Banking Glossary Shabta Ratna 17072010

Shabta Ratna, A Banking Glossary July 2010 Canara Bank RSTC Gurgaon

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SSHHAABBTTAA RRAATTNNAA

(A Banking Glossary)


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Table of Contents Profit Planning Terminology in a Nutshell Banking & Economic Glossary Different Types of Companies Investment Portfolio in Banks: Terminology Budget Glossary SEBI Terms Issues in Primary Market Applications Supported by Blocked Amount ASBA Basel II Risk Management Glossary Derivatives - Terminology Types of Derivatives Risks Glossary of Important Terms - Government Securities Market Money and Debt Market Terminology Bench Mark Interest Rates Technology / Internet Banking Glossary Quick Guide to Common Attacks Central Vigilance Commission Importance and Features of Domain Name Server (DNS) Business Process Re-Engineering (BPR) Total Quality Management (TQM) Mergers, Acquisitions, Amalgamations & Alliances - Basics Definition of Robbery, Dacoity, Theft and Burglary Project Appraisal : Terminology Balance Sheet Terms & their Meaning Ratio Formulae Uniform Customs And Practice For Documentary Credits Forex Terminology URR - 725 Cheque Truncation Death Claims Terminilogy


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Profit Planning Terminology in a Nutshell “Interest Spread” & “Net Interest Income” are one and the same. The difference between ‘non-interest expenditure’ and non-interest income’ is defined as

“Burden”. “Interest Spread’ less ‘Burden’ determines “ Operating Profit’ “ Profit vs. Profitability: While profit represents an absolute figure, profitability,

measured by a ratio, represents the operational efficiency. As opposed to absolute profit volumes, profitability is a more meaningful yardstick of operational efficiency as it is size-neutral.

Return on Assets (RoA) : RoA is the ratio of Net profit to total assets. This is a standard measure of profitability with 1% deemed as the international benchmark.

Net Interest Margin (NIM) : NIM is the ratio of net interest income (Total Interest Income minus Total Interest Expenditure) to average earning assets.

Return on Capital (ROC): ROC is the ratio of net profit to share capital. It indicates the return on paid up capital.

Return on Net worth , also known as Return on Equity (ROE): Ratio of net profit to average net worth (share capital, plus reserves minus intangible assets). It indicates the return on equity capital.

Book Value: Net worth divided by number of shares. Market price of share generally factors Book Value.

Earning Per Share (EPS) & Price earning Ratio (P/E ratio) : EPS is the ratio of Net profit to number of shares.

Price – Earning is the ratio of market price of a share to earning per share. EPS and P/E ratios indicate the ability of the bank to access to the capital market and the appetite of the bank’s scrip in the market.

Capital to Risk-weight Assets Ratio (CRAR): Total capital, consisting of Tier-I & Tier-II capital, as a ratio of risk-weighted assets. It indicates the soundness and risk bearing ability of a bank.

Yield on Advances: Interest income on advances divided by average advances indicates average yield on advances.

Yield on Investments: Interest & dividend income on investment divided by average investments indicate yield on investments..

Yield on Working Funds: Total interest income divided by average working funds, consisting of interest earning and non-interest earning assets.

Cost of Deposits: Interest paid on deposits divided by the average deposits, consisting of Current, Savings and Term deposits. This is the comparable benchmark for liabilities management.

Cost of Borrowings: Interest paid on borrowings, including borrowing for Tier-II capital, divided by average borrowings.

Cost of Interest Bearing Liabilities: Interest paid on deposits and borrowings divided by average interest bearing liabilities (deposits and borrowings, including Tier-II bonds).

Cost of Working Funds: Total interest expenditure divided by average working funds, consisting of interest bearing and non-interest bearing liabilities (total of liability side of balance sheet).

Spread: Difference between the Yield on Working Funds and Cost of Working Funds represents Spread.

Intermediation Ratio: It measures the ratio of operating expenditure to total assets. As per international criterion, this ratio should be less than 1 per cent.


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Cost- Income (Efficiency) Ratio: Non-interest expenditure divided by net total income (total income minus interest expenses). It signifies movement in operating cost relative to income. Global benchmark is 40 per cent.

Burden Ratio: Ratio of non-interest income to non-interest expenditure. As an efficiency criterion, non-interest income should be able to cover the non-interest expenditure.

A recent cost benefit study on ATMs has revealed that a minimum of 150 transactions per day is required on an ATM to make it BREAK-EVEN.

Global Benchmarks in Profitability: Criterion Parameter International Standard Solvency Ratio Capital Adequacy Minimum 8% Efficiency of Assets Use Return on Assets 1% Net NPA Ratio Net NPA Ratio to Net Advances Less than 1% Intermediation Efficiency Operating Cost to Average Working Funds Less than 1% Burden Ratio Other Income to Operating Expenses Minimum 100% Cost- Income Ratio Operating Cost to Net Income Less than 40% Benchmark Prime Lending Rate: RBI asked banks to declare their own Benchmark

Prime Lending Rate (BPLR), i.e the minimum interest rate which the bank can charge for its zero risk customers.

While deciding the BPLR, Banks should take into account following factors: Actual cost of Funds, Provision for NPAs, Other Regulatory provisions, Profit Margin.

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Banking & Economic Glossary Ad-Hoc Treasury Bills : The Reserve bank of India Act enables the Bank to make advances repayable within 3 months to the Central Government and the State governments. To the Central Government the advance is made against Ad Hoc Treasury Bills. Thus these are the bills issued by the Central government specifically to the RBI for obtaining financial accommodation to meet the temporary gap between receipts and expenditure of the Government. These bills were being automatically created when the Union Government's balance with RBI fell short of the stipulated minimum level of Rs.50 crore on any Friday, but were cancelled when the Central Government got replenishment up to the stipulated level. This resulted in automatic monetisation of government deficit. In April 1997 the practice of issuing Ad-hoc treasury Bills was discontinued and a system of granting of Ways and Means Advances (WMA) was introduced. The interest rate originally charged at Bank Rate has been linked to the Repo Rate as it emerged as a short term reference rate. The drawings over and above the sanctioned limits (over draft) for any year are charged at Repo Rate plus 2 percentage points. Advance Payment Guarantee (APG): Advance Payment Guarantee comes in to picture after a contract work is awarded to the applicant. This Guarantee supports an obligation to account for an advance payment made by the Beneficiary to the Contractor. The contractor who is awarded the project is allowed to draw advance money to facilitate initiation of the actual work. In case he draws advance money but does not complete the corresponding work, the Guarantee can be invoked. To overcome the issue of which comes first (Advance or Guarantee), Advance Payment Guarantees normally contain a clause that the Guarantee is inoperative until the Advance Payment has been received by the Applicant. Such Guarantees also contain a “Liability reduction clause” which ensures that the liability under the Guarantee is reduced proportionately as the work progresses and bills are submitted against the advance drawn. Example: Once the contract is awarded to PGIL, UP Government may sanction advance money of Rs.50 crore (25% of the project cost) to PGIL to proceed with the project. PGIL can draw the funds against submission of an Advance Money Guarantee for either full amount of Rs.50 crore or part thereof, depending upon the terms of the contract. At this stage, the Bid Bond Guarantee will be received back by the Bank and cancelled. Many times, there is a provision in the BBG, allowing it to be retained as Advance Money Guarantee. However, this should be a conscious decision on the part of the issuing Bank. BBGs should be drafted carefully to avoid confusion. American Depository Receipts (ADRs) : ADRs/GDRs are receipts (not shares) issued by an American Depository or any Global Depository to investors, giving them the title to underlying shares of a company. These receipts are listed by the company issuing the ADR/GDR on foreign exchanges (in American exchanges, it is called ADR and called GDR-or Global Depository Receipts if listed in international exchanges) and traded just like a share. An ADR/GDR can represent any number of underlying shares. All ADRs are a form of GDR. Corporates are allowed to access foreign equity capital in the form of ADR/GDR under an automatic route.


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ANBC: The targets and sub-targets under priority sector lending would be linked to Adjusted Net

Bank Credit (ANBC). ANBC or credit equivalent of Off-Balance Sheet Exposures will be computed with

reference to the outstanding as on March 31 of the previous year. ANBC means Net Bank Credit plus investments made by banks in non-SLR bonds held

in HTM category) or Credit Equivalent amount of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year.

The outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for computation of ANBC for priority sector lending purposes.

Deposits placed by banks with NABARD / SIDBI, as the case may be, in lieu of non-achievement of priority sector lending targets / sub-targets, though shown under Schedule 8 - 'Investments' in the Balance Sheet at item I (vi) - 'Others', will not be treated as investment in non-SLR bonds held under HTM category.

Investments made by banks in the Recapitalization Bonds floated by Government of India will not be taken into account for the purpose of calculation of ANBC.

For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method.

Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets / sub-targets.

Approved Securities : Approved securities are those issued by the Government and local bodies as also securities enjoying the guarantee of the Government in regard to payment of principal and interest. Such securities included in the computation of Statutory Liquidity Ratio (SLR), besides Government securities are bonds of IDBI, NABARD, IFCI, SFCs, cooperative debentures, Debentures of Electricity Board etc. Arbitrage : The process of buying a thing in one market and selling it at the same time in another market, in order to take advantage of the price difference. Asian Clearing Union (ACU) : The Asian Clearing Union (ACU) was established with its head quarters at Tehran, Iran on December 9, 1974 at the initiative of the United nations Economic and Social Commission for Asia and Pacific (ESCAP), as a step towards securing regional co-operation. The ACU is a system for clearing payments among the member countries on a multilateral basis. The central banks and monetary authorities of Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka and Myanmar are the members of the ACU. ACU is the simplest form of payment arrangements whereby the members settle payments for intra-regional transactions among the participating central banks on a multilateral basis. The main objectives of a clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries. The Asian Monetary Unit is the common unit of account of ACU and is equivalent in value to one U.S.Dollar. The Asian Monetary Unit may


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also be denominated as ACU dollar. All instruments of payments are required to be denominated in Asian Monetary Unit. Settlement of such instruments may be made by authorised dealers through operation on ACU dollar Accounts. Reserve Bank of India undertakes to receive and pay U.S. dollars from/to authorised dealer for the purpose of funding or for repatriating the excess liquidly in the ACU dollar accounts maintained by the authorised dealer with their correspondents in the other participating countries. Similarly, the Reserve bank of India has also been receiving and delivering U.S. dollar amounts for absorbing liquidity or for funding the ACU dollar (vostro) accounts maintained by the authorised dealers on behalf of their overseas correspondents. Asset Backing For Issue Of Notes : The RBI Act stipulates that the assets of the Issue Department against which currency notes are issued have to consist of gold coin and bullion, foreign securities, rupee coin, Government of India rupee securities of any maturity and bills of exchange and promissory notes payable in India which are eligible for purchase by the bank. So far such bills have not formed part of the assets of the Issue Department. The aggregate value of gold coin and gold bullion and foreign securities held in the Issue Department should not at any time be less than Rs 200 crore; of this, value of gold, not to be less than Rs 115 crore. There is no ceiling on the amount of notes that can be issued by the Reserve Bank at any time. Asset Classification : A recommendation of high level Committee on Financial System (Narasimham Committee) is that the policy of income recognition should be objectively based on record of recovery. International practice is that an asset is treated as non-performing when interest is overdue for at least 90 days. Recognising the need that a balance sheet should reflect a bank's actual financial health, a system for recognition of income, classification of assets and provisioning for bad debts on a prudential basis was introduced. The assets portfolio of the banks is required to be classified as (1) standard assets (2) sub-standard assets (3) doubtful assets and (4) loss assets. Standard asset is one that does not disclose any problems and which does not carry more than normal risk attached to the business .An asset which has been classified as NPA for a period not exceeding 12 months is considered as sub-standard asset. Doubtful asset is one which has remained NPA for a period exceeding 12 months. An asset which is considered uncollectable and loss has been identified by the bank or internal or external auditors or the RBI inspection and the loss has not been written off is regarded as loss asset. Asian Development Bank (ADB) : ADB is a multilateral development financial institution, established in 1966, to promote economic and social development in Asian and Pacific countries through loans and technical assistance. It was founded in 1966 with 31 member-states and has now grown to 67 (48 from the region and 19 from other parts of the globe). ADB's vision is a region, free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens. ADB's main instruments for providing help to its developing member countries are: i) policy dialogue, ii) loans, iii) technical assistance, iv) grants, v) guarantees, and vi) equity investments.


