RBI profits for
Agriculture, Industrial and Housing Credit Funds. No doubt, there are persistent
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demands on RBI to reverse the process, but the RBI advocates direct fiscal support to
development activities so as to be transparent, accountable and quantifiable rather
than through monetary operations of RBI, which would tantamount to quasi-fiscal
operations.
Transfer of the balance of profits, after necessary provisions, to the Central
Government has been rationalised as part of the reform process in 1997. The present
arrangement is governed by the objective of reaching a stipulated level of reserves in
RBIÊs balance sheet over a period – though the timeframe to reach the level is
extended by mutual consent to accommodate immediate fiscal compulsions.
In technical parlance, accountability of an institution like RBI goes together with a
specific mandate and operational independence or autonomy to achieve the said
mandate. In the absence of these, in practice, the RBI is accountable indirectly to
Parliament through the Ministry of Finance, Government of India. At times, it is
summoned by Parliamentary Committees, and even in such cases, it generally plays
only a supportive role to the executive wing of the government.
In a recent IMF Working Paper published in April 2007, where the indices of central
bank autonomy have been calculated for 163 central banks as of end-2003, in a group
of 32 emerging markets, India has scored 0.25 for political autonomy of the central
bank as against the average score of 0.56 for the group of emerging markets and
scored 0.75 for economic autonomy of the central bank which is the same as the
average score for that group.
Dr. Bimal Jalan at the time of laying down office as Governor in 2003 remarked: "the
autonomy of a central bank is best set by convention rather than by statute, especially
in emerging countries. There should be harmony between the government and the
central bank with shared objectives, though the instrumentalities in achieving the
objectives may be different‰.
Harmonious relations between Government and RBI have no doubt generally
contributed to the successful policy outcomes thus far, but it would not be
appropriate to conclude that there are no differences in analysis, approaches,
judgements and instrumentalities. In the given legal and cultural context, while
making every effort to give its views either informally or formally, but as
unambiguously as possible, the RBI generally respects the wishes and final inclination
of the government. The RBI, however, has to accept the responsibility for all its
decisions and actions, while being generally conscious of the impact of its articulation
and actions on the credibility for central banks operations. The Government, for its
part, recognises the dilemmas posed to RBI, and accord significant weight to central
bankÊs judgements.
In sum, de jure, RBI has not been accorded autonomy on par with recent trends in
some of the industrialised as well as emerging economies; but, de facto, the experience
reflects a growing degree of autonomy. During the period of reform since 1991, there
has been a gradual and mutually agreed progress towards greater autonomy in
matters relating particularly to financial markets and, in the conduct of monetary
policy.
Monetary Policy Framework
The preamble to the Reserve Bank of India Act, 1934 sets out in a way broadly the
tone of RBIÊs monetary policy objectives: „to regulate the issue of Bank notes and the
keeping of reserves with a view to securing monetary stability in India and generally
to operate the currency and credit system of the country to its advantage‰. I can do no
better than quote one of my distinguished predecessor and current Chairman,
Economic Advisory Council to the Prime Minister, Dr. C. Rangarajan on this subject:
25. Indian Financial System and
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"In a broad sense, the objectives of monetary policy can be no different from the
overall objectives of economic policy. The broad objectives of monetary policy in
India have been: (a) to maintain a reasonable degree of price stability; and (b) to help
accelerate the rate of economic growth. The emphasis as between the two objectives
has changed from year to year, depending upon the prevailing conditions." (1997)
Thus, although, unlike the current trend in many countries, there is no explicit
mandate for price stability, the twin objectives of monetary policy in India have
evolved as those of maintaining price stability and ensuring adequate flow of credit to
the productive sectors of the economy. Of late, considerations of macroeconomic and
financial stability have assumed an added importance in view of increasing openness
of the Indian economy.
In India, the broad money (M3) emerged as the nominal anchor from the mid-1980s
based on the premise of a stable relationship between money, output and prices. In
the late 1990s, in view of the ongoing financial openness and increasing evidence of
changes in the underlying transmission mechanism with interest rates and exchange
rates gaining in importance vis-a-vis quantity variables, it was felt that monetary
policy exclusively based on the demand function for money could lack precision. The
RBI, therefore, formally adopted a multiple indicator approach in April 1998 whereby
interest rates or rates of return in different financial markets along with data on
currency, credit, trade, capital flows, fiscal position, inflation, exchange rate, etc., are
juxtaposed with the output data for drawing policy perspectives. Such a shift was
gradual and a logical outcome of measures taken during the reform period since the
early 1990s. The switchover to a multiple indicator approach provided necessary
flexibility to respond more effectively to changes in domestic and international
economic environment and financial market conditions.
