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COMMERCE AND BUSINESS --ECONOMICS FOR INTERVIEW



This is from a book written by me a few years back.  I changed the rates in some places.  Wherever changings rates are given please refer for current rates -- from www.rbi.org.in  or other knowledge oriented web sites.
A perusal of these will help one answer many interview questions.  


 COMMERCE AND BUSINESS

 A few points relating to Banking are given here and they may be of use for personnel appearing for interviews in Banks, insurance and other financial sector companies.

BANKING

1.            The Reserve Bank is constituted under Section 3 of the Reserve Bank of India Act, 1934 for taking over the management of currency from the Central government and Carrying on the business of banking in accordance with the provisions of the Act. Originally, under the RBI Act, the Bank had the responsibility of;
(i)               regulating the issue of bank notes.
(ii)             Keeping of reserves for ensuring monetary stability, and
(iii)           generally to operate the currency and credit system of the country to its advantage.
2.           The major powers of the Reserve Bank in different roles as Regulator and Supervisor can be summed up as under:
(i)      Power to licence
(ii)     Power of appointment and removal of banking Boards/personnel;
(iii)   Power to regulate the business of banks;
(iv)    Power to give directions;
(v)     Power to inspect and supervise banks;
(vi)    Power regarding audit of banks;
(vii)  Power to collect and furnish credit information;
(viii)Powers relating to moratorium, amalgamation and winding up; and
(ix)   Power to impose penalties.
3.            (A) Banking means acceptance of deposits of money from the public for lending or investment. Such deposits may be repayable on demand or may be for a period of time as agreed to by the banker and the customer and may be repayable by cheque, draft or otherwise. Apart from banking, banks are authorized to carry on other business as specified in Section 6 of the Banking Regulation Act. Banks are, however, prohibited from undertaking any trading activities.
B.    Banks fare constituted as companies registered under the Companies Act, 1956, statutory corporations constituted under Special or cooperative societies registered under the Cooperative Societies Act. The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution of the bank.
C.    Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. The government has direct and indirect control over banks. It can exercise controls through the Reserve Bank of India, in appeals arising from decisions of the Reserve Bank  and also directly under the various provisions of the Banking Regulation Act. Public Sector banks like State Bank of India and its subsidiaries, nationalized banks and Regional Rural Banks are owned by the Central Government. Central Government has substantial control over the management of these banks. Only certain provisions of the BR Act are applicable to these banks as indicated in that Act. Cooperative banks Societies Act and subject to the control of the State Government and also the Reserve Bank. In the case of non-banking business of the banks, they are subject to controls by other regulatory agencies.
4.           (A)         Organizations of banks are controlled mainly by Reserve Bank of India under the powers granted under the provisions of the Banking Regulation Act 1949.
(B)  The main concerns of the Reserve Bank of India in this regard are protection of the depositors and stability of the banking system.
©Stringent requirements of minimum capital adequacy ratio, maximum voting rights, eligibility for appointment of whole-time and part-time directors are made by the Reserve Bank of India.
(D)The Banking Regulation Act lays down stipulations regarding the composition of Boards of Directors of Banks to ensure the Boards have required experience, knowledge and expertise for the financial stability of the banks and also that all important sectors of the economy are represented.
(E)  The Reserve Bank of India has the authority to remove the directors in case it is not satisfied with the performance of the banks. It can direct the banking company to elect or appoint other suitable / eligible person/s as director/s or appoint person/s of its choice to fill the vacancies so created. 

