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Gold Deposit Scheme --Banking/economic developments- march 2013

Gold Deposit Scheme

Banking Policy

RBI guidelines in circular dated Oct 05, 1999 have been modified by RBI (on Feb 14, 2013) as under, on the basis of Central Govt. notification dated Jan 24, 2013:
1. At present, the banks may either issue a passbook or statement of account or a certificate or bond to the depositors for deposit of gold, which will be transferable by endorsement and delivery
As per revision, the 'Gold Certificate would also mean the final receipt, in dematerialised form or otherwise, issued to a subscriber of the Scheme after the gold tendered by him has been assayed and accepted as deposit by the bank. In case of certificates issued in dematerialized form, the depository rules for transfer would apply.
2. Presently, the Resident Indians (Individuals, HUF, Trusts, Companies) can invest in the scheme. As per revision, a Trust including Mutual Funds/Ex­change Traded Funds registered under SEBI (Mutual Fund) Regulations may deposit under the scheme.
3. At present, the deposits may be made available within a maturity range from 3 to 7 years. As per revision, the maturity period, of gold deposits, will range from 6 months to 7 years.
4. As per revision, authorised banks would not be required to obtain prior approval of RBI for introducing the scheme.
5. Banks will report the gold mobilised under the scheme by all branches in a consolidated manner on a monthly  basis in the revised format.

Import of precious and semi precious stones- Clarification

In terms of circular dated Sep 24, 2012, AD Category — I banks were permit­ted to approve Suppliers' and Buyers` Credit (trade credit) including the us­ance period of Letters of Credit opened for import of gold in any form includ­ing jewellery made of gold/ precious metal or and studded with diamonds/semi precious/ precious stone should not exceed 90 days from the date of ship­ment. RBI clarified (Feb 20, 2013) that Suppliers' and Buyers' Credit (trade credit) including the usance period of Letters of Credit opened for import of precious stones and semi-precious stones should not exceed 90 days from the date of shipment.

NEFT - Continuous Release of Credit Messages

RBI has decided (Feb 18, 2013) to implement the feature of continuous release of credit messages in the National Electronic Funds Transfer (NEFT) system with effect from 9th March 2013. The feature of continuous release of credit messages has been introduced with the objective of providing maxi­mum time to beneficiary/destination banks to process the inward NEFF trans­actions, thereby facilitating more efficient handling of growing transaction volumes in the system. Further, the feature also envisages the optimum use of network resources and processing capacity by spreading the release of messages throughout the one hour time window between 2 batch settle­ments.

Membership in SEBI approved Stock Exchanges for PDs

With a view to further developing the debt market in India, RBI decided to permit standalone PDs to become members of SEBI approved stock exchanges for the purpose of undertaking proprietary transactions in corporate bonds. Opening of accounts by entities of Bangladesh ownership shall continue to require approval of RBI.

Advances Restructured by Banks / FIs

In terms of extant guidelines, banks are required disclose in their published Annual Balance Sheets, under "Notes on Accounts", information relating to number and amount of advances restructured, and the amount of diminution in the fair value of the restructured advances. Under each category advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories of restructuring, are required to be shown separately.

At presents the banks are required to disclose annually all accounts restructured in their books on a cumulative basis even though many of them would have subsequently shown satisfactory performance over a sufficiently long period. This position of disclosures do not take into account the fact that in many of these accounts the inherent weaknesses have disappeared and the accounts are in fact standard in all respects, but continue to be disclosed as restructured advances.

On recommendations of the Working Group to Review the existing Prudential Guidelines on Restructuring of Advances (Chairman: Shri B. Mahapatra) RBI has ad­vised the banks that they should disclose the informa­tion by giving (1) details of accounts restructured on a cumulative basis excluding the standard restructured accounts which cease to attract higher provision and risk weight (2) provision made on restructured account under various categories (3) details of movement of restruc­tured account.