In the context of monetary policy making, let me highlight some recent developments:
First, the availability of instruments to manage, in the context of large capital flows
and sterilisation, has been strengthened with open market operations through Market
Stabilisation Scheme (MSS), which was introduced in April 2004. Under the MSS, the
RBI was allowed to issue government securities as part of liquidity sterilization
operations in the wake of large capital inflows and surplus liquidity conditions. While
these issuances do not provide budgetary support, interest costs are borne by the fisc;
as far as Government securities market is concerned, these securities are also traded in
the secondary market, on par with the other government stock.
Second, another development in the recent period has been to fix a numeraire to
inflation. The RBIÊs self-imposed medium-term ceiling on inflation at 5.0 per cent has
had salutary effect on inflation expectations and the socially tolerable rate of inflation
has come down. In recognition of IndiaÊs evolving integration with the global
economy and societal preferences in this regard, going forward, the resolve would be
to condition policy and expectations for inflation in the range of 4.0-4.5 per cent. This
would help in maintaining self accelerating growth, keeping in view the desirability
of medium-term inflation at around 3 per cent to ensure IndiaÊs smooth global
integration.
Third, while the preferred instruments are indirect, and varied, there is no hesitation
in taking recourse to direct instruments also, if circumstances so warrant. In fact,
complex situations do warrant the dynamics of different combination of direct and
indirect instruments, in multiple forms, to suit the conditions affecting transmission
mechanism.
Fourth, there are occasions when the medium-term goals, say reduction in cash
reserve ratio for banks, conflict with short-term compulsions of monetary
management requiring actions in both directions. Such operations do warrant
attention to appropriate articulation to ensure policy credibility. Drawing a distinction
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between medium-term reform goals and flexibility in short-term management is
considered something critical in the current Indian policy environment.
Fifth, while there is considerable merit in maintaining a broad distinction between
monetary and prudential policies of the central bank, the RBI did not hesitate, as a
complement to monetary tightening, to enhance the provisioning requirements and
risk weights for select categories of banking assets, namely real estate, housing and
capital market exposures. These measures were needed to specifically address the
issues of rapidly escalating asset prices and the possible impact on banksÊ balance
sheets in a bank dominated financial sector. This combination, and more important,
readiness of the RBI to use all instruments, has a credible impact, without undue
restraint on growth impulses.
Sixth, some of the important factors that shaped the changes in monetary policy
framework and operating procedures in India during the 1990s were the delinking of
budget deficit from its automatic monetisation by the RBI, deregulation of interest
rates, and development of the financial markets with reduced segmentation through
better linkages and development of appropriate trading, payments and settlement
systems along with technological infrastructure. With the enactment of the FRBM Act
in 2003, the RBI has withdrawn from participating in the primary issues of Central
Government securities with effect from April 2006. The recent legislative amendments
enable a flexible use of the CRR for monetary management, without being constrained
by a statutory floor or ceiling on the level of the CRR. The amendments also removed
the statutory floor of 25 per cent on the Statutory Liquidity Ratio (SLR) – which would
further improve the scope for flexible liquidity management by the RBI.
Major Issues in Analytics of Monetary Policies
Let me now discuss some major issues in the analytics of monetary policy in India. It
is generally recognised that monetary policy framework, to be efficient and effective
requires a reasonable assessment of potential output, a measure of unemployment,
and above all a convincing measure of inflation. Monetary authorities are acutely
aware of inherent and growing difficulties in regard to all these three but in India,
perhaps the problems are less than fully appreciated.
First, the measurement of potential output, a key prerequisite for forward looking
monetary policy, is generally difficult and more so in an increasingly globalising
economies like India. Recent studies have shown that the measurement of potential
output is extremely sensitive to the choice of methodology. In respect of India,
empirical exercises have projected potential output in India in the range of 6 to 8 per
cent, based on alternative approaches (Ranjan et al, 2007). Besides the wide range of
estimates, which in itself is indicative of the uncertainties surrounding potential
output, it needs to be noted that these estimates do not fully factor-in fast and
significant structural changes of the more recent period which are expected to have a
positive impact on potential output. Similarly, reliable estimates of inventories, unit
labour costs, coefficient of capacity utilisation and the like, which can serve as
proximate determinants of potential output, are not readily available. Thus, what
would appear in standard analysis as an elegant formulation of the monetary policy
operating rule is extremely difficult to estimate and fashion, in terms of policy
formulation, in India.
Second, lack of an economy-wide measure of the rate of unemployment makes the
conduct of monetary policy in India complex. While framing appropriate policy
responses to trends in output and inflation, policymakers would like to make some
assessment as to whether the economy is operating beyond or short of full
employment. In the absence of comprehensive data on employment, any measure of
the natural rate of unemployment (NRU) would be inadequate for policy formulation.
