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Banking Awareness

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Co-operative Banks

State Bank

Co-operative Banks

Co-operative Banks

Foreign Banks

Regional Rural Banks

New Banks

Indian Banks

Private Sector

Old Banks

Nationalized Banks

Public Sector

Commercial Banks

Scheduled Banks

Banking Sector


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Scheduled Banks: The banks listed in the 2nd schedule of RBI Act 1934.
Commercial Banks: Commercial Banks are run on commercial basis. They accept deposits, give loan and
provide other financial services to earn profit. They are regulated under Banking Regulation Act 1949.
Public Sector Banks: Wholly (or) partly owned by Government. We have 19 nationalized banks and SBI
bank with its subsidiary.
Old Banks: The bank accepts those were nationalized, continued to be in the hand of privates. These
private banks and those which were set up before 1970s. (eg: KVB, TMB)
New Banks: Banks set up in the private sector in 1990s and after are called new banks.
Eg: HDFC Bank, ICICI Bank.
Foreign Banks: After 1991 economic reform, India opened the door for Foreign banks. They set up either
branches or subsidiaries.
Eg: ati bank, Barclays, ABN Ambre.
Co-operative Banks:

Are operated on the principle of co-operation, self helf and mutual help.

Profit is not the goal

They are functional specific in agricultural related products.

Also have cash reserve ratio of RBI, but less than commercial banks.

Eg: NABARD, National Bank for Agriculture and Rural Development (NABARD) in the opex body of cooperative sector in India. NABARD is also called on the National Bank. It function are: financing of
agriculture and refinancing of co-operative banks and RRB.
Regional Rural Banks (RRB):

These banks were established since 1975, under RRBs Act 1976.

These banks were set up by public sector banks

The public sector bank which set up a particular RRB is called spomor bank of that RRB.

Eg: Pandian Gram Bank, a RRB, was set up by Indian Overseas Bank. So, Indian Overseas Bank is called
spomor bank of Pandian Gram Bank.
Banking Sectors
Commercial bank is a type of financial intermediary. It is a financial intermediary because it
mediates between the savers and borrowers). It does so by accepting deposits from the public and lending
money to businesses and consumers. Its primary liabilities are deposits and primary assets are loans and

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Commercial bank has to be distinguished from another type called investment bank. (Investment
banks assist companies in raising funds in the capital markets (both equity and debt)), as well as in
providing strategic advisory services for mergers, acquisitions and other types of financial transactions. It
is also called merchant bank.
The commercial banking system in India consists of public sector banks; private sector banks and
cooperative banks.
Currently, India has 88 scheduled commercial banks (SCBs) 25 public sector banks (that is with the
Government of India holding majority stake), 31 private banks and 38 foreign banks. Public sector banks
hold over 75 percent of total assets of banking industry, with the private and foreign banks holding 18.2%
and 6.5 respectively.
Public Sector Banking:
They are owned by the Government either totally or as a majority stake holder.

State Bank of India and its five associate banks called the State Bank group

19 nationalized banks

Regional Rural Banks mainly sponsored by Public Sector Banks

SBI has five associate banks: State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of
Mysore, State Bank of Patiala and State Bank of Travancore. Earlier SBI had seven associate banks. State
Bank of Saurashtra and Indore merged with SBI.
Private Sector Banks include domestic and foreign banks Co-operative Banks are another class of banks
and are not considered as commercial banks as they have social objectives and profit is not the motive.
(explained later) Reserve Bank of India lays down the norms for banking operations and has the final
supervising power.
Development Banks:
Development Banks are those financial institutions which provide long term capital for industries
and agriculture : Industrial Finance Corporation of India (IFCI); Industrial Development Bank of India
(IDBI); Industrial Credit and Investment Corporation of India (ICICI) that was merged with the ICICI
Bank in 2000; Industrial Investment Bank of India (IIBI); Small Industries Development Bank of India
(SIDBI); National Bank for Agriculture and Rural Development (NABARD)a; Export Import Bank of India;
National Housing Bank (NHB).
The commercial banking network essentially catered to the needs of general banking and for meeting the
short-term working capital requirements of industry and agriculture. Specialized development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership of the
Reserve Bank were set up to meet the long-term financing requirements of industry and agriculture. To

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facilitate the growth of these institutions, a mechanism to provide concessional finance to these
institutions was also put in place by the Reserve Bank.
The first development bank n India- IFCI- was incorporated immediately after Independence in 1948
under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to
medium and large-scale. Then after in regular intervals the government started new and different
development financial institutions to attain the different objectives and helpful to five-year plans.
Government utilized these institutions for the achievements in planning and development of the nation as
a whole. The all India financial institutions can be classified under four heads according to their economic
importance that are:

All-India Development Banks

Specialized Financial Institutions (SIDBI)

Investment Institutions (The Industrial Reconstruction Corporation of India Ltd., set up in 1971 for
rehabilitation of sick industrial companies)

State-level institutions (SFC)

(S.H. Khan committee appointed by RBI (1997) recommended to transform the DFI (development finance
institution)) into universal banks that can provide a menu of financial services and leverage on their assets
and talent.
Bank Nationalizion:
In 1969 and again in 1980, Government nationalized private commercial banking units for channelizing
banking capital into rural sectors; checking misuse of banking capital for speculative purposes; to shift
from class banking to mass banking (social banking); and to make banking into an integral part of the
planning process of socio-economic development in the country. Today, no other developing country can
boast of a banking system comparable to Indias in terms of geographic coverage, operational capabilities,
range of services and technological prowess.
Today banks are broadly classified into two types- Scheduled Banks and Non-scheduled Banks.
Commercial Banks:
Scheduled banks are those banks which are included in the Second Scheduled of the Reserve Bank
Act, 1934. They satisfy two conditions under the Reserve Bank of India Act.

paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakh.

it must satisfy RBI that its affairs are not conducted in a manner detrimental to the depositors.

The scheduled banks enjoy certain privileges like approaching RBI for financial assistance; refinance etc.
and correspondingly, they have certain obligations like maintaining certain cash reserves as prescribed the

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RBI etc. The scheduled banks in India comprise of State Bank of India and its associates (5), the other
nationalized banks (19), foreign banks, private sector banks, co-operative banks and regional rural banks.
Today, there are about 300 scheduled banks in India having a total network of 79,000 branches among
Non-scheduled banks are those banks which are not included in the second schedule of the RBI Act as
they do not comply with the above criteria and so they do not enjoy the benefits either. There are only 3
non-scheduled commercial banks operating in the country with a total of 9 branches.
Co-operative Banks:
Co-operative Banks are organized and managed on the principle of co-operation, self-help, and
mutual help. They function with the rule of One member, one vote and on no profit, no loss basis Cooperative banks, as a principle, do not pursue the goal of profit maximization.
Co-operative bank performs all the main banking functions of deposit mobilization, supply of credit and
provision of remittance facilities.
Co-operative Banks provide limited banking products and are functionally specialists in agriculture related
products, However, co-operative banks now provide housing loans also.
Urban Co-operative Banks (UCBs) are located in urban and semi-urban areas. These banks, till 1996, were
allowed to lend money only for non-agricultural purposes. This distinction does not hold today. Earlier,
they essentially lent to small borrowers and businesses. Today, their scope of operations has widened
considerably. Urban CBs provide working capital, loans and term loan as well.
Co-operative banks are the first government sponsored, government-supported, and governmentsubsidized financial agency in India. They get financial and other help from the Reserve Bank of India,
NABRAD, central government and state governments. RBI provides financial resources in the form of
contribution to the initial capital (through state government), working capital, refinance.
Co-operative Banks belong to the money market as well as to the capital market- they offer short term
and long loans.
Primary agricultural credit societies provide short erm and medium term loans. State Co-operative Banks
(SCBs) and CCBs (Central Co-operative Banks at the district level) provide both short term and term
loans. Land Development Banks (LDBs) provide long-term loans.
Long term cooperative credit structure comprises of state cooperative agriculture and rural development
bank (SCARDB) at the state level and primary PCARDBs or branches of SCARDB at the decentralized
district or block level providing typically medium and long term loans for making investments in
agriculture, rural industries, and lately housing. The sources of their funds (resources) are

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ownership funds

deposits or debenture issues.

central and state government

Reserve Bank of India


other co-operative institutions

Some co-operative bank are scheduled banks, while others are non-scheduled banks. For instance,
SCBs and some UCBs are scheduled banks (included in the Second Schedule of the Reserve Bank of
India Act)
Co-operative Banks are subject to CRR and SLR requirements as other banks. However, their
requiremtns are less than commercial banks.
Although the main aim of the co-operative bank is to provide cheaper credit to their members and not
to maximize profits, they may access the money market to improve their income so as to remain
Commercial banks and their weaknesses by 1991
The major factors that contributed to deteriorating bank performance upto the end of eighties were

high SLR and CRR locking up funds

low interest rates charged on government bonds

directed and concessional lending for populist reasons

administered interest rates and

lack of competition

The reforms to set the above problems right were

Floor and cap on CRR and floor or SLR removed in 2006.

interest rates were deregulated to make banks respond dynamically to the market conditions.

near level playing field for public, private and foreign banks in entry adoption of prudential
norms-Reserve Bank of India issued guidelines for income recognitions, asset classification and
provisioning to make banks safer.

Basel II norms adopted for safe banking

VRS for better work culture and productivity

FDI upto 74% is permitted in private banks One of the sectors that has been subjected to
reforms as a part of the new economic policy since 1991 consistently is the is the banking
sector. The objectives of banking sector reforms have been:

to make them competitive and profitable

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to strengthen the sector to face global challenges

sound and safe banking

to help them technologically modernize for customer benefit

make available global expertise and capital by relaxing FDI norms.

Narasimham committee:
Banking sector reforms in India were conducted on the basis of Narasimham Committee reports
I and II 1991 and 1998 respectively). The recommendations of Narasimham committee 1991 are:

No more nationalization

create a level playing field between the public sector, private sector and foreign sector banks

select few banks like SBI for global operations

reduce Statutory Liquidity Ratio (SLR) as that will leave more resources with banks for lending.

reduce Cash Reserve Ratio (CRR) to increase lendable resources of banks

rationalize and better target priority sector lending as a sizeable portion of it is wasted and also
much of it turning into non-performing asset

introduce prudential norms for better risk management and transparency in operations.

deregulate interest rates.

Set up Asset Reconstruction Company (ARC) that can take over some of the bad debts of the
banks and financial institutions and collect them for a commission. Most of these reforms are
implemented except priority sector lending which is welfare-based and relates to agriculture.
SLR is 24% today and CRR is 6%. Bank rate is 6% (2011 January)
Divestment in public sector banks led to their listing on the stock exchanges and their
performance has improved.

NPA (Non-performing assets):

Non-performing assets are those accounts of borrowers who have defaulted in payment of
interest or installment of the principal or both for more than 90 days.
NPAs stood at 2.5% in 2008. They may grow more by 2011 due to the current global crisis and the
aggressive lending in recent years.
RBI rules require that banks should set aside certain amount of money (provisioning) for the NPAs.
Gross NPAs include the amount due along with the amount provisioned. Net NPAs include only the
amount due.
NPAs are largely fallout of banks credit appraisal system, monitoring of end-usage of funds and
recovery procedures. It also depends on the overall economic environment, the business cycle and the

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legal environment for recovery of defaulted loans. Willful default; priority sector problems among the
poor etc. are also responsible.
High levels of NPAs means: banks profitability diminishes; precious capital is locked up; cost of
borrowing will rise as lendable assets shrink; stock prices of banks will go down and investors will lose;
investment suffers etc.
NPAs are classiful as sub-standard; doubtful and loss making assets for provisioning requirements.
The following are the RBI guidelines for NPAs classification and provisioning: Sub Standard AssetsThese are those accounts which have been classified as NPAs for a period less than or equal to 18
Doubtful Assets- These are those accounts which have remained as NPAs for a period exceeding 18
Loss Assets- In other words, such an assets is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or recovery
value. But a loss asset has not been written off, wholly or partly.
What is being done


CAR norms

Securitization law

foreclosure norms

one time settlement

interest waiver


debt recovery tribunals

Foreclosure means taking over by the lender of the mortgaged property if the borrower does not
conform to the terms of mortgage. Securitization is the process of a group of assets, such as loans or
mortgages, and selling securities backed by these assets.
Why need SARFAESI Act 2002?
To expedite recovery of loans and bring down the non-performing asset level of the Indian
banking and financial sector, the government in 2002 made a new law that promises to make it much
easier to recover bad loans from willful defaulters. Called the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI), the law has given
unprecedented powers to banks, financial institutions and asset reconstruction/securitization
companies to take over management control of a loan defaulter or even capture its assets.

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What is Asset Reconstruction Company?
Normally banks and FIs themselves recover the loans. But in the case of bad debts (sticky
loans), it is outsourced to the ARCs who have built-in professional expertise in this task and who
handle recovery as their core business. ARCs buy bad loans from banks and try to restructure them
and collect them. Arcs were recommended by Narasimham committee II. ARCIL- the first asset
reconstruction company was set up recently. Prudential Norms
Prudential norms relate to

income recognition

asset classification

provisioning for NPAs

capital adequacy norms (capital to risk-weighted asset ratio, CRAR).

A proper definition of income is essential in order to ensure that banks take into account income that is
actually realized (received). It helps in classifying an asset as NPA in certain cases. Once classified as
NPA, funds must be set apart to balance the banks operations so as to maintain safety of operations in
case of non-recovery of NPAs. Thus, income recognition, asset classification and provisioning norms are
Prudential norms make the operations transparent, accountable and safe.
Prudential norms serve two primary purposes: bring out the true position of a banks portfolio and help
in prevention of its deterioration.
What Basel Forms?
Banks lend to different types of borrowers and each carries its own risk. They lend the deposits
of public as well as money raised from the market- equity and debt. The intermediation activity
exposes the bank to a variety of risks. Cases of big banks collapsing due to their inability to sustain the
risk exposures are readily available. Therefore, banks have to keep aside a certain percentage of
capital as security against the risk of non-recovery. Basel committee provided the norms called Basel
norms to tackle the risk.
Capital to Risk Weighted Assets Ratio (CRAR) as given by the Basel Committee mandates CRAR at 9
percent of the risk weighted assets. It is the capital that is required to be set aside for absorbing risks.
It is not to be provisioned from deposits raised but has to additionally provided from debt, equity,
reserves etc.
For the public sector banks, when they could not set aside finances in compliance of prudential norms,
Government recapitalized them (lent them money).