5.    (A)Securitization is the process of purchasing or acquiring the secured loans or advances, classified as non-performing asset in the books of originating bank or financial institutions at a negotiable price.
(B)The secured creditor can either:
Ø  Take up the management of the borrower, or
Ø  Sale or lease the business of the borrower, or
Ø  Reschedule the payment of debt, or
Ø  Enforce security interest, or
Ø  Settle the dues payable, or
Ø  Take possession of the secured assets, under the Act.
©All NPA are transferred to SCRC by bonds or debentures repayable in maximum period of 6 years with interest thereon @ 1.5% (min) over prevalent bank rate.
(D)The Provisions of SARFAESI Act do not apply when the amount of secured loan does not exceed 1 lakh rupees and unsecured dues 10 lakh rupees.
(E) Demand notice of a period of 60 days is served to the company for taking over possession and management of the secured assets and also to appoint manager to manage the affairs of the company.
(F) Secured creditors have right against the guarantors also.
(G)  Penalties are imposed for any default in compliance of regulations.
6.           Bancaassurance is a packaged service of banking and insurance offered to customer at one place under one roof at one time. Banks take up Bancassurance to earn fee income while for insurance industry; banks are source of ready distribution and sales network thus helping them to increase the market penetration.
But his is full of challenges for both insurance companies and banks due to wide spread bank employee discontent against insurance products; few surprises are thrown by IRDA itself, viz., insurance sellers have to undergo mandatory insurance training and clear the certification examination conducted by IRDA thus imposing additional burden on bank employees to undergo the same thus creating additional pressure on bank employees.
The other issue is that PSU banks need to figure out ways and means to address the anomalies in the remuneration structure.
7.            The growth of technology has enhanced the  banking business world over during the past two decades and the intense competition has forced banks to rethink the way they operated the business. Technology in the form of electronic banking has med it possible to find alternate banking practices at lower costs and more and more people are using electronic banking products at lower costs and meet their banking needs. The digital revolution is currently transforming the society, trade and commerce into an electronic world and e-commerce is emerging as a global reality that will have a significant impact on banking. E-Com has been made possible by internet and World Wide Web and offers enormous opportunities in every sphere of business. It allows trade at low costs worldwide and offers enterprise and banks a chance to enter global market at the right time.
The bank’s first use of computers was strictly a back office affair but rapid improvements in electronic technology and availability of higher computer power and faster communication technology has virtually transformed brick and mortar banking to Electronic Banking wherein customers need not necessarily visit banks to carry out their banking transactions and delivery of banks’ services to a customer at his office or home by using Electronic Technology is made available by banks.
Principle types of financial services rendered by banks in the electronic form include Electronic Payments (systems Branch Teller Machines, Automatic Teller Machine, Cash dispenser etc). While in Branch Teller Machine presence of employees of bank is required, the Automatic Teller Machine can operate without intervention of bank’s staff. An ATM consists of a processor, a consumer interface panel, card reader, printer, dispenser and depositor and have various inbuilt security system to check unauthorized use of the same, ATMs offer a lot of advantage to the customers, ,which include 24 hours, 7 days a week quick and efficient services with privacy in transaction. ATMs also provide opportunities to banks to offer extended services to customers without crowding at bank counters and to have greater penetration in the market.

KEYWORDS: 1
  1. Property means immovable property, movable property, any debt or any right to receive payment of money – whether secured or unsecured, receivables – whether existing or future, intangible assets (know-how, patent, trade mark, licence, franchise or any other business or commercial right of similar nature).
  2. Hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property.
  3. Security Interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor.
  4. Secured debt means a debt which is secured by ant security interest.
  5. A secured creditor means any bank or financial institution or any consortium or groups of banks or financial institutions and includes:
(i)               Debenture trustee appointed by bank or financial institution
(ii)             Securitization company and reconstruction company
(iii)           Any other trustee holding securities in whose favour security interest is created for due repayment by any borrower of any financial assistance. 
  1. Non-performing asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.
  2. Qualified Institutional buyer means a financial institution , insurance company, bank, state financial corporation, state industrial development corporation, trustee or any other asset management company; making investment on behalf of mutual fund / provident fund / gratuity fund / pension fund / a foreign institutional investor registered under the Securities & Exchange Board of India (SEBI) Act, 1992 or regulations made there under or any other corporate body as may be specified by the board.

KEYWORDS: 2
Bond: A debt security in the form of a loan. The bondholders receive interest at a fixed rate for a fixed period.
Closed-end fund: A type of investment Company that does not continuously offer its shares for sale but instead sells affixed number of shares at one time (in the initial public offering) which then typically trade on a secondary market.
Expense Ratio: The fund’s total annual operating expenses including management fees, distribution fees (and other expenses) expressed as a percentage of average net assets.
Front-end load: An upfront sales charge investors pay when they purchase fund shares, generally used by the fund to compensate brokers. A front-end load reduces the amount available to purchase fund shares.
Bank-end load: A sales charge )also known as a ‘deferred sales charge’) investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers.
Market index: A measurement of the performance of a specific ‘basket of stocks’ considered representing a particular market or sector of the stock or the economy.
Net Asset Value (NAV): The vale of the fund’s assets minus its liabilities. SEC rules require funds to calculate the NAV at least once daily. To calculate the NAV per share, simply subtract the fund’s liabilities from its assets and then divide the result by the number of shares outstanding.
Portfolio: An individual’s or entity’s combined holdings of stocks, bonds, or other securities and assets.
Prospectus: Describes the mutual fund to prospective investors. Every mutual fund has a prospectus. The prospectus contains information about the mutual fund’s costs, investment objectives, risks, and performance. You can get a prospectus from the mutual fund company through its website (or by phone or mail). Your financial professional or broker can also provide you with a copy.
Redemption fee: A shareholder fee that some funds charge when investors redeem or sell mutual fund shares. Redemption fees which must be paid to the fund are not the same (as and may be in addition to) a back-end load which is typically paid to a broker).
Hedging: Hedging is a process of protecting mutual fund assets from foreign currency fluctuations


