Understanding the fundamental parts of Banking

Why banks declare dividends?

Commercial organizations declare dividends when they make profits or surplus from their business. Part of the profits is shared with the share holders of the company in the form of dividends. Banks as commercial organizations, also adopt the same procedure for their shareholders.

Why public sector banks present dividend cheques to the central government ?

The majority shareholders of public sector banks is the government and hence when dividends are declared the government is the biggest beneficiary.

The number of subsidiaries of SBI (State Bank of India) is reducing why?

The number of subsidiaries of SBI has come down to 5 from 7 after the merger of State Bank of Saurashtra earlier and State Bank of Indore recently in 2010, with the parent bank. This is as a consequence of making State Bank of India as the biggest bank in India and enlarging its size to complete with global banks.

What is the percentage of government holding in public sector banks?

The government holding in public sector banks cannot be reduced below 51 percent as per current law. The holding in individual banks may differ depending upon the stake of the government which at any given time is more than 51 percent.

Why HDFC bank and ICICI bank not qualify as  Indian banks?

Any company with more than 51 percent foreign equity is considered as a foreign company. HDFC with 64 percent and ICICI with 79 percent foreign equity fall in this category through majority voting rights are with Indians.

What is meant by liquidity of banks?

Liquidity of banks indicates the ability to convert its assets into cash on demand. The liquid assets of a bank is defined by its holdings in cash balances with RBI, money at call and short notice, inter bank deposits due within 30 days. It is extremely important to have liquidity for banks and hence the need to maintain cash reserve ratio and statutory liquidity ratio which are cash and investments in government securities.

What are payment systems?

Payment systems have been defined as the instruments, rules and procedures that enable users to meet payment obligations. Types of payment instruments are cash, paper ( promissory notes, bill of exchange, drafts, cheques), plastic cards and electronic funds transfer methods.

Banks are supposed to observe Prudential norms. What are these Norms?

Banks are an important sector of the economy and hence need to be fully protected and safe. As per international best practices, bank are required to observe certain norms relating to capital adequacy, asset classification and provisioning for proper functioning.

Legal amount/Currency Notes/Bill of exchange/ Promissory note/Courtesy amount

  Legal amount and Courtesy amount

Legal Amount:- The amount in words is called the legal amount as per CTS(Cheque Truncation System) 2010 gudilines of RBI.

Courtesy Amount:- The amount in figure is called the courtesy amount as per CTS 2010 guidelines of RBI.

  

Currency Notes and Promissory Note

Currency notes being money, though full fill a number of promissory notes, are not promissory notes and have been excluded from the definition of u/s Section 4 of Negotiable Instrument Act and are governed by Indian Currency Act Section 21, Promissory note is an instrument (a) in writing, (b) containing an unconditional promise, (c) signed by maker (d) to pay certain sum of money, (e) to or to the order of a certain 'person' or the 'bearer' of the instrument.

 

Bill of Exchange and Promissory note made payable to bearer-

As per section 31 of RBI Act, persons other than RBI or Central Government can draw, accept, make or issue any bill of exchange or promissory note payable to bearer on demand.

Promissory note definition comes under Negotiable instrument act 1881-section 4, Bill of exchange definition comes under Section 5 of Negotiable instrument act 1881.

IBA/IDBI/IBPS/IRDA

What is the Indian Bank Association?

IBA(Indian Bank Association) Coordinates the various important activities of the banking industry in the country. It was established in 26 September, 1946 with 22 members to meet the diverse needs of the member banks.
A change in its rules in 1990 enabled the financial services industry and other related units to join as associate members. IBA is the body which decides the wage settlements for employees of the public sector banks.

The public sector banks include 20 nationalized banks including IDBI(industrial development bank of India) bank limited and the State bank group of state bank of India and its 5 subsidiaries.

IDBI(Industrial Development Bank of India): The IDBI was established on 1st July 1964 under an act of parliament as a wholly owned subsidiary of the Reserve Bank of India. On 16th February 1976, the ownership of IDBI was transferred to the Government of India.
Headquarters of IDBI is at Mumbai.

IBPS(Institute of Banking Personnel Selection): The IBPS is an autonomous agency in India. Which started its operation in 1995 as Personnel Selection Services (PSS). In 1984, IBPS became an independent entity at behest of Reserve Bank of India and Public Sector Banks.

IRDA(Insurance Regulatory and Development Authority): IRDA is Regulator for insurance sector, The IRDA was constituted in 2000, and set up by the Parliament under the IRDA act, 1999. It is 10 member body with a chairman, 4 whole time members and 4 part time members.

Regulatory bodies and their sectors in India

There are some important Regulators and their sectors and also Head Quarter Which are given below- 
Regulator: Sector: Head Quarter     

(1)Insurance Regulatory and Development Authority (IRDA): Insurance Industry-Hydrabad.  

(2)Forward Market Commission(FMC): Commodity Market-Mumbai.                                   

(3) Pension Fund Regulatory and Development Authority (PFRDA): Pension Sector- New Delhi.               

(4) Securities and Exchange Board of India (SEBI):Security and capital market stock broking and merchant banking, chit fund companies- Mumbai.                                               

(5) Telecom Regulatory Authority of India(TRAI):Telecommunication Industry- New Delhi.                           
(6) Reserve Bank of India (RBI): Financial system and monetary policy- Mumbai   

Financial Regulatory Bodies in India :-  

In India, the financial system is regulated with the help of independent regulators, associated with the field of insurance, banking, commodity market, and capital market and also the field of pension funds. On the other hand, the Indian Government is also known for playing a significant role in controlling the field of financial security and also influencing the roles of such mentioned regulators. You must be aware of the regulatory bodies and their functions, before a final say. The most prominent of all is RBI or Reserve Bank of India. Let us look in detail about various Financial Regulatory Bodies in India. 