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In 1988 Basel committee gave the first set of norms (Basel I) and presently the Base II norms are
being complied with by Indian Banks as follows:

by 2008- foreign banks and Indian with overseas operation and

by 2009 other Indian banks except local area banks and RRBs.

Basel 2 norms are 8% of CRAR.RBI made it 9% for greater security

India adopted Basel I norms in 1992 as a part of launch of economic reforms.
One of the problems perceived in Basel I norms was that all sovereign debt, in general, was given a
risk weight of zero, while all corporate debt was given similarly an equal weight irrespective of the
difference in risk of the corporate concerned.
The risk weights led to some curious behaviour in lending. Banks started preferring to lend to
governments, which required no capital addition, while even risk-free corporates, which had good
rating, demanded additional capital provisioning under adequacy norms. Thus, one size fits all
approach brought in distortions in lending.
Basel Committee revised Basel I norms and announced Basel 2 norms in 2004.
Basel-II Target:
Basel-II aims to strengthen bank safety Not only credit risk but also market risk and operational
risk are covered. Credit risk A bank always faces the risk that some of its borrowers may not repay
loan, interest or both. This risk is called credit risk, which varies from borrower to borrower depending
on their credit quality. Basel II requires banks to accurately measure credit risk to hold sufficient
capital to cover it.
Why Market Risk?
As part of the statutory requirement, in the form of SLR (statutory liquidity ratio), banks are
required to invest in liquid assets such as cash, gold, government and other approved securities. For
instance, Indian banks are required to invest 24 per cent of their net demand and term liabilities in
cash, gold, government securities and other eligible securities to comply with SLR requirements (200809).
Such investments are risky because of the change in their prices. This volatility in the value of banks
investment portfolio in known as the market risk, as it is driven by the market.
Why Operational risks?
Several events that are neither due to default by third party nor because of the vagaries of the
market. These events are called operational risks and can be attributed to internal systems, processes,
people and external factors.
Basel II uses a three pillars concept:

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Pillar I Specifies includes more types of risk-credit risk, market risk and operational risk.
Pillar 2 Enlarges the role of banking supervisors.
Pillar 3 Defines the standards and requirements for higher disclosure by banks on capital adequacy,
asset quality and other risk management processes.
Capital Tier1 --- Capital Tier 2:
Capital adequacy norms divide the capital into two categories. Tier one capital is used to absorb
losses while the Tier 2 capital is meant to be used at the time of winding up. Tier I Capital: Actual
contributed equity plus retained earnings.
Tier Ii Capital: Preferred shares plus 50% of subordinated debt (junior debt)
Subordinated debt figures between debt and equity- coming after the first in terms of eligibility for
benefits like compensation.
Recapitalization is lending to the bank the resources needed to conform to the capital adequacy norms
which stand at 8% today- minimum level.
Bank for International Settlements (BIS):
The Bank for International Settlements (BIS) is an international organization of central banks
which fosters international monetary and financial cooperation and serves as a bank for central banks.
It also provides banking services, but only to central banks, or to international organizations. Based in
Basel, Switzerland, the BIS was established by the Hague agreements of 1930.
As an organization of central banks, the BIS seeks to make monetary policy more predictable and
transparent among its 55 member central banks. The BIS man role is in setting capital adequacy
requirements to safeguard banks operations.
Basel-3 Norms:
The Bank for International Settlements (BIS) will soon unveil proposals for bank capital as part
of what is being called Basel-3 norms. (Global rules for bank capital known as Basel 1 were instituted in
1988. Basel 2 was introduced in 2007). The recent G20 meets endorsed the need for a new set of
Basel norms in the light of the global financial and economic crisis since 2008.
What are these new Basel rules about?
The Basel committee is a group of bank regulators that meets regularly to decide on risk
management rules for banks.
The latest rules (Basel 3) are much stricter, and have been agreed in response to the 2008 global
financial crisis. The most important rule by far is the capital adequacy ratio, which sets the minimum
cushion of capital a bank must keep to absorb losses on their loans. Banks may need to cut back on

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their lending in order to comply with the new rules. And in the long run, the rules should prevent a
repeat of the credit-fuelled boom seen in the last decade.
What is bank capital?
It is the value of the banks assets minus its liabilities. When a banks assets are worth less than
its liabilities, it is insolvent- it cannot pay its debts- and should be shut down. So the more capital a
bank has, the more losses it can take on its loans before it goes bust.
How do they calculate this capital adequacy ratio?
It is the value of the banks capital adequacy ratio?
It is the value of the banks capital as a percentage of its assets.
Regulators risk-weight the assets to calculate the ratio. This means they ignore ultra-safe
investments like cash, but heavily weight risky investments, like a loan to a struggling company. Under
the new rules, the risk-weightings are being made more cautious, especially for the complex financial
transactions that were at the heart of the crisis.
What is the new ratio?
The most important- and the strictest- is the core capital ratio. It will rise more than threefold,
from 2% currently, to 7%- although there are buffers that allow for flexibility in this number. In
simple terms, if a bank has Rs. 2 of capital, it can currently make a maximum Rs. 100 of loans. In
future, it must either increase its capital to Rs. 7, or else cut its lending to R. 28 (because Rs. 2 is 7%
of Rs. 28).
What about these buffers?
The 7% ratio includes a 2.5% capital conservation buffer.
This means that in a crisis, a bank will be allowed to let its capital ratio drop temporarily to as low as
But then the bank will be limited from paying bonuses and dividends until it has rebuilt its ratio back to
There is also an extra 2.5% countercyclical buffer that will allow regulators to raise the capital
requirement to 9.5% during boom times in order to slow down lending. Then how will banks meet the
new capital rules?
A bank has three choices:

It can issue new shares. This gives the bank more money without adding to its liabilities, adding
to its capital.

It can choose not to pay dividends. Profits not paid out to shareholders are included in its

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Or it can cut back on lending and make less risky investments. This will reduce its riskweighted assets, improving its capital adequacy ratio.

How soon do the banks have to do all this?

The new capital rules will be phased in over several years, and will only be fully operational by
2019. Controversially, the capital conservation buffer will only apply after 2016. That implies there will
be no restrictions on banks ability to pay dividends and bonuses for over three years, even though
many banks have far too little capital.
Special allowance has been made for banks rescued during the financial crisis- they will have 10 years
to fully comply.
Governments have given their banks so much time because they are afraid that if the change is
rushed; then the banks are more likely to cut their lending, pushing the world back into recession.
So is it the same rules for everyone?
The rules set a minimum standard, but some countries may choose to set stricter standards. And it will
also be up to individual countries when to apply the counter-cyclical buffer. There are also higher
requirements still to come for the biggest banks, whose failure could bring down the entire financial
Basel III and India:
Reserve Bank of India (RBI) does not see higher capital requirements under the proposed Basel
III norms hitting Indian banks significantly.
Indian banks are not likely to be significantly impacted by the proposed new capital rules. As on June
30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system, stood at
13.4% of which Tier I capital constituted 9.3%.
The Base Committee on Banking Supervision, under the Basel III rules, proposes that banks hold more
and better quality capital, besides having more liquid assets.
The norms will also limit banks leverage and make it mandatory for them to build up capital buffers in
good times that can be utilized in periods of stress.
Equity capital and some portion of reserves are together called core capital and it is a part of Tier I.
Bank Stress Test In world:
What if inflation sky rocketed asset bubbles formed and economic growth ground to a halt? How
would banks fare? Banks and government officials charged with overseeing banking systems try to
answer these types of questions by performing stress tests-subjecting banks to unlike but plausible
scenarios designed to determine whether an institution has enough net wealth- the impact of such
adverse developments.

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Stress tests of banking systems in Europe in 2010 and the United States in 2009 have generated
considerable interest given the impact of the global crisis on the health of the financial system as a
Stress tests are meant to find weak spots in the banking system at an early stage, and to guide
preventive actions by banks and those charged their oversight.
Stress test results depend on how pessimistic the scenarios assumptions are, and should be
interpreted in light of the assumptions made.
In the wake of the 2008 failure of investment bank Lehman Brothers, and of the worst global financial
and economic crisis in 80 years, those who design stress tests are taking a long, hard look at what
constitutes unlikely but plausible scenarios.
There are many different types of stress tests, with different uses. Some are carried out by banks
themselves to help manage their own risks. Some are done by supervisors as part of their ongoing
oversight of individual banks and banking systems. Many of these tests are never published.
There is one thing that almost all stress tests have in common. They are typically carried out to shed
more light on a few key types of threats to banks financial health: credit and market risk.
Credit and market risks:
Credit and market risks are key because they affect banks profits and solvency. Credit risks
reflect potential losses from defaults on the loans a bank makes, including consumer loans, such as
mortgages, and corporate loans. Stress tests for credit risk examine the impact of rising loan defaults,
or non-performing loans, on bank profit and capital.
Market risk stress tests gauge how changes in exchange rates, interest rates, and the prices of various
financial assets, such as equities and bonds, affect the value of the assets in a banks portfolio, as well
as its profits and capital. Typically, the test would assume a drop in the value of the various assets in
the banks portfolio. The changes in asset prices and default rates are often linked to a negative
economic scenario in which, among other things, unemployment climbs and economic growth
Shadow Bank System:
NBFCs are largely referred to as shadow banking system or the shadow financial system. They
have become the major financial intermediaries. As seen in the note on NBFCs elsewhere, shadow
institutions do not accept demand deposits and therefore are not subject to the same regulations.
Familiar examples of shadow institutions included Bear Stearns and Lehman Brothers. Hedge funds,
pension funds, mutual funds and investment banks are some examples.
Shadow institutions are not as effectively regulated as banks and so carry higher risk of failure.

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FDI in India:
A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in the
host country can now invest up to 100% in an Indian private sector bank. This option of 100% FDI will
be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment
companies. Other foreign investors can invest up to 74% in an Indian private sector bank, through
direct or portfolio investment.
The Government has also permitted foreign banks to set up wholly owned subsidiaries in India. The
government, however, restricted voting rights to 10% cap to the extent of shareholding.
The new FDI norms will not apply to PSU banks, where the FDI ceiling is still capped at 20%.
Universal banking in India:
Universal banking in India was recommended by the second Narasimham Committee (1998)
and the Khan Committee (1998) reports. It aims at widening and integration of financial activities.
Universal Banking is a multi-purpose and multi-functional financial supermarket. Universal banking
refers to those banks that offer a wide range of financial service, beyond the commercial banking
functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance,
Auto loans, Investment banking, Insurance etc. This is most common in European countries.
Benefits to banks from universal banking are that, since they have competence in the related areas,
they can reduce average costs and thereby improve spreads (difference between cost of borrowing and
the return on lending) by diversification. Many financial services are inter-linked activities, e.g.
insurance, stock broking and lending. A bank can use its instruments in one activity to exploit the
other, e.g., in the case of project lending to the same firm which has purchased insurance from the
bank. To the customers, one-stop-shopping saves transaction costs.
However, one drawback is that universal banking leads to a loss in specialization. There is also the
problem of the bank indulging in too many risky activities. ICICI (Industrial Credit and Investment
Corporation of India) merged with its subsidiary- ICICI Bank in a reverse merger (parent merging with
the subsidiary, the ICICI Bank). Other banks are also emerging as universal banks which are popular in
The compulsions for the DFIs like ICICI, IDBI, IFCI etc. to become UBs is the following:
Earlier in the sixties and seventies, the DFIs specialized in project finance for the industries with long
term capital needs. But the industries of late are mobilizing the finances from external sources or from
the stock market and so the DFI business suffered. The cheap Government funds that were available in
the earlier pre-liberalization era also are not available today. Banks and DFIs are having to compete for

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the same clients. Banks have an advantage in that they have a deposit base but the DFIs do not have
Financial Inclusion:
Many people, particularly those living on low incomes, cannot access mainstream financial
products such as bank accounts and low cost loans. This financial exclusion forces them to borrow from
the moneylenders at high cost. Therefore, financial inclusion has been the goal of governments policy
since late sixties.
Financial inclusion or taking banking services to the common man was the main driver of bank
nationalization in 1969 and 1980 powered by three priority areas

access to banking

access to affordable credit, and

access to free face-to-face money advice.

Thus, financial inclusion is the delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low-income groups. The Government of Indias rationale for creating Regional Rural
Banks (RRBs) in the years in 1975 following the nationalization of the countrys banks was to ensure
that banking services reached poor people.
The branches of commercial banks and the RRBs grew from 8,321 in 1969 to about 70,000.
Priority sector credit under which 40% of all bank advances should go to certain specified areas like
agriculture is a form of directed credit that is aimed at financial inclusion.
Micro-finance (savings, insurance and lending in small quantities) and self-help groups are another
innovation in financial inclusion.
Differential rate of interest; kisan credit cards; no-frills account (allowing opening of account with very
little or no minimum balances) etc. are examples of financial inclusion.
Scaling-up access to finance for Indias rural poor, to meet their diverse financial needs (savings,
credit, insurance, etc.) through flexible products at competitive prices is the goal of financial inclusion.
The total number of no-frill accounts opened over a two-year period (April 1, 2007 to May 30, 2009)
stands at 25.1 million.
While it is beyond doubt that financial access of the people has significantly improved in the last threeand-a-half decades and even more so in the last two years, the focus now should be on how to
accelerate it as financial inclusion is important for economic growth, equity and poverty alleviation.
Unique identification number has some advantages for financial inclusion
KYC (know your customer) bottlenecks will be dramatically reduced. Millions of new customers will
become bankable. Growth will get a boost. Risk management will undergo a paradigm shift. Credit

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histories will be available on tap. Profitability will improve and so will customer service. We could finally
have a technology initiative to extend financial inclusion.
Bank Consolidation:
Merging public sector banks to form big and globally aspiring banks is bank consolidation. It is
expected to bring about financial stability and was recommended by the Narasimham Committee- II
(1997) on financial sector reform.
State Bank of Saurashtras merger with SBI has been achieved and the remaining six are to be
merged. Government says that bigger banks can take on competition; can raise more than smaller
Rationalizing the manpower and branch network after bank mergers is a challenge and the criticism
also includes that the bigger banks will be so much more bureaucratized. Bigness also does not reduce
chances of failure as seen in the west in the current meltdown.
India has more than 175 commercial banks, out of which 28 state-run banks account for the majority
of the banking sectors assets followed by private sector banks and foreign banks, which have a tiny
Financial stability:
Financial stability is a situation where the financial system operates with no serious failures or
undesirable impacts on development of the economy as a whole, while showing a high degree of
resilience to shocks.
Financial stability may be disturbed both by processes inside the financial sector leading to the
emergence of weak spots like excessive of leverage; dealing in doubtful products like collateralized
debt options (CDS) etc. It can also be undermined through regulatory lapses and inadequate
safeguards prescribed by law.
In India, the banking system was not impacted badly by the world financial crisis as Indian banks are
well-regulated through proper supervision. They are also well capitalize through capital adequacy ratio
according to the Bank of International Settlements (Basel, Switzerland).
Calibrated globalization also meant that we would open upon only on achieving the strength to
compete successfully.
Prime Lending Rate:
PLR Prime Lending Rate (PLR) is the rate at which banks lend to the best customers. About 15%
today (2009)
Basis points:

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Changes in interest rates and other variable are expressed in terms of basis points to magnify
and express the importance of changes. One basis point is 1% of 1%. Weal Bank- Narasimham
Committee- II A Weak Bank has been defined by the committee as follows: Where a total
accumulated losses of the bank and net NPA amount exceed the net worth of the bank.
Narrow banking:
For restoring weak banks to strength, restructuring is needed. Such restructuring is generally
attempted by operating the bank(s) as narrow bank(s), among other things. Narrow banking would
restrict banks to holding liquid and safe government bonds. It prevents bank run.
Bank run:
A bank run is a type of financial crisis. It is a panic which occurs when a large number of
customers of a bank fear it is insolvent and withdraw their deposits.
Subordinated debt:
It is also known as junior debt. It is a finance term to describe debt that is unsecured or has a
lesser priority than that of other debt claim on the same asset. This means that if the party that issued
the debt defaults on it, people holding subordinated debt get paid after the holders of the senior debt.
A subordinated debt get paid after the holders of the senior debt. A subordinated debt therefore
carries more risk than a normal debt. Subordinated debt has a higher expected rate of return than
senior debt due to the increased inherent risk.
Core Banking:
Core Banking is normally defined as the business conducted by a banking institution with its
retail and small business customers. Many banks treat the retail customers as their core banking
customers, and have a separate line of business to manage small businesses. Larger businesses are
managed via the Corporate Banking division of the institution. Core banking basically is depositing and
lending of money.
World Bank Recapitalization:
Government of India has made an assessment that the public sector banking system would
needs as much as Rs. 35,000 crore worth of Tier- I capital by 2012, given projections of how much
their business needs to expand. Past divestment of equity has significantly reduced the governments
shareholding in many public sector banks. Hence, it is argued, if 51 per cent government ownership
has to be maintained to secure the public sector character of these banks, this recapitalization has to
be in the form of new government equity capital. Since the government is strapped for funds for this
purpose, it has decided to use this requirement as the basis for opting for a sector-specific $2 billion
World Bank loan.

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Bank Stress Test:
A stress test is an assessment or evaluation of a Banks balance sheet to determine if it is viable
as a business or likely to go bankrupt when faced with certain recessionary and other stress situationswhether it has sufficient capital buffers to withstand the recession and financial crisis. European banks
were recently subjected to such stress tests.
Financial Sector Reform:
Reforming the financial sector-banking, insurance, pension reforms- is crucial to make them
generate resources; gain efficiencies; innovate new products and serve the economy and people well.
It involves adoption of best practices in regulation and other areas like micro finance etc. The need is
particularly felt in the wake of the global financial crisis brought about essentially by the financial sector
that ruined the real economy related to production. Some recent initiatives in this sector relate to
introduction of base rate for banks; setting up of Financial Stability and Development Council; business
correspondent model for financial inclusion. There is a need however to improve the regulation of the
NBFCs as they borrow from banks and lend which means if they are not properly regulated, the whole
financial system is vulnerable. Crr and slr have been freed from floor and cap to make banking more
Consolidation of banks is taking place so that benefits of scale can push Indian banks to global heights.
State Bank of Saurashtra is merged with SBI and State Bank of Indore is also being merged. Bank of
Rajasthan has been acquired by ICICI Bank and merged with the latter.
However, in the insurance sector, reforms are still due. The Insurance Laws (Amendment) Bill, 2008,
which was introduced by the government in the Rajya Sabha in 2008, provides for enhancement of
share holdings by a foreign company from 26% to 49%. The Bill is pending parliamentary approval.
Pension reforms are taking place. NPS has been introduced. Private sector entities have been invited to
manage pension funds of Central government employees. Thus, there is dynamism imparted to
mobilization of pension funds and their deployment to reduce governments fiscal burden and generate
higher savings for the pensioners.
Debt market: The bond market in India remains limited in terms of nature of instruments, their
maturity, investor participation and liquidity. Recent reforms include raising of the cap on investment
by foreign institutional investors, or FIIs, from $6 billion to $15 billion.
Regulatory reforms- setting up of the FSDC is crucial for better supervision and clear demarcation of
the jurisdiction.
The roadmap for financial sector reforms has been defined by the RH Patil, Percy Mistry & Raghuram
Rajan reports.

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RBI Financial Stability:
Recent global financial crisis is largely attributed to the financial sector recklessness due to lack
of quality regulation. The lesson to draw from the crisis is to provide for good regulation- need not be
more regulation- by the Central Bank so that there is financial stability. Traditionally, central bank is
the institution that is given the function to regulate the financial system of which banks are the lifeline.
In India, RBI has performed the role by the following instruments

Licensing of banks

Deciding on who can set up a bank, expand etc.

SLR, CRR norms

CAR rules

Lender of last resort

Laying down prudential norms

Supervisory functions
RBI Governor heads the HLCC- High Level Coordination Committee of financial of financial

regulators of SEBI, PERDA and IRDA.

RBI defines from time to time NPA norms; allows or limits or banks credit to certain sectors like real
estate in order to make banking operations safe and stable.
Interest rates are also changed through repo and reverse repo rates to caution the borrowers and
consumers. How Indian banks survived the global crisis Even though many banks failed and some
survived on huge bailouts in the west due to the global financial crisis, Indian banking is almost
unscathed for the following reasons

Public sector banks- 27- dominate

FDI is 74% in private banks but voting rights are only 10%

We adopted capital account convertibility in a measured manner

RBI has been conservative and regulated the banks well. Banks were not allowed to invest in
risky instruments like credit default swaps (CDS)

Basel norms, SLR and CRR levels were well maintained

Prudential norms also saved the Indian banks from recklessness.

Financial Inclusion and the recommendations of the Rangarajan Panel. Access to finance by the poor
and vulnerable groups is a prerequisite for poverty reduction and social cohesion. This has to become
an integral part of our efforts to promote inclusive growth. Financial inclusion means delivery of
financial services at an affordable cost to the vast sections of the disadvantaged and low-income
groups. The various financial services include credit, savings, insurance and payments and remittance

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facilities. The objective of financial inclusion is to extend the scope of activities of the organized
financial system to include within its ambit people with low incomes.
NSSO data reveal that 45.9 million farmer households in the country (51.4%), out of a total of 89.3
million households do not access credit, either from institutional or non-institutional sources. Further,
despite the vast network of bank branches, only 27% of total farm households are indebted to formal
sources (of which one-third also borrow from informal sources). The poorer the group, the greater is
the exclusion.
While financial inclusion can be substantially enhanced by improving the supply side or the delivery
systems, it is also important to note that many regions, segments of the population and sub-sectors of
the economy have a limited or weak demand for financial services. In order to improve their level of
inclusion, demand side efforts need to be undertaken including improving human and physical resource
endowments, enhancing productivity, mitigating risk and strengthening market linkages.
The Committee on Financial Inclusion headed by Shri C.R. Rangarajan, submitted its report in 2008
and recommended that the semi-urban and rural branches or commercial banks and Regional Rural
Banks may set for themselves a minimum target of covering 250 new cultivator and non-cultivator
households per branch per annum, with an emphasis on financing marginal farmers and poor noncultivator householders for achieving financial inclusion.
The Committee feels that the task of financial inclusion must be taken up in a mission mode as a
financial inclusion plan at the national level. A National Mission on Financial Inclusion (NaMFI)
comprising representatives from all stakeholders may be constituted to aim at achieving universal
financial inclusion within a specific time frame. The Mission should be responsible for suggesting the
overall policy changes required for achieving the desired- level of financial inclusion, and for supporting
a range of stakeholders- in the domain of public, private and NGO sectors- in undertaking promotional
A National Rural Financial Plan (NRFIP) may be launched with a clear target to provide access to
comprehensive financial services, including credit, to atleast 50% of financially excluded households,
by 2012 through rural/semi-urban branches of Commercial Banks and Regional Rural Banks. The
remaining households, with such shifts as may occur in the rural/urban population, have to be covered
by 2015.
There is a cost involved in this massive exercise of extending financial services to hitherto excluded
segments of population. The Committee proposed the constitution of two funds with NABARD- the
Financial Inclusion Promotion & Development Fund and the Financial Inclusion Technology Fund with an
initial corpus of Rs. 500 crore each to be contributed in equal proportion by GoI/RBI/NABARD. In 2007-

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08 the Government had set up a Financial Inclusion Fund and a Financial Inclusion Technology Fund in
NABARD, to reach banking services to the unbanked areas. To give momentum to the pace of financial
inclusion, Union Budget 2010-11 proposed an augmentation of Rs. 100 crore for each of these funds,
which shall be contributed by Government of India, RBI and NABARD.
Extending outreach on a scale envisaged under NRFIP would be possible only by leveraging technology
to open up channels beyond branch network. Adoption of appropriate technology would enable the
branches to go where the customer is present instead of the other way round. This, however, is in
addition to extending traditional mode of banking by targeted branch expansion in identified districts.
The Business Facilitator/Business Correspondent (BF/BC) models riding on appropriate technology can
deliver this outreach and should form the core of the strategy for extending financial inclusion. The
Committee has made some recommendations for relaxation of norms for expanding the coverage of
BF/BC. Ultimately, banks should endeavour to have a BC touch point in each of the 6,00,000 villages in
the country.
RRBs, post-merger, represent a powerful instrument for financial inclusion. Their outreach vis--vis
other scheduled commercial banks particularly in regions and across population groups facing the brunt
of financial exclusion is impressive. RRBs account for 37% of total rural offices of all scheduled
commercial banks and 91% of their workforce is posted in rural and semi-urban areas. They account
for 31% of deposit accounts and 37% of loan accounts in rural areas. RRBs have a large presence in
regions marked by financial exclusion of a high order. RRBs are, thus, the best suited vehicles to widen
and deepen the process of financial inclusion. However, there has to be a firm reinforcement of the
rural orientation of these institutions with a specific mandate on financial inclusion. The Committee has
recommended the recapitalization of RRBs with negative. Net Worth and widening of their network to
cover all unbanked villages in the districts where they are operating, either by opening a branch or
through the BF/BC model in a time bound manner. Their area of operation may also be extended to
cover the 87 districts, presently not covered by them.
The SHG- Bank Linkage Programme can be regarded as the most potent initiative since Independence
for delivering financial services to the poor in a sustainable manner. It needs to be extended to urban
areas more. The Committee has recommended amendment to NABARD Act to enable it to provide
micro finance service to the urban poor.
JLBs are proposed by the Committee. It is like the SHG but is confined to farming operations mainly. A
Joint Liability Group (JLG) is an informal group comprising preferably of 4 to 10 individuals coming
together for the purposes of availing bank loan either singly or through the group mechanism against
mutual guarantee. The JLG members are expected to engage in similar type of economic activities like

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crop production.
Micro Finance Institutions (MFIs) could play a significant role in facilitating inclusion, as they are
uniquely positioned in reaching out to the rural poor. The committee feels that legislation to regulate
the microfinance sector is essential. For example, The Micro Financial Sector (Development and
Regulation) Bill, 2007.
Important data for Financial Inclusion:

The first major breakthrough in financial inclusion came through when MYRADA, an NGO
working in Karnataka developed the self-help group (SHG) methodology to link the unbanked
rural population to the formal financial system through the local bank branches. Thanks to the
efforts of the Reserve Bank of India (RBI), Nabard, state governments and numerous civil
society organizations, about 8.6 crore households now have access to banking through SHGs.
There are 61 lakh saving-linked SHGs with Rs 5,545.6 crore aggregate savings and 42 lakh
credit-linked SHGs with loan outstanding of Rs. 22,679 crore as on March 31, 2009.

The business correspondent (BC) model advocated by the RBI is another pertinent example of
potential frugal innovation in theinancial inclusion space. The use of BCs enables banks to
extend banking services to the hinterland without setting up a brick and-mortar branch, which is
often an unviable proposition. Banks use various types of hand-held devices, (aptly nicknamed
micro ATMs) to authenticate micro-transactions at the BC location and to integrate the same
with banks main database.


Union Budget 2010-11 and Banking

The Indian banking system has emerged unscathed from the crisis. We need to ensure that the
banking system grows in size and sophistication to meet the needs of a modern economy.
Besides, there is a need to extend the geographic coverage of banks and improve access to
banking services. RBI is considering giving some additional banking licenses to private sector
players. Non Banking. Financial Companies could also be considered, if they meet the RBIs
eligibility criteria.

During 2008-09, the Government infused Rs. 1900 crore as Tier-I capital in four public sector
banks to maintain a comfortable level of Capital to Risk Weighted Asset Ratio. An additional sum
of Rs. 1200 crore is being infused now. For the year 2010-11, Government proposes to provide
a sum of Rs. 16,500.

Regional Rural Banks (RRBs) play in important role in providing credit to rural economy. The
capital of these banks is shared by the Central Government, sponsor banks and State

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Governments. Government proposes to provide further capital to strengthen the RRBs so that
they have adequate capital base to support increased lending to the rural economy.

To reach the benefits of banking services to the Aam Aadmi, the Reserve Bank of India had set
up a High Level Committee on the Lead Bank Scheme. After careful assessment of the
recommendations of this Committee, and in further consultation with the RBI, it has been
decided to provide appropriate Banking facilities to habitations having population in excess of
2000 by March, 2012. It is also proposed to extend insurance and other services to the targeted
beneficiaries. These services will be provided using the Business Correspondent and other
models with appropriate technology back up. By this arrangement, it is proposed to cover
60,000 habitations.