KEYWORDS:
World Wide Web/Online Catalogue/E-money/Net based shopping/Cyber laws/Brick and Mortar Banking /SPNS/ Branch Teller Machine/ATM/Virtual Banking
BENEFITS OF E-BANKING TO THE CUSTOMER:
(i)          Anywhere banking: No matter wherever the customer is in the world, he can transact business through e-banking. E-banking ‘Customers’ can make some of the permitted business transactions from his home or while traveling through mobile phone. Generates greater customer satisfaction by offering unlimited access to the bank, not limited by the walls of the branch.
(ii)        By connecting all the branches through Wide Area Network WAN) any branch banking can be provided to the customers.
(iii)      Anytime banking: Managing funds in real time and importantly e-banking provides 24 hours a day, 365 days a year services to the customers of the bank.
(iv)       It inculcates a sense of financial discipline by recording each and every transaction.
(v)         Convenience acts as a tremendous psychological benefit all the time. It makes utility payments easier
(vi)       Cash/cards free banking through PC banking. E-banking expands the domain of access to the banking services. Lowers the risk and generates higher security to the customers as they can avoid traveling with cash. Cash withdrawal from any branch/ATM.
(vii)     Bring down ‘cost of banking’ to the customer over a period of time.
(viii)    On-line purchase of goods and services including on-line payment for the same benefits to the bank
(ix)       Innovative, secured, addresses competitive advantage to the bank and helps in establishing better customer. Any ATM on the relationship and retaining and attracting customer.
(x)        E-banking provides unlimited network to the bank and is not limited to the number of branches. Any PC connected to modem and telephone having internet connection can provide banking facility to the customer.
(xi)       By connecting ATMs and point of sale terminals online, risk of overdraw can be eliminated in case of ATM, credit and debit cards. ATM can be better monitored and planned by establishing a centralized data warehouse and using latest data mining tools.
(xii)     E-banking reduces customer visits to the branches and thereby human intervention and the establishment costs for the bank.
(xiii)   Inter branch reconciliation becomes easy thereby the chances of frauds and misappropriation.
(xiv)    On-line banking: an effective medium of promotion of various schemes of the bank and acts as a marketing tool.
(xv)      Establishing centralized database can considerably reduce loan on branches. Integrated customer data paves way for individualized and customized services.
(xvi)    Scope and potential of better profitability increases.

BOTTLENECKS IN DEVELOPMENT OF E-BANKING:
With so many benefits from electronic banking, let us see what are the bottlenecks? Some of them are discussed hereunder:
1.      Adoption of technology. Old established banks with vast network of branches and existing work culture/legacy make it difficult for banks to adopt technology and banks are required to make strenuous efforts for providing e-banking services to their customers.
2.     Customer’s acceptance: The level of acceptance of e-banking channels by average customers remains low due to certain psychological factors and fear of technology.
3.      Cost of technology: The cost of acquiring a PC , internet connection and other equipment is also limiting factor in development of e-banking facility as such facilities remain out of reach of the middle class or even the upper middle class customers.
4.     Lack of preparedness on the part of banks and blissful unawareness of changes in banking is also one of the bottlenecks.
5.      Security issues and cyber laws: Security is one of the major issues required to be addressed before implementing e-banking solutions. The security threat may come from unauthorized access/loss or damage of data by hackers, loss or damage of data by virus, unauthorized access within network. Banks need to address the threats to reduce the risk of implanting new and advanced technology. Enactment of proper cyber laws is also required to take care of cyber crimes in the area of e-banking.

E-COMMERCE IN BANKING: ISSUES AND CONCERNS FOR BANKERS:
There are three issues and concerns to be addressed in implementing e-commerce in banking, viz., security, legal issues, and skill development.
Security:
The risk of loss of security is present when an organization makes use of the internet for putting through an e-commerce transaction. For banks, the breach of security in e-commerce related application could result in the siphoning off of large sums of money by perpetrators. Banks, therefore, need to put in place computer security related hardware and software such as fire walls, encryption programmes and virus protection programmes. These have to be checked and updated regularly so as to reinforce controls in the computer environment. Following are the important security issues:
1.      Confidentiality: Information should be available only to the authorized user.
2.     Integrity: Information received should be exactly as the information sent or stored.
3.      Availability: Information sent/stored over communications network should be available whenever required.
4.     Authenticity: system should be able to verify about sender of the message, to the person directed in the message and should be able to prevent any individual from showing as another individual
5.      Non-repudiability: the sender/receiver should not be able to deny having sent/received the message.
6.     Auditability: Recording of data with confidentially for the purpose of audit.
Legal Issues:
Another area of concern for bank is legal issues and availability of laws to take care of cyber crimes. In the current Indian scenario legal issues arising, for example, on account of siphoning off cash electronically by computer criminals, will pose a major challenge to Indian banks entering the e-commerce arena. Cyber laws are, therefore, required to take care of all issues related to Cyber crime/transactions. Information Technology Law passed by the government of India seeks to introduce cyber laws that will provide requisite security and legal framework for E-commerce transactions. The government and enforcement agencies need to recognize the fct in future, we cannot go by paper based transactions. Laws recognize and certifying new methods of payment, electronic signature-based transactions, etc. would be required. The IT task force set up by the government is doing a good job in this direction.
Skill Development:
Development of human resources capable of meeting the requirements of e-commerce is another area of concern for banks in India and therefore, an important step that will have to be taken by banks in India is the building up a pool of software application developers and database administration who can handle their e-commerce business under proper supervision.
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MONETARY POLICY—BANKING AND OTHER AREAS
You are advised to go through your College books on the relevant subject.  However a brief account is provided for ready reference for revising before attending an Interview.  You must also be thorough with the latest newspaper reports relating to your subject.  You may also verify updated websites to know the latest information.