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Asset Liability Management : Denotes a scientific way of measuring, monitoring and managing the various risks banks or financial institutions are exposed during the course of their operations. Earlier banks had concentrated essentially on credit and investment portfolios and liquidity and profitability were given prime importance in the distribution of assets. Accumulation of mismatches among items on balance sheet and off balance sheet accounts often led to liquidity crisis and even insolvency. In the process of globalisation of economy, the domestic markets get affected by developments in the international financial and exchange markets which expose banks to various kinds of risks. Risk management involves continuous process of planning, organising and controlling the volumes, maturities, rates and yields of assets and liabilities. To help achieve this the RBI has issued Asset Liability Management guidelines to form part of the management of credit, market and operation risks. Thrust of ALM is on managing market risk. Asset Reconstruction Companies : These companies specialise in the recovery and liquidation of sticky assets of the banks and financial institutions. The non-performing assets can be assigned to ARC by banks at discounted price. In India the Committee on Financial Systems (1991) recommended creation of Asset Reconstruction Fund (ARF). The committee on Banking Sector Reforms (1998) suggested creation of Asset Reconstruction Company to which sticky advances of banks can be transferred. ARF was also considered essential as part of the comprehensive restructuring of weak banks. In pursuance of all this a legislation to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest was passed by the Parliament. Asset Securitisation : It is a process by which non-tradable assets are converted into tradable securities. Illiquid assets such as mortgage loans, auto loan receivable, cash credit receivables etc. on the balance sheet of the originator (such as Housing Finance Companies, Financial Institutions, banks etc.) are packaged, underwritten and sold in the form of securities to investors through a carefully structured process. These securities could be in the form of Commercial Paper, Participation Certificates, Notes or any other form of security permissible under the legal framework of the country. In a securitisation process, the underlying assets are used both as collateral and also to generate the income to pay the principal and interest to the investors of the asset backed securities. Autonomy : Autonomy of Central Bank is generally understood with reference to the degree of freedom a Central Bank enjoys in the formulation and implementation of monetary and banking policies. The Central Banks perform various roles such as banker to Government, banker to banks, issuing bank notes, management of public debt, managing foreign exchange reserves of the country, and regulation of banks and financial institutions. Central Banks' independence relate to three matters namely, personnel; financial (extent of finance to Govt;) and conduct of monetary policy. How far the Central Bank be independent of Government in matters of policies and what form should that independence take? The views vary from the


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position that Central Bank should be given absolute statutory independence from the Govt, both in determination and implementation of policies after listening to various opinions, to that it would be thoroughly undesirable for the bank to pursue policies, which did not have the concurrence and support of the Govt. and Parliament. In practice, the Central Bank, while having powers to formulate policies, is ultimately subordinate to government and is required to keep Govt informed of their policies and obtain specific government approvals for particular policies. Authorised Dealers : Scheduled commercial banks and other banks and financial institutions authorised to deal in foreign exchange are known as authorised dealers. The Reserve Bank has been delegating powers to authorised dealers for undertaking foreign exchange transactions without obtaining Bank's prior approval. Balance Of Payment Accounts : A country's balance of international payment is a systematic statement of all economic transactions between the country and the rest of the world The statistical statement for a period mainly show (1) transactions in goods, services and income between the economy and the rest of the world, (2) changes of ownership and other changes in that economy's monetary gold, Special Drawing Rights (SDRs) and claims and liabilities to the rest of the world. Like other accounts, the balance of payments records each transaction either a plus or a minus. If a transaction earns foreign currency for the nation it is called a credit and if a transaction involves spending foreign currency it is debit. The two major components of balance of payments are balance on current account and balance on capital account. Balance on current account summarises the difference between nation's total exports and imports of goods and services and capital account balance depicts changes in loans or investments that private citizens or government make or receive from foreign private citizen or governments. Since each country's capital and current accounts have to sum to zero the counterpart of the surplus or deficit would be capital flows and change in reserves. Balance Of Trade : International trade is made up of purchase and sale of goods between countries and are collectively called imports and exports. Exports and imports are visible trade. The difference between exports and imports is called balance of trade. The balance of trade is favourable when the value of exports exceeds imports (trade surplus) and unfavourable or adverse when value of imports exceed exports (trade deficit). Transactions in services relate to payment and receipt for services such as shipping, insurance, travel and tourism, transfer of interest, migrant remittances, interest and dividend payments, etc. These services are called invisibles. Trade in goods and services constitute the current account. In addition, there are capital transactions in the form of payments and receipts due to transfer of funds for acquiring assets, extension of credits and loans, investments etc. These three groups of economic transactions constitute the balance of payments of a country.


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Bank Credit To Commercial Sector : This denotes credit extended by RBI to commercial sector by investing in shares/bonds of financial institutions, ordinary debentures of cooperative institutions and loans to financial institutions and bills discounted by commercial banks with RBI and other banks. Other bank's credit to commercial sector is in the form of loans, cash credit, overdrafts, bills discounted and investment in approved securities and other investment. Bank Credit To Government : Reserve Bank Credit to Government is the sum of the claims of the bank on the Central Government in the form of holdings of dated securities, ways and means advances, Treasury Bills and rupee coins. These assets less the Centre's cash balances with the RBI give Net RBI Credit to Central Government. Net RBI Credit to State Governments comprises loans and advances to state Governments, less their deposit balance with banks. Other banks' credit to Government represents their investments in long term and short- term Government securities. Bank credit to Government is one of the factors explaining the variations in money supply. Other factors giving rise to change are RBI credit to commercial sector, other banks' credit to commercial sector, government's currency liabilities, net foreign exchange asset of RBI and other banks, and net non-monetary liabilities of RBI and banks. Bank Rate : An instrument of general credit control and represents the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the provisions of the Act. The Bank Rate influences the cost of financial accommodation extended by RBI. The impact of a change in the Bank Rate depends upon such factors as the extend of commercial banks' dependence on the Reserve Bank for funds, the availability of funds to banks from other sources, the extent to which other interest rates are directly influenced by changes in the Bank Rate, and the degree of importance attached to a change in the Bank Rate as an indicator of the stance of monetary policy. Banking Codes And Standard Board Of India (BCSBI) : This Board was set in pursuance of a recommendation of the Committee on Procedures and Performance Audit on public services to benchmark the existing level of public services in the banking sector. This is an autonomous body established by the RBI and the banks to evaluate and oversee the observance of voluntary code of conduct by the banks. The purpose is to ensure that comprehensive code of conduct for fair treatment of customers is evolved and adhered to. As a part of the collaborative arrangement, the Reserve bank would build up corpus of BCSBI to make it a self-sustaining organisation. Banking Department : The primary function of Reserve Bank regarding note issue and general banking business are performed by two separate departments viz. Banking Department and Issue Department. The Banking Department is entrusted with the task of handling general banking business in particular, handling of transaction arising from the bank's duties as Banker to Government and to the banks.


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Banking Ombudsman (BO) Scheme, 2006 The BO Scheme enables an expeditious and inexpensive forum to bank customers for

resolution of complaints relating to certain services rendered by banks. The BO Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949

by RBI with effect from 1995. The BO is a senior official appointed by the Reserve Bank of India to redress customer

complaints against deficiency in certain banking services. As on date, 15 Banking Ombudsmen have been appointed with their offices located

mostly in state capitals. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-

operative Banks are covered under the Scheme. One can file a complaint before the BO if the reply is not received from the bank within a

period of one month after the bank concerned has received one s representation, or the bank rejects the complaint, or if the complainant is not satisfied with the reply given by the bank.

Grounds of complaints: The BO can receive and consider any complaint relating to the following deficiency in banking services (including internet banking): non-payment or inordinate delay in the payment or collection of cheques, drafts, bills

etc.; non-acceptance, without sufficient cause, of small denomination notes tendered for any

purpose, and for charging of commission in respect thereof; non-acceptance, without sufficient cause, of coins tendered and for charging of

commission in respect thereof; non-payment or delay in payment of inward remittances ; failure to issue or delay in issue of drafts, pay orders or bankers’ cheques; non-adherence to prescribed working hours ; failure to provide or delay in providing a banking facility (other than loans and advances)

promised in writing by a bank or its direct selling agents; delays, non-credit of proceeds to parties accounts, non-payment of deposit or non-

observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank ;

complaints from Non-Resident Indians having accounts in India in relation to their remittances from abroad, deposits and other bank-related matters;

refusal to open deposit accounts without any valid reason for refusal; levying of charges without adequate prior notice to the customer; non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on

ATM/Debit card operations or credit card operations; non-disbursement or delay in disbursement of pension (to the extent the grievance can be

attributed to the action on the part of the bank concerned, but not with regard to its employees);

refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;

refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government securities;


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forced closure of deposit accounts without due notice or without sufficient reason; refusal to close or delay in closing the accounts; non-adherence to the fair practices code as adopted by the bank or non-adherence to the

provisions of the Code of Bank s Commitments to Customers issued by Banking Codes and Standards Board of India and as adopted by the bank ;

non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; and

any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.

A customer can also lodge a complaint on the following grounds of deficiency in service with respect to loans and advances

non-observance of Reserve Bank Directives on interest rates; delays in sanction, disbursement or non-observance of prescribed time schedule for

disposal of loan applications; non-acceptance of application for loans without furnishing valid reasons to the applicant;

and non-adherence to the provisions of the fair practices code for lenders as adopted by the

bank or Code of Bank’s Commitment to Customers, as the case may be; non-observance of any other direction or instruction of the Reserve Bank as may be

specified by the Reserve Bank for this purpose from time to time. The BO may also deal with such other matter as may be specified by the Reserve Bank

from time to time. Rejection of complaints: The BO may reject a complaint at any stage if it appears to him that a complaint made to him is: not on the grounds of complaint referred to above Compensation sought from the BO is beyond Rs 10 lakh . requires consideration of elaborate documentary and oral evidence and the proceedings

before the BO are not appropriate for adjudication of such complaint without any sufficient cause that it is not pursued by the complainant with reasonable diligence In the opinion of the BO there is no loss or damage or inconvenience caused to the

complainant. Complaints not considered: One’s complaint will not be considered if: One has not approached his bank for redressal of his grievance first. One has not made the complaint within one year from the date one has received the reply

of the bank or if no reply is received if it is more than one year and one month from the date of representation to the bank.

The subject matter of the complaint is pending for disposal / has already been dealt with at any other forum like court of law, consumer court etc.

Frivolous or vexatious. The institution complained against is not covered under the scheme. The subject matter of the complaint is not within the ambit of the BO . If the complaint is for the same subject matter that was settled through the office of the

BO in any previous proceedings.


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Procedure for filing the complaint: One can file a complaint with the BO simply by writing on a plain paper. One can also file it online or by sending an email to the BO .

The complainant can be filed by one’s authorized representative (other than an advocate). The BO does not charge any fee for filing and resolving customers’ complaints. Limit on the amount of compensation: The amount, if any, to be paid by the bank to the

complainant by way of compensation for any loss suffered by the complainant is limited to the amount arising directly out of the act or omission of the bank or Rs 10 lakhs, whichever is lower.

Compensation for mental agony and harassment: The BO may award compensation not exceeding Rs 1 lakh to the complainant only in the case of complaints relating to credit card operations for mental agony and harassment. The BO will take into account the loss of the complainant s time, expenses incurred by the complainant, harassment and mental anguish suffered by the complainant while passing such award.

Details required in the application: The complaint should have the name and address of the complainant, the name and address of the branch or office of the bank against which the complaint is made, facts giving rise to the complaint supported by documents, if any, the nature and extent of the loss caused to the complainant, the relief sought from the BO and a declaration about the compliance of conditions which are required to be complied with by the complainant.

Handling of complaints at Ombudsman office: The BO endeavours to promote, through conciliation or mediation, a settlement of the

complaint by agreement between the complaint and the bank named in the complaint. If the terms of settlement (offered by the bank) are acceptable to one in full and final

settlement of one’s complaint, the BO will pass an order as per the terms of settlement which becomes binding on the bank and the complainant.

If a complaint is not settled by an agreement within a period of one month, the BO proceeds further to pass an award. Before passing an award, the BO provides reasonable opportunity to the complainant and the bank, to present their case.

It is up to the complainant to accept the award in full and final settlement of your complaint or to reject it.

If one is not satisfied with the decision passed by the BO, one can approach the appellate authority against the Banking Ombudsmen’s decision. Appellate Authority is vested with a Deputy Governor of the RBI.

One can also explore any other recourse and/or remedies available to him/her as per the law.

The bank also has the option to file an appeal before the appellate authority under the scheme.

Time limit for filing appeal: If one is aggrieved by the decision, one may, within 30 days of the date of receipt of the award, appeal against the award before the appellate authority. The appellate authority may, if he/ she is satisfied that the applicant had sufficient cause for not making an application for appeal within time, also allow a further period not exceeding 30 days.

Handling at the office of the appellate authority: The appellate authority may dismiss the appeal; or allow the appeal and set aside the award; or send the matter to the BO for fresh disposal in accordance with such directions as the appellate authority may consider necessary or proper; or modify the award and pass such directions as may be necessary to give effect to the modified award; or pass any other order as it may deem fit.


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Banking System : Banking system consists of commercial banks and cooperative banks. The former include

Indian banks in public sector, private sector and foreign banks. Among the commercial banks, public sector banks (The State Bank of India and its associate banks and the 20 Nationalised banks) account for predominant share of bank deposits.

Private sector banks-old as well as the new banks, which came into being following the recommendation of Committee on Financial System 1991 to induce greater competition and efficiency-are banking companies and are governed by the provisions of Banking Regulation Act 1949.

The century old cooperative banking structure providing banking access to the rural masses is federal in character. State cooperative banks, district central cooperative banks and primary agricultural societies specialise in short-term credit while state cooperative agriculture and rural development banks and primary cooperative agriculture and rural development banks provide long term loans and advances. Urban banks finance small business in urban and semi urban areas.

Regional Rural Banks are subsidiaries of commercial bank which are specially set up in rural areas to provide credit and other facilities to weaker sections for productive activities in agriculture, trade, industry, etc. Besides there are a few Local Area Banks functioning in a few states. The government owned post office savings bank is a distinct entity in the sense that it is oriented towards mobilisation of small savings of the community and does not undertake lending activity.

Bank For International Settlements (BIS) : The Bank for International Settlements was set up in 1930 and is situated in Basle. Under

article 3 of the Bank's statute, the basic object is to promote cooperation among central banks and as such is designated as "Central Banks' Bank".

It carries out a wide range of banking operations arising from the task of assisting the Central Banks in managing and investing their monetary reserves. It promotes international monetary cooperation facilitating exchange of views about international banking and monetary system among the central bankers and central bank experts.

BIS is also a research centre particularly in the monetary sphere. BIS acts as trustee or agent for a number of international bodies or arrangements, in the execution of international payment agreements.

The BIS currently has 55 member central banks. Base Rate: RBI Guidelines dated April 9, 2010 & Clarification dt.14.05.2010 RBI constituted a Working Group on BPLR (Chairman : Shri Deepak Mohanty) to review

the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent.

The Working Group its report submitted in October 2009. Draft guidelines on Base Rate were placed on the Reserve Bank's website in February

2010. RBI has decided that banks should switch over to the system of Base Rate. The BPLR system, introduced in 2003, fell short of its original objective of bringing

transparency to lending rates.