Reserve Banks of India (RBI):-          Reserve Bank of India is the apex monetary Institution of India. It is also called as the central bank of the country.

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

The Central Office is where the Governor sits and is where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Securities and Exchange Board of India (SEBI):-

Apart from RBI, SEBI also forms a major part under the financial regulatory body of India. This regulatory body(SEBI) is associated with the security markets in Indian Territory. Established in the year 1988, the SEBI Act came into power in the year 1992, 12th April. The board comprises of a Chairman, Whole time members, Joint secretary, member appointed, Deputy Governor of RBI, secretary of corporate affair ministry and also part time member. There are three groups, which fall under this category, and those are the investors, the security issuers and market intermediaries.

Pension Fund Regulatory and Development Authority (PFRDA):-

Pension Fund regulatory is a pension related authority, which was established in the year 2003 by the Indian Government. It is authorized by the Finance Ministry, and it helps in promoting income security of old age by regulating and also developing pension funds. On the other hand, this group can also help in protecting the interest rate of the subscribers, associated with the schemes of pension money along with the related matters. PFRDA is also responsible for the appointment of different other intermediate agencies like Pension fund managers, CRA, NPS Trustee Bank and more.

Forward Markets Commission (FMC):-

FMC also plays a major role. It is the chief regulator of the commodity(MCX, NCDEX, NMCE, UCX etc) of the Indian futures market. As per the latest news feed, it has regulated the amount of Rs. 17 trillion, under the commodity trades. Headquarter is located in Mumbai, and the financial regulatory agency is working in collaboration with the Finance Ministry. The chairman of FMC works together with the Members of the same organization to meet the required ends. The main aim of this body is to advise the Central Government on matters of the Forwards Contracts Act, 1952.

Insurance Regulatory and Development Authority (IRDA):-

Lastly, it is better to mention the name of IRDA or insurance regulatory and Development authority, as a major part of the financial body. This company is going to regulate the apex statutory body, which will regulate and at the same time, develop the insurance industry. It comprised of the Indian Parliamentary act and was passed duly by the Indian Government. Headquarter of this group is in Hyderabad, and it was shifted from Delhi to Hyderabad. These are some of the best possible points, which you can try and focus at, while dealing with financial bodies of India                     

5 Tips to Remember Vocabulary

Gaining mastery in a new language can seem like an impossible task, especially when that language is as complex as English! As experts say, many students preparing for competitive exams like Bank Po /Clerk, IELTS, GRE,  GMAT, CAT and other government exams have the following query: 
" After working doggedly to improve my English, I still find it difficult to memorize the large number of words that I come across. It feels like all my hard work comes to naught"
In our opinion, the approach taken by the students needs to be rectified, as merely memorizing a lot of words together will never work for you. You will end up forgetting most of them and fail to recognize when you need it the most. But fret not ( don't worry), for we have come up with short list of 5 tips that has been immensely beneficial for the students. Here are the tips you should follow:

(1) Tip one: Interest- Remembere that topics that interest you will be easier to learn. Therefore, carefully select words that you will find useful or interesting. Choose topics that relate to your life at the moment to make the words you learn more relevant. For Example, if you have a college seminar next week,learn some English vocabulary to use in seminar. Even if you don't use English in the actual seminar, connecting the words to real situation will help you remembere them.

(2) Tip two: Hear and Watch- First of all watch everything with subtitles, hear news in English, see news in English. If there is any particular word being used by a character that seems unfamiliar to you, note it down and also see the situation in which he is speaking the same. This will provide you context for that word (that means you know contextual meaning) and you will be able to use it in a similar situation in real life!

(3) Tip three: Limit them- Instead of mugging up 20-30 words at one go, restrict yourself to learning 5-10 words per week only. Use them in different conversation that you have with people. Learn their meanings and visualize what kind of conversations you could have with people in that week where these words could be used. Remembere, building a solid repository of words this way will take some time so prepare for your exams way before they are scheduled and most of all, don't become impatient. The results will show eventually.

(4) Tip Four: Connect- Its easier to memorize words based on common theme. Make your own connections between words and possibly organize them in a spider digram or on the same pages of your notebook.

(5) Tip five: Associate- Assign different colours to different words. This association will help you recall vocabulary later. To prevent the system from becoming confusing make sure you have a consistent theme. For Example, you could use different colours for verbs, nouns and adjectives.

Number of Entities to Set up ATM labels,

RBI Permits 4 Non bank entities to set up label ATMs; The Reserve Bank of India has issued 'Certificate of Authorization' to four non bank entities:- ( Muthoot Finance, Prizm Payment Services, Tata Communication Payment Solutions and Vakrangee Limited) to Set up White Label ATMs in the Country.                                                                              
Most of the ATMs belong to banks, but the cash dispensing machines which are owned and operated by non banking companies are called White Label ATMs.

RBI Permits Srei to roll out White Label ATMs; Srei Infrastructure Finance is  started its White Label ATM's between Uttar Pradesh and Bihar with a pilot of 200 Tire-III towns.