1.            What is the Monetary Policy?
The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy.
These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy.
Besides, the RBI also announces norms for the banking and financial sector and the institutions, which are governed by it. These would be banks, financial institutions, non-banking financial institutions, Nidhis and primary dealers (money markets) and dealers in the foreign exchange (forex) market.
2.           When is the Monetary Policy announced?
Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (October-March) in accordance with agricultural cycles. These cycles also coincide with the halves of the financial year.
Initially, the Reserve Bank of India announced all its monetary measures twice a year in the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI reserves its right to alter it from time to time, depending on the state of the economy.
However, with the share of credit to agriculture coming down and credit towards the industry being granted whole year around, the RBI since 1998-99 has moved in for just one policy in April-end. However a review of the policy does take place later in the year.
3.           How is the Monetary Policy different from the Fiscal Policy?
Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy.
The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.
The Monetary Policy aims to maintain price stability, full employment and economic growth.
The Reserve Bank of India is responsible for formulating and implementing Monetary Policy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements.
The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.
The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.
For instance, at the time of recession the government can increase expenditures or cut taxes in order to generate demand.
On the other hand, the government can reduce its expenditures or raise taxes during inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes.
The annual Union Budget showcases the government's Fiscal Policy.
4.           What are the objectives of the Monetary Policy?
The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.
Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.
There are four main 'channels' which the RBI looks at:
  • Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates).
  • Interest rate channel.
  • Exchange rate channel (linked to the currency).
  • Asset price.
5.           All this is more linked to the banking sector. How does the Monetary Policy impact the individual?
In recent years, the policy had gained in importance due to announcements in the interest rates.
Earlier, depending on the rates announced by the RBI, the interest costs of banks would immediately either increase or decrease.
A reduction in interest rates would force banks to lower their lending rates and borrowing rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate of interest.
On the other hand, if there were to be an increase in interest rates, banks would immediately increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs of corporates and as a result, their bottom lines (profits), the monetary policy is important for them also.
Being the central bank, however, the RBI would have a say and determine direction on interest rates as it is an important tool to control inflation.
The bank rate is a tool used by RBI for this purpose as it refinances banks at the this rate. In other words, the bank rate is the rate at which banks borrow from the RBI.
6.           How was the scenario prior to recent liberalisation?
Prior to recent liberalisation, the RBI resorted to direct instruments like interest rates regulation, selective credit control and CRR (cash reserve ratio) as monetary instruments.
One of the risks emerging in the past 5-7 years (through the capital flows and liberalisation of the financial sector) is that potential risk has increased for institutions. Thus, financial stability has become crucial and there are concerns relating to credit flows to the agricultural sector and small-scale industries.
7.           What do the terms CRR and SLR mean?
CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.
The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. Although the bonds are long-term in nature, they are liquid as they can be traded in the secondary market.
Since 1991, as the economy has recovered and sector reforms increased, the CRR has fallen from 15 per cent in March 1991 to 5.5 per cent in December 2001. The SLR has fallen from 38.5 per cent to 25 per cent over the past decade. (verify about current rate)
8.           What impact does a cut in CRR have on interest rates?
From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have to maintain with it. The CRR is fixed as a percentage of total deposits. As more money chases the same number of borrowers, interest rates come down.
9.           Does a change in SLR and gilts products impact interest rates?
SLR reduction is not so relevant in the present context for two reasons:
First, as part of the reforms process, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared to earlier for their statutory investments in government securities.
Second, banks are still the main source of funds for the government.
This means that despite a lower SLR requirement, banks' investment in government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a couple of years ago.
Therefore, for the purpose of determining the interest rates, it is not the SLR requirement that is important but the size of the government's borrowing programme. As government borrowing increases, interest rates, too, rise.
Besides, gilts also provide another tool for the RBI to manage interest rates. The RBI conducts open market operations (OMO) by offering to buy or sell gilts.
If it feels interest rates are too high, it may bring them down by offering to buy securities at a lower yield than what is available in the market.
10.         How does the Monetary Policy affect the domestic industry and exporters in particular?
Exporters look forward to the monetary policy since the central bank always makes an announcement on export refinance, or the rate at which the RBI will lend to banks which have advanced pre-shipment credit to exporters.
A lowering of these rates would mean lower borrowing costs for the exporter.
11.          The stock markets and money move similarly, in some ways. Why?
Most people attribute the link between the amount of money in the economy and movements in stock markets to the amount of liquidity in the system. This is not entirely true.
The factor connecting money and stocks is interest rates. People save to get returns on their savings. In true market conditions, this made bank deposits or bonds (whose returns are linked to interest rates) and stocks (whose returns are linked to capital gains), competitors for people's savings.
A hike in interest rates would tend to suck money out of shares into bonds or deposits; a fall would have the opposite effect. This argument has survived econometric tests and practical experience.
12.         What are the measures to regulate money supply?
The RBI uses the interest rate, OMO, changes in banks' CRR and primary placements of government debt to control the money supply. OMO, primary placements and changes in the CRR are the most popular instruments used.
Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system.
The changes in CRR affect the amount of free cash that banks can use to lend - reducing the amount of money for lending cuts into overall liquidity, driving interest rates up, lowering inflation and sucking money out of markets.
Primary deals in government bonds are a method to intervene directly in markets, followed by the RBI. By directly buying new bonds from the government at lower than market rates, the RBI tries to limit the rise in interest rates that higher government borrowings would lead to.
13.         Considering that interest rates are now tweaked looking at market conditions, is the Monetary Policy losing its importance?
Governor of RBI has said he would make the Credit Policy a 'non-event' and would use the policy only to review developments in the banking industry and money markets. Interest rate announcements since 1998-99 were based on economic and market developments.
The policy now concentrates mostly on structural issues in the banking industry.
Some Monetary Policy terms:
14.         Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. (6.75)(22.01.2019)
Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit.
15.         Cash Reserve Ratio
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 4 per cent.(22.01.2019)
16.         Inflation
Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up.
The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation.
17.         Money Supply (M3)
This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public.
The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts.
The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee.
The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1.
18.         Statutory Liquidity Ratio
Banks in India are required to maintain 19.25  per cent of their demand and time liabilities in government securities and certain approved securities. (22.01.2019)
These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam.
19.         Repo
A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities. Present repo rate is6.50% (22.01.2019)
Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.
20.        Open Market Operations
An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations.
In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.