Given that only a small part of the Indian labour force, say about ten per cent, is
27. Indian Financial System and
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employed in the organised sector and the greater majority is in the unorganised
sector, estimation of unemployment is rendered difficult. Moreover, even within the
organised sector, the process of gradual outsourcing of jobs compounds the problem
of measurement.
A third set of issues which represents a gap in monetary policy analysis and, therefore,
a constraint on operational autonomy, is the assessment of inflationary pressures in
the economy. In terms of commodity prices, the issue relates to the choice of price
index and RBI has to depend on those which are readily available. In India, there are
two sets of indices, viz., wholesale price index (WPI) and consumer price indices
(CPIs). The latter is based on occupational classification and category of residence
(rural or urban). Four broad measures of CPIs are available at the national level to
capture prices of a defined basket of goods and services consumed by a particular
segment of the population : (i) CPI for Agricultural Labourers (CPI-AL); (ii) CPI for
Rural Labourers (CPI-RL); (iii) CPI for Industrial Workers (CPI-IW); and (iv) CPI for
Urban Non-Manual Employees (CPI-UNME). While these various measures of CPI do
move together in the long run, significant variations are observed in the short-run.
Moreover, food and fuel items together, having a weight of 52.6 per cent in CP-IW,
are prone to supply shocks, both domestic and global, which contribute to sudden
spikes in the inflation rate. As a result, this renders the assessment of inflationary
pressures difficult which, in turn, complicates the process of monetary policy
formulation. The recommendation of the National Statistical Commission (NSC)
regarding the importance of developing an appropriate index is relevant in this
regard and, when implemented, may alleviate the situation. The NSC has
recommended:
„As the current CPI series does not provide changes in the prices for the entire rural
and urban population since they are designed to measure the changes in the prices of
goods and services consumed by specific segments of the population, there is a need
to compile the CPI separately for the entire rural and urban population. TAC on SPCL
should give a methodology for compilation of CPI of rural and urban areas separately
using quinquennial NSS Consumer Expenditure Survey Data for the preparation of
the weighting diagram. TAC should also give a procedure for compiling a combined
index based on these two indices. The existing system of price data collection should
be suitably streamlined and augmented so as to provide price data for compilation of
CPI for rural and urban areas.‰
Instruments and Transmission of Monetary Policy:
Dynamics
The instruments that the central bank uses in day-to-day implementation of monetary
policy can be broadly classified into direct and indirect instruments. Typically, direct
instruments include cash and/or liquidity reserve ratios, directed credit and
administered interest rates. The indirect instruments generally operate through price
channel which cover repurchase (repos) and outright transactions in securities (open
market operations), standing facilities (refinance) and market-based discount
window. The RBI currently uses multiple instruments to ensure that appropriate
liquidity is maintained in the system, consistent with the objective of price stability, so
that all legitimate requirements of credit are met. Towards this end, the RBI pursues,
inter alia, a policy of active management of liquidity through open market operations
including liquidity adjustment facility (LAF), market stabilisation scheme and cash
reserve ratio, and deploys the policy instruments at its disposal, flexibly, as warranted
by the situation. Changes in fixed repo/reverse repo rates set by the RBI from time to
time for the conduct of its LAF, under which the central bank conducts daily auctions
for the banks, have emerged as the main instruments for interest rate signalling in the
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Indian economy. Institutional mechanisms have been evolved in parallel to improve
transparency and communication of monetary policy.
Traditionally, four key channels of monetary policy transmission are identified, viz.,
interest rate, credit aggregates, asset prices and exchange rate channels. The interest
rate channel emerges as the dominant transmission mechanism of monetary policy.
Nevertheless, it is fair to regard the credit channel as running alongside the interest
rate channel to produce monetary effects on real activity. Changes in interest rates by
the monetary authorities also induce movements in asset prices, which generate
wealth effects in terms of market valuations of financial assets and liabilities. With the
increasing integration of the Indian economy with the global economy the
significance of exchange rate channel has increased. In the recent period, a fifth
channel – expectations – has assumed prominence in the conduct of forward-looking
monetary policy in view of its influence on the traditional four channels.
In a market-oriented economy, policy signals are transmitted through an integrated
and efficient money, government securities and foreign exchange markets combined
with a robust payments and settlement system. The RBI has therefore, been engaged
in developing, widening and deepening of various markets and institutions.
Development of these markets has been done in a calibrated, sequenced and careful
manner such that these developments are in step with those in other markets in the
real sector. The sequencing has also been informed by the need to develop market
infrastructure, technology and capabilities of market participants and financial
institutions in a consistent manner.
