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A pre recruitment training program was conducted recently in Coimbatore. Based on the doubts raised by participants answers are given for certain issues. Candidates are advised to study +2 book on commerce, economics and Business studies to update their knowledge relating to Banking.

Doubts raised in training program in Coimbatore in May 2011


In economics, fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy.[1]
Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
 Aggregate demand and the level of economic activity;
 The pattern of resource allocation;
 The distribution of income.
Fiscal policy refers to the use of the government budget to influence the first of these: economic activity.



Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.
Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.[2


When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.
A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balancedbudget policy.


Generally speaking, Open Market Operation (OMO) is a transaction on the open financial market, involving fiscal instruments such as governments` securities, or commercial papers, commenced by a central banking authority, with the purpose of regulating the money supply and credit conditions. In terms of their duration, there may be distinguished two types of OMO – PEMO (permanent OMO) and REPO (temporary OMO, or repurchase agreement OMO). Most central banks focus their monetary-regulating policies and monitoring on REPO transactions. As transactions, both REPO and PEMO serve to drain or add the available to the banking system reserves. However, PEMO means an outright buying or selling of government securities, while a distinguished feature of REPO is that they are generally short-term, often overnight, and the securities are subject to buy-back.

OMO, as related to the commercial banks, serves a liquidity-providing function. The central banking authority may provide money reserve to the commercial banks by buying securities and unleashing money in the banking system, or it may sell securities. By selling, the central bank (or a group of reserve banks as is the case with the US FED) may lower the interest. The institution does so by means of lowering the interest rates on the government securities and by increasing their offering and, consequently, price, on the open market. Often, OMO is a direct instrument ofmonetary policy, because the instrument influences the money supply directly. Forex swaps and other types of foreign exchange operations are also open market operations.

For the European Union, the European Central Bank (ECB) is an independent monetary institution, which is responsible for the monetary policy of the Union and the Euro zone. OMOs of the ECB, as part of the European System of Central Banks, are governed and regulated by CHAPTER IV. Article 18 of the Statute of the European System of Central Banks and of the European Central Bank declares that while attaining the aims of the ESCB and implementing its tasks, the ECB, together with the central banking institutions may: — function in the financial markets through the purchase and sale outright or via repurchase agreements, conducted in different currencies and precious metals. In the functioning of the ECB and the national banks in Europe, OMO serves not only as the aforementioned liquidity generator and a steering wheel for short-term interest rates, but also as a way to proclaim the ECB position on the monetary situation in the Euro area. Between mid - 2009 and mid - 2010 the central banks from the Eurosystem plan to conduct OMO purchases in covered bonds with a targeted nominal of EUR60.000.000.000.

According to Reuters, it is the open market operations that helped the Fed to hold interest rates down by backing the WWII borrowing extravaganza of the US government, while refinancing effectively the debt at low cost. Reuters also adds that the Fed of Bernanke is acting in a similar manner through its Treasury bills purchase program.

FED’s Federal Open Market Committee (FOMC) is responsible for conducting OMO policy in the US. FOMC has 12 members. Seven of the members come from the Board of Governors of the Federal Reserve System and thus constitute a majority. They are appointed by the President of the US and approved by the Senate before starting their 14 years of service in the Board. The other 5 representatives in the Committee are Presidents of the Reserve Bank: one of them is the President of the district FRB of New York. This district reserve bank is the largest and most prominent of the twelve reserve banks.

2) Open market operation is the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.[1][2]
When there is an increased demand for base money, action is taken in order to maintain the short term interest rate (that is, to increase the supply of base money). The central bank goes to the open market to buy a financial asset such as government bonds, foreign currency or gold. To pay for this, bank reserves in the form of new base money (for example newly printed cash) is transferred to the sellers bank, and the sellers account is credited. Thus, the total amount of base money in the economy has increased. Conversely, if the central bank sells these assets in the open market, the amount of base money that the buyer's bank holds decreases, effectively destroying base money.
Since most money is now in the form of electronic records rather than cash, open market operations are conducted simply by electronically increasing or decreasing ('crediting' or 'debiting') the amount of base money that the bank has in its reserve account at the central bank. Thus, the process does not literally require new currency. (However, this will increase the central bank's requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance.)