Basic Savings Bank Deposit Account (BSBDA)

Definition and Purpose:  Under the guidelines issued on August 10,2012 by RBI, Any individual including poor or those from weaker section of the society, can open zero balance account in any bank,BSBDA guidelines are applicable to all Scheduled Commercial banks in India, including foreign banks having branches in India. The aim of  introducing ' Basic Saving Bank Deposit Account' is very much part of the efforts of RBI for furthering financial inclusion objectives. 

The Basic Savings Bank Deposit Account (BSBDA) is a type of account that aims to increase financial inclusion by providing basic banking facilities with minimum charges. There is no minimum balance requirement in BSBDA.

The main and basic facilities provided under Basic Savings Bank Deposit Account (BSBDA) are mentioned below:

Withdrawals Limit Minimum and Maximum: No requirement of minimum balance,  It is a normal banking service available to all (not only to poor people, it is for all and any one can open a BSBDA Account).Services include deposit and withdrawal of cash at bank branch as well as ATM card No limit on the number of deposits that can be made in a month; However maximum of four withdrawals in a month. Facility of ATM card or ATM-cum-Debit Card

These facilities are provided without any charge by the bank. No charge will be levied for non-operation/activation of in-operative 'Basic Savings Bank Deposit Account'. 

Relaxations in KYC norms for BSBDAs (BSBDA Small Account)
When BSBDA is opened on the basis of Simplified KYC, the accounts would be treated as "BSBDA-SMALL account".                                         

The conditions of 'BSBDA-Small Account' are:

Total of all credits in a financial year does not exceed Rs. 1 Lakh;Total of all withdrawals and transfers (Debits) in a month does not exceed Rs. 10,000; and The balance at any point of time does not exceed Rs 50,000. Small accounts are valid for a period of 12 months initially which may be extended by another 12 months if the person provides proof of having applied for an Officially Valid Document. Small Accounts can only be opened at CBS linked branches of banks.

Foreign Currency Accounts;NOSTRO,VOSTRO,LORO

  Foreign Currency Accounts or Correspondent Bank Accounts or Currency  Accounts

Account	Description
NOSTRO	Account of State Bank with Citibank in NewYork in $. Also Called our account with you
VOSTRO	Citibank Account with State Bank in New Delhi in Indian Rupee. Also called your account with us
LORO	When PNB wants to utilize the above NOSTRO Account, for PNB it becomes LORO account. Also called their account with them.

Positions in Foreign Currency

                                                   Positions in Foreign Currency

Where no balance is receivable or payable (sale=purchase)	Closed Position
Where balance is either receivable or payable (i.e. sale greater than purchase or purchase greater than sale)	Open Position
where sale greater than purchase	oversold position or short position
Where purchase greater than sale	overbought position or Long Position
Oversold(short) position is squared by	Purchase of foreign currency
If rates are increasing while squaring short position	Bank incurs loss
If rates are declining while squaring short position	Bank gains
Overbought or Long position is squared by	Sale of foreign currency
If rates are increasing while squaring the Long position	Bank gains
If rates are declining while squaring Long position	Bank incurs loss
Balance in hand during day time	Day Light position
Balance in hand at close of the day	Overnight Position

Currency Rates; From Bankers' Point of View

                  Currency Rates;From Bankers' angle ' buy low  sell high'

Rate	Description
Direct	When foreign currency is fixed (say $) and Indian rupees are variable, In India Direct rates are quoted. When rupee appreciates its beneficial to the importer and when rupee depreciates it benefits the exporter
Indirect	When foreign currency is variable and Indian rupee is kept as fixed unit
Buying	When bank delivers rupees and gets foreign exchange (say in case of purchase of export bill or encashment of foreign currency travellers' cheques or receipt of remittance from abroad
Selling	When bank delivers foreign currency and gets Indian rupees (say in case of payment of import bill or issue of foreign currency travellers' cheques or sending of remittance abroad
Spot	It is cash or value today or immediately. TOM= T+1 that is rate today and deal completion by next day. Spot=T+2 (that is 48 hours)
Forward	Deal today and delivery later on say 1,2,3,4,6,12 months afterwards. It can be at a premium or at a discount. If foreign currency will be available at a higher price ( that is for more rupees), it carries premium. If available at a lower price (say for lesser rupees), it is at a discount.

Currency Swap and Currency Future

Currency Swap:- A Foreign Currency Swap is an agreement to make a currency exchange between two foreign parties. The agreement Consists of swapping Principal and Interest Payments on a loan made in one currency for principal and Interest payments of loan of equal value in another Currency. The Federal Reserve system offered this type of swap to several developing countries in 2008. The World Bank first introduced Currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years. They differ from interest rates swaps because they also involve principal.                                 Currency Future:- A Currency Future also known as an FX  future or a foreign exchange future, is a futures Contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date; see foreign exchange derivative. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of the other currency.   This can be different from the standard way of quoting in the Spot foreign exchange markets.  The trade unit of each Contract in then a Certain amount of other Currency, for instance €125000. Most Contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each Currency. However most Contracts are closed out before that. Investors can close out the Contract at any time prior to the Contract's delivery date.