A wide range of regulatory and institutional reforms were introduced in a planned
manner over a period to improve the efficiency of financial markets. These included
development of market micro structure, removal of structural bottlenecks,
introduction/diversification of new players/instruments, free pricing of financial
assets, relaxation of quantitative restrictions, better regulatory systems, introduction
of new technology, improvement in trading infrastructure, clearing and settlement
practices and greater transparency. Prudential norms were introduced early in the
reform phase, followed by interest rate deregulation and gradual lowering of
statutory pre-emptions. These policies were supplemented by strengthening of
institutions, encouraging good market practices, rationalised tax structures and
enabling legislative and accounting framework.
Going forward, a judicious mix of appropriate policy, strong macro economy and a
sound and resilient financial system would be necessary as the Indian economy
moves up in the ladder from an emerging market economy towards a more mature
economy. As development of financial markets is an ongoing process, initiatives to
further deepen and widen the various segments of financial markets would have to be
continuously pursued. As the economy ascends a higher growth path, with greater
opening up and financial integration with the rest of the world, the financial sector
development in all its aspects will need further scaling up along with corresponding
measures to continue regulatory modernisation and strengthening. Since the overall
objective of maintaining price stability in the context of economic growth and
financial stability will remain, the effort will be to harmonise the deregulation and
liberalisation of financial markets with the domestic developments in real as well as
fiscal sectors and global developments in international financial architecture. The
medium-term framework is to keep developing the financial markets, preserving the
integrity of financial markets and thereby, improving the transmission of monetary
policy impulses.
Constraints on Conduct of Monetary Policy
The reform period in India is characterised by gradual but impressive improvements
in effectiveness of monetary policy. High growth along with price and financial
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stability has been maintained while improving the sophistication and effectiveness of
monetary policy. There have been three important constraints on conduct of monetary
policy even within the existing legal framework but these are being gradually
overcome.
First, the fiscal dominance which, no doubt, is getting reduced, impedes the efficient
conduct of monetary policy. Progress in this regard is conducive to improved
monetary management.
Second, the predominance of publicly-owned financial intermediaries as well as non-financial
public enterprises has created a blurring of the demarcation between
funding of and by the Government vis-à-vis public sector as a whole. The joint family
approach to public sector still persists to a significant extent.
Third, despite significant progress, the maturation of financial markets is yet
incomplete which also reduces, at least partly, the effectiveness of monetary policy
instruments.
It is essential to recognise that there has been considerable alleviation on all fronts.
Fiscal deficits are being progressively reduced though the total public debt as a
proportion of GDP is still high by global standards. Share of wholly publicly owned
financial intermediaries is reduced though share of institutions with public sector
character remains high. The financial markets especially money, forex, government
securities and equity markets, are noticeably well developed now. There is scope for
further improvements in reform of financial markets but the progress in this regard is
linked to improvement in fiscal management and the dominant public sector in
financial intermediation especially their governance and risk management skills.
With progressive deregulation and development of financial markets, available
empirical evidence suggests some improvement in the pass-through from policy rates
to lending and deposit rates. Interest rates are emerging as a more potent instrument
of monetary policy than before. In this context, however, the continued existence of
administered interest rates distorts the interest rates structure and blunts its efficacy
in monetary policy transmission. Currently, several of administered interest rates are
prescribed over a range of deposit and lending activity, roughly accounting for a third
of overall banking business in India. While bank term deposit rates stand deregulated,
small savings and provident funds continue to be administered, thereby imparting a
degree of rigidity to the interest rate structure. In recent times, there has been some
tendency to widen the net of administered interest rates to cover bank loans for
agriculture. While such a tendency may not be an unlikely outcome, given the
predominance of publicly-owned financial intermediaries, it needs to be recognised
that the current system of pricing of bank loans appears less than satisfactory. There is
a public perception that banksÊ risk assessment and risk management processes are
less than appropriate and sub-optimal and that there is under pricing of credit for
corporates, while there could be overpricing of lending to agriculture and the small
scale industries. In addition to formal prescription of interest rates, public sector
banks which account for over seventy per cent of banking assets in a bank-dominated
economy are called upon by the majority shareholder to discharge social obligations
to reflect public policy priorities, through continuous interaction and periodical
reviews with chief executives.
In a way, moral suasion, the traditionally potent weapon with a central bank may, on
occasions, be exercised by the government to sub-serve public policy, broadly
defined. While the initiatives in the public sector, in some cases, add to the
effectiveness of monetary policy intent, they could operate in the opposite direction
also, especially when the perceptions and relative weights accorded to credit
expansion, price stability and financial stability by the government and RBI
significantly differ.
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In a financial system, where banks play a dominant role in non-banking activities
also, the transmission of monetary policy through both credit and monetary channels
is also impacted in this environment. In brief, the operation of monetary policy in
India has to be oriented around the predominantly public sector ownership of the
banking system. This plays a critical role not only in the transmission of monetary
policy signals but also in other public policy considerations which may overlap or
even dominate monetary policy objectives.