In 2007-08 the Government had set up a Financial Inclusion Fund and a Financial Inclusion
Technology Fund in NABARD, to reach banking services to the unbanked areas. To give
momentum to the pace of financial inclusion, Government proposes an augmentation of Rs. 100
crore for each of these funds, which shall be contributed by Government of India, RBI and

Base Rate (BR):

What is the base rate (BR)? It is the minimum rate of interest that a bank is allowed to charge
from its customers. Unless mandated by the government, RBI rules stipulates that no bank can offer
loans at a rate lower than BR to any of its customers. How is the base rate calculated?
A host of factors, like the cost of deposits, administrative costs, a banks profitability in the previous
financial year and a few other parameters, with stipulated weights, are considered while calculating a
lenders BR. The cost of deposits has the highest weight in calculating the new benchmark. Banks,
however, have the leeway to take into account the cost of deposits of any tenure while calculating their
BR. For example, SBI took costs of its 6-month deposits into account while calculating its BR, which it
has fixed at 7.5%.
When did the base rate come into force?
It is effective from Thursday, July 1. However, all existing loans, including home loans and car
loans, continue to be at the current rate. Only the new loans taken on or after July 1 and old loans
being renewed after this date are be linked to BR.
How is it different from bank prime lending rate?
BR is a more objective reference number than the bank prime lending rate (BPLR)- the currentbenchmark. BPLR is the rate at which a bank lends to lend to its most trustworthy low-risk customer.
However, often banks lend at rates below BPLR. For example, most home loan rates are at sub-BPLR

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levels. Some large corporates also get loans at rates substantially lower than BPLR. For all banks, BR
will be much lower than their BPLR.
How often can a bank change its BR?
A bank can change its BR every quarter, and also during the quarter. What does it mean for
corporate borrowers? Under the BPLR system, large corporates who enjoyed rates as low as 4-6% will
be hit.
What are its benefits?
Aces the lending rates transparent. Monetary policy changes will find genuine transmission.
Cross subsidation of the corporate at the expense of MSNEs will stop and MSMEs will get credit more
affordably. What are the exceptions? Educational loans, export credit, credit to weaker sections can be
given at sub-base rate.
Securities and Insurance Laws (Amendment) and Validation Bill, 2010:
United Linked Invest Plans (Ulips) are the insurance products in which payment is made partly
for premium (insurance) and rest of it invested in the capital market like a Mutual Fund investment. It
led to jurisdictional disputes between Sebi and Irda. Sebi says that a huge amount of Ulip is invested in
stock market. Government promulgated an ordinance to set up a mechanism to regulate such
jurisdictional disputes.
Financial sector is inter-related. Banks keep money that is invested in stock market. Insurance
companies have stock market related products like Ulips. Pension funds are becoming popular in the
stock market. These players can have mutual problems of jurisdiction as seen in the case of Ulips.
Therefore, there is a need for a super regulator. Parliament passed a Bill-Securities and Insurance
Laws (Amendment) and Validation Bill, 2010- that provides a mechanism, headed by the finance
minister, to resolve disputes between financial regulators as an ad-hoc arrangement. It has
representations from the four financial sector regulators and the Finance Ministry- Sebi, Irda, Rbi and
The Bill states that the Reserve Bank Governor will be the Vice-Chairman of the joint committee. The
joint body can entertain only jurisdictional issues. Even here, forst the involved parties should settle it
between them.
However, there were apprehensions expressed by RBI over its autonomy.
The government is still working on a permanent body to settle the inter-regulator disputes such as the
SEBI-IRDA turf war.
The criticism is that there is already a High level Coordination Committee with Rbi Governor heading it
and there is no need for the current mechanism. It has lead to politicization.

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What is a credit default swap?
A credit default swap is a bilateral contract where one party buys and another party sells
protection on a credit instrument, which could either be a bond or a loan, in case of occurrence, of a
credit event. If the reference bond performs without default, the buyer of the swap makes interim
payments to the seller till maturity. If the bond or the credit instrument defaults, then the seller pays
par value of the bond to the buyer.
A default is referred to as a credit event and includes such events as failure to pay, restructuring or
What is the difference between a CDS and credit insurance? The buyer of a CDS does not need to own
the underlying security or other forms of credit exposure; in fact the buyer does not even have to
suffer a loss from the default event.
What are teaser rates?
Teaser loan rates are special home loan rates that are called so, the banks attract customers by
offering them lower rates of interest in the initial years and then, in the longer run, the rates are
shifted from fixed to floating rates or the market- adjusted rates.
In the months that followed the collapse of Lehman Brothers, the Indian Banks Association, nudged by
the government, formulated a scheme where interest rates for loans up to 5 lakh and loans up to 20
lakh were available at discounted rates of 8.5% and 9.25%, respectively, for the first five, years. This
was a limited period scheme, which was part of the stimulus measures announced by the government.
Why have teaser loans received a bad name?
Teaser home loans have received a bad name because of the sup-prime crisis in the US. In America,
many lenders encouraged borrowers to take on home loans they could not afford by offering them
teaser rates for the initial years. As long as home prices rose, many borrowers were able to take
second loans on their property and meet their obligations. But when home prices stabilized, many
borrowers were not in a position to repay and banks found it difficult to realize their loans.
What are the banks arguments?
India faces a housing shortage of 19 million homes, which means that the demand is unlikely to fall.
Also, the systemic risk is lower because in India, the average loan-to-value ratio is below 80%, which
means that lenders have a good chance of recovering their loans in a default.
Why is it a cause of concern for RBI?
RBIs concern over teaser rates has to be seen in conjunction with its concern over the sudden rise in
real estate prices, which have jumped 60% in less than two years in some centres. RBI fears that
teaser rates sharply after two years, many borrowers might find it difficult to afford to pay their

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installments and if there is a simultaneous correction in real estate prices, it could also lead to a rise in
defaults. To reduce these risks, RBI raised the standard provision on teaser loans from 0.40% to 2%.
The Reserve Bank of India released a technical paper on inflation-indexed bonds in
December 2010.
What are bonds?
Bonds are fixed income securities or financial instrument through which an investor loans
money to an entity in return for a periodic interest payments (coupon) and repayment of the amount
loan at the end of the agreed maturity. The rate of interest demanded by investors is based on risk
profile of the borrower, inflation expectation over the maturity period and the real yield demanded.
That is an investor expects a real rate of return after adjusting for inflation. What is the inflation risk in
investing in regular bonds? The fixed rate of return demanded by investors is based on inflation
expectation. There is a chance that the actual inflation over the maturity period of bond turns out to be
higher than this inflation expectation.
In such a case, the investor could end up with a negative rate of return. How do inflation-indexed
bonds reduce risk for investors? Inflation-indexed bonds assures investors a fixed real rate of return.
That is the return that an investor gets will be a fixed premium over some measure of inflation such as
the wholesale price index. This means that the interest payment that investors would receive would
tend to vary from year to year, depending on the rate of inflation. But investor will be protected
because he would get a real rate of return on investment. These are particularly beneficial to investors
such as pension and retirement funds that want to invest funds for long periods.
The structure proposed by the RBI has suggested that while coupon, or the rate or interest, will remain
fixed the principal will be indexed to inflation. For example, if an investor invests in a bond of face
value of Rs. 100 for a 5% interest rate after one year in which average inflation is 5% the principal will
be increased to Rs. 105 after one year and the 5% return will be calculated on this higher amount.
One variant of the inflation-indexed bond, capital index bond, was issued in India in 1997 wherein only
principal repayment at the time of redemption was indexed to inflation. The response to the issuance
was muted, as interest payments were not protected against inflation.
RBI Discussion Paper on entry of new banks in the private sector The Reserve Bank of India released in
August 2010 the Discussion Paper on Entry of New Banks in the Private Sector. The paper seeks
views/comments of banks, non-banking in the Private Sector. The paper seeks views/comments of
banks, non-banking financial institutions, industrial houses, other institutions and the public at large.
Suggestions and comments are invited on the following aspects delineated in the Discussion Paper:

Minimum capital requirements for new banks and promoters contribution

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Minimum and maximum caps on promoter shareholding and other shareholders.

Foreign shareholding in the new banks

Whether industrial and business houses could be allowed to promote banks

Should Non-Banking Financial Companies be allowed conversion into banks or to promote a


New banks:
After receiving feedback, comments and suggestions on the possible approaches discussed in
this paper and detailed discussions with the stakeholders, comprehensive guidelines for licensing of
new banks would be framed and applications invited for setting up new banks.
Public Sector Bank recapitalization:
The Government approved to provide an additional amount of Rs. 6000 crore, in addition to the
Rs. 15000 crore already provided in the Budget 2010-11, to ensure Tier I CRAR (Capital to Risk
Weighted Assets) of Public Sector Banks (PSBs) and also to raise Government of India holding in all
PSBs to 58%. The proposed capital infusion would enhance the lending capacity of the PSBs to meet
the credit requirement of the economy in order to maintain and accelerate the economic growth
momentum. This additional, availability of capital is likely to benefit employment oriented sectors,
especially agriculture, micro & small enterprises, export, entrepreneurs etc.
During the recent global financial crisis, the Public Sector Banks (PSBs) played a pivotal role in the
economy by extending credit to all the productive sectors of the economy.
These banks, in this backdrop, would require, capital commensurate with the increase in their. Risk
Weighted Assets (RWAs). Though the minimum regulatory requirement of Capital to Risk Weighted
Assets (CRAR) for the banks is 9%, the Government has mandated a total CRAR of 12% with 8% Tier I
Capital. Keeping, all other factors, the Finance Minister, in his Budget speech for the year 2010-11
announced that capital would be infused in the PSBs so that these are able to attain a minimum &
percent Tier I Capital by 31st March, 2011.
There are many PSBs where the Government of Indias holding is close to 51%. This implies that in
case of need, these banks cannot access the capital market for raising additional capital by dilution of
Government holding. The present capitalization process of the PSBs has presented an opportunity to
the Government to raise its shareholding in the PSBs, specially in those PSBs where the Governments
holding is close to 51%. This will enable the PSBs to raise additional capital from the market, in future,
without depending upon the Government.
Recapitalization is a process of changing a firms capital structure by altering the mix of debt and
equity financing without changing the total amount of capital.

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Important Economic Terms
The best credit rating that can be given to a borrowers debts, indicating that the risk of a borrower
defaulting is minuscule.
An annual general meeting, which companies hold each year for shareholders to vote on important
issues such as dividend payments and appointments to the companys board of directors. If an
emergency decision is needed for example in the case of a takeover a company may also call an
exceptional general meeting of shareholders or EGM.
Things that provide income or some other value to their owner.

Fixed assets (also known as long-term assets) are things that have a useful life of more than one
year, for example buildings and machinery; there are also intangible fixed assets, like the good
reputation of a company or brand.

Current assets are the things that can easily be turned into cash and are expected to be sold or
used up in the near future.

Economic policy aimed at reducing a governments deficit (or borrowing). Austerity can be achieved
through increases in government revenues primarily via tax rises and/or a reduction in government
spending or future spending commitments.
The financial rescue of a struggling borrower. A bailout can be achieved in various ways:

providing loans to a borrower that markets will no longer lend to

guaranteeing a borrowers debts

guaranteeing the value of a borrowers risky assets

providing help to absorb potential losses, such as in a bank recapitalisation

A legal process in which the assets of a borrower who cannot repay its debts which can be an
individual, a company or a bank are valued, and possibly sold off (liquidated), in order to repay
Where the borrowers assets are insufficient to repay its debts, the debts have to be written off. This
means the lenders must accept that some of their loans will never be repaid, and the borrower is freed

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of its debts. Bankruptcy varies greatly from one country to another, some countries have laws that are
very friendly to borrowers, while others are much more friendly to lenders.
Base rate:
The key interest rate set by the Bank of England. It is the overnight interest rate that it charges
to banks for lending to them. The base rate and expectations about how the base rate will change in
the future directly affect the interest rates at which banks are willing to lend money in sterling.
Basel accords:
The Basel Accords refer to a set of agreements by the Basel Committee on Bank Supervision
(BCBS), which provide recommendations on banking regulations. The purpose of the accords is to
ensure that financial institutions have enough capital to meet obligations and absorb unexpected
Basis point:
One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points
might take the rate, for example, from 3% to 2.75%.
The British Bankers Association is an organization representing the major banks in the UK
including foreign banks with a major presence in London. It is responsible for the daily Liborinterest
rate which determines the rate at which banks lend to each other.
Bear market:
In a bear market, prices are falling and investors, fearing losses, tend to sell. This can create a
self-sustaining downward spiral.
A debt security- or more simply an IOU. It is very similar to a bond, but has a maturity of less
than one year when first issued.
The Bank for International Settlements is an international association of central banks based in
Basel, Switzerland. Crucially, it agrees international standards for the capital adequacy of banks that
is, the minimum buffer banks must have to withstand any losses. In response to the financial crisis, the
BIS has agreed a much stricter set of rules. As these are the third such set of regulations, they are
known as Basel III.
A debt security or more simply, an IOU. The bond states when a loan must be repaid and what
interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or

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governments to raise money. Banks and investors buy and trade bonds.
An acronym used to describe the fast-growing economies of Brazil, Russia, India China and
South Africa
Bull market:
A bull market is one in which prices are generally rising and investor confidence is high.
For investors, it refers to their stock of wealth, which can be put to work in order to earn
income. For companies, it typically refers to sources of financing such as newly issued shares.
For banks, it refers to their ability to absorb losses in their accounts. Banks normally obtain capital
either by issuing new shares, or by keeping hold of profits instead of paying them out as dividends. If a
bank writes off a loss on one of its assets for example, if it makes a loan that is not repaid then the
bank must also write off a corresponding amount of its capital. If a bank runs out of capital, then it is
insolvent, meaning it does not have enough assets to repay its debts.
Capital adequacy ratio:
A measure of a banks ability to absorb losses. It is defined as the value of its capital divided by
the value of risk-weighted assets (ie taking into account how risky they are). A low capital adequacy
ratio suggests that a bank has a limited ability to absorb losses, given the amount and the riskiness of
the loans it has made.
A banking regulator typically the central bank sets a minimum capital adequacy ratio for the banks
in each country, and an international minimum standard is set by the BIS. A bank that fails to meet
this minimum standard must be recapitalized, for example by issuing new shares.
The point when a flurry of panic selling induces a final collapse and ultimately a bottoming out
of prices.
Carry trade:
Typically, the borrowing of currency with a low interest rate, converting it into currency with a
high interest rate and then lending it. The most common carry trade currency used to be the yen, with
traders seeking to benefit from Japans low interest rates. Now the dollar, euro and pound can also
serve the same purpose. The element of risk is in the fluctuations in the currency market.
The term for bankruptcy protection in the US. It postpones a companys obligations to its
creditors, giving it time to reorganize its debts or sell parts of the business, for example.
Collateralized debt obligations (CDOs):

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A financial structure that groups individual loans, bonds or other assets in a portfolio, which can
then be traded. In theory, CDOs attract a stronger credit rating than individual assets due to the risk
being more diversified. But as the performance of many assets fell during the financial crisis, the value
of many CDOs was also reduced.
Commercial paper:
Unsecured, short-term loans taken out by companies. The funds are typically used for working
capital, rather than fixed assets such as a new building. The loans take the form of IOUs that can be
bought and traded by banks and investors, similar to bonds.
Commodities are products that, in their basic form, are all the same so it makes little difference
from whom you buy them. That means that they can have a common market price. You would be
unlikely to pay more for iron ore just because it came from a particular mine, for example.
Contracts to buy and sell commodities usually specify minimum common standards, such as the form
and purity of the product, and where and when it must be delivered.
The commodities markets range from soft commodities such as sugar, cotton and pork bellies to
industrial metals such as iron and zinc.
Core inflation:
A measure of CPI inflation that strips out more volatile items (typically food and energy prices).
The core inflation rate is watched closely by central bankers, as it tends to give a clearer indication of
long-term inflation trends.
Correction (market):
A short-term drop in stock market prices. The term comes from the notion that, when this
happens, overpriced or underpriced stocks are returning to their correct values.
The Consumer Prices Index is a measure of the price of a bundle of goods and services from
across the economy. It is the most common measure used to identify inflation in a country. CPI is used
as the target measure of inflation by the Bank of England and the ECB.
Credit crunch:
A situation where banks and other lenders all cut back their lending at the same time, because
of widespread fears about the ability of borrowers to repay.
If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay
existing debts. Reduced lending also slows down economic growth, which also makes it harder for all
businesses to repay their debts.