International Trade Relationship Building ways or Creating Ways

(1) Management Contract (2) Opening of New Branches (3) Franchising (4) Merger and Acquisition.                                      (1) Management Contract: Management Contract Means that a company takes the responsibility for the management and the administration of another company for multinational companies to hand over specific tasks such as calculating employees interest to other specialized companies. This helps the multinational corporations as they do not have to invest to create a new team for calculating these interest.                                 (2) Opening of New Branches: Many Companies are worried that their identities may be stolen if they use the 'Franchising' or 'Management Contract' model to expend their business in the international market. These Companies usually open up their own branches in the foreign markets. It is very expensive procedure as the company has to invest heavily in market research, create its own team in foreign, customers its offering as per the demand in the international market etc. All on its own. Thus, many large organisations leverage the opportunity of franchising.             (3) Franchising: It is a Contractual relationship between owner of the company (franchiser) and buyer of a Brand Name (franchisee). The owner of the company allows the franchisee to use its trademark along with certain business systems and processes in exchange for a fee. Franchising helps a small business to get the recognition of a larger company. The larger company usually charges a commission on the profits.                                              (4) Merger and Acquisition: A merger takes place when two or more than two Companies join together create a larger company. However, during a merger, merger companies forego their identities and a new company is formed.  In case of Acquisition, usually a larger company takes over a smaller company by either buying all of its shares or paying up a specified amount. The acquiring company retains its name it is important to remember that in a general scenario most mergers take place to help companies diversify into new domains whereas acquisitions take place to avail Competition in the future.

Banking History

History of Banking in India

Banking system is mainly divided into commercial banks, Regional Rural Banks, Cooperative Banks etc. The important phase in the history of Indian banking was nationalization of banks that makes way for the Indian Economy to enter in the top 10 economies of the world. In this article, we will brief you about the history of banking in India.

Phases of Indian Banking System - 

The Pre-Independence Phase i.e. before 1947,Second Phase from 1947 to 1991,Third Phase 1991 and beyond

Pre-Independence Phase i.e. before 1947 - 

This phase is characterized by the presence of a large number of banks (more than 600). Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta (now Kolkata) in 1770 which ceased to operate in 1832. After that many banks came but were not successful like -

General Bank of India (1786-1791)

Oudh Commercial Bank (1881-1958) – the first commercial bank of India.

Whereas some are successful and continue to lead even now like -

Allahabad Bank (Established in1865)

Punjab National Bank (,,1894, with HQ in Lahore (that time))

Bank of India (,,1906)

Bank of Baroda (,,1908)

Central Bank of India (,,1911)

While some others like Bank of Bengal (,,1806), Bank of Bombay (,,1840), Bank of Madras (,,1843) merged into a single entity in 1921 which came to be known as Imperial Bank of India. Imperial Bank of India was later renamed in 1955 as the State Bank of India.In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young Commission (set up in 1926). In this time period, most of the bank were small in size and suffered from the high rate of failures. As a result, public condence is low in these banks and deposit mobilization was also very slow. People continued to rely on the unorganized sector (money lenders and indigenous bankers).
Second phase from 1947 to 1991 - 

Broadly the main characteristic feature of this phase is the Nationalization of the bank.With the view of economic planning, nationalization emerged as the effective measure.

Need for nationalization in India -

The banks mostly catered to the needs of large industries, big business houses.Sectors such as agriculture, small-scale industries and exports were lagging behind.The poor masses continued to be exploited by the moneylenders

Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.

Central Bank of India,Bank of India, United Commercial Bank,Allahabad Bank,United Bank,Bank of Maharashtra,Punjab National Bank,Bank of Baroda,Union Bank of India,Indian Overseas Bank,Canara Bank,Syndicate Bank,Indian Bank,Dena Bank

Six more commercial banks were nationalized in April 1980.

New Bank of India,Vijaya Bank,Andhra Bank,Punjab and Sindh Bank,Oriental Bank of Commerce,Corporation Bank

Meanwhile, on the recommendation of Narasimham committee, Regional Rural Banks (RRBs) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large unserved population of rural areas and promoting financial inclusion.

With a view to meet the specic requirement from the different sector (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also setup like -

NABARD (Established in1982),EXIM (,,1982),NHB (,,1988),SIDBI (,,1990)

Impact of Nationalization -

Improved eciency in the Banking system – since the public's condence got boosted.Sectors such as Agriculture, small and medium industries started getting funds which led to economic growth.
Third Phase 1991 and beyond - 

This period saw a remarkable growth in the process of development of banks with the liberalization of economic policies. Even after nationalization and the subsequent regulations that followed, a large portion of masses is untouched by the banking services. Considering this, in 1991, the Narasimham committee gave its recommendation i.e. to allow the entry of private sector players into the banking system. Following this, RBI gave license to 10 private entities, out of which few survived the market demands, which are- ICICI, HDFC, Axis Bank, IndusInd Bank, DCB. In 1998, the Narsimham committee again recommended entry of more private players. As a result, RBI gave license to the following new bies:

Kotak Mahindra Bank (Established in 2001)

Yes Bank (,,2004)

In 2013-14, 3 round of bank licensing took place. And in 2015, IDFC bank and Bandhan Bank emerged. In order to further financial inclusion, RBI also proposed to set up 2 new kinds of banks i.e. Payment Banks and Small Banks.

Financial Inclusion; objective, importance, benefits, example

What is Financial Inclusion: Financial inclusion is the process of  ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and lower income groups at an affordable cost in a fair and transparent manner by mainstream institutional players. It is to take banking services to everybody to meet their savings, credit and remittances need initially and need for other financial products and services subsequently.       