CONCEPTS IN DEVELOPMENT


Economic Growth:  It is defined as long term increase in production potential of the economy.  It is a quantitative concept.

Economic Development:  It refers to the economic growth with structural changes in favour of non-agricultural activities.  It is a qualitative concept.

Sustainable Development:  It is that development which takes care of the needs of the present generation without compromising the needs of the future generations.  It also emphasizes on a clean environment.

Quality of Life:  It simply indicates the better health, welfare freedom of choice and basic liberties in a society.

Indicators of Growth


Gross Domestic Product (GDP):  It is the sum total of the market value of the final goods and services produced within the geographical boundary of a country during an accounting year.

Gross National Product (GNP):  GNP = GDP + Net factor income from abroad.

Net factor income = X – M, [X = Income earned and received by nationals in foreign countries; M=Income earned by foreign nationals in a country.]

It better indicates the production potential of the nationals as against GDP.  In India’s case, GNP is less than GDP.  In other words, net factor income is negative in India.

Net National Product (NNP):  NNP = GNP – Depreciation

Depreciation is consumption of fixed capital in the process of production.

National Income:  When NNP is calculated at factor cost, it is known as National Income.  In other words, it can be represented as,
National Income = NNP at market prices – Indirect taxes + subsidies

Indicators of Development


Human Development Index: It was introduced in 1990 by United Nations Development Programme (UNDP).  It is defined as average of social components, namely, life expectancy at birth, education attainment and standard of living.

To define the human development level of a country, this index has been divided on a scale of 1.

High human development = HDI value is greater than 0.8.

Medium human development = HDI value is between 0.5 and 0.8.

Low human development = HDI value is below 0.5.

In the UN Human Development Report 2002 India lies in the medium development group.  Its rank is 124 out of 172 nations, with a HDI value of 0.577.

Quality of Life Index:  It is calculated on the basis of six parameters (as defined by noted economists, Dasgupta and Weale).

1. Per capita income in Purchasing Power Party (PPP) in dollars.
2. Life expectancy at birth.
3. Infant mortality rate.
4. Adult literacy rate.
5. Index of political rights.
6. Index of civil rights.

By one view of economists, it is considered as a more comprehensive indicator than HDI.

Explain the following terms.