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Credit default swap (CDS):
A financial contract that provides insurance-like protection against the risk of a third-party
borrower defaulting on its debts. For example, a bank that has made a loan to Greece may choose to
hedge the loan by buying CDS protection on Greece. The bank makes periodic payments to the CDS
seller. If Greece default on its debts, the CDS seller must buy the loans from the bank at their full face
value. CDSs are not just used for hedging they are used by investors to speculate on whether a
borrower such as Greece will default.
Credit rating:
The assessment given to debts and borrowers by a ratings agency according to their safety from
an investment standpoint based on their creditworthiness, or the ability of the company or
government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company
that has already defaulted. Ratings of BBB- or higher are considered investment grade. Below that
level, they are considered speculative grade or more colloquially as junk.
Currency peg:
A commitment by a government to maintain its currency at a fixed value in relation to another
currency. Sometimes pegs are used to keep a currency strong, in order to help reduce inflation. In this
case, a central bank may have to sell its reserves of foreign currency and buy up domestic currency in
order to defend the peg. If the central bank runs out of foreign currency reserves, then the peg will
Pegs can also be used to help keep a currency weak in order to gain a competitive advantage in trade
and boost exports. China has been accused of doing this. The Peoples Bank of China has accumulated
trillions of dollars in US government bonds, because of its policy of selling Yuan and buying dollars a
policy that has the effect of keeping the Yuan weak.
Dead cat bounce:
A phrase long used on trading floors to describe the small rebound in market prices typically
seen following a sharp fall.
Debt restructuring:
A situation in which a borrower renegotiates the terms of its debts, usually in order to reduce
short-term debt repayments and to increase the amount of time it has to repay them. If lenders do not
agree to the change in repayment terms, or if the restructuring results in an obvious loss to lenders,
then it is generally considered a default by the borrower. However, restructurings can also occur
through a debt swap a voluntary agreement by lenders to switch existing debts for new debts with

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easier repayment terms in which case it can be very hard to determine whether the restructuring
counts as a default.
Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other
debt, for example if a borrower misses a payment. The term is also loosely used to mean any situation
that makes clear that a borrower can no longer repay its debts in full, such as bankruptcy or a debt
A default can have a number of important implications. If a borrower is in default on any one debt,
then all of its lenders may be able to demand that the borrower immediately repay them. Lenders may
also be required to write off their losses on the loans they have made.
The amount by which spending exceeds income over the course of a year.
In the case of trade, it refers to exports minus imports. In the case of the government budget, it
equals the amount the government needs to borrow during the year to fund its spending. The
governments primary deficit means the amount it needs to borrow to cover general government
expenditure, excluding interest payments on debts. The primary deficit therefore indicates whether a
government will run out of cash if it is no longer able to borrow and decides to stop repaying its debts.
Negative inflation that is, when the prices of goods and services across the whole economy
are falling on average.
A process whereby borrowers reduce their debt loads. Primarily this occurs by repaying debts. It
can also occur by bankruptcies and debt defaults, or by the borrowers increasing their incomes,
meaning that their existing debt loads become more manageable. Western economies are experiencing
widespread deleveraging, a process associated with weak economic growth that is expected to last
years. Households are deleveraging by repaying mortgage and credit card debts. Banks are
deleveraging by cutting back on lending. Governments are also beginning to deleverage via austerity
programmes cutting spending and increasing taxation.
A financial contract which provides a way of investing in a particular product without having to
own it directly. For example, a stock market futures contract allows investors to make bets on the
value of a stock market index such as the FTSE 100 without having to buy or sell any shares. The value
of a derivative can depend on anything from the price of coffee to interest rates or what the weather is

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like. Credit derivatives such as credit default swaps depend on the ability of a borrower to repay its
debts. Derivatives allow investors and banks to hedge their risks, or to speculate on markets. Futures,
forwards, swaps and options are all types of derivatives.
An income payment by a company to its shareholders, usually linked to its profits.
Legislation enacted by the US in 2011 to regulate the banks and other financial services. It
(i) restrictions on banks riskier activities (the Volcker rule)
(ii) a new agency responsible for protecting consumers against predatory lending and other unfair
(iii) regulation of the enormous derivatives market
(iv) a leading role for the central bank, the Federal Reserve, in overseeing regulation
(v) higher bank capital requirements
(vi) new powers for regulators to seize and wind up large banks that get into trouble
Double-dip recession:
A recession that experiences a limited recovery then dips back into recession. The exact
definition is unclear, as the definition of what counts as a recession varies between countries. A widelyaccepted definition is one where the initial recovery fails to take total economic output back up to the
peak seen before the recession began.
The European Banking Authority is a pan-European regulator responsible created in 2010 to
oversee all banks within the European Union. Its powers are limited, and it depends on national bank
regulators such as the UKs Financial Services Authority to implement its recommendations. It has
already been active in laying down new rules on bank bonuses and arranging the European bank stress
Earnings (or profit) before interest payments, tax, depreciation and amortization. It is a
measure of the cash flow at a company available to repay its debts, and is much more important
indicator for lenders than the borrowers profits.
The European Bank for Reconstruction and Development is a similar institution to the World
Bank, set up by the US and European countries after the fall of the Berlin Wall to assist in economic

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transition in Eastern Europe. Recently the EBRDs remit has been extended to help the Arab countries
that emerged from dictatorship in 2011.
The European Central Bank is the central bank responsible for monetary policy in the euro zone.
It is headquartered in Frankfurt and has a mandate to ensure price stability which is interpreted as
an inflation rate of no more than 2% per year.
The European Investment Bank is the European Unions development bank. It is owned by the
EUs member governments, and provides loans to support pan-European infrastructure, economic
development in the EUs poorer regions and environmental objectives, among other things.
The European Stability Mechanism is a 500bn-euro rescue fund that will replace the EFSF and
the EFSM from June 2013. Unlike the EFSF, the ESM is a permanent bail-out arrangement for the euro
zone. Unlike the EFSM, the ESM will only be backed by members of the euro zone, and not by other
European Union members such as the UK.
The European Financial Stability Facility is currently a temporary fund worth up to 440bn euros
set up by the euro zone in May 2010. Following a previous bail-out of Greece, the EFSF was originally
intended to help other struggling euro zone governments, and has since provided rescue loans to the
Irish Republic and Portugal. More recently, the euro zone agreed to broaden the EFSFs mandate, for
example by allowing it to support banks.
The European Financial Stability Mechanism is 60bn euros of money pledged by the member
governments of the European Union, including 7.5bn euros pledged by the UK. The EFSM has been
used to loan money to the Irish Republic and Portugal. It will be replaced by the ESM from 2013.
The value of a business or investment after subtracting any debts owed by it. The equity in a
company is the value of all its shares. In a house, your equity is the amount your house is worth minus
the amount of mortgage debt that is outstanding on it.
A term increasingly used for the idea of a common, jointly-guaranteed bond of the euro zone
governments. It has been mooted as a solution to the euro zone debt crisis, as it would prevent
markets from differentiating between the creditworthiness of different government borrowers.

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Confusingly and quite separately, Eurobond also refers to a bond issued in any currency in the
international markets.
Euro zone:
The 17 countries that share the euro. Now Lativa has recently added 18 th Countries in Euro
Federal Reserve:
The US central bank.
Financial Policy Committee:
A new committee at the Bank of England set up in 2010-11 in response to the financial crisis. It
has overall responsibility for ensuring major risks do not build up within the UK financial system.
Financial transaction tax

See Tobin tax.

Fiscal policy:
The governments borrowing, spending and taxation decisions. If a government is worried that it
is borrowing too much, it can engage in austerity; raising taxes and/or cutting spending. Alternatively,
if a government is afraid that the economy is going into recession it can engage in fiscal stimulus,
which can include cutting taxes, rising spending and/or raising borrowing.
Freddie Mac, Fannie Mae:
Nicknames for the Federal Home Loans Mortgage Corporation and the Federal National
Mortgage Association respectively. They dont lend mortgages directly to homebuyers, but they are
responsible for obtaining a large part of the money that gets lent out as mortgages in the US from the
international financial markets. Although privately-owned, the two operate as agents of the US federal
government. After almost going bust in the financial crisis, the government put them into
conservatorship guaranteeing to provide them with any new capital needed to ensure they do not
go bust.
FTSE 100:
An index of the 100 companies listed on the London Stock Exchange with the biggest market
value. The index is revised every three months.
Fundamentals determine a company, currency or securitys value in the long-term. A companys
fundamentals include its assets, debt, revenue, earnings and growth.

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A futures contract is an agreement to buy or sell a commodity at a predetermined date and
price. It could be used to hedge or to speculate on the price of the commodity. Futures contracts are a
type of derivative, and are traded on an exchange.
G7: The group of seven major industrialised economies, comprising the US, UK, France, Germany,
Italy, Canada and Japan.
G8: The G7 plus Russia.
G20: The G8 plus developing countries that play an important role in the global economy, such as
China, India, Brazil and Saudi Arabia. It gained in significance after leaders agreed how to tackle the
2008-09 financial crisis and recession at G20 gatherings.
GDP: Gross domestic product. A measure of economic activity in a country, namely of all the services
and goods produced in a year. There are three main ways of calculating GDP - through output, through
income and through expenditure.
A US law dating from the 1930s Great Depression that separated ordinary commercial banking
from investment banking. Like the UKs planned ring-fence, the law was intended to protect banks
which lend to consumers and businesses deemed vital to the US economy from the risky
speculation of investment banks. The law was repealed in 1999, largely to enable the creation of the
banking giant Citigroup a move that many commentators say was a contributing factor to the 2008
financial crisis.
A reduction in the value of a troubled borrowers debts, imposed on, or agreed with, its lenders
as part of a debt restructuring.
Hedge fund:
A private investment fund which uses a range of sophisticated strategies to maximize returns
including hedging, leveraging and derivatives trading. Authorities around the world are working on
ways to regulate them.
Making an investment to reduce the risk of price fluctuations to the value of an asset. Airlines
often hedge against rising oil prices by agreeing in advance to buy their fuel at a set price. In this case,
a rise in price would not harm them but nor would they benefit from any falls.
IIF: The Institute of International Finance is a global trade association of the major banks.

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The International Monetary Fund is an organisation set up after World War II to provide financial
assistance to governments. Since the 1980s, the IMF has been most active in providing rescue loans to
the governments of developing countries that run into debt problems. Since the financial crisis, the IMF
has also provided rescue loans, alongside the European Union governments and the ECB, to Greece,
the Irish Republic and Portugal. The IMF is traditionally and of late controversially headed by a
Impairment charge:
The amount written off by a company when it realises that it has valued an asset more highly
than it is actually worth.
Independent Commission on Banking:
A commission chaired by economist Sir John Vickers set up in 2010 by the UK government in
order to make recommendations on how to reform the banking system. The commission reported back
in September 2011, and called for:
(i)a ring-fence, to separate and safeguard the activities of banks that were deemed essential to the UK
(ii) Measures to increase the transparency of bank accounts and competition among banks, including
the creation of a new major High Street bank
(iii) Much higher capital requirements for the big banks so that they can better absorb future losses
Inflation: The upward price movement of goods and services.
A situation in which the value of a borrowers assets is not enough to repay all of its debts. If a
borrower can be shown to be insolvent, it normally means they can be declared bankrupt by a court.
Investment bank:
Investment banks provide financial services for governments, companies or extremely rich
individuals. They differ from commercial banks where you have your savings or your mortgage.
Traditionally investment banks provided underwriting, and financial advice on mergers and acquisitions,
and how to raise money in the financial markets. The term is also commonly used to describe the more
risky activities typically undertaken by such firms, including trading directly in financial markets for
their own account.
Junk bond:
A bond with a credit rating of BB+ or lower. These debts are considered very risky by the
ratings agencies. Typically the bonds are traded in markets at a price that offers a very high yield
(return to investors) as compensation for the higher risk of default.