All villages with a population of more than 2000 will have access to financial services through a banking outlet, not necessarily a bank branch, by March 2012. Public Sector banks have been asked to draw up their respective plans as to how they propose to achieve the objective. RBI has permitted opening of branches in the rural areas without the need for formal approval thus insisting on greater coverage of unrepresented areas.                     

RBI has initiated the concept of banking correspondents who would travel from village to village with hand held devices to provide basic banking services. Many local people have been permitted to discharge this rule in association with banks.   No frills account, Mobile banking, Microfinance institutions, self help groups, kishan credit are part of financial inclusion which makes financial inclusion successful. Micro insurance is also being pushed to promote the benefits of insurance. Banks have initiated many social initiatives in rural sector like adoption of villages for all around development, healthcare programmes, support to education etc in order that villages also keep pace with the growth in the urban areas.                                           

 Constitutes financial inclusion: The requirements to be fulfilled by banks to qualify in achieving the objective of financial inclusion are:-  

(i) Providing a savings account with overdraft facility.                                             

(ii) Pure savings product  like recurring deposit account or a variable recurring deposit account.  

(iii) Remittance product to facilitate electronic banking transfer.           

(iv) credit products like kisan credit card or general credit card.                     The eligibility criteria for business correspondents is being periodically relaxed by RBI in order that the system of doorstep banking and banking through customer services points is maximized to cover the large number of unbanked  villages. Efforts are being made in right earnest but the progress is still slow as the working model and delivery system is still in the process of application and evaluation.   

Financial inclusion Inevitable: Financial inclusion as a major economic policy objective is under close scrutiny and monitoring of the government of India. RBI has also directed that performance of commercial banks under this parameter would be closely observed and regular reporting by the banks has been mandated. A separate fund has been created to part reimburse the expenses of banks in promoting activities to achieve the desired progress in this area. There was no way of promoting savings and to channelize these savings in the national economic in the absence of banks.                                             

Why need stress on Financial inclusion: Financial inclusion is necessary for financial stability of a country as coexistence is mandatory.  It is well known that stability, poverty and backwardness cannot prevail simultaneously for long.   World Bank development indicators suggest a strong connect between financial access and development. Research studies also point towords a distinct rise in income levels of countries with high number of branches and more deposit accounts of banks.   

Benefits of Financial inclusion:- 

(1) They can improve financial conditions and standard of living.  

(2) They increase economic activities and correspondingly open up employment avenues.               

(3) Higher disposable income and wider deposit base.                         

(4) Greater business opportunities for commercial organizations, by volume and range of services or products.                                         

(5) social welfare schemes become more meaningful.                            

(6) Small customers make for stable markets.          

The Renewed Focus:- The growth of the economy in this period had lessons for the researchers and policy makers.  The huge growth story, which made everyone sing praises brought a serious issue to surface. This growth was not inclusive as bulk of the Indian population was deprived of the benefits.  In fact, the disparity between the haves and have nots has become sharper and the gap wider. It is well known that economic and financial stability cannot be achieved in case of such sharp divisions. This awareness and concern brought back the focus on financial inclusion and the necessity to maximize the coverage of banking services within the country.

Age Limit for Managing Directors and Chief Executive Officers in Private Sector Banks

Under Companies Act 2013 the RBI has decided to fix the minimum Age to become Manager is 21 yrear. Maximum Age for Managing Directors and chief Executive Officers in private sector bank is 70 year. The PJ Nayak committee recommended a maximum age 65 for private sector banks CEOs. This issue emerged  when the board of Indusland Bank specified the extension of tenure of Romeah Sobti by another 3 years extension the move triggered speculation that the RBI wanted to fix the retirement age at 65 year.

PUBLIC PROVIDENT FUND

Public Provident Fund:- The Public Provident Fund is saving-cum-tax-saving instrument in India, introduced by the National saving Institute of the Ministry of finance in 1968 The aim of the PPF is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits.        

Public Provident Fund (PPF) is operated by State Bank of India or Selected Banks and Post Offices. Account can be opened by Individuals ( joint account not allowed since 13.3.2005). Minimum Contribution Rupees 500 and Maximum Contribution 1.5 Lakh ( not more than 12 installments in a year).                                         

Period:- Generally 15 year is time period but it can be extended 5 year at a time for 3 such blocks.     

Loan:- Loan allowed after 3rd year of opening of account till end of 6th year.                                   

Nomination:- Nomination in favour of one or more person allowed. 

Interest:- Interest rate is 8.7 % ( since 1.4.2013) allowed on the minimum balance between 5th and Last day of the month. Withdrawal after 6th year allowed Subject to Maximum 50% of the balance at the end of 2nd preceding financial year.

Banking Ombudsman Scheme

Banking Ombudsman Scheme came into the picture in order to resolve the complaints of bank customers related to certain services rendered by the banks. 

Banking Ombudsman was introduced in India for the First time in 1995 under Section 35 A of the Banking Regulation Act, 1949 by RBI and underwent a revision in 2002. 

Banking Ombudsman Scheme became operational in the country on 1st January 2006, and also replaced the previously operational Scheme of 2002. 

Banking Ombudsman Scheme 2006:-

The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services. The Banking Ombudsman does not charge any fee for filling and resolving customers' complaints. The amount, if any,to be paid by the banks to the complainant by way of compensation for any loss suffered by the complainant is limited to the amount arising directly out of the act or omission of the bank or Rs. 10 lakhs, whichever is lower.  The complaint of the customer may be led by his/ her authorised representative as well.The customer may also be awarded a compensation of amount not exceeding Rs. 1 lakh to the complainant, only in case of complaints related to credit card operations for mental agony or harassment. In case the customer is not satised with the decision passed by the Banking Ombudsman, one can approach the appellate authority against the Banking Ombudsman's decision. Appellate Authority is vested with a Deputy Governor of RBI. Such an appeal has to be made within 30 days of the date of receipt of the award. 