·        Insider Trading: It is a term used to explain the purchase and sale of shares of a company by accessing information concerning the company that is not publicly available and is of such a  nature that it enables the person to make substantial profits in the share transaction. This is a punishable offence and SEBI has proposed stringent regulations to curb it.
·        Laissez Faire: It is an economic doctrine which emphasis superiority of free markets over state regulation of individual markets and of the economy in general. Proponents of Laissez Faire argue that a private enterprise economy will achieve a more efficient allocation and use of scarce economic resources and greater economic growth than will a centrally planned economy where the government owns and directs the use of resources.
·        Credit Rating Information Services of India Ltd., (CRISIL): It was set up in 1988 and has been promoted jointly by the ICICI and UTI to provide credit rating services to the corporate sector. Credit rating promotes investors’ interests by providing them information on assessed comparative risk of investment in the listed securities of different companies. It also helps companies to raise funds more easily and at relatively cheaper cost, if their credit rating is high.
·        Non Performing Assets (NPAs): It is a credit facility which ceases to generate income for a bank. Generally it is one on which interest or principal to be received has remained “past due” for a period of 180 days. NPAs consist of assets under 3 categories. Standard, doubtful and loss. Assets classified as NPAs for a period upto 18 months belong to substandard while doubtful are those that remain NPAs for a period beyond 18 months and loss assets are those identified as such and have not been written off.
·        Birth Rate: Birth rate is the number of live births per 1000 of the population in a place, state or country, in a year. The difference between this rate and the death rate is used to calculate the rate of growth of population of the country over a certain period of time. The birth rate tends to decline as the country attains higher levels of economic development.
·        Repo or Repurchase Options: Repos were introduced in 1992 in India. They are instruments of repurchase agreement between the RBI and the commercial banks and this is used by banks for short-term liquidity management. By selling repos RBI mops up temporary excess liquidity in the financial market. Their rates are market – determined.
·        National Bank for Agriculture and Rural Development (NABARD): NABARD was set up in July 1982. It works as the apex body to look after the credit requirements of rural sector. It provides short-term credit to state cooperative banks (SCBs) medium-term credit to SCBs and RRBs and long-term credit SCB, LDBs, RRBs and commercial banks. It also promotes research in agriculture and rural development. It took over from RBI all the functions it performed in the field of rural credit and agricultural Refuiannce and Development Corporation (ARDC) was also merged with NABARD.
·        Small Industries Development Bank of India (SIDBI): SIDBI was et up in April 1990 as a wholly owned subsidiary of IDBI. It functions as the principal financial institution for the promotion, financing and development of industry in the small sector and to coordinate the functions of institutions engaged in promoting the small units.
·        Hot Money: Hot money refers to large amounts of short term funds held internationally by banks, financial institutions and wealthy individuals, which quickly move out of or into a country, in anticipation of interest rate charges or exchange rate fluctuations. This is, therefore, a very volatile source of funds and its flight from a country in terms of crisis may trigger a collapse of the economy.
·        Agricultural Export Zone (AEZs): The concept AEZs was introduced by the Exim Policy 2001 to give primacy to promotion of agricultural exports and a reorganization of our export efforts on the basis of specific products and specific geographical areas. The scheme is already in operation and the exim policy 2002-07 intends to set up 20 more AEZs.
·        Scheduled Bank: A bank registered in the second schedule of the RBI Act, 1934 is called a scheduled bank and to be included in the schedule it must fulfill the following criteria:
(i)     Paid up capital and reserves must be at least RS. 5 lakh
(ii)   Its conduct must not be to the detriment of its depositors.
These scheduled banks are required to maintain cash reserves with RBI and they enjoy certain privileges such as borrowing facilities from the RBI.
·        Infant Mortality Rate (IMR): It is the number of deaths of infants, upto one year of age, per thousand live births. IMR is high in les developed countries due to lack of healthcare facilities and proper nutrition to the infants and as development takes place, IMR is reduced in the country.
·        Net Asset Value (NAV): NAV is the net value of the mutual fund’s portfolio, expressed on a per share basis.
NAV per share = Total net Assets
Total Number of Shares outstanding
‘Total Net Assets’ is calculated by periodically valuing investments are market prices and other assets are added, while liabilities are deducted. Open-end funds set their sale and repurchase prices on the basis of their NAVs.
·        Hard Currency: A currency that is in strong demand, but in short supply on the foreign exchange market. Hard currency status is usually associated with an economically strong country which is running a large surplus on its balance of repayments. Demand for the currency is high to finance purchases of its exports, but the supply of the currency is relatively limited because the amount of it being made available through the purchase of imports is much lower.
·        Per Capita Income: It is the per head income of the country and can be obtained by dividing the gross national product (GNP) or national income of the country by its population. It can be measured either at current prices of at constant (base year) prices. Per capita income as a measure of people’s standard of living is flawed as it does not indicate the distribution of income and the non monetary elements of lifestyle.
·        Working Capital: The funds deployed by a company in the form of cash, investories, accounts receivable and other current assets. The term “working capital” generally means “Net Working Capital” i.e. the excess of current assets over current liabilities. These current liabilities are repayable within a year. Hence working capital is that portion of current assets which is financed by long-term funds such as loans, share capital and retained earnings.