Financial Literacy Material

In terms of RBI circular dated Jun 06, 2012, Financial Literacy Centres (FLCs) and all the rural branches of scheduled commercial banks should scale up financial lit­eracy efforts through conduct of outdoor Financial Lit­eracy Camps at least once a month, to facilitate financial inclusion through provision of two essentials i.e. 'Finan­cial Literacy' and easy 'Financial Access:
RBI circulated (Jan 31, 2013) a comprehensive Financial Literacy Guide for conduct of Financial Literacy Camps & Financial Literacy Material as also a Financial Diary and a set of 16 posters.

Operational Guidelines

All the Financial Literacy Centres and rural branches are required to prepare an annual calendar of locations for conduct of outdoor Financial Literacy Camps. At every location, the program should be conducted in 3 stages to be spread over a period of 3 months comprising of 3 sessions of minimum 2 hours each plus a visit to ensure timely delivery of cards. 2"d session is to be conducted a fortnight after first session. After 15 days of the second session, branch officials should visit the village to ensure delivery of cards to the villagers. They will also make sure that the BC has started operations and villagers are able to make transactions. 3'd Session is to be con­ducted, 2 months after holding of second session.

NRO accounts by individuals of Bangladesh

In terms of extant guidelines, opening of Non-Resident Ordinary Rupee (NRO) accounts by individuals/ entities of Bangladesh/ Pakistan nationality/ ownership requires approval of Reserve Bank. RBI has decided (Feb 11, 2013) that Authorised banks would be permitted to open NRO account of individual/s of Bangladesh nationality without the approval of the Reserve Bank if they hold valid visa and valid residential permit issued by Foreigner Registration Office (FRO)/Foreigner Regional Registra­tion Office (FRRO) concerned, Banks are to furnish de­tails of such accounts on quarterly basis to the Under Secretary (Foreigners), Ministry of Home Affairs, Govt. of India.

Licensing of New Banks in Private Sector

RBI had placed a Discussion Paper on its website on August 11, 2010 and the draft guidelines were released on August 29, 2011 inviting views and comments. After con­sulting the Government of India, the guidelines for 'Licensing of New Banks in the Private Sector', RBI issued the guidelines on Feb 22, 2013.

The key features of the guidelines are:

(i) Eligible Promoters: Entities/ groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

(ii) 'Fit and Proper' criteria: Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.

(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.

(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be Rs.5 billion (Rs.500 cr). The NOFHC shall initially hold a minimum of 40% of the paid-up voting equity capital of the bank which shall be locked in for a period of 5 years. It shall be brought down to 15% within 12 years. The bank shall get its shares listed on the stock exchanges within 3 years of the commencement of business by the bank.

(v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators. The NOFHC shall be regis­tered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

(vii) Corporate governance of NOR-IC: At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.

(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.

(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.

(x) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(xi) Other conditions for the bank :
1) The Board of the bank should have a majority of independent Directors.
2) The bank shall open at least 25% of its branches in unbanked rural centres (popula­tion upto 9,999 as per the latest census)
3) The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
4) Banks promoted by groups having 40% or more assets/income from non-financial business will require RBI's prior approval for raising paid-up voting equity capital beyond Rs. 10 billion (Rs. 1000 cr) for every block of Rs.5 billion (Rs.500 Cr).
5) Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

(xii) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

Submission of application : In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted by interested entities, in the prescribed form (Form III) by Jun 30, 2013, to RBI.

The validity of the in-principle approval issued by RBI will be one year.

Fiscal Policy

The fiscal policy is the policy relating to government expenditure and revenue collection, to influence the eco­nomic activity. The two main instruments of fiscal policy are government expenditure and taxation.

The change in the level and composition of taxation and government spending can impact the following variables
1.   Aggregate demand and the level of economic activity;
2.   The pattern of resource allocation;
3.   The distribution of income.

Stance of fiscal policy
The 3 possible stances of fiscal policy are neutral, expansionary and contractionary.
(a)   A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall, the budget outcome has a neutral effect on the level of economic activity.
(b)  An expansionary stance of fiscal policy involves government spending exceeding tax revenue.
(c)  A contractionary fiscal policy occurs when government spending is lower than tax revenue.