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This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the

Reserve Bank to lending rates of banks. The Base Rate system is aimed at enhancing transparency in lending rates of banks and

enabling better assessment of transmission of monetary policy. Base Rate The Base Rate system will replace the BPLR system with effect from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all

categories of borrowers. Base Rate = Cost of Deposit + Negative Carry on SLR/CRR* + Unallocatable

Overhead Cost* + Average Return on Net Worth* ( *Formula has been suggested by RBI for calculating each of these elements of BR)

Negative carry on CRR and SLR balances arises because the return on CRR balances is nil, while the return on SLR balances (proxied using the 364-day Treasury Bill rate) is lower than the cost of deposits.

Unallocatable Overhead Cost is calculated by taking the ratio (expressed as a percentage) of unallocated overhead cost and deployable deposit.

Average Return on Net Worth is computed as the product of net profit to net worth ratio and net worth to total liabilities ratio expressed as a percentage.

Actual lending rates on loans will include such other customer specific charges as considered appropriate.

Banks may choose any benchmark / methodology to arrive at the Base Rate for a specific tenor that may be disclosed transparently. (It should be consistent and be made available for supervisory review).

The actual lending rates charged may be transparent and consistent and be made available for supervisory review.

The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal.

Base rate not applicable to: The following categories of loans could be priced without reference to the Base Rate: (a) DRI advances; (b) Loans to banks' own employees; (c) Loans to banks' depositors against their own deposits. Applicability of Base Rate All categories of loans should henceforth be priced only with reference to the Base Rate. The Base Rate system would be applicable for all new loans and for those old loans that

come up for renewal. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing

contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over.


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Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner.

Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs.2 lakh stands withdrawn. It will increase the credit flow to small borrowers at reasonable rate and direct bank finance.

RBI will separately announce the stipulation for export credit. Clarification on Fixed rate Loans: Even after introduction of the Base Rate system,

banks would have the freedom to offer all categories of loans on fixed or floating rates. Where loans are offered on fixed rate basis, notwithstanding the quarterly review of the Base Rate, the rate of interest on fixed rate loans will continue to remain the same. However, the only condition is that such fixed rate should not be below the Base Rate.

Review of Base Rate Banks should review the Base Rate at least once in a quarter with the approval of the

Board or the ALCOs. Since transparency in the pricing of lending products has been a key objective, banks to

display their Base Rate at all branches / websites. Changes in the Base Rate should also be conveyed to the general public from time to time

through appropriate channels. Banks to provide information on the actual minimum and maximum lending rates to the

RBI on a quarterly basis. Basel Committee On Banking Supervision (BCBS) : The Basel Committee is a committee of bank supervisors drawn from 13 member countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, The Netherlands, Spain, Sweden, Switzerland, United Kingdom and United State of America). It was founded in 1974 to ensure international cooperation among a number of supervisory authorities. It usually meets at the Bank for International settlements in Basel, Switzerland, its permanent Secretariat. The Committee framed two Capital Accords, Basel I (1988) and Basel II (1999). (See Capital Accords) The differences in these Accords are as follows: Basel I Basel II Only Credit Risk (Although included capital for market risk subsequently in 1996)

Credit, Market and Operational Risk

Credit Risk: One measure fits all - Broadbrush approach

Based on Underlying Risk

Single Risk Measure: Minimum Capital Requirement

Package of Minimum Capital Requirement, Supervisory Review Process and Market Discipline working complementary to each other


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Basel Committee on Banking Supervision - BCBS: (RBI press release 17.3.2009) The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. It seeks to promote and strengthen supervisory and risk management practices globally. The Committee's Secretariat is based at the Bank for International Settlements in Basel, Switzerland.With its expanded membership, the Committee is comprised of representatives from Australia, Belgium, Brazil, Canada, China, France, Germany, India, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Spain, Sweden, Switzerland, the United Kingdom and the United States. The Basel Committee on Banking Supervision (BCBS) has decided at its meeting on 10-11 March, 2009 to expand its membership and invite India as a new member. Other countries invited to become new members are Australia, Brazil, China, Korea, Mexico and Russia. The Basel Committee's governance body will also be enlarged to include the Central Bank Governors and Heads of Supervision from these new member organisations. Benchmark Prime Lending Rate (BPLR) : Prime Lending Rate calculated after considering cost of funds, operating expenses, regulatory provisioning, capital charge and profit margin. It forms the reference rate for pricing of loans and advances. Benchmark Prime Lending Rate (BPLR) and Spreads: 1. With effect from Oct 18, 1994, RBI deregulated the interest rates on advances above Rs.2

lakh to be determined by the banks themselves subject to BPLR and Spread guidelines. Banks can offer loans at below BPLR to exporters or other creditworthy borrowers, including public enterprises, on the basis of a transparent and objective policy approved by their respective Boards. Banks are to declare the maximum spread of interest rates over BPLR.

2. BPLR to be treated as the ceiling for loans up to Rs. 2 lakh will continue. 3. Banks can determine the rates without reference to BPLR for loans for purchase of

consumer durables, loans to individuals against shares and debentures / bonds, other non-priority sector personal loans, etc.

4. BPLR will be made uniformly applicable at all branches of a bank. Determination of Benchmark Prime Lending Rate While determining their Benchmark PLR, the banks should take into account their (i) actual cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory requirement of provisioning / capital charge and profit margin. Banks should announce a Benchmark PLR with the approval of their Boards. In the interest of customer protection and to have greater degree of transparency in regard to actual interest rates charged to borrowers, banks should continue to provide information on maximum and minimum interest rates charged together with the Benchmark PLR. Freedom to fix Lending Rates without reference to BPLR Banks can determine the rates of interest without reference to BPLR and regardless of the size in respect of the following loans:


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Loans for purchase of consumer durables; Loans to individuals against shares and debentures / bonds; Other non-priority sector personal loans including credit card dues; Advances / overdrafts against domestic / NRE / FCNR (B) deposits with the bank,

provided that the deposit/s stands / stand either in the name(s) of the borrower himself / borrowers themselves, or in the names of the borrower jointly with another person;

Finance granted to intermediary agencies including housing finance intermediary agencies for on-lending to ultimate beneficiaries and agencies providing input support.;

Discounting of Bills; Loans / Advances / Cash Credit / Overdrafts against commodities subject to Selective

Credit Control; To a co-operative bank or to any other banking institution; To its own employees; Loans covered by refinance schemes of term lending institutions. Bharatiya Reserve Bank Notes Mudran Private Ltd (BRBNMPL): Bharatiya Reserve Bank Notes Mudran Private Limited was set up as a wholly owned subsidiary of RBI in 1995, to take up the work of two note presses, one each at Mysore and another in Salboni in 1986. The company is also entrusted to finance the modernisation and expansion programme of the two existing note printing presses at Nasik and Devas. The company's authorised share capital is Rs 800 crores and is headquartered at Bangalore. The BRBNMPL arranges to print and supply the bank notes to the issue offices of the RBI according to the requirement and production target set in consultation with the GOI and RBI. Bid Bond Guarantee : Construction / Project Contractors are awarded contracts through a bidding process. This is especially so in the case of public sector works. The bidding process is costly and time consuming. If a Contractor bids for a job / project, wins the bid and then refuses to undertake the work, the costly process of calling for bids has to be repeated. To ensure that only parties with serious intentions participate in the bidding or tender process, Bid Bond Guarantees (BBG) are called for from the Contractor (Principal or Applicant) along with the tender or bid. The BBG normally represents around 5% of the value of the contract. If the Contractor wins the bid but does not take up the work, BBG will be invoked to make good the loss of time and money caused by him. Thus a BBG supports the Applicant’s obligation to execute a contract if a bid is awarded. Example: If U.P. Government calls bids for the project of cleaning the river Ganga (Project cost Rs.200 crore) and your customer Progressive Infrastructure (I) Ltd (PGIL) wants to apply for the contract, PGIL may have to submit their proposal along with a Bid Bond Guarantee of Rs.10 crore, to demonstrate their seriousness in taking up the contract if awarded. In case they win the bid and do not take up the work, UP Government will invoke the Guarantee and the issuing Bank has to pay Rs.10 crore to UP Govt. first and recover it from PGIL in due course.


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Board For Financial Supervision : This was constituted in November 1994, under the Central Board of Directors of RBI with a view to give undivided attention to supervision of banks, all India financial institutions and NBFCs . It functions within the framework of RBI (BFS) Regulation 1994 exclusively framed for the purpose in consultation with Government of India. The Governor of RBI is the Chairman of the Board and four non-official directors of the Central Board are the members. The Deputy Governors of RBI are the Ex-officio members. Board For Regulation And Supervision Of Payment And Settlement System (BPSS) : As a committee of the Central Board of the RBI, BPSS was set up in March 2005 to prescribe the policies relating to the regulation and supervision of all types of payments and settlements system, set standards for existing and future systems, authorise the payments and settlements systems etc. To assist the BPSS the RBI formed a new department called the Department of Payment and Settlement Systems. Bonds – Types: Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life

of the bond. Most government bonds are issued as fixed rate bonds. Floating Rate Bonds – Floating Rate Bonds are securities which do not have a fixed

coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the Government of India so far, the base rate is the weighted average cut-off yield of the last three 364-day Treasury Bill auctions preceding the coupon re-set date and the spread is decided through the auction. Floating Rate Bonds were first issued in September 1995 in India.

Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to the face value. The Government of India issued such securities in the nineties. It has not issued zero coupon bond after that.

Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997. These bonds matured in 2002. The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein payment of both, the coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale Price Index).

Bonds with Call/ Put Options – Bonds can also be issued with features of optionality where the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of fi ve years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007.


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Special Securities - In addition to Treasury Bills and dated securities issued by the Government of India under the market borrowing programme, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc., as compensation to these companies in lieu of cash subsidies. These securities are usually long dated securities carrying coupon with a spread of about 20-25 basis points over the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities but are eligible as collateral for market repo transactions. The benefi ciary oil marketing companies may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising cash.

Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of Registered Interest and Principal of Securities). STRIPS are instruments wherein each cash fl ow of the fi xed coupon security is converted into a separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash fl ow of coupon (Rs.4.12 each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash fl ows are traded separately as independent securities in the secondary market.

Bridge Loans (RBI Guidelines): Banks have been permitted to sanction bridge loans to companies for a period not

exceeding one year against expected equity flows / issues. Such loans should be included within the ceiling of 40 percent of the banks' net worth as

on March 31 of the previous year prescribed for total exposure, including both fund-based and non-fund based exposure to capital market in all forms.

Banks may also extend bridge loans against the expected proceeds of Non-Convertible Debentures, External Commercial Borrowings, Global Depository Receipts and / or funds in the nature of Foreign Direct Investments, provided the banks are satisfied that the borrowing company has already made firm arrangements for raising the aforesaid resources / funds.

Business Facilitator Model Banks may use intermediaries, such as, NGOs / Farmers' Clubs, cooperatives, community

based organisations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents, well functioning Panchayats, Village Knowledge Centres, Agri Clinics / Agri Business Centers, Krishi Vigyan Kendras and KVIC / KVIB units, depending on the comfort level of the bank, for providing facilitation services.

Depending upon comfort level, individuals may also be engaged as business facilitators. Such services may include

a) identification of borrowers and fitment of activities; b) collection and preliminary processing of loan applications including

verification of primary information / data; c) creating awareness about savings and other products and education and advice

on managing money and debt counselling; d) processing and submission of applications to banks; e) promotion and nurturing Self Help Groups / Joint Liability Groups; f) post-sanction monitoring;


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g) monitoring and handholding of Self Help Groups / Joint Liability Groups / Credit Groups / others; and

h) follow-up for recovery. Business Correspondent Model 1. NGOs / MFIs set up under Societies / Trust Acts, Societies registered under Mutually

Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, Section 25 companies act, 1956, registered NBFCs not accepting public deposits and Post Offices may act as Business Correspondents.

2. Banks may engage retired bank employees, ex-servicemen and retired government employees as Business Correspondents (BCs) with immediate effect, in addition to the entities indicated above, subject to appropriate due diligence, adhering to distance criteria, and the individuals being permanent residents of the area in which they propose to operate as BCs.

3. RBI during the annual policy 2009-10 announcement increased the maximum distance criterion for the operation of the BC for rural, semi-urban and urban areas from the existing 15 kms. to 30 kms.

4. Thorough due diligence on such entities may be conducted keeping in view parameters indicated by RBI.

5. The scope of activities to be undertaken by the Business Correspondents will include Disbursal of small value credit, recovery of principal / collection of interest Collection of small value deposits Sale of micro insurance / mutual fund products / pension products / other third party

products and Receipt and delivery of small value remittances / other payment instruments in

addition to the activities listed above for business facilitators model. Buyer’s credit The buyer in India will have to avail either a rupee loan from any bank in India or Foreign Currency Loan from a Bank or Financial Institution in India or abroad to settle the bill of the Seller on sight terms.


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Call Money Market /Notice Money Market : Refers to a segment of money market where participants lend and borrow money on an overnight basis. The notice money market provides for lending and borrowing of money at a short notice for periods up to 14 days. Since 1992 many financial institutions like IDBI, NABARD, mutual funds, GIC and subsidiaries were allowed to participate in the call money market. On the recommendations of the Narasimham committee 1998, the non-bank participation in the market has been phased out in order to make it a pure inter-bank call/notice money market including primary dealers. Cash Management Bills The Government of India, in consultation with the Reserve Bank of India, has decided to issue a

new short-term instrument, known as Cash Management Bills, to meet the temporary cash flow mismatches of the Government.

The Cash Management Bills will be non-standard, discounted instruments issued for maturities less than 91 days.

The Cash Management Bills will have the generic character of Treasury Bills and their sale will be subject to the terms and conditions specified in the General Notification issued by Government of India and as amended from time to time.