·        Equity Shares: Equity shares represent ownership interest is a company and the claim of equity share holders on earnings and on assets in the event of liquidation, follow all others. Only equity shareholders are generally entitled to vote at the Annual General Meetings (AGM) which depend upon the number of shares which they hold. They take the maximum risks and also have the possibility of highest gains. They are entitled to any net profits made by their company after all expenses have been paid and they receive it in the form of dividend.
·        Microcredit: It is the credit extended to small and needy borrowers who are outside the domain of commercial banks. The scope of microcredit is immune, considering the number of such individuals who may undertake productive activities. It has emerged as a viable alternative credit channel to the poor as their access to conventional collateral and high transaction costs. Self help Group (SHG) Bank Lineage Programme propagated by NABARD, for last 10 years, has been recognized as the largest and fastest growing micro-finance programme in the world.
·        Depression: It is an economic condition that is characterized by a severe contraction in economic activity, which is manifested in numerous business shut down, widespread unemployment and declining investment in plant and equipment on account of falling sales.
·        Commodity Futures: A standardized contract guaranteeing delivery of a certain quantity of a commodity (such as wheat, sugar, soybeans etc.) on a specified future date, at a price agrees to, at the time of transaction. These contracts are standardized in terms of quantity, quality and delivery months for different commodities. Contracts on certain commodities are already traded in India.
·        London Inter Bank Offer Rate (LIBOR): LIBOR is an average of interest rates at which leading international banks are prepared to offer term Eurodollar deposits to each other. These rates reflect market conditions for international funds and are widely used by the banks as a basis for determining the interest rates charged on dollar and foreign currency loans to business customers.
·        Treasury Bill: A short-term debt instrument of the Government of India. This security bears no default risk and has a high degree of liquidity and low interest rate risk in view to its short term. The instrument is negotiable and is issued at a discount from the face value. At the maturity, the investor receives the face value and hence the increment constitutes the interest earned.
·        Over the country Exchange of India (OTCEI): OTCEI is a floorless national securities exchange with a screen-based system of trading. This modern market characterized by fully computerized operations, was promoted by UTI, ICICI and SBI Capital Markets Ltd., among others, in order to overcome problems such as the lack of transparency, delays in settlements and prohibitive cost of a public issue through conventional route. It began operations in 1992 and its network consists of inter-linked counters located all over the country.
·        Debt Trap: It is a financial crisis in which an individual or country raises further loans in order to fulfill its obligations of interest payment and repayment of principal during a time period. So the country or individuals is caught in a vicious circle of debt where it raises more debt in order to retire its earlier debts and finds it difficult to get out of this trap.
·        American Depository Receipts (ADRs): ADRs are instruments traded at US exchange representing a fixed number of shares of a foreign company that is traded in the foreign country. By trading in ADRs, US investors manage to avoid some of the problems of dealing in foreign securities markets. The ADR route enables companies to raise funds in the US financial markets.
·        Venture Capital: It is any share capital or loans subscribed to a firm financial specialists (for example, the venture capital arms of commercial banks and insurance companies), thus enabling the form to undertake investment in processes and products which because of their novelty are rate as especially high-risk projects, and as such would not normally attract conventional finance.
·        EEFC Account: This refers to the Exchange Earners’ Foreign Currency Account, a scheme introduced in 1992 for exporters and residents receiving foreign exchange. A certain percentage of the earnings may be maintained in this account in order to limit exchange rate risk in case of future imports or for other specified purposes.
·        Regional Rural Banks (RRBs): The banks sponsored by public sector banks to cater exclusively to rural areas. The target segments of RRBs loans are small and marginal farmers, agricultural labourers, agricultural cooperative societies, artisans and small entrepreneurs among others. The sponsoring bank, besides subscribing to the share capital, provides managerial and financial assistance to its RRB. There are 196 RRBs in India, established from 1975.
·        Export Promotion Capital Goods Scheme (EPCG Scheme): It has been started to permit the exporters to import capital goods on concessional import duties. Under exim polity 1997-2002 exporters of goods and services could import capital goods by paying only 10% import duty but they had to export goods worth four times to CIF value with 5 years. This has not only been retained but made more flexible in the exim policy 2002-07.
·        ECGC: It is an acronym for Export credit Guarantee Corporation of India Ltd., which has been playing a crucial role by providing credit insurance cover for exports from the country. There is great potential for project exports from India with our exporters winning bids against intense international competition. In order to enable ECGC to provide adequate underwriting support to such projects, the Government has decided, in 2003-04 Budget, to increase its share capital to Rs. 80 crore.
·        Discount and Finance House of India Ltd., (DFHI): An institution promoted by RBI, public sector banks and financial institutions to meet the long-felt and need of activating the secondary market as well as developing their primary market for money market instruments. (SBI has a major 32% stake in DFHI). It was set up on the recommendation of Vaghul Committee. From April 1992, it began dealing in dated securities and accredited as a primary dealer in the February 1996.
·        Agricultural and Processed Food Products Export Development Authority (APEDA): APEDA is a body engaged in the export promotion and development of markets for fruits, vegetables and their products rice, wheat floricultures, processed fruits and juices and several other miscellaneous agricultural products. It is a promotional agency and does not undertake direct exports of any products on its own account.