If the govt. spending is higher than the govt. revenue, there will be deficit, which can be a revene deficit, fiscal deficit or primary deficit.
(a)   Revenue deficit = Revenue expenditure - revenue receipts.
(b)   Fiscal deficit = Total expenditure - (revenue receipts + capital receipts other than borrowing).
(c)  Primary deficit = Fiscal deficit - interest payments. There are various methods of funding of these deficits. Fiscal deficit is generally financed by way of borrowing by the govt. by selling treasury bills or by raising long term loans etc. This borrowing entails interest cost and in case it increase beyond the reasonable level, it can create default problem and resultant effects as happened in certain European countries during 2010.

Methods of funding
Govt. spends money on a wide variety of things, from gen­eral administration to the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded by way of Taxation, Seigniorage (by printing money), borrowing money from the public or from abroad, consumption of fiscal reserves, sale of fixed as­sets (e.g., land) i.e. disinvestment.
All of these except, taxation are forms of deficit financing.

Economic effect of fiscal policy

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Increasing the govt spending and decreasing tax rates, are the methods to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment.

National Income Concepts

A no. of measures of national income and output are used to estimate total economic activity in a country. These help in counting the total amount of goods and services produced within geographically boundary or by citizens. Gross Domestic Product (GDP): It is total money value of all final goods and services produced within a country's domestic territory during a particular period. The goods should be consumer goods or capital goods (should should not include intermediary goods and services).
(GDP = Money value of final goods and services)
Net Domestic Product (NDP): When, out of gross domestic product, the amount of depreciation on fixed capital is reduced, we get net domestic product.
(NDP = GDP - Depreciation)

Gross National Product (GNP): It is seen in the context of citizenship, which means adding the net factor income from abroad to gross domestic product.
The net factor income from abroad can be positive or negative depending upon as to how much wages, rent, interest and profit is earned by foreign citizens in India and Indian citizens in foreign countries.
(GNP = GDP + or - net factor income from abroad)

Net National Product (NNP) : It can be worked as gross national product reduced by the amount of depreciation. (NNP = GNP - Depreciation)
National Income: It means the net national product at factor cost, which include total of net domestic product at factor cost plus net factor income from abroad. Net domestic product at factor cost : It means the total amount earned by various factors of production with in the domestic territory. The NDP at factor cost is the net domestic product at market price (-) indirect taxes (+) amount of subsidies given by the government.

Net domestic product at market price: It means market value of all the final goods and services produced within domestic territory of a country. In practice the net domestic product at factor cost and at market price are not equal although they should be equal.
The NDP at market price is the net domestic product at factor cost (+) indirect taxes (-) subsidies.

Calculation of GDP - Different approaches

(1) Output approach: GDP at market price = value of output in an economy minus intermediate consumption
NNP at factor cost= GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes

(2) Income approach : NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit of incorporated and unincorporated firms + Income from self- employment.
National income = NDP at factor cost + NFIA (net factor income from abroad).

(3) The expenditure approach
GDP = C + I + G + (X - M)
Where: C = household consumption expenditures / personal consumption expenditures.
I = gross private domestic investment
G = govt. consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services.

Economic Policy

Economic policy refers to policy actions of the government initiated in the economic field. The policy has a direct bearing on the economic strength, general economic welfare of citizens and economic ranking of a country in the world.
The policy sets the economic priorities of the govt. such as (a) national ownership of resources (b) the level of government income and spending (c) money supply and interest rates (d) conditions in the labour market and (e) many other areas of government interventions.
Economic policy is influenced by the social and political envi­ronment within the country and by the degree of integration with other economies of the world (called globalization) and the international institutions like IMF or World Bank.
Objectives of economic policy
1. Full employment - This ensures creation of opportunities where there are jobs for all of those, who are willing to work (it needs to be noted that full employment does not mean employment for all).
2. Inflation control - This keeps the purchasing power of the currency stable and real wage high. Increasing prices reduce the purchasing power of the currency and indirectly affect the standard of living.
3. GDP growth - This is major objective of the economic policy as it increases the income of the people. If there is increase in per capita income of the population, it leads to better standrd of life, provided there is equitable distribution of income.
Important policies that support the economic policy
1. Fiscal policy - It is the income, expenditure and tax policy of the govt executed through annual budget. Through this, the govt. can impact all sectors of the economy. The policy determines the duty/tax rates or tax concessions. In addition, the policy about investments or disinvestments.
2. Monetary policy - It relates to monetary stabilisation to stimulate the economy. The policy regulates the money supply to ensure adequate liquidity for growth and not to allow excessive liquidity that results into inflation.
3. Credit policy - This policy announced by RBI, ensures availability of credit to all productive sectors of the economy at reasonable interest rates. Through the policy actions, RBI impacts the flow of credit, the cost of deposit Et credit etc.
4. Trade policy : This policy announced by Ministry of Commerce, covers internal and external trade of the country. The issues relating to tariffs, trade agreements and the international institutions are also dealt with through this policy
Measures of Economic Growth and Welfare
Economic growth is measured through GDP, GNP and Per capita income. Economic welfare is measured through Human Development Index.