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Keynesian economics:
The economic theories of John Maynard Keynes. In modern political parlance, the belief that the
state can directly stimulate demand in a stagnating economy, for instance, by borrowing money to
spend on public works projects such as roads, schools and hospitals.
Lehman Brothers:
A US investment bank, whose collapse in September 2008 sparked the most intense phase of
the financial crisis.
Leverage, or gearing, means using debt to supplement investment. The more you borrow on top
of the funds (or equity) you already have, the more highly leveraged you are. Leverage can increase
both gains and losses. Deleveraging means reducing the amount you are borrowing.
A debt or other form of payment obligation, listed in a companys accounts.
London Inter Bank Offered Rate. The rate at which banks in London lend money to each other
for the short-term in a particular currency. A new Libor rate is calculated every morning by financial
data firm Thomson Reuters based on interest rates provided by members of the British Bankers
Limited liability:
Confines an investors loss in a business to the amount of capital they invested. If a person
invests 100,000 in a company and it goes under, they will lose only their investment and not more.
A process in which assets are sold off for cash. Liquidation is often the outcome for a company
deemed irretrievably loss-making. In that case, its assets are sold off individually, and the cash
proceeds are used to repay its lenders. In liquidation, a companys lenders and other claimants are
given an order of priority. Usually the tax authorities are the first to be paid, while the companys
shareholders are the last, typically receiving nothing.
How easy something is to convert into cash. Your current account, for example, is more liquid
than your house. If you needed to sell your house quickly to pay bills you would have to drop the price
substantially to get a sale.
Liquidity crisis:

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A situation in which it suddenly becomes much more difficult for banks to obtain cash due to a
general loss of confidence in the financial system. Investors (and, in the case of a bank run, even
ordinary depositors) may withdraw their cash from banks, while banks may stop lending to each other,
if they fear that some banks could go bust. Because most of a banks money is tied up in loans, even a
healthy bank can run out of cash and collapse in a liquidity crisis. Central banks usually respond to a
liquidity crisis by acting as lender of last resort and providing emergency cash loans to the banks.
Liquidity trap:
A situation described by economist John Maynard Keynesin which nervousness about the
economy leads everybody to cut back on their spending and to hold cash, even if the cash earns no
interest. The widespread fall in spending undermines the economy, which in turn makes households,
banks and companies even more nervous about spending and investing their money. The problem
becomes particularly intractable when as in Japan over the last 20 years the weak spending leads
to falling prices, which creates a stronger incentive for people to hold onto their cash, and also makes
debts more difficult to repay. In a liquidity trap, monetary policy can become useless, and Keynes said
that the onus is on governments to increase their spending.
Loans-to-deposit ratio:
For financial institutions, the sum of their loans divided by the sum of their deposits. It is used
as a way of measuring a banks vulnerability to the loss of confidence in a liquidity crisis. Deposits are
typically guaranteed by the banks government and are therefore considered a safer source of funding
for the bank. Before the 2008 financial crisis, many banks became reliant on other sources of funding
meaning they had very high loan-to-deposit ratios. When these other sources of funding suddenly
evaporated, the banks were left critically short of cash.
Mark-to-market (MTM):
Recording the value of an asset on a daily basis according to current market prices. So for a
Greek government bond, the MTM is how much it could be sold for today. Banks are not required to
mark to market investments that they intend to hold indefinitely (in what is called the banking book
in accounting jargon). Instead, these investments are valued at the price at which they were originally
purchased, minus any impairment charges which might arise following a default by the borrower.
Monetary policy:
The policies of the central bank. A central bank has an unlimited ability to create new money.
This allows it to control the short-term interest rate, as well as to engage in unorthodox policies such
as quantitative easing printing money to buy up government debts and other assets. Monetary policy
can be used to control inflation and to support economic growth.

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Money markets:
Global markets dealing in borrowing and lending on a short-term basis.
Monoline insurance
Mono lines were set up in the 1970s to insure against the risk that a bond will default. Companies and
public institutions issue bonds to raise money. If they pay a fee to a mono line to insure their debt, the
guarantee helps to raise the credit rating of the bond, which in turn means the borrower can raise the
money more cheaply.
Mortgage-backed securities (MBS):
Banks repackage debts from a number of mortgages into MBS, which can be bought and traded
by investors. By selling off their mortgages in the form of MBS, it frees the banks up to lend to more
The Monetary Policy Committee of the Bank of England is responsible for setting short-term
interest rates and other monetary policy in the UK, such as quantitative easing.
Naked short selling:
A version of short selling, illegal or restricted in some jurisdictions, where the trader does not
first establish that he is able to borrow the relevant asset before selling it on. The aim with short selling
is to buy back the asset at a lower price than you sold it for, pocketing the difference.
Nationalization: The act of bringing an industry or assets such as land and property under state
Negative equity: Refers to a situation in which the value of your house is less than the amount of the
mortgage that still has to be paid off.
The Organization for Economic Co-operation and Development is an association of industrialized
economies, originally set up to administer the Marshall Plan after World War II. The OECD provides
economic research and statistics, as well as policy recommendations, for its members.
A type of derivative that gives an investor the right to buy (or to sell) something anything
from a share to a barrel of oil at an agreed price and at an agreed time in the future. Options become
much more valuable when markets are volatile, as they can be an insurance against price swings.
Ponzi scheme:
Similar to a pyramid scheme, an enterprise where funds from new investors instead of
genuine profits are used to pay high returns to current investors. Named after the Italian fraudster

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Charles Ponzi, such schemes are destined to collapse as soon as new investment tails off or significant
numbers of investors simultaneously wish to withdraw funds.
Preference shares:
A class of shares that usually do not offer voting rights, but do offer a superior type of dividend,
paid ahead of dividends to ordinary shareholders. Preference shareholders often also have somewhat
better protection when a company is liquidated.
Prime rate:
A term used primarily in North America to describe the standard lending rate of banks to most
customers. The prime rate is usually the same across all banks, and higher rates are often described as
x percentage points above prime.
Private equity fund:
An investment fund that specializes in buying up troubled or undervalued companies,
reorganizing them, and then selling them off at a profit.
The Producer Prices Index, a measure of the wholesale prices at which factories and other
producers are able to sell goods in an economy.
Profit warning:
When a company issues a statement indicating that its profits will not be as high as it had
expected. Also profits warning.
Quantitative easing:
Central banks increase the supply of money by printing more. In practice, this may mean
purchasing government bonds or other categories of assets, using the new money. Rather than
physically printing more notes, the new money is typically issued in the form of a deposit at the central
bank. The idea is to add more money into the system, which depresses the value of the currency, and
to push up the value of the assets being bought and to lower longer-term interest rates, which
encourages more borrowing and investment. Some economists fear that quantitative easing can lead to
very high inflation in the long term.
The assessment given to debts and borrowers by a ratings agency according to their safety from
an investment standpoint based on their creditworthiness, or the ability of the company or
government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company
that has already defaulted. Ratings of BBB- or higher are considered investment grade. Below that
level, they are considered speculative grade or more colloquially as junk.

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Rating agency:
A company responsible for issuing credit ratings. The major three rating agencies are Moodys,
Standard & Poors and Fitch.
To inject fresh equity into a firm or a bank, which can be used to absorb future losses and
reduce the risk of insolvency. Typically this will happen via the firm issuing new shares. The cash raised
can also be used to repay debts. In the case of a government recapitalising a bank, it results in the
government owning a stake in the bank. In an extreme case, such as Royal Bank of Scotland, it can
lead to nationalization, where the government owns a majority of the bank.
A period of negative economic growth. In most parts of the world a recession is technically
defined as two consecutive quarters of negative growth when economic output falls. In the United
States, a larger number of factors are taken into account, such as job creation and manufacturing
activity. However, this means that a US recession can usually only be defined when it is already over.
A repurchase agreement a financial transaction in which someone sells something (for
example a bond or a share) and at the same time agrees to buy it back again at an agreed price at a
later day. The seller is in effect receiving a loan. Repos were heavily used by investment banks such as
Lehman Brothers to borrow money prior to the financial crisis.
Repos are also used by speculators for short selling. The speculator can buy a share through a repo
and then immediately sell it again. At a later date the speculator hopes to buy the share back from the
market at a cheaper price, before selling it back again at the pre-agreed price via the repo.
Reserve currency:
A currency that is widely held by foreign central banks around the world in their reserves. The
US dollar is the pre-eminent reserve currency, but the euro, pound, yen and Swiss franc are also
Assets accumulated by a central bank, which typically comprise gold and foreign currency.
Reserves are usually accumulated in order to help the central bank defend the value of the currency,
particularly when its value is pegged to another foreign currency or to gold.
Retained earnings profits not paid out by a company as dividends and held back to be reinvested.
Rights issue:

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When a public company issues new shares to raise cash. The company might do this for a
number or reasons because it is running short of cash, because it wants to make an expensive
investment or because it needs to be recapitalized. By putting more shares on the market, a company
dilutes the value of its existing shares. It is called a rights issue, because existing shareholders have
the first right to buy the new shares, thereby avoiding dilution of their existing shares.
A recommendation of the UKs Independent Commission on Banking. Services provided by the
banks that are deemed essential to the UK economy such as customer accounts, payment transfers,
lending to small and medium businesses should be separated out from the banks other, riskier
activities. They would be placed in a separate subsidiary company in the bank, and provided with its
own separate capital to absorb any losses. The ring-fenced business would also be banned from lending
to or in other ways exposing itself to the risks of the rest of the bank in particular its investment
banking activities.
Securities lending:
When one broker or dealer lends a security (such as a bond or a share) to another for a fee.
This is the process that allows short selling.
Turning something into a security. For example, taking the debt from a number of mortgages
and combining them to make a financial product, which can then be traded (see mortgage backed
securities). Investors who buy these securities receive income when the original home-buyers make
their mortgage payments.
A contract that can be assigned a value and traded. It could be a share, a bond or a mortgagebacked security.
Separately, the term security is also used to mean something that is pledged by a borrower when
taking out a loan. For example, mortgages in the UK are usually secured on the borrowers home. This
means that if the borrower cannot repay, the lender can seize the security the home and sell it in
order to help repay the outstanding debt.
Shadow banking:
A global financial system including investment banks, securitization, SPVs, CDOs and Monoline
insurers that provides a similar borrowing-and-lending function to banks, but is not regulated like
banks. Prior to the financial crisis, the shadow banking system had grown to play as big a role as the

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banks in providing loans. However, much of shadow banking system collapsed during the credit crunch
that began in 2007, and in the 2008 financial crisis.
Short selling:
A technique used by investors who think the price of an asset, such as shares or oil contracts,
will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is
to buy back the asset at a lower price and return it to its owner, pocketing the difference. Also known
as shorting.
Spread (yield):
The difference in the yield of two different bonds of approximately the same maturity, usually in
the same currency. The spread is used as a measure of the markets perception of the difference in
creditworthiness of two borrowers.
A Special Purpose Vehicle (also Special Purpose Entity or Company) is a company created by a
bank or investment bank solely for the purpose of owning a particular set of loans or other
investments, and distributing the risk to investors. Before the financial crisis, SPVs were regularly used
by banks to offload loans that they owned, freeing the banks up to lend more. SPVs were a major part
of the shadow banking system, and were used in securitization and CDOs.
Stability pact:
A set of rules demanded by Germany at the creation of the euro in the 1990s that were
intended among other things to limit the borrowing of governments inside the euro to 3% of their GDP,
with fines to be imposed on miscreants. The original stability pact was abandoned after Germany itself
broke the rules with impunity in 2002-05. More recently, the German government has called for an
even stricter system of rules and fines to be introduced in response to the euro zone debt crisis.
The dreaded combination of inflation and stagnation an economy that is not growing while
prices continue to rise. Most major western economies experienced stagflation during the 1970s.
Sticky prices:
A phenomenon observed by Depression-era economist John Maynard Keynes. Workers typically
strongly resist falling wages, even if other prices and therefore the cost of living is falling. This can
mean that, particularly during deflation, wages can become uncompetitive, leading to higher
unemployment. The implication is that periods of deflation usually go hand-in-hand with very high
unemployment. Many economists warn that this may be the fate of Greece and other struggling
economies within the euro zone.

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Monetary policy or fiscal policy aimed at encouraging higher growth and/or inflation. This can
include interest rate cuts, quantitative easing, tax cuts and spending increases.
Sub-prime mortgages:
These carry a higher risk to the lender (and therefore tend to be at higher interest rates)
because they are offered to people who have had financial problems or who have low or unpredictable
A derivative that involves an exchange of cash flows between two parties. For example, a bank
may swap out of a fixed long-term interest rate into a variable short-term interest rate, or a company
may swap a flow of income out of a foreign currency into their own currency.
The Troubled Asset Relief Program a $700bn rescue fund set up by the US government in
response to the 2008 financial crisis. Originally the TARP was intended to buy up or guarantee toxic
debts owned by the US banks hence its name. But shortly after its creation, the US Treasury took
advantage of a loophole in the law to use it instead for a recapitalisation of the entire US banking
system. Most of the TARP money has now been repaid by the banks that received it.
Tier 1 capital:
A calculation of the strength of a bank in terms of its capital, defined by the Basel Accords,
typically comprising ordinary shares, disclosed reserves, retained earnings and some preference
Tobin tax:
A tax on financial transactions, originally proposed by economist James Tobin as a levy on
currency conversions. The tax is intended to discourage market speculators by making their activities
uneconomic, and in this way, to increase stability in financial markets. The idea was originally pushed
by former UK Prime Minister Gordon Brown in response to the financial crisis. More recently it has been
formally proposed by the European Commission, with some suggesting the revenue could be used to
tackle the financial crisis. It is now opposed by the current UK government, which argues that to be
effective, the tax would need to be applied globally not just in the EU as most financial activities
could quite easily be relocated to another country in order to avoid the tax.
Toxic debts:
Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some
customers cannot repay; toxic debt describes a whole package of loans that are unlikely to be repaid.