Overseas Banking Units (OBUs): The exim policy 2002-07 permitted registered Indian Banks to set up OBUs in the SEZs. Through these OBUs exporters in SEZs will have access to finances at international costs. This is because OBUs would be exempted from CRR, SLR and priority sector lending requirements which would permit them to operate at par with their overseas branches. These units have been permitted to accept funds from NRIs and individuals and so they can raise foreign currency funds from international markets at global interest rate. These banks should have a minimum capital of $10 million, to set up OBUs. Recently SBI opened the first OBU in Mumbai.

ECONOMICS -- TERMS

Hyperinflation: Exceptionally high inflation rates. While there are no had and fast guidelines, an annual inflation rate of 20% or more is likely to create hyperinflation.
Money Laundering: The attempt to conceal or disguise the ownership or source of the proceeds of criminal activity and to integrate them into the legitimate financial systems in such a way that they cannot be distinguished from assets acquired by legitimate means. Typically this involves the conversion of cash-based proceeds into account-based forms of money.
A Pigouvian tax: It is a tax levied on an agent causing an environmental externality (environmental damage) as an incentive to avert or mitigate such damage.
Portfolio investment: It is the category of international investment that covers investment in equity and debt securities, excluding any such instruments that are classified as direct investment or reserve assets.
Poverty Reduction And Growth Facility: An IMF facility known until November 1999 as the enhanced Structural Adjustment Facility (ESAF). The PRGF is available to those countries that are facing protracted balance of payments problems and are eligible to borrow on concessional terms under the International Development Association
Purchasing Power Parities (PPPs): The rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. In their simplest form, PPPs are simply price relatives which show the ration of the prices fin national currencies of the same good or service in different countries.
Inflation Gap: An inflationary gap, also termed an expansionary gap associated with a business cycle expansion, especially the latter stages of an expansion. This is one of two alternative output gaps that can occur when short-run production differs from full employment. The other is a recessionary gap.
Quantitative Restrictions: Specific limits on the quantity or value of goods that can be import4ed (or exported) during a specific time period.
Insider Trading: The buying and selling of corporate stock or other financial instruments based on knowledge that is not widely available to the general public. Insider trading is most often undertaken by corporate executives or directors using information that they have acquired by working “inside” the company. Insider trading is illegal because it gives an unfair advantage to those on the inside.
Refinancing: It refers to the extension of a new loan to enable the repayment of all or part of the amounts outstanding on earlier borrowing, possible including amounts not yet due.
Re-exports; Are foreign goods exported in the same state as previously imported, from the free circulation area, premises for inward processing of industrial free zones, directly to the rest of the world and from premises for customs warehousing or commercial free zones, to the rest of the world.
Reverse investment: Refers to the acquisition by a direct investment enterprises of a financial claim on its direct investor. Because direct investment is recorded on a directional basis, capital invested by the direct investor as an offset to capital invested in the direct investment enterprises by a direct investor and its related enterprises, except in instances when the equity participations are at least 10 percent in both directions.
Revolving credit: Refers to credit with a clause for automatic renewal under certain conditions.
Risk-weighted assets: Refer to a concept developed by the BCBS for the capital adequacy ratio. Assets are weighed by factors representing their riskness and potential for default.
A real-time gross settlement system (RTGS): It is a settlement system in which processing and settlement take place on an order-by-order basis (without netting ) in real time (continuously).
Rules of origin: Laws, regulations and administrative procedures which determine a product’s country of origin. A decision by a customs authority on origin can determine whether a shipment falls within a quota limitations, qualifies for a tariff preference or is affected by an anti-dumping duty. These rules can vary from country to country.
A forward exchange rate: It is the exchange rate in contract for receipt of and payment for foreign currency at a specified date usually for 30 days, 90 days or 180 days in the future, at a stipulated current or ‘spot’ price.
Abnormal Returns: Used in the context of stock returns; abnormal returns means the return to a portfolio in excess of the return to a market portfolio. Abnormal returns can be negative.
Philips Curve: The Philips curve is a relation between inflation and unemployment follows from William Philips’ 1958 work on the relation between unemployment and the rate of change of money wage rates in the United Kingdom.



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