Banking Ombudsman is appointed for a  period of 3 years. 

The Banking Ombudsman Scheme covers all Scheduled Commercial Banks, Regional Rural Banks as well as Scheduled Primary Co-operative Banks.                 

Gold Monetization Scheme/Liberalized Remittance Scheme

Gold Monetization Scheme

Gold Monetization Scheme was launched by Government of India in 2015 and managed by Reserve Bank of India. The scheme is known by the name Gold Monetisation Scheme, 2015.

How it works: Under this Gold Monetization Scheme a customer who possesses Gold can deposit their gold in any form in a GMS account to earn interest as the price of the gold metal goes up.

Purpose: The main purpose of this scheme is to reduce the import of Gold by India. This will happen because the household gold will be mobilized as per this scheme and there will be more gold in the market. 

The Gold Monetization Scheme has modified the existing 'Gold Deposit Scheme' (GDS) and 'Gold Metal Loan Scheme (GML).

Basic Information about the Scheme

Who can deposit Gold: Only Resident Indians can open such accounts with the bank where they can deposit the gold. The subcategory includes- Individuals, Hindu Undivided Families, Proprietorship and Partnership firms, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations, Companies, charitable institutions, Central Government, State Government or any other entity owned by Central Government or State Government.

Joint deposits of two or more eligible depositors are also allowed under the scheme.

Where can one deposit the Gold under GMS:The customer can deposit gold at Collection and Purity Testing Centre (CPTC) or any bank branch designated for this business. However, this gold must be first examined at CPTC. 

Banks may identify at least one branch in a State/Union Territory where they have presence to accept the deposits under the Scheme.

What is CPTC- Collection and Purity Testing Centre (CPTC):–The collection and assaying centres certified by the Bureau of Indian Standards (BIS) and notified by the Central Government for the purpose of handling gold deposited and redeemed under GMS.

What kind of Gold can be deposited: raw gold(bars, coins, jewelry excluding stones and other metals) with the amount of 995 fineness gold.

Minimum Quantity of Gold: The minimum deposit at any one time shall be 30 grams

Maximum Quantity of Gold: No Maximum Limit

Interest Rate and Type of Gold Deposit Scheme

There are two types of Gold Deposit Scheme under the Gold Monetization Scheme:

First: Short Term Bank Deposit

Second: Medium and Long Term Government Deposit

Short Term Bank Deposit

Time Period of Deposit– 1 to 3 years

Interest Rate: Decided by the bank. The interest can be paid in (i) Indian Rupee equivalent of the deposited gold or (ii) denominated in grams of gold.

Medium and Long Term Government Deposit

Time Period of Deposit for Medium Term: 5-7 years (Minimum Lock in period- 3 years)

Time Period of Deposit for Long Term: 12-15 years (Minimum Lock in period- 5 years)

Liberalised Remittance Scheme (LRS):Do you know about Liberalised Remittance Scheme (LRS)? How much money can you send abroad? What is the limit under LRS? If you know then just go this post for a quick revision. If you don't then read this post thoroughly. 

Introduction

Have you ever thought if you need to send money from India to any foreign country that is outside India, what is the maximum amount of money that you can send? We will answer this question here.

Liberalised Remittance Scheme (LRS)

The Liberalised Remittance Scheme (LRS) was established by Reserve Bank of India and it permits citizens of India to transfer funds abroad. 

Since sending money abroad involves foreign exchange, let's see some important points related to foreign exchange in India.

Important Points related to Foreign Exchange in India

Foreign Exchange in India is managed by the Reserve Bank of India provided by the Foreign Exchange Management Act, 1999. Under the FEMA Act 1999, all transactions involving foreign exchange have been classified either as capital account transactions or current account transactions. Capital account transactions- It alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India. Current account transactions- It does not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions. ln terms of Section 5 of the FEMA,persons resident in India are free to buy or sell foreign exchange for any current account transaction except for those transactions for which drawal of foreign exchange has been prohibited by Central Government

What is Liberalised Remittance Scheme (LRS)

Under the Liberalised Remittance Scheme of RBI, all resident Indian individuals (including minors), are allowed to freely remit up to USD 2,50,000 in each financial year (April to March) for any permissible current or capital account transaction or a combination of both.

When the scheme was introduced in the year 2004, that time this limit was of USD 25,000. With time, the scheme has been liberalised to allow more transfer of funds.

For whom LRS is not applicable?

The Liberalised Remittance Scheme (LRS) is not available to corporates, partnership firms, Hindu Undivided Family, Trusts etc. It is available for sole proprietor. 

Important Points regarding Liberalised Remittance Scheme (LRS)

You cannot remit money under LRS to countries identified by the Financial Action Task Force (FATF) as "non- cooperative countries and territories". It is mandatory under the Liberalised Remittance Scheme (LRS) to have Permanent Account Number (PAN) for sending outward remittances. Maximum Frequency of Remittance: There are no restrictions on the frequency of remittances under LRS. However, the sum total of all remittance should not be more than USD 2,50,000 in a Financial Year. The remittances can be made in any freely convertible foreign currency.