Human Development Index (HDI)

The UN Human Development Index (HDI) measures poverty, literacy, education, life expectancy, and other factors. It is a standard means of measuring well-being, especially child welfare. The index was developed in 1990 by the Pakistani economist Mahbub ul Haq. It is used since 1993 by the United Nations Development Programme in its annual report.
The HDI measures the average achievements in a country in 3 basic dimensions of human development:
1.Long & healthy life (measured by life expectancy at birth). 2 Knowledge, as measured by adult literacy rate (with two- thirds weight) and the combined primary, secondary and tertiary gross enrollment ratio (with one-third weight).
3. Decent standard of living, as measured by Gross Domes­tic Product per capita (Purchasing Power Parity in $US). Each year, countries are ranked according to these measures. HDI is considered by many to be an excellent tool for measuring development, since both economic and social indicators are covered.
Value - HDI can have a value between 0 and 1. Nearer it is to 1, higher the level of human development.
Countries and regions have classified into three categories: Low human development: <0 data-blogger-escaped-o:p="">
Medium human development: from 0,500 to 0,799 High human development: > 0,800

HDR 2011:Country Ranking

Released on 2.11.2011, it covered 185 countries out of 193 UN member nations (2013 report to be released on Mar 14, 2013)

Overall ranking
HDI Ranking (max 1)
Life Expectancy at birth (yr)
Mean years of schooling (Yr)
Expected years of schooling
Gross National Income $
(Per Capita) PPP

Non-income HDI value (max 1)
Limitation: The data availability determines HDI country coverage. To enable cross-country comparisons, the HDI is, to the extent possible, calculated based on data from leading international data agencies and other credible data sources available at the time of writing.
Genuine Progress Indicator (GPI)
GPI is a metric used to measure the economic growth of a country. It is considered as a replacement to gross domestic product (GDP) economic indicator, The GPI indicator takes everything the GDP uses into account. GPI also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others). The GPI nets the positive and negative results of economic growth to examine whether or not it has benefited people overall,
The GPI metric was developed out of the theories of green economics. Proponents of the GPI see it as a better measure of the sustainability of an economy when compared to the GDP measure.
Multidimensional Poverty Index (MPI)

Replacing the previous Human Poverty Index, MPI was de­veloped in 2010 under United Nations Development Pro­gram. It is uses different factors to determine poverty be­yond the income base poverty.
MPI is an index of acute multi-dimension poverty. It indi­cates the no. of multi-dimensionally poor people who are deprived in rudimentary services.
MPI uses the same 3 dimensions as the Human Development Index, i.e. health, education and standard of living. These are measured by using 10 indicators as under:
A. Health - (1) Child mortality (2) Nutrition
B.   Education - (1) Year of schooling (2) Children enrolled
C. Living standard - (1) Cooking fuel (2) Toilet (3) Water (4) Electricity (5) Floor (6) Assets.
Each dimension and each indicator within a dimension is equally weighted. MPI is calculated as under:
MPI = H x A [H = %age of people who are MPI poor i.e. incidence of poverty. A = Average intensity of MPI across ,the poor (%)]

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