To conclude, the role of RBI has been redefined through gradual evolution and
adaptation, along with some statutory changes, and not through any radical
restructuring. Further, while assessing the autonomy of the RBI, one should recognise
that RBI is not a pure monetary authority but is responsible for several other functions
also, as a central bank. The developments in the recent past lead one to the conclusion
that, de facto, there has been enhancement of the autonomy of the RBI.
As regards monetary policy framework, the objectives remained the same but the
framework has been changed from time to time in a gradual fashion in response to the
evolving circumstances. Contextually, there are three important issues in the conduct
of monetary policy viz., the assessment of potential output, the measurement of
unemployment and appropriate measure of inflation.
While the policy tries to cope with these issues, a combination of instruments is
necessarily used in a flexible manner to meet these complexities. Every effort has been
made to improve the transmission channels especially through the financial markets,
and through regulatory and institutional reforms. In addition, there are some
constraints in the conduct of monetary policy, in particular, the fiscal impact,
predominant public ownership, prevalence of administered interest rate, etc. While
these challenges and dilemmas persist in the Indian context, every effort is made by
the RBI to meet the broader objectives set forth, from time to time.
Commercial Banks
Among the financial institutions commercial banks have played a very crucial role in
the economic development of India. Commercial banks play an important role in
economic development of developing country. Economic development involves
investment in various sectors of economy. The banks collect savings from the people
and mobilize saving for investment in industrial project. The investors borrow from
banks to finance the projects. Promote the growth rate through the reorientation of
loan policy. Special funds are provided to the investors for the completion of projects.
The banks provide a guarantee for industrial loan from international agencies. The
foreign capital flows to developing countries for investment in projects.
Besides normal banking the banks perform agency services for the client. The banks
buy and sell securities, make rent payments, receive subscription funds and collect
utility bills for the Government departments. Thus these banks save time and energy
of busy peoples. Banks arrange foreign exchange for the business transaction with
other countries. The facility of foreign currency account has resulted in an increase of
foreign exchange reserves. By opening a letter of credit the banks promote foreign
trade.
The banks are not simply collecting funds but also serve as a guide to the customer
investment of their funds. The policy of banks is an instrument in wide dispersal of
credit in country.
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Credit Rating Agencies
CRAs play a key role in financial markets by helping to reduce the informative
asymmetry between lenders and investors, on one side, and issuers on the other side,
about the creditworthiness of companies (corporate risk) or countries (sovereign risk).
CRAs' role has expanded with financial globalization and has received an additional
boost from Basel II which incorporates the ratings of CRAs into the rules for setting
weights for credit risk.
In making their ratings, CRAs analyse public and non-public financial and accounting
data as well as information about economic and political factors that may affect the
ability and willingness of a government or firms to meet their obligations in a timely
manner. However, CRAs lack transparency and do not provide clear information
about their methodologies.
Ratings tend to be sticky, lagging markets, and then to overreact when they do
change. This overreaction may have aggravated financial crises in the recent past,
contributing to financial instability and cross-country contagion. Moreover, the action
of countries which strive to maintain their rating grades through tight macroeconomic
policies may be counterproductive for long-term investment and growth.
Summary
The unit attempted to provide a brief exposure about the subject of financial system
and the structure of it to enabling to understand the spectrum of financial system and
a wide spectrum of financial and corporate advisory services.
Keywords
Financial system is concerned about money, credit and finance.
Money refers to the current medium of exchange or means of payment.
Financial Institutions are business organizations that act as mobilizes and
depositories of savings and as purveyors of credit or fiancé. They also provide various
financial services to the society.
A Mutual fund is a trust that pools the saving of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instrument such as shares, debentures and the other securities.
Development banking is the financing of projects assessed on the basis of their
viability to generate cash flows to meet the interest and repayment obligation. They
have an in-built promotional aspect, because projects have to fall within the overall
national industrial priorities, located preferably in backward areas and promoted by
entrepreneurs.
Venture capital is long-term risk capital to finance high technology projects, which
involve risk, but at the same time has strong potential for growth.
Venture capitalist pools their resources including managerial abilities to assist new
entrepreneurs in the early years of the project. Once the project reaches the stage of
profitability, they sell their equity holdings at high premium.
Unit banking consists of provision of banking services by a single institution. The size
as well as the area of operation is small and far more limited than branch banking.
However, the unit bank may have branches within a strictly limited area.
Bank-risk: Banks in the process of providing financial services assume various kinds
of risks, credit, interest rate, currency, liquidity and operational risks.
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Credit risk is the risk of loosing money when loans default. Credit risk or default risk
gives rise to problems of bank management.