The Cash Management Bills will have the following features:

o The tenure, notified amount and date of issue of the proposed Cash Management Bills will depend upon the temporary cash requirement of the Government. However, the tenure of the proposed Bills will be less than 91 days.

o The proposed Bills will be issued at discount to the face value through auctions, as in the case of the Treasury Bills.

o The announcement of the auction of the proposed Bills will be made by the Reserve Bank of India through separate Press Release to be issued one day prior to the date of auction.

o The settlement of the auction will be on T+1 basis. o The Non-Competitive Bidding Scheme for Treasury Bills will not be extended to the

Cash Management Bills. o The proposed Bills will be tradable and qualify for ready forward facility. Investment in

the proposed Bills will be reckoned as an eligible investment in Government Securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949.

The proposed cash management bill will be treated as Government of India Treasury Bill and accordingly shall be treated as SLR securities. (RBI Master Circular on CRR & SLR dated 18.9.2009). Cash Management Bills - CMBs (RBI guidelines) For the purpose of borrowing money, the Government of India makes uses of different types of instruments with maturities ranging from 10 days to more than 30 years. To meet the temporary receipt and expenditure mismatch, it obtains over draft from RBI under Ways & Means Advances (WMA), to meet the short term liquidity situations, it issues treasury bills of 91 days, 182 days and 364 days maturity. For long term funds needs, it makes use of dated securities in the form of bonds and long term loans. In a year of tight cash flows, the Govt. of India has added another instrument to meet immediate need for funds, by issuing a


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notification, in consultation with Reserve Bank of India, for issue of ‘cash management bills’ (CMBs), on August 11, 2009. What is a Cash Management Bill? CMB is a short term security to be sold by Govt. of India to raise temporary money for cash management needs. In USA, the Treasury sells CMBs for a period up to 6 months. These bills have been found to be flexible instrument as these can be issued when needed. By doing so, the Treasury has to hold lower cash balances. Though the Treasury pays higher interest rate on CMBs than the fixed maturity bills, but their shorter maturities lead to lower overall interest expense. In India, the CMBs will supplement the other short-term cash raising measures such as WMA and treasury bills. CMBs will allow the govt. to raise finance only when it needs and avoid holding excess cash for longer duration, thus leading to better cash anagement. How issue of CMBs is beneficial? For the year 2009-10, the govt. plans to borrow Rs.450000 cr and its interest cost on outstanding loans is pegged at Rs 2,25,511 cr. This interest cost adds to revenue deficit as well as fiscal deficit. The treasury bills have a variable spread while the ways and means advances carry the same rate of interest as the repo rates. Therefore, in both the cases there is an interest cost, which, given the scale of govt. borrowing, can be massive. The CMBs will carry an overall lower rate of interest and will, thus, benefit the government in the form of lower interest cost. Features of cash management bills 1. CMBs will have the generic character of Treasury Bills and their sale will be subject to the terms and conditions specified in the General Notification No. F.2 (12)-W&M/97 dated 31st March 1998 issued by Govt. of India and as amended from time to time. 2. The tenure, notified amount and date of issue of the proposed Cash Management Bills will depend upon the temporary cash requirement of the Government. However, the tenure of the proposed Bills will be less than 91 days. 3. The proposed Bills will be issued at discount to the face value through auctions, as in the case of the Treasury Bills. 4. The announcement of auction of the CMBs will be made by RBI through separate Press Release to be issued one day prior to the date of auction. 5. The settlement of the auction will be on T+1 basis. 6. The Non-Competitive Bidding Scheme for Treasury Bills will not be extended to CMBs. 7. The proposed Bills will be tradable and qualify for ready forward facility. 8. Investment in CMBs will be reckoned as an eligible investment in Government Securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. Clean Note Policy: Reserve Bank of India has been continuously making efforts to make good quality banknotes available to the members of public. To help RBI and banking system, the members of public are requested to ensure the following: 1. Not to staple the banknotes 2. Not to write / put rubber stamp or any other mark on the banknotes 3. Store the banknotes safely to prevent any damage


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Corporate Governance (Clause 49): Corporate Governance may be defined as “A set of systems, processes and principles

which ensure that a company is governed in the best interest of all stakeholders.” It ensures Commitment to values and ethical conduct of business; Transparency in business transactions; Statutory and legal compliance; adequate disclosures and Effective decision-making to achieve corporate objectives.In other words, Corporate Governance is about promoting corporate fairness, transparency and accountability. Good Corporate Governance is simply Good Business.

Clause 49 of the SEBI guidelines on Corporate Governance as amended on 29 October, 2004 has made major changes in the definition of independent directors, strengthening the responsibilities of audit committees, improving quality of financial disclosures, including those relating to related party transactions and proceeds from public/ rights/ preferential issues, requiring Boards to adopt formal code of conduct, requiring CEO/CFO certification of financial statements and for improving disclosures to shareholders. Certain non-mandatory clauses like whistle blower policy and restriction of the term of independent directors have also been included.

The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE). This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999.

Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005.

It has been formulated for the improvement of corporate governance in all listed companies.

In corporate hierarchy two types of managements are envisaged: Companies managed by board of directors; and Those by a managing director, whole-time director or manager subject to the control and

guidance of the board of directors. As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the

board should comprise independent directors. In the case of a company with a non-executive Chairman, at least one-third of the board

should be independent directors. It would be necessary for chief executives and chief financial officers to establish and

maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form.

The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report.

A company is also required to obtain a certificate either from auditors or practicing company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report.

The clause mandates composition of an audit committee; one of the directors is required to be "financially literate".

It is mandatory for all listed companies to comply with the clause by December 31, 2005.


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Clause 49, when it was first added, was intended to introduce some basic corporate governance practices in Indian companies and brought in a number of key changes in governance and disclosures (many of which we take for granted today). It specified the minimum number of independent directors required on the board of a company. The setting up of an Audit committee, and a Shareholders’ Grievance committee, among others, were made mandatory as were the Management’s Discussion and Analysis (MD&A) section and the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to non-executive directors. A limit was placed on the number of committees that a director could serve on.

In late 2002, SEBI constituted the Narayana Murthy Committee to assess the adequacy of current corporate governance practices and to suggest improvements. Based on the recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the ‘revised Clause 49’) which came into operation on January 1, 2006.

The revised Clause 49 has suitably pushed forward the original intent of protecting the interests of investors through enhanced governance practices and disclosures. Five broad themes predominate. The independence criteria for directors have been clarified. The roles and responsibilities of the board have been enhanced. The quality and quantity of disclosures have improved. The roles and responsibilities of the audit committee in all matters relating to internal controls and financial reporting have been consolidated, and the accountability of top management—specifically the CEO and CFO—has been enhanced. Within each of these areas, the revised Clause 49 moves further into the realm of global best practices (and sometimes, even beyond).

Carbon Finance: Carbon finance is a new branch of Environmental finance. Carbon finance explores the financial implications of living in a carbon-constrained

world, a world in which emissions of carbon dioxide and other greenhouse gases (GHGs) carry a price.

Financial risks and opportunities impact corporate balance sheets, and market-based instruments are capable of transferring environmental risk and achieving environmental objectives.

Issues regarding climate change and GHG emissions must be addressed as part of strategic management decision-making.

This general term is applied to investments in GHG emission reduction projects and the creation (origination) of financial instruments that are tradeable on the carbon market.

Joint Implementation and Clean Development Mechanism: Clean Development Mechanism (CDM), is recognized through the Kyoto Protocol, allowing the offset of emissions in developed countries by the investment in emission reduction projects in developing countries like China, India or Latin America.

Joint Implementation (JI), is another mechanism, allowing investments in developed countries to generate emission credit for the same or another developed country.

World Bank: The World Bank has created the World Bank Carbon Finance Unit (CFU). The World Bank CFU uses money contributed by governments and companies in OECD

countries to purchase project-based greenhouse gas emission reductions in developing countries and countries with economies in transition.

The emission reductions are purchased through one of the CFU's carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol's Clean Development Mechanism (CDM) or Joint Implementation (JI).


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Market value: The market for the purchase of carbon has grown exponentially since its conception in 1996.

The following is the estimated size of the worldwide carbon market according to the World Bank.

Volume (millions metric tonnes, MtCO2): 2005: 718 (330 in Main Allowances Markets & 388 in Project based transactions) 2006: 1,745 (1,134 in Main Allowances Markets & 611 in Project based transactions) 2007: 2,983 (2,109 in Main Allowances Markets & 874 in Project based transactions)

Dollars (millions of USD) 2005: 10,908 (7,971 in Main Allowances Markets & 2,937 in Project based

transactions) 2006: 31,235 (24,699 in Main Allowances Markets & 6,536 in Project based

transactions) 2007: 64,035 (50,394 in Main Allowances Markets & 13,641 in Project based

transactions) Carbon credit Carbon credits are a key component of national and international attempts to mitigate

the growth in concentrations of greenhouse gases (GHGs). The major greenhouse gases emitted by these industries are carbon dioxide, methane,

nitrous oxide, hydrofluorocarbons (HFCs), etc, all of which increase the atmosphere's ability to trap infrared energy and thus affect the climate.

One Carbon Credit is equal to one ton of Carbon. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions

among the group of regulated sources. The idea is to allow market mechanisms to drive industrial and commercial processes in

the direction of low emissions or less "carbon intensive" approaches than are used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere.

Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis.

These carbon off-setters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects.

The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.

This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.

There are two distinct types of Carbon Credits. (1) Carbon Offset Credits COC's and (2) Carbon Reduction Credits CRC's.

Carbon Offset Credits consist of clean forms of energy production, wind, solar, hydro and biofuels.

Carbon Reduction Credits consists of the collection and storage of Carbon from our atmosphere through reforestation, forestation, ocean and soil collection and storage efforts.


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Both approaches are recognized as effective ways to reduce the Global Carbon Emissions crises. Background:

The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions.

The Intergovernmental Panel on Climate Change has observed that: Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes.

The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries.

The market mechanisms were agreed through the subsequent Marrakesh Accords. A credit can be an emissions allowance which was originally allocated or auctioned by

the national administrators of a cap-and-trade program, or it can be an offset of emissions. Capital Account Convertibility (CAC) : Convertibility means the ability of the domestic residents to convert the local currency to any foreign currency at will. The Report of the Committee on Capital Account Convertibility (Tarapore Committee)(RBI, 1997) provided the following working definition of CAC: "freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign / domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. CAC can be, and is, coexistent with restriction other than on external payments". Broadly it would mean freedom for firms and residents to buy overseas assets such as equity, bonds, property and acquire ownership of overseas firms, besides free repatriation of proceeds by foreign investors. Capital Adequacy : In the context of growing size and variety of banking transactions the prescription of minimum fixed capital for banks (as well as financial institutions) was considered inadequate The Committee on Banking Regulation and Supervisory Practices, set up by the Bank for International Settlements (BASEL COMMITTEE) prescribed certain capital adequacy standards taking into account the element of risk in various types of assets in the balance sheet and off-balance sheet business. Under this system, the funded and non-funded items and other off-balance sheet exposures are assigned weights according to the risk perception and banks are required to maintain unimpaired minimum capital funds to the prescribed ratio on the risk weighted assets. In India the Capital adequacy norms were adopted in 1992, following the Basel Accord of 1988. This accord exclusively focussed on credit risk. In the context of financial innovations and growing complexity of financial transactions a new Capital Accord known as Basel II was released by the Basel Committee on Banking Supervision. The revised framework helps banks to determine the capital requirement for credit risk, market risk and operational risk. This involves a 3-pillar approach of Minimum Capital Requirements, Supervisory Review Process and Market Discipline.


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Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems And Controls (CAMELS) : Banks incorporated in India are supervised and awarded supervisory ratings under CAMELS model. The foreign banks operating in India are rated under CALCS which stand for Capital Adequacy, Asset Quality, Liquidity & Compliance and Systems. A system of supervisory rating based on CAMELS is being used to assess the performance and strength and soundness of banks. Capital Accords : The Basel Committee on Banking Supervision published the first Basel Capital Accord in July, 1988 prescribing minimum capital adequacy requirement in banks and the signatory countries fully implemented the accord by the end of 1992. In the subsequent years, increased market volatility as well as incidents such as the Asian crisis, the near collapse of a significant hedge fund in the US and the crisis in several Latin American and emerging economies prompted a new look at the 1988 Capital Accord. Therefore, in July 1999, the Basel Committee released the first proposal to replace the 1988 Capital Accord with a more risk sensitive capital adequacy framework. Capital Accord aims to strengthen the soundness and stability of the International Banking System and diminish existing source of competitive inadequacy among international banks. The framework will be applied on a consolidated basis to internationally active banks. The scope of application will also include, on a fully consolidated basis, any holding company that is the parent entity within a banking group, to ensure that it captures the risk of the whole banking group. As one of the principal objectives of supervision is the protection of depositors, supervisors have to test that individual banks are adequately capitalized on a stand alone basis. Capital Formation : Refers to that part of a country's current output and imports which is not consumed or exported during the accounting period but set aside as additions to its stock of capital goods for use in future productive process - machinery, equipment, plants, buildings, stock of raw material, semi-finished goods, etc. Net capital formation is distinguished from gross capital formation in that it is measured after allowances are made for depreciation, obsolescence and accidental damage to fixed capital. Capital Funds Of Banks : Capital Funds comprise of Tier I capital and Tier II capital as defined under Capital Adequacy Standards. Tier I capital mainly consists of Capital, Statutory reserves, Capital reserves etc, reduced by equity investments in subsidiaries, intangible assets etc. Tier II capital consists of undisclosed reserves, revaluation reserves, general provision and loss reserve, subordinate debt instruments etc. Capital Market : This is an important part of financial sector and refers to a system which provides for facilities and arrangements for borrowing and loaning of long term funds. The sources of funds for market are from household savings, corporate savings, institutional investments-


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foreign and domestic, the surpluses of government sector and non-residents. Capital market consists of primary market and secondary market. The primary market or new issue market facilitates mobilisation of resources through public issue (by prospectus) right issues (through letter of offer) and private placements. Apart from equity shares and preference shares, a number of innovative instruments have been lately introduced in the primary market. The secondary market provides liquidity through marketability of these instruments. Cash Reserve Ratio (CRR) : This term refers to a policy instrument to control money supply. The Reserve Bank of

India Act requires the scheduled banks to maintain a minimum average daily cash balance equivalent to a specified percentage of their time and demand liabilities in India outstanding as on the Friday of the previous fortnight. This is known as Cash Reserve Ratio. The RBI is empowered to vary the Cash Reserve Ratio between 3 percent and 20 percent depending on the prevalent monetary conditions. Total cash reserves actually maintained by a scheduled commercial bank may consist of (1) the minimum CRR of 3% or prescribed CRR (2) additional cash reserves relating to incremental demand and time liabilities (DTL) and (3) excess cash reserves over and above the level required to comply with the prescribed cash reserve requirement or short fall therein. Following the amendment of the Reserve Bank of India Act in 2006, the Reserve Bank, keeping the needs of securing monetary stability in the country, can prescribe CRR for scheduled commercial banks without any floor rate or ceiling rate.