Money Laundering/Masala Bonds/Merchant Discount Rate

What is Money Laundering?

Money laundering refers to the process/financial transactions that are carried out to conceal the source, identity and destination of illegally-obtained money. 

By hiding the details of this illegally obtained money, a person can enjoy that money which otherwise would have landed him in jail.

Some examples of illegally obtained money: drug trafficking, extortion, insider trading and illegal gambling

Launderer– a person who does this money laundering.

How is this financial transaction done?

The process of money laundering involves passing the money through a complex sequence of banking transfers or commercial transactions so that it seems legitimate.

At the end of the process, the money is returned to the launderer n an obscure and indirect way.

Stages of Money Laundering (PLI)

Money laundering involves three stages, these are- placement, layering and integration.

Placement– It means to place the money into the financial system by any means. Some examples can be- via Asset Purchase, by Currency Exchanges and Currency Smuggling.

Layering- This step involves carrying out complex financial transactions (multiple transactions) to hide the illegal source of the cash. Means the money is distributed/transferred at various place, that is more than one place. You can understand it like, to put a layer on something so that the original thing becomes hidden. 

Example– Cash converted into Monetary Instruments, Material assets bought with cash then sold

Integration– The last step means bringing in the previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. The last step is to integrate all the money that was distributed in the layering stage. This step returns the money to the launderer in an obscure and indirect way.

Example– Property Dealing, use of shell company, Foreign Bank Complicity (as there is higher order of sophistication), False Import/Export Invoices.

Reverse Money Laundering

It is a process in which legal money is used for illegal purposes. Example- terror financing. In this process, legitimate funds are taken out of regular circulation and is used for criminal activity and/or avoid tax. 

Prevention of Money Laundering Act, 2002

It is an Act of the Parliament of India to prevent money laundering and to provide for confiscation of property derived from money Laundering. We will discuss this in a new post.                                                                   What are Masala Bonds?

A Masala Bond is a type of bond which is issued by any company, denominated in Indian Rupee and issue outside India. It is issued outside India, but not in the local currency of that place, rather in Indian Rupee. It is also known as "Rupee denominated bonds overseas".

What is a bond:– A bond is a loan (given by person(s) who buys a bond) to a company or government (which issues a bond) that pays investors a fixed rate of return over a specific timeframe.

Why is Masala Bond named so? The term Masala means spices in India. The term was used by International Finance Corporation (an arm of World Bank) to evoke the culture and cuisine of India.       First Indian Company to Issue Masala Bond:-

In the year 2016, HDFC became the first company in India to issue a Masala Bond. It raised Rs 3,000 crore through the masala bond issuance at 8.33% for a paper maturing in 37 months.

However the first Masala bond was issued by IFC (an arm of World Bank) in November 2014. There it raised Rs 1,000 crore bond to fund infrastructure projects in India.

Framework of Issuance of Rupee denominated bonds overseas (Masala Bond) by RBI

Eligibility of borrowers:- Any corporate or body corporate is eligible to issue Rupee denominated bonds overseas. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts coming under the regulatory jurisdiction of the Securities and Exchange Board of India are also eligible.

Type of instrument:– Only plain vanilla bonds issued in a Financial Action Task Force (FATF) compliant financial centres; either placed privately or listed on exchanges as per host country regulations.

Recognised investors:– Any investor from a FATF compliant jurisdiction. Banks incorporated in India will not have access to these bonds in any manner whatsoever.

Maturity:– Minimum original maturity period for Masala Bonds raised upto USD 50 million equivalent in INR per financial year should be 3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.                                 Merchant Discount Rate (MDR)

If a shopkeeper (referred to as a merchant) wants to accept payment using Debit/Credit Cards, he/she has to make arrangements Point of Sale (PoS) Machine. He gets this PoS machine from some bank. Say the shopkeeper approaches HDFC Bank for this PoS machine and HDFC Bank installs the Point of Sale at the shop.

Since the bank provides payment services to the merchant, it will charge the merchant for using the payment infrastructure set up by the bank. This service charged by the bank or other entity involved in this process is known as Merchant Discount Rate.

Definition of MDR

Merchant Discount Rate: It is the rate or fee being charged on the merchant by the service providers at the time the customer makes the payment using his/her card on the Point of Sale machine.

The service providers that come into the picture are-

Bank installing Point of Sale:- The Bank that has installed the PoS Machine. Card issuing Bank:- The Bank whose card has been used for making the payment.           Payment Gateways:- These are the entities that provide technology infrastructure to route and facilitate the processing of an online payment transaction without any involvement in the handling of funds. Example: These mainly includes banks like HDFC, AXIS, ICICI Bank.                            Payment Aggregators:- These are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. They pass on the payment to the merchant after some point of time. Payment Aggregator is the inclusion of all these payment gateways. Examples: Citrus, Billdesk, Instamojo, CCAvenue and PayUMoney.                                When MDR Charge is applicable?

MDR charges are applicable on the merchants when the payment by the customer is made using all debit card/BHIM UPI/ Aadhaar enabled Payment System (AePS) transactions and QR based transactions.

Points to remember about MDR Charges

MDR charges are to be paid by the merchant to the service providers and not by customers. Merchants should not pass on the charge to the customer. MDR rates are fixed by the Reserve Bank of India. MDR is the maximum charge that a merchant has to pay to the service provider. If a merchant can bargain with the service providers he/she can pay less than MDR charges fixed by RBI. MDR denotes the maximum rate that can be charged by the service provider and it can also be less than the limit fixed by RBI.