Liquidity risk refers to the bankÊs ability to meet its cash obligations to depositors and
borrowers. A liability-sensitive position than to assets of interest rates reduces the
liquidity position of a bank.
Disintermediation: The withdrawal of funds from financial intermediaries for the
purpose of direct investment or direct financing.
Different Return (Alpha): JensenÊs measure of portfolio performance. It is the
difference between what was expected return and what was the actual return given
the systematic risk level.
Diversification of risk: Investment in more than one risky asset with the primary
objective of risk reduction.
Financial Intermediation: The process of facilitating the flow of funds from surplus
spending units to deficit units with the help of primary securities.
Depository: The objective of a depository is to provide for the maintenance of
ownership records of securities in an electronic book entry from and enable scrip less
trading in stock exchanges, thereby reducing settlement risk. To strengthen further
the depository and custodial services, the Finance Ministry mandated in the creation
National Clearance and Depository System. The Govt. introduced ordnance for
Depositories in 1995.
A hire purchase can be defined as a contractual arrangement under which the owner
lets his goods on hire for purchasing the goods in accordance with the terms of the
contract.
Leasing, as a financing concept, is an arrangement between two parties, the leasing
company or lesser and the user or lessee, whereby the former arranges to buy capital
equipment for the use of the latter for an agreed period of time in return for the
payment of rent.
„Lease is a contract whereby the owner of an asset (lesser) grants to another party (lessee) the
exclusive right to use the asset usually for an agreed period of time in return for the payment
of rent.‰
Financial lease is also known as Capital lease, Long-term lease, Net lease and Close
lease. In a financial lease, the lessee selects the equipments, settles the rice and terms
of sale and arranges with a leasing company to buy it.
Leveraged lease transaction -the leasing company called equity investor invests in the
equipments by borrowing a large chunk of the investment with full recourse to the
lessee and without any recourse to it.
Sale and Lease Back: Under this type of lease, a firm, which has an asset, sells it to the
leasing company and gets if back on lease. The asset is generally sold at its market
value.
Cross border lease is international leasing and is known as transnational leasing. It
related to a lease transaction between a lesser and lessee domiciled in different
countries and includes exports leasing.
Derivatives: A contract or an agreement for exchange of payments, whose value
derives from an underlying asset or underlying rates or indices.
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Futures trading are a natural out growth of the problems of maintaining a year-round
supply of seasonal products like agricultural crops. F.T is regulated by an agency of
the Department of Agriculture called the Commodity Futures trading Commission.
It regulates the futures exchanges, brokerage firms, Money managers and commodity
advisors.
Review Questions
1. What are the critical functions of financial system?
2. Write about the functions of financial institutions.
3. What are the corporate advisory services offered by FIs?
Further Readings
RBI publications can be sourced from the website.
34. Commercial Banks
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Unit 2 Commercial
Banks
Unit Structure
• Introduction
• Evolution of Commercial Banking
• Functions of Commercial Bank
• Risk Management
• Types of Risk
• RBI Guidelines for Risk Management
• Risk Management Systems
• Functions of Bank Capital
• Classification of Capital of Banks
• Norms for Capital Adequacy
• New Capital Adequacy Framework, 1999
• CRR and SLR on Interbank Deposits
• Management of Loans in a Commercial Bank
• Summary
• Keywords
• Review Questions
• Further Readings
Learning Objectives
At the conclusion of this unit you should be able:
• To understand about commercial banking system in India
• To learn about the factors affecting the growth and development, their functions and
contribution for the economic development of the nation
• To know about the different types risk of lending due to policies of the management and
Government, and the risk management practices in commercial banks
Introduction
Banks are financial firms and depend on economies of size and gains arising from
internalizing certain activities rather than relying on market transactions. Banks
provide packages of financial services which individuals find too costly to search out,
produce and monitor by them. Commercial banking offers a wide variety of services
to small, medium and large scale business units. The role of banking is more
prominent in the open economy.
Evolution of Commercial Banking
The evolution of banking which lasted for centuries until two types of modern
banking developed in the industrially advanced economies in the late nineteenth
century was an integral part of the expansion of capitalism. The techniques of banking
developed in the 17th century facilitated the industrial and territorial expansion that
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began about the same time. Banking systems evolved to meet the demands of the
constituents, vested interests are regulations governing their establishment. The
British system evolved around the central banking system with a central bank and
clearing banks with a large network of offices regulated by the central bank while the
German one evolved out of an identification of interests of finance, industry and
government to provide multiple services to the constituents. The US system however
was set apart by the dominance of the unit banks, the role played by an active inter
bank market in deposits and reserves and the cooperative lending practices. It also
features wholesale banking, which was the source of several innovative practices such
as rollover credit or flexi rate lending.