4) voting right 10% restriction – bill removing this
The proposed Banking Amendment Bill, if approved by in the Parliament, could trigger investor interest in some of the old private sector banks, say market participants. Among other things, the Amendment Bill seeks to remove the restriction on voting rights. Currently, voting rights for a single investor are restricted to 10% of the total, even if that investor owns more than 10% in the bank.
“Old private sector banks stand to benefit from the amendment bill,” said Chokkalingam G, ED—CIO, Centrum Wealth Managers. “If the existing cap on voting rights goes, many foreign investors will be keen to buy sizeable stakes in banks,” he said.
The Reserve Bank of India is finalising guidelines for allowing corporates to enter the banking sector. Analysts feel non-banking finance companies (NBFCs) too would be interested in picking up stakes in existing banks to foray into banking business.
“Removal of 10% voting rights would encourage higher shareholding in a bank, by a single investor. The intention is to increase voting rights limit in proportion to shareholding. It is some kind of prelude to the new banking license,” said Bipin Kabra, chief financial officer, at Dhanlaxmi Bank.
However, Reserve Bank nod is needed for acquiring 5% or more share in banks..
“This move will certainly increase interest of NBFCs to get into banking business. They will try to acquire old private sector banks to kick-start banking business with an existing set-up,” said a head of an old generation private sector bank adding that his bank is ready to be acquired if the acquirer has a sound management background.
Old generation private sector banks are currently run by individuals, not by any anchor investors with majority stake holding. For example, Kotak Bank and IndusInd bank (new generation private sector banks) are promoted by Kotak group and Hinduja group respectively. However, there is no single promoter for banks like Karur Vysya or Lakshmi Vilas or Dhanlaxmi.
The amendment bill also proposes to allow banks to issue preference shares subject to RBI’s regulatory guidelines.
“This is another avenue to raise capital other than plain equity or debt options. It is helpful to maintain higher capital adequacy ratio in times of rapid expansion in the loan book,” said Dhanlaxmi’s Kabra.
Meanwhile, analysts look for further cues from the Amendment Bill once it is fully passed by the parliament.


A written, dated and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.


A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque.
More specifically, it is a document contemplated by a contract, which (1) warrants the payment of money, the promise of or order for conveyance of which is unconditional; (2) specifies or describes the payee, who is designated on and memorialized by the instrument; and (3) is capable of change through transfer by valid negotiation of the instrument.
As payment of money is promised subsequently, the instrument itself can be used by the holder in due course as a store of value; although, instruments can be transferred for amounts in contractual exchange that are less than the instrument’s face value (known as “discounting”). Under United States law, Article 3 of the Uniform Commercial Code as enacted in the applicable State law governs the use of negotiable instruments, except banknotes (“Federal Reserve Notes”, aka "paper dollars").

iou - means I owe you.


A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

A standard, commercial letter of credit (LC[1]) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.
The letter of credit can also be payment for a transaction, meaning that redeeming the letter of credit pays an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. In such cases, the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version).[2] They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment was insured against loss or damage in transi

7) RAM - Random access memory
Random-access memory (RAM) is a form of computer data storage. Today, it takes the form of integrated circuits that allow stored data to be accessed in any order with a worst case performance of constant time. Strictly speaking, modern types of DRAM are therefore not random access, as data is read in bursts, although the name DRAM / RAM has stuck. However, many types of SRAM, ROM, OTP, and NOR flash are still random access even in a strict sense. RAM is often associated with volatile types of memory (such as DRAM memory modules), where its stored information is lost if the power is removed. Many other types of non-volatile memory are RAM as well, including most types of ROMand a type of flash memory called NOR-Flash. The first RAM modules to come into the market were created in 1951 and were sold until the late 1960s and early 1970s. However, other memory devices (magnetic tapes, disks) can access the storage data in a predetermined order, because mechanical designs only allow this.

8) CAR - Capital adequacy ratio
Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR)[1], is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed as a percentage of its assets weighted credit exposures.
Capital adequacy ratio is defined as

TIER 1 CAPITAL -A)Equity Capital, B) Disclosed Reserves
TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term Debts
where Risk can either be weighted assets ( ) or the respective national regulator's minimum total capital requirement. If using risk weighted assets,
≥ 10%.[1]
The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries.
Two types of capital are measured: tier one capital (T1 above), which can absorb losses without a bank being required to cease trading, and tier two capital (T2 above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders. Banking regulators in most countries define and monitorCAR to protect depositors, thereby maintaining confidence in the banking system.[1]
CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-to-equity leverage formulations (although CAR uses equity over assets instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels ofrisk.
[edit]Risk weighting
Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
[edit]Risk weighting example
Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets.
Non-funded (Off-Balance sheet) Items : The credit risk exposure at¬tached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the credit conversion factor. This will then have to be again multiplied by the relevant weightage.
Local regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.
Bank "A" has assets totaling 100 units, consisting of:
 Cash: 10 units.
 Government bonds: 15 units.
 Mortgage loans: 20 units.
 Other loans: 50 units.
 Other assets: 5 units.
Bank "A" has debt of 95 units, all of which are deposits. By definition, equity is equal to assets minus debt, or 5 units.
Bank A's risk-weighted assets are calculated as follows
Cash 10 * 0% = 0
Government securities 15 * 0% = 0
Mortgage loans 20 * 50% = 10
Other loans 50 * 100% = 50
Other assets 5 * 100% = 5
Total risk
Weighted assets 65
Equity 5
CAR (Equity/RWA)
Even though Bank "A" would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of itsassets are less risky than others.

The Reserve Bank of India had increased the savings bank rate by 50 basis points from May 3,2011. After the policy announcement, a number of banks effected deposit rate increases but only as an adjustment to the new interest rate on savings account. “The rate hikes were to make short-term deposit products more attractive as compared to the four per cent being offered on savings bank accounts,” said a senior official with Union Bank of India


COFEPOSA (the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act) is an Indian law passed in 1974 for conservation of foreign exchange and Preventing smuggling. ASSOCHAM has demanded its repeal.

OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.
Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

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