Why MDR is necessary?

There are Payment Gateways and Payment Aggregators involved in online transactions. MDR charges serves as a profit for them. Absence of such MDR charges will kill the industry and will leave no incentive to expand the universe. How the cost is borne in case where MDR is zero?

The RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to the digital modes of payments.

World Bank/International Monetary Fund(IMF)/New Development Bank(NDB)/Asian Development Bank(ADB)

World Bank

What is World Bank – The World Bank is a group of some members countries (consider it like a cooperative), formed with an aim of providing finance and technical assistance to developing countries around the world. It is a partnership between the member countries.

Number of Member Countries of the World Bank: Presently there are 189 member countries of the World Bank. To become a member of the World Bank, a country must first become a member of the IMF.

World Bank was formed in 1944. 

Headquarters of World Bank:Washington, D.C, US.

The World Bank Group comprises five institutions managed by their member countries. The details of these are given below:

The International Bank for Reconstruction and Development (IBRD)

The IBRD provides loan to governments of the middle-income nation and creditworthy low-income countries.

The International Development Association

The International Development Association (IDA) provides interest-free loans and grants to governments of the poorest countries.

Together, IBRD and IDA make up the World Bank.

Remember: For Poor Country- IDA; For Middle-Income Country- IBRD

The International Finance Corporation

The International Finance Corporation (IFC) is the largest global development institution that focusses on the development of privatesector. Formed in 1956.

The Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 to promote foreign direct investment into developing countries to support economic growth, reduce poverty, and improve people's lives. MIGA fulfills this mandate by offering political risk insurance (guarantees) to investors and lenders.

The International Centre for Settlement of Investment Disputes

The International Centre for Settlement of Investment Disputes (ICSID) provides international facilities for conciliation and arbitration of investment disputes.

World Banks goal for 2030

The World Bank Group has set two goals for the world to achieve by 2030:

End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3% Promote shared prosperity by fostering the income growth of the bottom 40% for every country

President of World Bank: David R. Malpass (13th President)

Important Reports by World Bank

World Development Report,Ease of Doing Business,Global Economic Prospects       International Monetary Fund (IMF)

IMF is an organisation/group of 189 nations that work together to:

to foster global monetary cooperation,secure financial stability,facilitate international trade,promote high employment and sustainable economic growth, andreduce poverty around the world. 

Member countries of IMF: There are 189 member countries of IMF. 

IMF was formed in 1945.

Headquarters of IMF: Washington, D.C., United States

Managing Director of IMF: Christine Lagarde

Major objective of the International Monetary Fund (IMF)

The main objective of the International Monetary Fund (IMF) is to ensure the stability of the international monetary system. IMF achieves this in three ways:

Economic Surveillance – Keeping track of the global economy and the economies of member countries. The IMF highlights possible risks to stability and advises on needed policy adjustments of its member country.  Lending– Lending to countries with balance of payments difficulties. The IMF provides loans to member countries experiencing actual or potential balance of payments problems to help them rebuild their international reserves Capacity Development– Giving practical help to members. The IMF works with governments around the world to modernize their economic policies and institutions, and train their people.

Special Drawing Rights (SDR)– It was created by IMF in 1969 and these are supplementary foreign-exchange reserve assets defined and maintained by the International Monetary Fund.

Important Reports by IMF

Global Financial Stability Report,World Economic Outlook.                                 New Development Bank / BRICS Bank

New Development Bank was established by the BRICS nations of Brazil, Russia, India, China and South Africa with an aim to mobilize resources for infrastructure and sustainable development projects in BRICS economies.

It is also known as BRICS Bank. 

Objectives of New Development Bank

The main objectives of NDB operations are:

Fostering development of member countries, Supporting economic growth, Promoting competitiveness and facilitating job creation, Building a knowledge sharing platform among developing countries

Facts about NDB

Initial authorized capital of US$ 100 billion

Formed: July 2014 (Treaty signed); July 2015 (Treaty in force)

Headquarters of New Development Bank: Shanghai, China

President of New Development Bank:K.V. Kamath.                                                      Asian Development Bank (ADB)

Asian Development Bank is a regional bank established in 1966 to promote social and economic development in Asia.

Purpose: ADB aims to eradicate extreme poverty in Asia and the Pacific. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.

Formed: 19 December 1966 

Headquarters of ADB: Manila, Philippines

Members: Presently there are 68 members of ADB (49 are from within Asia and the Pacific and 19 outside.). When ADB was formed in 1966, there were 32 members.

Board of Governors of ADB

Board of Governors is the highest decision-making body of the ADB. It has one representative from each member country. Shri Arun Jaitley is the member from India. 

Board of Governors elects a 12 member Board of Directors and a chairperson of Board of Directors, who is also the President of Asian Development Bank (ADB).

President of ADB: Takehiko Nakao (Japan)

Asian Development Fund

Asian Development Fund (ADF) was established in 1974 to provide loans on concessional terms to ADB's lower-income developing member countries (DMCs). 

Grants were introduced in 2005. 

The main difference between a grant and a loan is that  loans are to be repayed while grants are not. Grants are, essentially, a gift. In other words, they're non-repayable.

How is ADF funded

Funds are added to ADF by its members on a rotational basis. For example, for one duration some members will contribute and next time another member will contribute. 

ADF resources have been replenished eleven times, the latest being ADF 12 for the period 2017–2020.