Factors affecting Banking Systems Growth
While provision of payment services involving the transfer of ownership of bank
deposits from one account to another, provision of deposit facilities and advance
credit by means of overdrafts and loans, by the discounting of bills and by trade
finance constitutes the ordinary business of banking, there has been a sea change in
the business of banking in the lasts forty years as exemplified by the rise of wholesale
banking, liability management, international banking, multiple currency loans,
rollover credits, securities lending collaterised mortgages note issuance facilities,
interest rate and currency options and financial futures. Credit cards, debit cards,
automated teller machines, e-cash and on-line banking, also a part of the worldwide
process of change, which began in 1960s, has been sustained ever since. Banks
globally have undergone fundamental changes because of the ongoing revolution in
information technology and communications.
The winds of change are reshaping the nature of banking and financial markets. The
demand for new types of services as well as the need to step up earnings through fee
income is the major factors. On the other hand, technological advances by reducing
costs give individuals and business firms direct access to markets reducing the need
for banks to offer certain services. Technological advances and subsequent
innovations have also led to the creation of new markets in terms of future options,
secondary mortgage markets expanding the range of portfolio strategies open to
financial intermediaries.
The changes in competitive conditions since 1990s with banks as a leading partner of
financial services industry have transformed banks (especially large international
ones) into new financial firms. Among the important factors behind changes in
competitive conditions are the internationalization of banking and financial markets.
The opening up of financial markets, the supply of cross-border financial services and
the impact of the entry of foreign commercial and investment banks are the important
features of the process. Other factors are the continuous process of deregulation,
partly as a consequence of the globalization of the markets and partly as a muddle
through process. The sources of change of banking industry, mergers and
amalgamations of banks, integration of markets by exchanges, growth of financial
information business and internet.
Desegmentation of Financial Services Industry
Global financial services industry in the 1990s has become desegmented on account of
the transformation of traditional business lines such as securities trading, insurance
and asset management and assuming concomitant risk. Banks had to diversify by
taking on related activities in different markets since their lending business suffered
on account of competition from securities market and institutional asset managers.
Banks had to seek new ways of intermediating funds.
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Punjab Technical University 27
The degree of disinter mediation, however, varies between banks and countries.
Banks in turn, face competition from non-bank financial institutions such as mutual
funds, investment banks, pension funds and insurance. During 1990s, the business of
banks with international focus experienced displacement, especially of lending by
other activities, larger growth in off balance sheet items relative to total assets and
larger increase in other operating income as compared to traditional deposit loan
spread. Derivatives and fee based income became important sources of income.
Restructuring of the banking industry is reflected in banks expanding into other
segments of financial industry and by consolidation within the banking industry. In
domestic insurance, business banks distribute insurance products such as annuities
and variable life policies that mirror other long-term investment products to retail
customers. In Europe, banks distribute standardized savings type policies referred to
as bank assurance, and some have acquired insurance companies. With the passage of
time, recent legislation banks in USA can now enter insurance business. Banks were
earlier fastest growing distributors of annuities and life insurance policies. They have
also set up or acquired asset management units to earn fee income from providing
investment management to their traditional customers. Universal banks in Europe
which have been providing asset management services have to meet competition now
from asset managers.
Mergers and Acquisitions
Finally, there is a wave of mergers and acquisition activities among domestic banks in
North America, Japan and Europe since size is considered an advantage in competing
both domestically and internationally. Further, international competition is a reality
since restrictions on the entry of foreign financial institutions are being removed.
Global banks can maintain extensive distribution channels, develop new products
and transfer risks around the globe. The trend in disaggregation at national and
international levels is likely to lead banks and other financial institutions to become
more specialized, niche players. The institutions will specialize only in few areas and
meet particular customer demands. Liberalisation of domestic capital markets and of
international capital flows since the early 1970s coupled with rapid gain in
information technology has been the catalyst for financial innovation and the growth
in cross border capital movements. These national financial markets have become
increasingly integrated into a single financial system.
Role of Exchanges
Global markets are integrated by the exchanges which link up across borders. This
results in reduction of costs, lower trading fee and longer trading hours. SIMEX and
Chicago Mercantile Exchanges are also relaxing membership criteria to expand
participation by including off site members. The switch from floor trading to screen
based trading has also opened the door to remote membership and broader
participation. Broader membership means access to more capital and less risk for
clearing house and larger volume. Some exchanges (MATIF) are combining floor
trading with electronic trading by allowing some of each.
Financial Information Business
Facilitating globalisation-Reuters Holding, Bloomberg, Dow Jones Markets and
Bridge Information services are the four large firms. The line between information
provision and trading is becoming blurred in the race to provide globally accessible
financial services.
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Internet
Internet is breeding a host of niche players with connection to financial institutions
and investors.