When there is a change in CRR, the first impact is felt by the banks. For banks, a rise in CRR would mean that a larger proportion of their lendable resources will be with RBI, while a fall in the rate will mean a lower proportion will be with the Central Bank. In times of boom, lending will give a higher rate of return to banks. Hence, if they have to keep a large proportion of their funds away from lending and in the form of a deposit with the RBI, it is a loss of opportunity for them. This will bring down their earnings.

An increase in CRR would also mean that money is being sucked out of the system. This would mean that funds are hard to come by and hence banks will have to pay more to depositors in order to induce them to keep their funds with banks. This will push up cost of funds for banks. The banks therefore will also have to raise lending rates in order to meet the increased cost while maintaining their margins.

There may also be an overall impact on companies in terms of scarcity of funds, along with an increase in costs, due to which the overall interest charges for capital intensive companies will increase. A lower lending could lead to a contraction in the activities which might slow down demand in various sectors. Raising CRR is a measure used by the RBI to contain inflation by mopping up excess liquidity in the economy.

Cash Reserve Ratio

In terms of Section 42 (1) of RBI Act, 1934 the RBI prescribes the CRR for Scheduled Commercial Banks (SCBs) without any floor or ceiling rate. At present, effective from the fortnight beginning January 17, 2009, the CRR is prescribed at 5% of a bank’s total of demand and time liabilities adjusted for the exemptions. Incremental CRR: In terms of Section 42 (1-A) of RBI Act, 1934, the SCBs are required to maintain, an additional average daily balance, not be less than the rate specified by the RBI from time to time. At present no incremental CRR is required to be maintained by banks.


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Computation of Demand and Time Liabilities: The liabilities of a bank may be towards banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. Demand Liabilities: Demand Liabilities include all liabilities which are payable on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against LCs/guarantees, balances in overdue FDRs, cash certificates and cumulative/recurring deposits, outstanding TTs, MTs, DDs, unclaimed deposits, credit balances in the CC account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others. Time Liabilities : Time Liabilities are those which are payable otherwise than on demand. These include FDs, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against LC, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits. Other Demand and Time Liabilities (ODTL): ODTL include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the “Banking System” which are not in the nature of deposits or borrowing. Such liabilities may arise due to items, like (i) collection of bills on behalf of other banks, (ii) interest due to other banks and so on. Participation Certificates issued to other banks, the balances outstanding in the blocked account pertaining to segregated outstanding credit entries for more than 5 years in inter-branch adjustment account, the margin money on bills purchased / discounted and gold borrowed by banks from abroad, also should be included in ODTL. Assets with the Banking System: Assets with the banking system include balances with banks in current accounts, balances with banks and notified financial institutions in other accounts, funds made available to banking system by way of loans or deposits repayable at call or short notice of a fortnight or less and loans other than money at call and short notice made available to the Banking System. Any other amounts due from banking system which cannot be classified under any of the above items are also to be taken as assets with the banking system. Borrowings from Banks Abroad: Loans/borrowings from abroad by banks in India will be considered as ‘liabilities to others’ and will be subject to reserve requirements. Upper Tier II instruments raised and maintained abroad shall be reckoned as liability for the computation of DTL for the purpose of reserve requirements. Arrangements with Correspondent Banks : The amount received by correspondent banks has to be shown as ‘Liability to the Banking System’ by them and not as ‘Liability to others’. This liability could be netted off by the correspondent banks against the inter-bank assets. Likewise sums placed by banks issuing drafts/interest/dividend warrants are to be treated as ‘Assets with Banking System’ in their books and can be netted off from their inter-bank liabilities. Liabilities not to be included for DTL/NDTL computation 1. Paid up capital, reserves, any credit balance in the Profit & Loss Account, amount of loan

taken from RBI and amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI.

2. Net income tax provision. 3. Amount received from DICGC towards claims and held by banks pending adjustments

thereof.


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4. Amount received from ECGC by invoking the guarantee. 5. Amount received from insurance company on ad-hoc settlement of claims pending

judgment of the Court. 6. Amount received from the Court Receiver. 7. The liabilities arising on account of utilization of limits under Bankers Acceptance

Facility (BAF). 8. DRDA subsidy of Rs.10,000/- kept in Subsidy Reserve Fund account in the name of Self

Help Groups. 9. Subsidy by NABARD under Investment Subsidy Scheme for

Construction/Renovation/Expansion of Rural Godowns. 10. Net unrealized gain/loss arising from derivatives transaction under trading portfolio. 11. Income flows received in advance such as annual fees and other charges which are not

refundable. 12. Bill rediscounted by a bank with eligible financial institutions as approved by RBI. 13. Provision not being a specific liability arising from contracting additional liability and

created from profit and loss account. 14. SCBs are not required to include inter-bank term deposits/term borrowing liabilities of

original maturities of 15 days and above and up to one year in “Liabilities to the Banking System” (item 1 of Form “A”). Similarly banks should exclude their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in “Assets with the Banking System” (item III of Form A) for the purpose of maintenance of CRR. The interests accrued on these are also exempted from reserve requirements.

Exempted Categories: 1. Liabilities to the banking system in India as computed under Clause (d) of Explanation to

Section 42(1) of the RBI Act, 1934. 2. Credit balances in ACU (US$) Accounts. 3. Transactions in Collateralized Borrowing and Lending Obligation with Clearing Corpn of

India Ltd. (CCIL). Loans out of FCNR (B) Deposits and IBFC Deposits : Loans out of FCNR [B] Deposits and Inter-Bank Foreign Currency (IBFC) Deposits should be included as part of bank credit while reporting in Form ’A’. For the purpose of reporting, banks should convert these foreign currency liabilities / assets in 4 major currencies into rupees at FEDAI noon mean rate on the reporting Friday. Procedure for Computation of CRR: A lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning November 06, 1999. Maintenance of CRR on Daily Basis: With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra fortnight cash flows, all Scheduled Commercial Banks are required to maintain minimum CRR balances up to 70% of the average daily required reserves for a reporting fortnight on all days of the fortnight with effect from the fortnight beginning December 28, 2002. Interest Payment: No interest is paid on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007. Fortnightly Return in Form A : Under Section 42 (2) of RBI Act, 1934, all SCBs are required to submit to RBI a provisional return in Form ‘A’ within 7 days from the expiry of the relevant fortnight. The final Form ‘A’ is required to be sent to RBI within 20 days from expiry of the relevant fortnight.


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Penalties: From the fortnight beginning June 24, 2006, penal interest will be: (i) In cases of default in maintenance of CRR requirement on a daily basis (i.e. 70%), penal interest will be recovered on default amount for that day @ 3% above Bank Rate. If the shortfall continues, penal interest will be recovered at 5% p.a. above the Bank Rate. (ii) In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be recovered as envisaged in sub-section (3) of Section 42 of RBI Act, 1934. Central Bank : Conducting a special class of business distinct from commercial banking, the primary function of Central Bank is to serve as a lender of last resort so as to stabilise the banking system. In order to ensure monetary discipline and healthy growth of economy the Central Bank has been entrusted with function of monopoly of note issue, keeping the nation's gold and foreign exchange reserves, providing banking services to the government and other banks. The central bank is an important source of advice on economic policy matters to the government. As the monetary authority it conducts monetary policy to influence economic trends through the cost and availability of credit and regulates the operations of banks and non-banking financial companies. Central Record And Documentation Centre (CRDC) : This was established in August 1981 in Pune with the object of serving as a repository of non-current permanent records and as the central archives of the Reserve Bank of India for research purposes. It maintains an archival of RBI library, and provides for repairs and rehabilitation of records of RBI in a scientific manner and research facilities for the staff of the Bank as well as students from other institutions. Channels Of Influence Of Intervention In Exchange Rates : The four channels of influence of intervention in exchange rates are: 1) Monetary Policy Channel - Effect on domestic interest rates, when intervention is not fully sterilized; 2) Portfolio Balance Channel - Composition of domestic and foreign assets held by the main market participants changes as a result of sterilized intervention; 3) Signalling or Expectations Channel - Sterilized intervention changes private agents' exchange rate expectations by giving signals about the future stance of monetary policy and 4) Order Flow or Micro Structure Channel - impact of intervention on buy or sell orders of traders who follow past market trends. Clearing Corporation Of India Ltd (CCIL) : This was set up in November 2002 to serve as an industry-wise organisation for clearing and settlement of trades in foreign exchange government securities and other debt instruments. The CCIL manages various risks and reallocates risks among the participants. CCIL reduces the liquidity requirements of the market and thereby liquidity risk of the system. Major commercial banks, financial institutions and primary dealers own it.


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Code Of Banks Commitment To Customers : A code evolved by the Indian Banks' Association and Banking Codes and Standard Board of India to provide a framework for minimum standard of banking services which individual customers can legitimately expect. It sets out a minimum standard of customer service with reliability, transparency and accountability and outlines how each bank expects to deal with the customers day to day requirements and accordingly what each customer should reasonably expect from his bank. The code was released in July 2006. Coinage : Coins are minted in the denominations of 10paise, 20paise, 25paise, 50paise, 1rupee, 2rupees, and 5rupees. Coins up to 50paise are called small coins and other coins are termed as rupee coins As per the provisions of Coinage Act 1906, coins can be issued up to denominations of Rs 1000/-. The responsibility for coinage vests in the Government of India in terms of Coinage Act 1906. Collateralised Borrowing And Lending Obligation (CBLO) : CBLO is a money market instrument. Conceptually, it is (1) an obligation by the borrower to return the money borrowed, at a specified future date, (2) an authority to the lender to receive money lent, at a specified date and (3) an underlying charge on securities held in the custody with Clearing Corporation of India Limited (CCIL) for amount borrowed. CBLO is a new money market instrument developed by CCIL. It is a hybrid of repo (backed by securities) and call money products (short term). Consistent with the move to phase out non-bank participants from the call money market, CBLO was introduced to facilitate participation of non-bank entities in money market. Borrowing under CBLO is against the collateral of Government securities. CBLO also has certain other features such as maturity period ranging from 1day to 1year and is issued in electronic book entry form only. The CCIL provides the trading platform and market participants (Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Non-Banking Financial Companies, Corporations etc) decide the rate at which it is issued and traded.


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Commercial Paper (CP) Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to

enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time.

Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP.

A corporate would be eligible to issue CP provided : (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s / institution/s.

All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the CRISIL or the ICRA or the CARE or the FITCH.

The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue.

The maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value).

CP can be issued as a "stand alone" product. The aggregate amount of CP from an issuer shall be within the limit as approved by its

Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower.

Banks and FIs will, however, have the flexibility to fix working capital limits duly taking into account the resource pattern of companies' financing including CPs.

An FI can issue CP within the overall umbrella limit fixed by the RBI, i.e., issue of CP together with other instruments, viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

CP may be issued on a single date or in parts on different dates provided that in the latter case, each CP shall have the same maturity date.

Every renewal should be treated as a fresh issue. Every issuer must appoint an IPA for issuance of CP. Only a scheduled bank can act as an Issuing and Paying Agent (IPA) for issuance of

CP.


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CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI).

CP can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories approved by and registered with SEBI. Subscribers are encouraged to prefer exclusive reliance on dematerialised form of issue / holding.

CP will be issued at a discount to face value as may be determined by the issuer. No issuer shall have the issue of CP underwritten or co-accepted. In view of CP being a 'stand alone' product, it would not be obligatory in any manner on

the part of the banks and FIs to provide stand-by facility to the issuers of CP. Non-bank entities including corporates may also provide unconditional and irrevocable

guarantee for credit enhancement for CP issue provided the guarantor has a credit rating at least one notch higher than the issuer given by an approved credit rating agency; and the offer document for CP properly discloses the net worth of the guarantor company, the names of the companies to which the guarantor has issued similar guarantees.

FIMMDA may prescribe any standardised procedure and documentation that are to be followed by the participants,

ISIN: Means the International Securities Identification Number issued as a unique identification number to each Commercial Paper which is dematerialized.

Certificate of Deposit (CD)

Certificates of Deposit (CDs) is a negotiable money market instrument and issued in

dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.

Eligibility: CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Aggregate Amount: Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments, viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh and in the multiples of Rs.1 lakh thereafter.

CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.

The maturity period of CDs issued by banks should be not less than 7 days and not more than one year.

The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

CDs may be issued at a discount on face value.


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Banks / FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based.

The issuing bank / FI are free to determine the discount / coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance

with a pre-determined formula that indicates the spread over a transparent benchmark. Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio

(CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs. Physical CDs are freely transferable by endorsement and delivery. There is no lock-in period for the CDs. Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the Reserve

Bank may relax these restrictions for temporary periods through a separate notification. Banks / FIs should issue CDs only in the dematerialised form. However, according to the

Depositories Act, 1996, investors have the option to seek certificate in physical form. Further, issuance of CDs will attract stamp duty. There will be no grace period for repayment of CDs. If the maturity date happens to be holiday, the issuing bank should make payment on the

immediate preceding working day. Banks / FIs may, therefore, so fix the period of deposit that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.