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During the financial crisis, toxic debts were very hard to value or to sell, as the markets for them
ceased to function. This greatly increased uncertainty about the financial health of the banks that
owned much of these debts.
The term used to refer to the European Union, the European Central Bank and the International
Monetary Fund the three organizations charged with monitoring Greeces progress in carrying out
austerity measures as a condition of bailout loans provided to it by the IMF and by other European
governments. The bailout loans are being released in a number of tranches of cash, each of which must
be approved by the troikas inspectors.
The financial institution pledging to purchase a certain number of newly-issued securities if they
are not all bought by investors. The underwriter is typically an investment bank who arranges the new
issue. The need for an underwriter can arise when a company makes a rights issue or a bond issue.
To unwind a deal is to reverse it to sell something that you have previously bought, or vice
versa, or to cancel a derivative contract for an agreed payment. When administrators are called in to a
bank, they must do the unwinding before creditors can get any money back.
Vickers Report See Independent Commission on Banking
Volcker Rule:
A proposal by former US Federal Reserve chairman Paul Volcker that US commercial banks be
banned or severely limited from engaging in risky activities, such as proprietary trading (taking
speculative risks on the markets with their own, rather than clients money) or investing in hedge
funds. The Volcker Rule follows similar logic to the Glass-Steagall Act and the UK ring-fence proposal,
and a modified version of the rule was included in the Dodd-Frank financial regulation law passed in the
wake of the financial crisis.
Warrants: A document entitling the bearer to receive shares, usually at a stated price.
Working capital:
A measure of a companys ability to make payments falling due in the next 12 months. It is
calculated as the difference between the companys current assets (unsold inventories plus any cash
expected to be received over the coming year) minus its current liabilities (what the company owes
over the same period). A healthy company should have a positive working capital. A company with
negative working capital can experience cash flow problems.
World Bank:

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Set up after World War II along with the IMF, the World Bank is mainly involved in financing
development projects aimed at reducing world poverty. The World Bank is traditionally headed by an
American, while the IMF is headed by a European. Like the IMF and OECD, the World Bank produces
economic data and research, and comments on global economic policy.
Write-down: Reducing the book value of an asset, either to reflect a fall in its market value (see
mark-to-market) or due to an impairment charge.
The return to an investor from buying a bond implied by the bonds current market price. It also
indicates the current cost of borrowing in the market for the bond issuer. As a bonds market price
falls, its yield goes up, and vice versa. Yields can increase for a number of reasons. Yields for all bonds
in a particular currency will rise if markets think that the central bank in that currency will raise shortterm interest rates due to stronger growth or higher inflation. Yields for a particular borrowers bonds
will rise if markets think there is a greater risk that the borrower will default.
Call money market:
It is also known as money at call short notice market. It deals in loans for a period ranging from
come to 14 days. It is an interbank borrowing and lending market. One bank demands money from
another bank to cover its cash reserve requirements with RBI every fortnight and to gain from foreign
exchange market
It has two segments. They are as follows:
The call market (or) overnight market:
It is a market for borrowing and lending of money between banks within one day
Short notice market:
It is a market for borrowing and lending of money between banks up to 14 days. The rate at which
funds are borrowed in these markets is called call money rate.
Bill market (or) discount market
In bill market, short term funds (usually 90 days) are bought and sold. The bill market consists of
two markets, one is commercial bill market and another is treasury bill market as shown in figure 5.9
Commercial bill market:
Commercial bills are bills other than treasury bills. They are issued by industries and traders.
Treasury bill market:
Treasury bills are securities issued by government treasury. They are of short term in nature. In
this regard, they differ from market loans. They are non-interest bearing (zero interest/zero coupon).

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These kinds of bonds are called zero coupon bonds. They are issued at a discount rate. For example, a
security worth of 1000, may be issued against receipt of amount lower than 1000. The purchaser of
security can redeem the full 1000 at a particular date (maturity date). This is called redemption at par
(original value). There were two types of treasury bills. They are shown in the following figure 5.10
Ad hoc treasury bills:
It is issued for a particular end or case in hand. Till 1991-92 there was only treasury bill of 91
days. It was called as ad-hoc treasury bill. It was discontinued from 1997-98. To replace it ways and
means advance introduced.
Regular treasury bills:
These bills are issued regularly to meet budgetary expenditure. There are number of treasury
bills of differing maturity. In 1998-99,182 days treasury bills were introduced. But it was replaced by
364 days treasury bills. Again 182 days treasury bills were reintroduced. 14 days treasury bills were
introduced in 1992-2000.
Dated government securities:
The government securities with long term maturity are called dated government securities. The
government of india sells dated securities of 5 years maturity and 10 years maturity on an auction
basis. There are dated government securities with 30 years maturity period.
Certificates of deposits (CDs):
Certificates of deposits (cds) are issued by commercial banks and financial institutions to raise
additional fund. There are issued in multiples of 25 lakh, subject to a minimum amount of 1 crore. The
maturity period range from 3 month to one year to 3 years in the case of other financial institutions.
Commercial papers (cps):
It was introduced in 1990. Commercial papers (CPs) are issued by corporate, primary dealers
(PDs) and the all-india financial institutions (FLs) to raise fund. These are issued in denominations of 5
lakh or multiples of it, subject to a minimum amount of 1crose. The maturity period is 3 to 6 months.
Lead bank scheme:
In this scheme, any one public sector bank is selected in a district. That bank is designated as
lead bank of the district. It co-ordinates the activities of all banks in that district to avoid duplication of
banking works, to ensure same person does not get loan from different banks, and to ensure the
banking benefit to all sections of people.
Service area approach (1988):
It operated under lead bank scheme. Each semi urban & rural branch is allotted a specific area
(cluster of village) to implement banking scheme.

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Differential rate of interest scheme (1972):
Public sector banks were directed to grant at least 1% of their total deposits of previous year to
weaker sections of society at a concessional rate of 4%. At least 40% loan under this scheme to sc/st
people is made compulsory.
Social banking:
Financing of poverty reduction and employment programme of government by banks is called
social banking. Under this scheme, beneficiaries of governments self-employment programme and
those who got training from government programme are provided with loan
GDP Deflator:
The GDP deflator (implicit price deflator for GDP) is a measure of the level of prise of all
domestically produced final goods and services in an economy in a particular period of time. This is
calculated to find the overall rise in the level of price.
GDP Deflator = Normal GDP is 14300 and real GDP is 11000 for 2008-09
GDP deflator = 14300/11000*100=130
Therefore the price is 130%. It means price rise of 30% i.e (130-100=30)
If the increase in price is already known the real GDP can be calculated from nominal GDP
Real gdp = Normal GDP/GDP Deflator.
Country, Capital and Currency













Buenos Aires

Argentino Sentavos



Australian Dollar









Baharain Dinar









Belaros Rubbe






Real (BRC)

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Bander Seri Begawan

Brunei Dollar or Ringhit





Phnom Penh





China, Peoples Republic








Cyprus Pound



Danish Krone





Adis Ababa





















Guatemala City


Hong Kong










New Delhi










Iraqui Dinar






New Shekel



















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Korea (North)



Korea (South)








New Kiplao








Luxembourg Ville






Kuala Lumpur






Port Luis



Mexico City

New Peso


Ulan Bator

















New Zealand
















Panama City




















Saudi Arabia





CFA Franc

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Serbia and Montenegro



South Africa

Cape Town








Sri Lanka











New Taiwan Dollar




Trinidad & Tobago

Port of Spain








United Arab Emirates

Abu Dhabi










Pound Sterling


Washington D.C.

U.S. Dollar





Ho Chi Minh City (Hanoi)








Zambia Lusaka





Indian Organization
Head of the Department

Attorney General

Mohan Parasaran

Solictor general

Avinash Chander

Chief of

Rahul Khullar


Kaushik Basu

World bank Chief economist


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Ranjit Sinha


Sam Pitroda

National Knowledge Commission.

YV Reddy

Chairman of 14th Finance Commission. (period: 2015-2020)

Naina Kidwai

Chief of HSBC India. Became first woman President of FICCI.

Shasi Kant Sharma

President of CAG

UK Singha


VS Sampath

Chief Election Commissioner (CEC)




Domestic gas price. Rangarajan is also the Chairman of Prime Ministers

Economic Advisory Council.

Raghuram Rajan

RBI Governor

Devendra Joshi

Admiral (Navy)

N.A.K. Browne

Air Marshal(Aircraft)

Gen. Bikram Singh


Ashok Chawla

Competition Commission of India (CCI)

Radha Krishnan

Chairman of ISRO

Altamas Kabir

Chief Justice of India(Succeed P.SathaSivam will replace as the head of

the supreme court on July 18)

Urjit Patel

Deputy RBI Governor

Satyanand Mishra

Central Information Commission (CIC)

Shivshankar Menon

National Security Advisor

KC Chakrabary

Committee of financial inclusion. Deputy Governor RBI

TS Vijayan



Atomic Energy Commission

B. G. Balakrishnan


Some Important Committee


Founder of SEWA (Self-Employed Women's Association) Got

Ela Ramesh Bhatt

Indira Gandhi Prize for Peace. (Actually won in 2011, but was
awarded that prize in 2013).


Committee on Western Ghat ecology.

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JS Verma

Committee on women safety after Delhi gang rape

Justice DK Jain

20th law commission

Parthsarthi Shome

Committee GAAR. General anti avoidance rules.


Committee Taxation in IT sector

Aravind Mayaram

Purpose for FDI (%) Increase (Secretary of Economic Affairs )


Committee of Banking Reforms

Justice Shaymal Sen

Chit Fund scam (West Bengal)

Justice mudgal

Wall Mart Enquiry

K.M.Chandra Sekran

SEBI regulate

FSLRC Committee

B.N.Sri Krishna

Poverty Line Committee

Suresh Tendulkar
World Organization




UN General Secretary

Jim Yong Kim

World Bank

Justice Dalveer Bhandari

Judge of International court of Justice. ( 2nd from India)

Christine Lagarde

Chief of IMF

Pascal Lamy

Chief of WTO (Succeed: Roberto Azevedo, a top Brazilian trade

diplomat, will replace Pascal Lamy as the head of the WTO in
September 2013)

Thomas Bach

President IOC, Olympic Committee.

SK Jain

Chairman of World Association Of Nuke operators (First Indian to

become Chairman)

Nkosazana Zuma

Head of African Union (AU): First woman

Takehiko Nakao

President of Asian Development Bank

Christopher Briggs

Secretary General of Ramsar Convention

Lee Jong Wook


Yukiya Amano


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Some Important Government Schemes

Community Development Programme (CDP)-overall development of rural areas and
peoples participation


Intensive Agriculture Development program (IADP)-To provide loan for seeds and
fertilizers to farmers


Intensive Agriculture Area programme (IAAP)-To develop special harvest in

agriculture area


Credit Authorization Scheme (CAS)-Involved qualitative credit control of reserve

bank of India


High yielding variety programme (HYVP)-To increase the productivity of food grains
by adopting latest varieties of inputs of crops


Green Revolution: To Increase productivity. Confined to wheat production


Rural Electrification Corporation-To provide electricity in rural areas


Scheme of Discriminatory Interest Rate-To provide loan to the weaker sections of

society at a concessional interest rate of 4%


Accelerated Rural water Supply Programme (ARWSP)-Providing drinking water in



Drought Prone Area Programme-Protection from drought by achieving environment

balance and by developing ground water


Crash Scheme for Rural Employment CSRE-For rural employment


Marginal Farmer and Agriculture Labor Agency (MFALA)-Technical & financial

assistance to marginal farmers


Small Farmer Development Scheme SFDS-Technical & financial assistance to small



Command Area Development Programme: (CADP)-Better utilization of irrigational



National Institution of Rural Development-Training, investigation and advisory for

rural development


Desert Development Programme: (DDP)-To control the desert expansion by

maintaining environment balance


Food For Work Programme-providing food grains to labor


Antyodaya Yojna -Scheme of Rajasthan, providing economic assistance to poorest

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Training Rural Youth for Self Employment TRYSEM (launched on

15th August)-educational and vocational training


Integrated Rural Development Programme :IRDP (launched on

October 2, 1980)-overall development of rural poor


National Rural Development programme NREP-employment for rural manforce


Development of Women & Children in Rural Areas (DWCRA)-sustainable

opportunities of self employment to the women belonging to the rural families who
are living below the poverty line.


Rural Landless Employment Guarantee Programme (RLEGP)

(Launched on August 15)-employment to landless farmers and laborers


Farmers Agriculture Service Centers FASCs-Tell the people use of improved

instruments of agriculture


National Fund for Rural Development - To grant 100% tax rebate to donors and also
to provide financial assistance for rural development projects


Comprehensive Crop Insurance Scheme -Crop Insurance


Council of Advancement of Peoples Action & Rural Technology

(CAPART)-Assistance to rural people


Self Employment Programme for the Poor -Self employment through credit and


National Drinking Water Mission-For rural drinking water renamed and upgraded to
Rajiv Gandhi National Drinking Water Mission in 1991.


Service Area Account - Rural Credit


Jawahar Rozgar Yojna : JRY -Employment to rural unemployed


Nehru Rozgar Yojna NRY -Employment to Urban unemployed


Agriculture & Rural Debt Relief Scheme: ARDRS -Exempt Bank loans up to Rs. 10000
for rural artisans and weavers


Scheme for Urban Micro Enterprises SUME -Assist urban small entrepreneurs


Scheme of Urban wage Employment SUWE -Scheme for urban poors


Scheme of Housing and Shelter Upgradation (SHASU) -Providing employment by

shelter Upgradation


National Housing Bank Voluntary Deposit Scheme - Using black money by

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constructing low cost housing for the poor

National Renewal Fund -This scheme was for the employees of the public sector


Employment Assurance Scheme (EAS) (Launched on October, 2)

Employment of at least 100 days in a year in villages


Members of parliament Local Area Development Scheme

MPLADS (December 23, 1993) -Sanctioned 1 crore per year for development works


Scheme for Infrastructural Development in Mega Cities - SIDMC

Water supply, sewage, drainage, urban transportation, land development and
improvement slums projects in metro cities


District Rural Development Agency DRDA - Financial assistance to rural people by

district level authority


Mahila Samridhi Yojna (October 2, 1993) -Encourage rural women to deposit in Post
office schems


Child labor Eradication Scheme - Shift child labour from hazardous industries to


prime Minister Integrated Urban Poverty Eradication programme

PMIUPEP - To eradicate urban poverty


Mid day Meal Scheme - Nutrition to students in primary schools to improve

enrolment, retention and attendence


Group Life Insurance Scheme for Rural Areas

Insurance in rural area for low premium


national Social Assistance programme - Assist BPL people.


Ganga Kalyan Yojna - Provide financial assistance to farmers for exploring ground
water resources


Kastoorba Gandhi Education Scheme: (15 August 1997) -Establish girls schools in
low female literacy areas (district level)


Swaran Jayanto Shahari Rojgar Yojna -Urban employment


Bhagya Shree Bal Kalyan Policy - Upliftment of female childs

March 1999

Annapurna Yojna - 10 kgs food grains to elderly people

April 1999

Swaran Jayanto Gram Swarojgar Yojna -Self employment in rural areas

April 1999

Jawahar Gram Samriddhi Yojna - Village infrastructure

August 2000

Jan Shree Bima Yojna - Insurance for BPL people

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Pradhan Mantri Gramodaya Yojna -Basic needs of rural people

Dec 25, 2000

Antyodaya Anna Yojna - To provide food security to poor

December 25,

Pradhan Mantri Gram Sadak Yojna- Connect all villages with nearest pukka road


Sarva Shiksha Abhiyan To provide elementary education all over country.( free
education to children aged 614 )

September 2001

Sampoorna Grameen Rozgar Yojna -Employment and food security to rural people

December 2001

Valmiki Ambedkar Awas Yojna VAMBAY -Slum houses in urban areas


Universal health Insurance Scheme- Health insurance for Rural people


Vande mataram Scheme VMS -Initiative of public Private partnership during



National Food for Work programme - Supplementary wage as foodgrains for work


Kastoorba Gandhi Balika Vidyalaya -Setting up residential schools at upper primary

levels for girls belonging to predominantly OBC, SC & ST


Janani Suraksha Yojna -Providing care to pregnant women

2005, Dec. 16

Bharat Nirman -Development of India through irrigation, Water supply, Housing,

Road,Telephone and electricity for Rural infrastructure


National Rural Health Mission- Accessible, affordable, accountable, quality health

survices to the porest of the poor on remotest areas of the country.