Market Oriented vs. Bank Oriented Financial Systems
The two systems of banking are the market-oriented financial system (Anglo Saxon)
characterized by a division of functions and the bank-oriented financial system
(Central European) characterized by universal banking. In a market-oriented financial
system, specialized financial institutions including banks, financial markets and
market intermediaries cater to the different financial needs. In a bank-oriented
financial system, savings are largely transferred directly from those who generate
them to those wishing to use them by the intermediation of banks. Britain with its
functional specialisation represents a market-oriented financial system while
Germany with her tradition of universal banking as a bank-oriented financial system.
Branch vs. Unit Banking Systems
The unit and branch banking systems evolved around the central banking system
which consists of the central bank, commercial banks and other financial institutions.
Unit banking consists of provision of banking services by a single institution. The size
as well as the area of operation is small and far more limited than branch banking.
However, the unit bank may have branches within a strictly limited area. A third of
banking offices in the United States are unit banks. Their presence in USA is a result
of law vested interests and the ability of this type of organization to meet the
demands of banking customers. It was also a practical method earlier because of
inadequate transportation and communication facilities. Unit banking gave way to
branch banking in many parts of USA with the economic interdependence of large
areas, the development of transportation and communication, the growth of big
business firms, a more mobile population and increasing emphasis placed on location
and convenience.
The banking systems operating in different countries may be classified into branch
banking and unit banking system. Unit banking exists when banking services are
provided by single offices. Some of these banks are often allowed to have some
branches within a limited area. These unit banks are linked together by the
correspondent bank system. The correspondent bank system acts as a medium for
remittances between one bank and another and provides facilities for consultation for
lending risks and sharing loan business.
Approximately a third of American banking offices are unit banks. The presence of
unit banks in American banking system is partly a be termed as local banking system
emphasizing the limited areas served by result of law, vested interests and the ability
of the unit type of bank organization to meet the demands of banking customers. In
the absence of transportation and communication facilities in the nineteenth century,
the most practical banking organization was unit banking. The unit banking system in
USA would perhaps most banks rather than a form of bank organization. Unit
banking is largely concentrated between the Mississippi and the Rockies.
Functions of Commercial Bank
The functions of a commercial bank are:
To change cash for bank deposits and bank deposits for cash
To transfer bank deposits between individuals andor companies
38. Commercial Banks
Notes
Punjab Technical University 29
To exchange deposits for bills of exchange, government bonds, the secured and
unsecured promises of trade and industrial units
To underwrite capital issues, they are also allowed to invest 5% of their incremental
deposit liabilities in shares and debentures in the primary and secondary markets.
The commercial banks have set up subsidiaries to provide advice on portfolio
management or investment counseling. They also offer their constituents services to
pay insurance advice on-tax problems and undertake executive and trustee services
Transformation Services
Banks combine various types of transformation services with financial intermediation.
They provide three transformation services when they undertake intermediation
process.
Firstly, liability, asset and size transformation consist of mobilization funds and their
allocation (provision of large loans on the basis of numerous small deposits).
Secondly, maturity transformation by offering the savers, the relatively short-term
claim on liquid deposits they prefer and providing borrowers long-term loans which
are better matched to the cash flows generated by their investment.
Finally, risk transformation by transforming and reducing the risk involved in direct
lending by acquiring more diversified portfolios than individual savers can.
Commercial banks by effectively appraising credit requests can channel funds into
productive uses.
Transformation Services and Risks
Banks incur risks while undertaking transformation services. In the past three
decades, banks abroad assumed new roles and accepted new forms of financial
intermediation by undertaking currency and interest rate swaps and of dealing in
financial futures, options and forward agreements. These new instruments reflect
considerable flexibility in responding to market situations and adjusting continually
assets and liabilities both on and off balance sheet, while enhancing profitability.
Risk Management
Basic Function of a Bank
Risk is inherent in banking and is unavoidable. The basic function of bank
management is risk management. In the words of Alan Greenspan, former Chairman
of the Federal Reserve Board of US (Conference at Federal Reserve Bank of Chicago,
May 12, 1994), „traditional banking can be viewed at an elemental level as simply the
measurement, management and acceptance of risk‰ and banking involves
understanding, processing and using massive amounts of information regarding the
credit risks, market risks and other risks inherent in a vast array of p products and
services, many of which do not involve traditional lending, deposit taking and
payment services
Banks in the process of providing financial services assume various kinds of risks,
credit, interest rate, currency, liquidity and operational risks. To some extent, these
risks could be managed through sound business practices and the others through a
combination of product design and pricing. In the past banks concentrated on asset
management with liquidity and profitability being regarded as two opposing
considerations. As a result, banks ended up distributing assets in such a way that for
given liquidity level, the return was the maximum.