Banks / FIs may account the issue price under the Head "CDs issued" and show it under deposits.

Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time.

FIMMDA may prescribe any standardized procedure and documentation that are to be followed by the participants, in consonance with the international best practices.

Banks should include the amount of CDs in the fortnightly return under Section 42 of the Reserve Bank of India Act, 1934 and also separately indicate the amount so included by way of a footnote in the return.

Consolidated Supervision : Consolidated Supervision refers to system whereby the RBI undertakes consolidated supervision of bank groups (with related to entities) where the controlling entity is an institution (banks, financial institution or NBFCs) which comes under the regulatory/supervisory purview of the RBI. The components of consolidated supervision are (1) Consolidated financial statements (CFs) (2) consolidated prudential reports (CPR) and (3) application of certain prudential regulations like capital adequacy, large exposure, risk concentration etc. on group basis. CFs would include consolidated balance sheet, profit and loss account and other statements including cash flow statements Contagion : Phenomenon when one country's economy is shaken because of changes in the asset prices of another country's financial market.


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Corporate Governance : The concept of Corporate Governance is differently defined. It means doing every thing better to improve relationship between companies or organisations and their shareholders and other stakeholders. It is also defined as a system by which business operations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decision on corporate affairs. According to the World Bank, Corporate Governance is about promoting corporate fairness, transparency, and accountability. Corporate governance is becoming crucial for banks and financial institutions to promote effective risk management and financial stability. As part of financial sector reforms banks are required to follow due diligence procedures for appointment of directors on the boards of private sector banks and regarding role and responsibilities of independent directors. Banks are also required to take steps to strengthen risk management framework and constitute various committees in conformity with corporate governance. The purpose is to ensure that owners and managers of banks are persons of sound integrity so as to protect the interest of depositors and integrity of financial system. Coupon Rate : Refers to the interest rate fixed to the bond/security. Credit : The term refers to the use of someone else's funds in exchange for a promise to pay (usually with interest) at a later date e.g. short term loans from a bank. In balance of payments accounting, it denotes an item such as exports that earns a country foreign currency. Bank credit is an important variable affecting consumption and capital formation. Credit Policy : Refers to the policy of using central banking instruments for varying the cost, availability and direction of credit or "loans and discounts" extended by the banks to their customers. The capacity of banks to provide credit depends on their cash reserves (cash in hand and balances with Reserve Bank of India; substantial portion of the reserves is held in the form of balance with RBI). These reserves increase through a rise in the deposits of banks or their borrowings from Reserve Bank or a sale of their investments. Regulations of credit essentially means regulation of quantum of reserves of banks. If the RBI desires to bring about credit expansion it would adopt measures to help augment reserves; if credit expansion is to be restricted, measures to curtail the reserves are adopted. Credit Information Companies CICs companies inform banks whether a prospective borrower is creditworthy or not

based on his past payment track record RBI has recently issued ‘in-principle-approval’ to four companies to set up Credit

Information Companies (CICs).


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These are: (i) Credit Information Bureau (India) Ltd, (ii) Equifax Credit Information Services Pvt. Ltd, (iii) Experian Credit Information Company of India Pvt. Ltd and (iv) Highmark Credit Information Services Pvt. Ltd.

The approvals were under the Credit Information Companies (Regulation) Act, 2005. Credit Information Companies are formed and registered under the Companies Act, 1956. RBI is the approving authority. Authorized capital should be a minimum of Rs.30 crore and the Issued capital not be less

than Rs.20 crore. The paid up capital should not be less than 75% of the issued capital. “Credit Information” means any information relating to: (a) Credit facilities granted or to

be granted, by a credit institution to any borrower (b) Nature of security (c) Guarantee furnished or any other non-fund based facility granted (d) Creditworthiness of any borrower of a Credit institution.

Credit Information Bureau Of India Ltd (CIBIL) : In a Nutshell: This is an agency for compilation and dissemination of credit information covering data on defaults to the financial system. Banks and financial institutions are required to submit periodical requisite data to CIBIL and report to the RBI. With a view to strengthen the legal mechanism and facilitating credit information bureau to collect, process and share credit information on borrowers of banks /FIs the Credit Information Companies' Regulation Act was passed and came into vogue with the President of India giving assent in June 2005. The Act empowers CIBIL to collect information relating to all borrowers and confers upon the RBI the power to determine policy in respect of functioning of credit information companies. CIBIL: In detail: CIBIL is India’s first credit information bureau. It is a repository of information, which

contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its Members in the form of credit information reports (CIR).

Initially, CIBIL’s equity was held by SBI, HDFC, Dun & Bradstreet Information Services India and Trans Union International Inc. Later on the shareholding was diversified to include other banks.

Segments for credit reports: CIBIL is a composite Credit Bureau. The Consumer Credit Bureau covers credit availed by individuals while the Commercial Credit Bureau covers credit availed by non-individuals such as partnership firms, private and public limited companies, etc.

Members of CIBIL: Banks, Financial Institutions, State Financial Corporations, Non-Banking Financial Companies, Housing Finance Companies and Credit Card Companies are Members of CIBIL. Recently RBI has instructed Cooperative banks also to furnish data to Cibil.

Operations of CIBIL: For banks to obtain the payment history of an applicant, they must have access to the applicant’s complete credit record spread over different institutions. CIBIL collects credit-related data and collates such data to create and distribute credit reports to Members.

Source of information for CIBIL: CIBIL primarily gets information from its Members only and at a subsequent stage supplements it with public domain information in order to create a truly comprehensive snapshot of an entity’s financial track record.


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Credit Information Report: A Credit Information Report (CIR) is a factual record of a borrower’s credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors make informed lending decisions - quickly and objectively.

Information Security at CIBIL: The security of the Members’ data is of paramount importance to CIBIL. CIBIL’s security measures are aligned with global ‘best practices’, stringent risk management standards and are subject to regular audits by independent auditors. CIBIL has adopted state-of the-art technology to provide information security.

Type of Information with CIBIL: The CIR includes the information such as (a) borrower's name and address (b) in case of individuals the identification numbers, passport ID, voters ID, date of birth (c) in case of non-individuals, DUNS number, registration number, legal constitution, (d) records of all the credit facilities availed by the borrower, past payment history, amount overdue, number of inquiries made on that borrower, by different Members, suit-filed status.

What type of information is NOT included in the CIR?: The CIR does not contain income / revenue details, amount(s) deposited with the bank, details of borrowers’ assets, value of asset(s) mortgaged, details of investment(s).

When is a credit facility classified as ‘default’? : CIBIL does not classify any accounts as default accounts. It merely reflects the information after the Member has classified it as such. The number of days past due and / or asset classification as per RBI definition as submitted by Members is reflected in the CIR.

Access To CIBIL Information Who can access CIRs?: Reports can be accessed by Members on the principle of

reciprocity i.e. only those who have provided all their data to CIBIL are permitted to access CIRs. Members can do so only to take valid credit decisions. Disclosure to any other person or entity is prohibited.

CIR to the borrower: It is not provided to borrowers. But if a Member has drawn a report on that borrower, a copy of the same can be obtained from the Member.

CIRs to credit providers in other countries: CIBIL will provide credit information reports only to its Members in India.

Application of Right to Information Act, 2005: The Act is not applicable on CIBIL, as CIBIL is not a 'Public Authority' as defined under Sec 2(h) of the Right to Information Act, 2005.

Lending Decisions: The CIR only provides available factual credit information and does not provide any opinion, indication or comment pertaining to whether credit should or should not be granted. The credit grantors who have received an application for credit will make the credit decision. CIBIL does not grant or deny credit.

Benefits to borrower from CIBIL: CIBIL’s CIRs are aimed at helping credit grantors make fast and objective lending decisions. This will contribute to a more competitive credit marketplace among Credit Grantors. With a Bureau in place, responsible customers can expect faster and more competitive services at better terms from the Credit Grantors.

Rectification of inaccurate Information in Credit Report: If a person finds inaccuracy in the information about his, he can contact the credit grantor from whom he availed the loan and request the necessary changes. The credit grantor will then report the change to CIBIL and CIBIL will make the necessary updates in records.


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Credit Risk Measurement : The Basel Accord permit Banks a choice between two broad methodologies for calculating their capital requirements for credit risk. i) Standardised Approach: One alternative will be to measure credit risk in a standardised manner, supported by external credit assessment. ii) Internal Rating Based Approach: Subject to certain minimum conditions and disclosure requirements, banks that have received supervisory approval to use IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD) and effective maturity (M). Under IRB Approach, the accord has made available two broad approaches: a foundation and an advanced. Under the foundation approach, as a general rule, banks provide their own estimates of PD and rely on supervisory estimates for other risk components. Under the advanced approach, banks provide for more of their own estimates of PD, LGD and EAD and their own calculation of M, subject to meeting minimum standards. Currency : Paper currency, a medium of exchange, stands out as an important landmark in the evolution of payment system for various transactions, from the primitive barter of early societies to coins, credit cards and electronic money. As against physical coins possessing intrinsic value, the paper currency represents a promise to pay the physical equivalent or the underlying value. In the West, currency was introduced around the 17th century. In India up to 1861 from the latter part of the 18th century, banks were free to issue currency notes which were payable to bearer on demand. These promissory notes, convertible into coins on demand were termed as bank notes. Issue of official Government of India paper currency commenced in 1861 with the enactment of Paper Currency Act. With the formal inauguration of the Reserve Bank of India on 1-4-1935, the RBI took over the function of issuing notes. The Indian currency is called Indian rupee and sub-denomination is called the paise. Currency Board : Currency Board issues currency in accordance with certain strict rules; the Board prints domestic currency and commits itself to converting it on demand to a specified currency at fixed rate of exchange. To make this commitment credible the board holds reserves of foreign currency (or of gold or some other liquid asset) equal to at least 100%of the domestic currency issue at the fixed rate of exchange. The Board issues currency only when there are enough foreign assets to back it. And it does little else; no open market operations; no lending to the Government; no guarantee of banking system. The main advantage of Currency Board Systems is it is easy to run. More over a Currency Board compels Governments to adopt a responsible fiscal policy. If the budget is not balanced the government has to persuade private banks to lend to it. Bullying the Central bank to print money is no longer an option; the currency board therefore will tend to produce more prudent fiscal policies than a malleable Central bank will.


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Currency Chests : Currency chests are storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank of India. The Reserve Bank of India has authorised selected branches of banks to establish Currency Chests in order to facilitate distribution of notes and coins across the country through other bank branches in their area of operation. The currency chest is like a miniature Issue Department and notes held in the chests are not deemed to be in circulation and the coins held in chest form part of Issue Department. Currency Management : This function involves designing of currency notes, issue and distribution of fresh notes and coins, management of inventory of notes and accounting withdrawal of soiled notes from circulation and their destruction, note exchange facilities and anti-counterfeit measures. Currency Options : A contract where the purchaser of the option has the right but not the obligation to either purchase (call option) or sell (put option) and the seller (or writer) of the option agrees to sell (call option) or purchase (put option) an agreed amount of a specified currency at a price agreed in advance and denominated in another currency (known as the strike price) on a specified date (European Option) or by an agreed date (American Option) in the future. Currency Risk : The possibility that exchange rate changes will alter the expected amount of principal and return of the lending or investment. Currency Verification And Processing System : This is an electronic mechanical device designed for examination, authentication, counting, sorting and online destruction of notes which are misfit for further circulation. The system is capable of sorting the notes on the basis of denomination, design and level of shortage. Notes are sorted into fit, unfit, reject and suspect categories. Current Account Convertibility : Refers to the process of easing restrictions on current international transactions and liberalization for payment of current transactions involving foreign exchange. This is formalized by the country accepting the obligations of Article (Vii) of the International Monetary Fund to refrain from imposing restrictions on the making of payments and transfers for current international transactions. With the introduction of Current account convertibility, Authorised Dealers have been delegated extensive powers to provide foreign exchange for current account transactions purposes.


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Dated Government Securities:

Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly).

The tenor of dated securities can be up to 30 years. The Public Debt Office (PDO) of the Reserve Bank acts as the registry / depository of

Government securities and deals with the issue, interest payment and repayment of principal at maturity.

Most of the dated securities are fixed coupon securities. The nomenclature of a typical dated fixed coupon Government security contains

following features - coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017 would mean : Coupon : 7.49% paid on face value Name of Issuer : Government of India Date of Issue : April 16, 2007 Maturity : April 16, 2017 Coupon Payment Dates : Half-yearly (October16 and April 16) every year Minimum Amount of issue/ sale : Rs.10,000 In case there are two securities with the same coupon and are maturing in the same year,

then one of the securities will have the month attached as suffix in the nomenclature. Just as in the case of Treasury Bills, dated securities of both, Government of India and

State Governments, are issued by the Reserve Bank through auctions. The Reserve Bank announces the auctions a week in advance through press releases. Government Security auctions are also announced through advertisements in major

dailies. The investors are, thus, given adequate time to plan for the purchase of government securities through such auctions.

Debt Recovery Tribunals (DRT) : These tribunals are established under the Recovery of Debt due to Banks and Financial Institutions Act 1993 for expeditious adjudication and recovery of debts due to Banks and financial institutions and for connected matters or incidental there to. Cases of recovery can be filed by Banks and financial institutions with the DRT where the amount of debt is not less than Rs 10 lakh. Deflation : Denotes persistent fall in general price levels of goods and services. It should not be

confused with decline in prices in one economic sector or fall in inflation rate (known as disinflation). While productivity driven deflation in which costs and prices are pushed lower by technological advances is beneficial to the economy that reflecting sharp slump in demand, excess capacity and shrinking money supply is harmful to the economy.

Deflation is a situation where a sustained decline in the general price level of goods and services takes place. The deflation occurs when the inflation rate falls below zero percent. Deflation does not represent a temporary fall in prices. Deflation can also be called a negative inflation rate. While the inflation reduces the real value of money over time, the deflation increases the real value of money.