Rajeev Gandhi Grameen Vidyuti Karan Yojna-Extending electrification of all villages

and habitations and ensuring electricity
to every household


Jawahar Lal Nehru national Urban Renewal Mission: (JNNURM)- to improve the
quality of life and infrastructure in the cities which creating economically
productive, efficient, equitable and responsive Cities by a strategy of upgrading the
social and economic infrastructure in cities.

2006 (NREGS)

February 2 :Mahatma Gandhi National Rural Employment Guarantee Scheme

(MNNREGS) -100 days wage employment for development works in rural areas


Rastriya Swasthya Bima Yojna -Health insurance to all workers in unorganized area
below poverty line


Aam Aadmi Bima Yojna - Insurance cover to the head of the family of rural landless
households in the country.

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Rajiv Awas Yojna -To make India slum free in 5 years


Rajiv Gandhi Equity Savings Scheme-"encouraging the savings of the small investors
in the domestic capital markets. This Scheme would give tax benefits to new
investors who invest up to Rs. 50,000 and whose annual income is below Rs. 10 lakh

Institution Name

Head Quarter

Chairman and Managing Director

Allahabad Bank


Shubhalakshmi Panse

Central Bank of India


Rajeev Rishi

Andhra Bank


B A Prabhakar

Corporation Bank


Ajai Kumar

Bank of Baroda


S S Mundra

Indian Bank



Bank of India


Vijayalakshmi R Iyer

Indian Overseas Bank


M. Narendra

Bank of Maharashtra



Pune India
Oriental Bank of Commerce



Punjab National Bank

New Delhi

K R Kamath

Punjab & Sind Bank

New Delhi

Devender pal singh

Syndicate Bank


Sudhir Kumar Jain

Uco Bank


Arun Kaul

Union Bank of India



United Bank of India


Archana Bhargava

Vijaya Bank


Upendra Kamath




Dena Bank


Ashwani Kumar

Export Credit Guarantee


Corporation of India
Limited (ECGC)

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State Bank of India


Pratip Chaudhuri



Prakash Baksh

IRDA(Insurance Regulatory and


TS Vijayan

Development Authority)


National Insurance Company


Limited (NICl)
Canara Bank


Bhartiya Mahila Bank (opened

New Delhi



Rajiv Kishore Dubey

Usha Ananthasubramanian

November Then Indira

Gandhi Birthday).This budget

allocated Nirbhya fund 1000 cr.
SBI and associate banks
1. State Bank of India
2. State Bank of Bikaner & Jaipur
3. State Bank of Hyderabad
4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Travancore
7. State Bank of Saurashtra (merged into SBI in 2008)
8. State bank of Indore (merged into SBI in 2010)
Balance of payment is a systematic record of countrys economic transaction with rest of the world. It
consists of 3 accounts.
1. Trade Account

2. Invisible Account

3. Capital account

I) Trade account: Exports and Imports of Goods.

Exports Increases

--- Import Decreases --> Favourable Trade account

Exports Decreases --- Import Increases --> Unfavourable Trade Account

II) Invisible Account:
1. Private Transfer (people working aboard send money to domestic & vice versa)
2. Travel receipts (foreigners coming India and Indians going aboard)
3. Miscellaneous receipts (software export)

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Invisible Accounts Increases Receiving Decreases Unfavourable
Invisible accounts Decreases Receiving Increases Favourable
Current Account = = > Trade Account + Invisible account
Current Account Deficit: If we made more payments and receiving less receipts are known as
Current account deficit.
Reasons for CAD:
(1) Import of gold

(2) Rupee Depreciation

Current Account Surplus: If we made less payments and receiving more receipts are known as
Current Account Surplus
III) Capital Account:
1. Foreign Investments (FDI, FII)
2. External Assistance
3. External Commercial Borrowings (ECB)
4. Foreign Exchange reserves
Balance of Payment = > Current Account + Capital Account
BOP Surplus Receipts More & Payments Less
BOP Deficit Payments More & Receipts less
Due to the problem that we faced in late 1990s, we approached International Monetary Fund. IMF
provided assistance with conditionality. They suggested certain reform process in India. They are:
1. Stabilizing program: prices driven program
2. Structural adjustment program: medium and long term program

Inflation means a persistent increase in Price of goods and services

It refers to a situation of reduction in Purchasing Power of People. In other words, is a

conditional in which Too Much Money chases too Little Goods

As per RBI guidelines, the acceptable level of Inflation is India is 5 %

Base Year: 2004 -2005as recommended by Abjit Sen Gupta Committee

As per S. S. Charavathy committee, the acceptable level of inflation is 4 %

Type of Inflation:
1. Based on rate of increase in Inflation
1. Creeping Inflation (1 to 5 %)
2. Trotting Inflation ( 5 to 10%)
3. Glaopping Inflation (10 to 15%)

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4. Hyper Inflation (anything above 20 %)
2. Based on cause
1. Demand Full Inflation: Inflation caused by Increase in Demand due to increases in government
2. Cost Push Inflation: Due to increased prices of products.
{If interest rate for inputs (capital, land, salary for employee) are increased, the Goods and Services
automatically increases}
3. Structural Inflation: caused by deficiency in economy such as backward agricultural sector.
Impact of Inflation:

It affects low income group badly

People on Fixed Income will be worse of in real time due to higher prices and equal income as
before. This condition will reduce the Quality of life.

Inflation discourage exports as domestic sales are attractive, which will result in BOP Problem

Inflation may reduce savings and thereby investment.

It will redistribute Income from those of fixed income to those who are in inflation linked Income
and business.

To control of Inflation:

Fiscal policy: Income tax will be reduced; reduction in government expenditure

Dual pricing: Government will provide goods at lesser for vulnerable people and above
economic cost for other sections.

Monetary Measure: Cheap money policy, Deer Money policy.

Supply mater features include making goods available through imports.

Administrative measure includes implementation of anti-black marketing measure, wage and

price control measures.

Reason for Inflation in India:

Increase in growth rate.(Booming Period)

Monsoon based agricultural sector {64 % of total cultivable land in India is based on monsoon
based irrigation, so bad monsoon and decline in production, rises the Inflationary pressure}

Weakness in Distribution system

Regular Increase in Minimum Support Price

Fuel Price deregulation for petrol and increase in prices of Diesel and LPG

Excess presence of middle man in the Economy

How Inflation is calculated in India:-

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Inflation in India was calculated using two indices
1. Consumer Price Index(CPI): It measure the change in price paid by the consumer at Retail
level including sales tax.
2. WholeSale Price Index (WPI): It measures the change in price offers selection of goods at
whole sale before reaching the retail market that excluding sales tax.
Base Year: 2004 -2005
WPI was calculated on a weekly basis
Deflation: General fall in level of prices, not because of inflation
Disflation: Reduction of the rate of inflation
Reflation: attempt to raise the prices to control the inflation pressure
Stagflation:- Inflation coupled with Unemployment
Open Inflation: Government is not ready to take any measure to control the inflation
Capital Adequacy Ratio: It is maintained in two ways
Tier I: Used to maintain absorb the losser, when there is a risk
Tier II: Provide money to compensate at the time of winding up
Producer Price Index: It measures the change in price received by a producer (i.e.,) a price of good
as they are sold to the whole sales by the producer.
Philips Curve: If inflation increases, the unemployment decreases.



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Important Days to Remember



January 9


January 10

World Laughter Day

January 12

National Youth Day

January 15

Army Day

January 25

National Voters Day

January 26

India's Republic Day, International Customs Day

January 30

Martyrs' Day; World Leprosy Eradication Day

2nd Sunday of February

World Marriage Day

February 13

World Radio Day


February 24

Central Excise Day


February 28

National Science Day


Second Monday March

Commonwealth Day


March 8

International Women's Day; International literacy Day


March 15

World Disabled Day; World Consumer Rights Day


March 18

Ordnance Factories Day (India)


March 2

World Forestry Day;

International Day for the Elimination of Racial Discrimination


March 22

World Day for Water


March 23

World Meteorological Day


March 24

World TB Day


April 5

International Day for Mine Awareness; National Maritime Day


April 7

World Health Day


April 17

World Haemophilia Day


April 18

World Heritage Day


April 21

Secretaries' Day


April 22

Earth Day


April 23

World Book and Copy Right Day


May 1

Workers Day (International Labour Day)


May 3

Press Freedom Day; World Asthma Day

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May 2nd Sunday

Mothers Day


May 4

Coal Miners' Day


May 8

World Red Cross Day


May 9

World Thalassaemia Day


May 11

National Technology


May 12

World Hypertension Day; International Nurses Day


May 15

International Day of the Family


May 17

World Telecommunication Day


May 24

Commonwealth Day


May 31

Anti-tobacco Day


June 4

International Day of Innocent Children Victims of Aggression


June 5

World Environment Day


June 3rd Sunday

Father's Day


June 14

World Blood Donor Day


June 26

International Day against Drug Abuse and Illicit Trafficking


July 1

Doctor's Day


July 6

World Zoo noses Day


July 11

World Population Day


July 12

Malala Day


August 3

International Friendship Day


August 6

Hiroshima Day


August 8

World Senior Citizen's Day


August 9

Quit India Day, Nagasaki Day


August 15

Indian Independence Day


August 18

International Day of the World's Indigenous Peoples


August 19

Photography Day


August 29

National Sports Day


September 2

Coconut Day


September 5

Teachers' Day; Sanskrit Day


September 8

World Literacy Day (UNESCO)


September 15

Engineers' Day


September 16

World Ozone Day

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September 21

Alzheimer's Day; Day for Peace & Non-violence (UN)


September 22

Rose Day (Welfare of cancer patients)


September 26

Day of the Deaf


September 27

World Tourism Day


October 1

International Day for the Elderly


October 2

Gandhi Jayanthi


October 3

World Habitat Day


October 4

World Animal Welfare Day


October 8

Indian Air Force Day


October 9

World Post Office Day


October 10

National Post Day


October 2nd Thursday

World Sight Day


October 13

UN International Day for Natural Disaster Reduction


October 14

World Standards Day


October 15

World White Cane Day (guiding the blind)


October 16

World Food Day


October 24

UN Day; World Development Information Day


October 30

World Thrift Day


November 9

Legal Services Day


November 14

Children's Day; Diabetes Day


November 17

National Epilepsy Day


November 20

Africa Industrialization Day


November 29

International Day of Solidarity with Palestinian People


December 1

World AIDS Day


December 3

World Day of the Handicapped


December 4

Indian Navy Day


December 7

Indian Armed Forces Flag Day


December 10

Human Rights Day; International Children's Day of Broadcasting


December 18

Minorities Rights Day (India)


December 23

Kisan Divas (Farmer's Day) (India)

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After 2nd World War, there was a major economic crisis. To avoid this future, major economic countries
decided to start IMF. In Brettonwood at US, IMF started, along with World Bank. The conference is
known as Brettonwood Conference

Its lends the money to members in economic difficulties and provide technical assistance

It fight against Money laundering & Terrorism

Doesnt lend for specified projects

Special Drawing Rights (SDR): It is an international reserve assets created by IMF to supplement its
members. Its value based on four keys International currencies (1) Dollar (2) Euro (3) Yen (4) Pound
(5) Mark
SDR was introduced in 1970. It is also known as Paper Gold. According to SDR, the country will
get more or less


Five World Banks units are:
1. IBRD (International Bank for Reconstruction & Development)
2. IDA (International Development Agency)
3. IFC (International Finance Corporation)
4. MIGA (Multilateral Investment Guarantees Agency)
5. ICSID (International Center for Settlement of International Dispute)
IBRD & IDA together known as World Bank; All together are known as World Bank Groups
Objectives: WB provide loan for developing countries for capital program for reduction in poverty
IBRD depth financing on the basis of sovereign guarantees (187 members)
IDA provide concessional financing (low interest rate or zero) with sovereign guarantees (188
IFC they will give loan without guarantees mainly to the private sector
MIGA they will provide insurance against certain type of risks including political risks
ICSID they works with government to reduce risks
India & World Bank:

Indias Millinemium Development Goal (MDG) are financed by WB

SSA Primary Education

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National AIDS Control Programme funded fully by WB

India is the 7th largest shareholder of WB


General Agreement on Trade and Tariff (GATT) also known as World Trade Organization was
established after World War 2 in Geneva came into being in January 1948.
Later, WTO was established in 1995

Make international trade as free as possible by ensuring that the ground rules are made
predictable and transparent

Act as a forum for trade negotiations

World as a neutral agency for settlement of trade disputes

Doha Round: It was started in 2001 and still negotiations are going; relaxation of trade barriers is
not accepted by developing countries in Agricultural (i.e.,) Agreement on Agriculture (AoA)


Intellectual Property (IP): are the work of mind (or) intellect to create products that have
commercial uses like drugs, literature, paintings, food products, etc.,
TRIPS: lays down legal standard for members to protect intellectual property by ways of copy right,
patent, trade mark and Industrial design.
Geographical Indication: granted to community or groups or an institution that represents their
interest of products. It cannot be granted to individual.

Mini Ratna: Company earns 30 Crore profits in any one of the 3 last years (or) earned acceptable
profit in last 3 years
Nava Ratna (9 Gems): Earned 300 Crore profit in any one of the last 3 years; Introduced in 1997

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Maharatna: To make global giants companies; Average annual turnover of a company should be more
than Rs. 25, 000 crores in last 3 years; Average Annual net worth should be greater than (or) Rs. 1500
crores in last 3 years; Average Annual Net profit more than Rs. 5000 cores in last 3 years
Maharatna Companies: BHEL, CIL, GAIL, IOC, NTPC, ONGC, SAIL


The Income from disinvestment directly goes into NIF. 75 % of Income (NIF) used to social sector
reforms like Education, Health, etc.,

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