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UK experienced deflation of approx 14% in 1922 and US faced it around 1930 when the rate was around 10%.

Causes of deflation : The deflation is caused by a combination of (a) supply and demand for goods and (b) the supply and demand for money.

Effect of deflation : Due to lower demand, there is decline in production leading to lower capacity utilisation and rendering the capacities idle, leading to higher cost of production resulting in losses to the producers. Further due to lower activity, there is increasing unemployment impacting the purchasing power and leading to further reduction in demand. Since the businesses are unable to make enough profit they are liquidated.

Delivery Versus Payment: Execution of trade and trade settlements are the two stages involved in securities and funds transactions. There are two types of settlement systems. (i) Differed Net Settlements (DNS) and (ii) Real Time Gross Settlements (RTGS) In DNS all claims and counter claims of participants are accumulated over a period of time and netted out to arrive a multilateral net payment position. The RTGS on the other hand represents settlement of any transaction involving claims and counter claims instantly on gross basis, thereby obviating the need for clearing arrangement. While netting out under DNS reduces the liquidity requirement for the system, RTGS mechanism eliminates default risks. The application of principles of RTGS in the context of securities settlement is called Delivery Vs Payment System. In the case of Government securities transactions the selling banker signs a form for transfer of securities and the buying bank authorises transfer of funds from its account with the RBI. Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions. There are three types of DvP settlements, viz., DvP I, II and III which are explained below; i. DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant. ii. DvP II – In this method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to arrive at the fi nal payable or receivable position which is settled. iii. DvP III – In this method, both the securities and the funds legs are settled on a net basis and only the fi nal net position of all transactions undertaken by a participant is settled. Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode. Demand For Money : A term often used in the context of the study of inter- relationship between money, output and prices, to explain why individuals and business hold money balances. The important motivations for holding money balances are (i) transaction demand signifying that people demand money to purchase goods and services (ii) asset demand relating to the desire to hold a very liquid risk free asset. In other approaches money holding is said to be resting on the basic variables of income and rate of return.


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Demonetization : Refers to the policy of removal of certain currency from circulation or the discontinuance of the monetary unit of a nation the value of which was previously defined in terms of precious metal. The standard money made of that metal is then said to be demonetised but it may continue to circulate as Fiduciary Money. This measure is resorted to check black market operation and tax evasion. Rs. 1000 and Rs.10000 banknotes, which were then in circulation were demonetized in January 1946, primarily to curb unaccounted money. The higher denomination banknotes in Rs.1000, Rs.5000 and Rs.10000 were reintroduced in the year 1954, and these banknotes (Rs.1000, Rs.5000 and Rs.10000) were again demonetized in January 1978. Deposit Insurance And Credit Guarantee Corporation (DICGC) : This Corporation was established in January 1962, under the Deposit Insurance Corporation Act, 1961 for the purpose of providing insurance cover to the bank depositors, particularly small depositors against the risk of loss arising out of bank failures. All commercial banks including Local Area banks Regional Rural banks are to be registered under the Scheme. All specified cooperative banks like State cooperative banks and Central cooperative banks come under its ambit. As for the Credit Guarantee Scheme it is optional for the credit institutions. The Credit Guarantee Scheme is intended to provide necessary incentive to banks and financial institutions for giving credit to small borrowers, (including small farmers) to priority sector, to small-scale industries, etc; there is legislative proposal to do away with credit guarantee function of the corporation and to introduce an alternative scheme. Depreciation : In accounting, this term means calculation, by any one of the standardised methods of the decline in the value of an asset. Depression : Denotes an economic condition characterised by lengthy period of low business activity when prices remain low, gross domestic product falls, purchasing power is sharply reduced and unemployment is high. Derivatives : Financial derivatives are basically contingent contracts whose values are derived from some underlying financial instruments like currency, bonds, stock indices, and commodities etc, whose future price movements are uncertain. Derivatives shift the risk from the buyer of the derivative product to the seller and hence are effective risk management tools. Derivatives are used to protect assets from erosion in value due to market volatility enhancing income by making a two-way price movement or making quick money by taking advantage of the volatile price movement. The popular derivative products are forward rate agreement, interest rate futures, interest rate swaps, option contracts etc.


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Devaluation : With reference to a monetary unit, it implies a reduction in its metallic content as prescribed by law or the lowering of the exchange rate of one nation's currency in terms of the currencies of other nations. Devaluation is introduced for improving relative competitiveness in the international trade. It is resorted to as a corrective action towards solving balance of payment difficulties. Developed Countries : Developed countries are those who have achieved (currently or historically) a high degree of industrialisation, and which enjoy the higher standards of living. The level of income in these countries are sufficient to generate the required saving for future investments. As per the World Bank's classification these are the countries (high-income) with per capita Gross National Income $3466 and more in 2005. Developing Countries : It is a group of countries that have not yet reached the stage of economic development characterised by the growth of industrialisation, nor a level of a national income sufficient to yield the domestic savings required to finance the investment necessary for further growth. There are currently about 125 developing countries with populations over 1 million. As per the World Bank's classification these are the countries (middle-income) with per capita Gross National Income between $876 and $3465 in 2005. Digital Certificates Digital certificates are the equivalent of a driver's license, a passport , or any other form

of identity. The only difference is that a digital certificate is used in conjunction with a public key encryption system.

Digital certificates are electronic files that simply work as an online passport. Digital certificates are issued by a third party known as a Certification Authority such as

VeriSign or IDRBT. These third party certificate authorities have the responsibility to confirm the identity of

the certificate holder as well as provide assurance to the website visitors that the website is one that is trustworthy and capable of serving them in a trustworthy manner.

Digital certificates have two basic functions. The first is to certify that the people, the website, and the network resources such as

servers and routers are reliable sources, in other words, who or what they claim to be. The second function is to provide protection for the data exchanged from the visitor and

the website from tampering or even theft, such as credit card information. A digital certificate contains the name of the organization or individual, the business

address, digital signature, public key, serial number, and expiration date. When you are online and your web browser attempts to secure a connection, the digital

certificate issued for that website is checked by the web browser to be sure that all is well and that you can browse securely.


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This allows the browser to quickly check for problems, abnormalities, and if everything checks out the secure connection is enabled.

When the browser finds an expired certificate or mismatched information, a dialog box will pop up with an alert.

There are many certificate-enabled applications such as online banking, Structured

Financial Messaging Systems (SFMS), Public Debt Office-Negotiable Dealing System (PDO NDS), Electronic Data interchange (EDI), Electronic Fund Transfer (EFT), Secure Electronic mail, etc. To access these applications securely, you will need to have a digital certificate.

IDRBT Certifying Authority will issue digital certificate for employees of Banks and

Financial Institutions. IDRBT, an autonomous institution established by Reserve bank of India (RBI), is the Certifying Authority in India licensed by the Controller of Certification Authorities (CCA).

The licensing of IDRBT CA by CCA is an indication to the public that it has met the stringent regulatory requirements established by the Controller.

Our Bank has a Registration Authority Office at Department of Information Technology Wing, HO Bangalore which is handling collection of application and forwarding the same to IDRBT CA for issuing digital certificate.

Digital certificates issued by IDRBT CA fall under the following Classes. o Class 1 Certificate o Class 2 Certificate o Class 3 Certificate

The Class 1 Certificates can be used for Secure Mail applications and for Digital Signatures.

Class 2 Certificates can also be used for Digital Signature and Encryption of messages. Class 3 Certificates can be used for Digital Signature, Object Signing and Secure Server. Canara Bank: Our employees should apply for Class 2 Certificates only, unless the

certificate sought is for Servers. Smart cards, and other cryptographic tokens, are suitable for very secure applications. Smart cards require card readers and related drivers. E-tokens require e-token drivers only. E-tokens are easy to carry it around. Hence, we are issuing e-tokens to our employees Officers and above only are issued with

digital certificate Certificates issued by IDRBT CA are generally valid for two year. Employee should take note of the expiry date of his Certificate and renew it prior to its

expiry. The Registration Authority will notify in advance before the expiry of the certificate on

their web-page Suspension is the process of making a certificate to make it invalid temporarily.

Revocation is the process of making a certificate to be invalid permanently. IDRBT CA provides a service that allows you to suspend or revoke certificate. Employee

would revoke it when he is certain it was compromised. An organisation can also revoke a certificate e.g. when an employee leaves. The application form for the Certificate revocation/suspension is available in the IDRBT

CA repository or Payment System Download section. Canara Bank Employee need to apply online for a certificate revocation on the IDRBT

CA Website (https://10.0.65.60).


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The Digital Certificate will be revoked according to the IDRBT CACPS. Direct Quotation : Foreign exchange rate which values a foreign currency in terms of the national currency. For instance, dollar quoted in Tokyo, in yen terms. Directed Lendings : Loans given by banks in accordance with the direction of Government and Reserve Bank is referred to as directed lending. The objective of directed lending is to canalise credit into areas where it would not have flowed in the normal course and hence it is an institutional correction to direct the credit flow into the desired areas. Disintermediation : Circumvention of the banking system as a source of finance. Dual listing: Put simply, it’s a process that allows a company to be listed on the stock exchanges of two different countries. The company’s shares, which enjoy voting rights, can be traded on both the bourses. When two companies in two countries enter into an equity alliance without an outright merger, dual listing means continued listing of the firms in both the countries. The key point to note here is that shareholders can buy and sell shares of both the companies on bourses in the two countries. In other words, if the Bharti-MTN deal happens with a dual listing rider, a Bharti share can be sold on the Johannesburg Stock Exchange and vice-versa. How common is it? Well, not exactly, mainly because of the complexities involved. However, there are enough examples to prove that it works: Royal Dutch Shell (UK/ Netherlands), BHP Billiton (Australia/ UK) Rio Tinto Group (Australia/ UK), Unilever (UK/ Netherlands). Is it allowed in India? No. Dual listing will need major amendments to key corporate laws of the country. Like... :To begin with, the existing Companies Act and its proposed successor would both need to be amended. In the case of a dual listed company, an investor can buy shares in one country and sell it in an overseas market. That would need the Indian rupee to be fully convertible, something that the central bank is yet to allow. The Foreign Exchange Management Act (FEMA) too would need to be amended. Besides, domestic trading in shares denominated in foreign currency cannot happen without the permission of the Reserve Bank of India. As it stands now, the proposed deal between Bharti and MTN does not require dual listing. However, if that happens, Bharti shares will have to be listed on the Johannesburg Stock Exchange, and MTN on NSE or BSE. In addition, the companies will need government permission to allow composition of a board identical to that of a foreign company. It will need permission for trading of shares denominated or expressed in a foreign currency (if shares are expressed in Rupee and shares of foreign company are expressed in local currency, the equilisation will be disturbed). Therefore, it may be necessary to permit trading of shares expressed in a common currency, say dollar.


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How will dual listing benefit MTN shareholders? For one, MTN will remain a separate entity that cannot be subsumed into Bharti, a concern for the South African government as of now. Post-dual listing, the issue of merger would become irrelevant. It will also help circumvent the Indian FDI rules that makes minimum 26% shareholding in Indian hands mandatory. Ditto with the South African law — Black Economic Empowerment Act, 2003 — which stipulates that a certain percentage of ownership should be in the hands of black people. How is it different from ADRs/GDRs? In case of ADRs/GDRs, the companies deposit their equity shares with a custodian, say a bank, which in turn issues depository receipts to the investors. These receipts have all the rights, barring voting rights. Investors can convert ADRs/GDRs into underlying shares, which can be issued only within India and traded only on domestic bourses. Doorstep Banking (RBI Guidelines dt. May 24, 2007) Services to be offered: (a) Corporate Customers / Government Departments / PSUs etc.

(i) Pick up of cash (ii) Pick up of instruments (iii) Delivery of cash against cheques received at the counter (iv) Delivery of demand drafts

(b) Individual Customers / Natural persons: (i) Pick up of cash (ii) Pick up of instruments (iii) Delivery of demand drafts

Modalities of Delivery: (a) Through own employees (b) Through Agents. Where banks engage the services of Agents for delivery of services,

it should be ensured that the policy approved by the Board lays down the broad principles for selection of Agents and payment of fee / commission etc. Banks to refer the guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks issued by RBI on 3.11.2006.

Delivery process: (i) Cash collected from the customer should be acknowledged by issuing a receipt on

behalf of the bank; (ii) Cash collected from the customer should be credited to the customer’s account on the

same day or next working day, depending on the time of collection; (iii) The customer should be informed of the date of credit by issuing a suitable advice. (iv) Delivery of demand draft should be done by debit to the account on the basis of

requisition in writing / cheque received and not against cash or instruments collected at the doorstep;

(v) Cash delivery services may be offered to the corporate clients / PSUs / departments of Central and State Governments against receipt of cheque only at the branch and not against telephonic request. No such facility, however, shall be made available to individual customers;


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Risk Management / Other guidelines: It may be ensured that the agreement entered into with the customer does not entail any

legal or financial liability on the bank for failure to offer doorstep services under circumstances beyond its control.

The services should be seen as a mere extension of banking services offered at the branch and the liability of the bank should be the same as if the transactions were conducted at the branch.

The agreement should not provide any right to the customer to claim the services at his doorstep.

Charges, if any, to be levied on the customer for doorstep services should be incorporated in the policy approved by the Board and should form part of the agreement entered into with the customer.

The charges should be prominently indicated on brochures offering doorstep services. Doorstep services should be offered to only those customers in whose case proper KYC

procedures. The services should be offered at either the residence or office of the customer, the

address of which should be clearly and explicitly mentioned in the agreement. The agreement / contract with the customer shall clearly specify that the bank will be

responsible for the acts of omission and commission of its ‘agent’. The “Scheme” should not be restricted to any particular client / customer or class of

customers. Banks should constitute an appropriate Grievance Redressal Machinery internally for

redressing complaints about services rendered by its ‘agents’. If a customer will have the option to approach Banking Ombudsman for redressal of his

grievance/s. Dynamic Provisioning:

It may be necessary to adopt counter cyclical provisioning measures. The case of Spain has been widely quoted, which introduced across the board increase in

provisioning requirements, the dynamic provisioning approach. This is based on the premise that loans given at the top of the cycle tend to have higher

losses as the cycle turns. In downturns defaults tend to emerge requiring more provisions. Banks should therefore be required to set aside a general provision against likely future

loss each time they write a loan on the basis of a formula which is sensitive to the cycle. This being an accounting provision, would have the effect of reducing the distributable

profits, and will thereby constrain the dividends and profit-linked bonuses. These provisions could then be drawn down automatically as losses appear. In effect, this approach requires banks to build up reserves in the upswing of a cycle

which can cushion their losses during the downswing. RBI, in India, adopted a similar approach through a calibrated increase in the risk weights

and provisioning requirements during the period of rapid credit growth. However, the important difference was that RBI’s approach entailed sector-specific prescriptions (say Commercial Real Estate).

The objective was not so much to lean against the wind of rising asset prices but as a cautionary measure to contain the exposure of the banking sector to sensitive asset classes where rapid credit expansion was observed.


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It is commonly agreed now that the monetary authorities can't avoid creation of bubbles by targeting asset prices. However, they should communicate their concerns on the sustainability of strong increase in asset prices and contribute to a more objective assessment of systemic risks.

However, this is where there is a tension between the regulatory approach and the accounting rule makers who, view such counter-cyclical measures as being liable to be misused for profit smoothening and find it against their basic principles of transparency and reporting plain economic reality.

According to the critics, dynamic provisioning is a form of "cookie-jar accounting" and has the potential for misuse.

Earnings management of an entity is not something which is acceptable to the accounting profession since there have been accounting frauds which involved cookie jars.

A solution that is being considered for resolving this tension is to add a separate line, further down the balance sheet into shareholders' equity instead.

The envisaged counter-cyclical provisions will, therefore, be made after the net profit has been arrived at and will be in the nature of an appropriation of profits.

This would be called something like "undistributable reserves" and to my mind, should also not be allowed to be included in regulatory capital - even though the general provisions are allowed to be treated as a part of Tier II capital, subject to the prescribed caps.


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Earnest Money / Security Deposit Guarantee: In most cases, the contractors are asked to deposit a certain sum of money as Security deposit or Earnest money. The terms of the contract will provide for refund of this deposit either in stages (reflected in periodical bills submitted) or in a lump sum at the end of successful execution. Here again, an Earnest Money Bank Guarantee will satisfy the requirements of both the parties. Easy Money Policy : As contrasted to tight money policy this refers a policy of the central bank of expanding money supply to reduce interest rates. One purpose of such a policy is to facilitate increase in investment thereby raising gross domestic product. E-Banking : Refers to the process of conducting banking with the use of electronic tools and facilities. With the Internet serving as a new delivery mechanism for reaching the customers, Internet banking has become predominant mode of e- banking in India. E-banking facilitates an effective payment and accounting system thereby enhancing the speed of delivery of banking services significantly. Economic Capital : As distinguished from Regulatory capital, the Economic Capital is defined by the Global Association of Risk Professionals (GARP) as the capital cushion required against the underlying credit, market and operational risk exposure of a banking organization. It is called 'economic" capital because it measures risk in terms of economic realities rather than potentially misleading regulatory or accounting rules. Economic Development : Signifies progressive and more efficient utilisation of human and physical resources of a country, so as to attain rise in the per capita income of the people, gradual transformation of subsistence sector (production for purpose of own consumption) into a monetised sector and institutionalisation of saving and investment. Economic System : The term refers to the nature of economic life as a whole, with particular reference to the ownership and use of property and extent of Government regulation and controls.


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Electronic Fund Transfers : Refers to a system, which enables transfer of funds through electronic means. RBI has introduced a scheme for electronic funds transfer among the four metros, Mumbai, Chennai, New Delhi and Kolkotta from April 1998. Under this scheme member banks in the four cities can accept remittance amounts up to Rs 5 lakhs from the customers for a credit to customer account in any of the branches in the four cities. The payment is credited to beneficiary's account next day, message pass through BANK NETWORK of National Clearing Cells. E-Money : Defined as an electronic store of monetary value on a mechanical device that may be widely used for making payments to entities other than the issuer without involving bank accounts in the transaction, but acting as a prepaid bearer instrument. An important form of E-money is the network money by way of funds stored in software products that are used for making payments over communication network like the Internet. Access products, yet another form of e-money enable the customers to access their bank accounts and transfer funds. Emerging Market Economies : These are countries that are starting to participate globally by implementing reform programmes and undergoing economic improvement. A term coined in 1981 by Antoine W Van Agtmael of the International Finance Corporation, an emerging market economy is defined as an economy with low- to- middle per capita income. Such countries constitute approximately 80% of the global population, representing about 20% of the world's economies. To begin with the term "emerging market" was used to describe a fairly narrow list of middle-to-higher income economies among the developing countries, with stock markets in which foreigners could buy securities. The term's meaning has since been expanded to include more or less all developing countries. EMEs are characterised as transitional, meaning they are in the process of moving from a closed to an open market economy while building accountability within the system. Examples include the former Soviet Union and Eastern Bloc countries. Escrow Account : Escrow account is an account where the moneys parked will be released only on fulfilment of some conditions of contract like export taking place or like power fed into the national power grid etc. (in the case of government getting power from independent power producers). The beneficiary of the account can get the money after fulfilling the prescribed conditions. It is an account placed in trust with a third party, by a borrower for a specific purpose and to be delivered to the borrower only up on the fulfilment of certain conditions.


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Escrow Account arrangement A Trust and Retention Account mechanism needs to be distinguished from an Escrow Account arrangement, though the two are somewhat similar. An Escrow Account is an arrangement for safeguarding the borrower against its customers from the payment risk for the goods or services sold by the former to the latter. This is achieved by removing the control over the cash flows from the hands of the customer to an independent agent, who in turn could ensure appropriation of cash flows as per the its mandate. The Escrow arrangement provides for directing a pre-determined payment stream from the customers of the borrower to a special account maintained with a designated agent. Payment / deposit by the user / buyer into such an account is assumed to be a valid discharge of his liability to the supplier of the goods / services. An Escrow arrangement involves parties different from the parties in a TRA mechanism. The Escrow arrangement would involve usually four parties : the lender, the borrower, the customers of the borrower and the Escrow Agent. The mandate to the Escrow Agent would normally be finalised by the lenders in consultation with the borrower and its customers. Thus, for instance, in financing of a power plant which sells its power generated to a SEB, the Escrow arrangement would involve the power producer (borrower), the SEB concerned (customer), the bank / FI (lenders) and the Escrow Agent (a designated bank). The SEB would agree to direct its collection centres to deposit the electricity charges received from retail consumers, into a designated account with the designated bank (Escrow agent) and to direct its bulk consumers to deposit their payments directly with the Escrow Agent in the specified account. The Escrow Agent would then appropriate the funds in the Escrow account as per the priority laid down in the Escrow Agreement. ] Exchange Control : Refers to official restrictions, which limit the freedom of residents to buy and sell foreign exchange. The primary aim of exchange control is the conservation of scarce foreign exchange resources. Controls are also used generally to support exchange rate policy. Exchange control helps a country to avoid destabilising capital flows or sharp movements in reserves. Exchange Rate : This expresses the price of one unit of foreign currency in relation to the domestic currency in a foreign exchange market. The foreign exchange market is a market where currencies of different countries are traded. Under the fixed exchange rate regime where there are fixed par values, exchange rates are reasonably stable. Central Bank intervention in the forex market is frequent and most of the foreign exchange transactions are in the spot or cash market. Under the floating exchange rate system, exchange rates are not determined by Government or Central Bank but by the market forces of supply and demand. The exchange rates float or freely move up and down. As there would be large fluctuation in the rates, exposure to risk increases and large proportion of transactions takes place in forward market. Central Bank intervention in the market becomes less frequent. When the exchange rate is adjusted downwards, prices of exports of goods and services fall in foreign currency terms and causes


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increase in foreign demand. Imports become costlier in terms of domestic currency and tend to reduce domestic demand. Exchange Rate Forecasting : Exchange rate is the price of one currency in terms of another currency. Outside fixed exchange rate system, the rate, like any other market price is determined by the forces of demand and supply. These forces are governed by certain economic variables like trade balances, inflation, interest rate etc. Fundamental approach to forecasting exchange rate depends on forecasts of these key variables. As a rule of thumb method, exchange rate will tend to rise (fall) if (i) the current account is in surplus (deficit) (ii) inflation relative to other countries is low (high) (iii)interest rate relative to other countries rise (fall). The capital flows and interplay between market expectations and government policy often render the fundamental approach inadequate. Exchange Rate Management : One of the responsibilities of the RBI is to ensure the stability of the exchange rate of rupee. The RBI Act 1934 empowers the RBI to buy from and sell to any authorised person foreign exchange at such rate of exchange and on such terms and conditions that the government may decide. Presently the RBI announces a reference rate based on the quotation of a few selected banks in Mumbai at 12 noon every day and buys and sells only U.S. Dollar. The exchange rate is determined by the supply and demand of the currency. When the demand for currency exceeds supply, the currency becomes dear and vice versa. In order to bring orderly conditions in the market and protect the domestic currency's value, Central Bank intervenes in the market by selling or buying the foreign currency in the market. The objective of the exchange rate management is to ensure that the external value of the rupee is realistic and credible so as to have sustainable balance of payments position and healthy foreign exchange situation. Exposure Norms : Refers to the prescription of limits on exposure with respect to credit (funded or non-funded) and investment to (i) individual/group borrowers in India, (ii) specific industry or sectors and towards unsecured guarantees and unsecured advances. Exposure limits are also prescribed with regard to advances against shares/debentures. This is intended to attain better risk management and avoidances of concentration of credit risks.


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Export and Trading Houses Status Eligibility for Export and Trading Houses Status: Merchant as well as Manufacturer Exporters, Service Providers, Export Oriented Units (EOUs) and Units located in Special Economic Zones (SEZs), Agri Export Zones (AEZs),Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio- Technology Parks (BTPs) shall be eligible for status. Status Category : Applicant shall be categorized depending on his total FOB (FOR - for deemed exports) export performance during current plus previous three years (taken together) upon exceeding limit below. For Export House (EH) Status, export performance is necessary in at least two out of four years (i.e., current plus previous three years). Status Category & Export Performance FOB / FOR Value (Rupees in Crores)

Export House (EH) 20 Star Export House (SEH) 100 Trading House (TH) 500 Star Trading House (STH) 2500 Premier Trading House (PTH) 7500

Privileges of Export and Trading House Status Holders : A Status Holder shall be eligible for privileges as under: 1. Authorization and Customs Clearances for both imports and exports on self-declaration

basis; 2. Fixation of Input-Output norms on priority within 60 days; 3. Exemption from compulsory negotiation of documents through banks. Remittance /

Receipts, however, would be received through banking channels; 4. 100% retention of foreign exchange in EEFC account; 5. Exemption from furnishing of BG in Schemes under FTP; 6. SEHs and above shall be permitted to establish ExportWarehouses, as per DoR

guidelines. 7. For status holders, a decision on conferring of ACP Status shall be communicated by

Customs within 30 days from receipt of application with Customs. 8. As an option, for Premier Trading House (PTH), the average level of exports under EPCG

Scheme shall be the arithmetic mean of export performance in last 5 years, instead of 3 years.

9. Status Holders of specified sectors shall be eligible for Status Holder Incentive Scrip under Para 3 .16 of FTP.

10. Status Holders of Agri. Sector (Chapter 1 to 24) shall be eligible for Agri. Infrastructure Incentive Scrip under VKGUY - Para 3.13.4 of FTP.


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External Debt : Refers to outstanding contractual liabilities of residents of a country to non-residents in

gross terms, involving payment of interest with or without principal or payment of interest principal with or without interest.

The debt liabilities consist of long term and short term liabilities. Long term liabilities include 7 items: (i) multilateral government or non-government debt

(ii) bilateral government or non-government debt (iii) loans from International Monetary Fund (iv) commercial borrowing (v) NRI deposits and (vi) rupee debt (Civilian + defense) and (vii) trade credit.

Short term liabilities include: (a) Trade Related credits Above 180 days + Upto 180 days (b) FII investment in Government Treasury Bills and other instruments ( c) Investment in Treasury Bills by foreign central banks and international Institutions etc. d) External Debt Liabilities of : Central Banks + Commercial Banks.

Contingent external liabilities (like derivatives, letter of credit, guarantees etc) which have the potential of becoming actual liabilities do not form part of the external debt data.

RBI Bulletin – July 2010: India’s External Debt, as at end-March 2010, at US$ 261.4 billion or 18.9 per cent of GDP. The long-term debt at US$ 209.0 billion and short-term debt at US$ 52.4 billion accounted for 79.9 per cent and 20.1 per cent, respectively, of the total external debt.

External commercial borrowings:

It can be in the form of bank loans, buyer’s credit, supplier’s credit, floating rate bonds, fixed rate bonds. It is availed from Non resident lenders. There are two routes for availing ECB. Automatic route and approval route. Automatic route is used for investment in real sector (mfg sector). Corporate borrowers (except financial intermediaries) are eligible. Individuals, Trusts, Non profit organizations are not eligible. NGOs engaged in micro finance eligible. Upto USD 20 Mn with minimum average maturity of 3 years. Above USD 20 Mn upto USD 500 Mn with minimum average maturity of 5 years. Maximum amount a corporate can raise in a year is USD 500 Mn. Maximum amount for NGOs involved in Micro Financing it is USD 5 Mn only. Issue of BG, SBLCs or Letter of comfort for ECBs not permitted.


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FIAT Money : Refers to money, like the currency of the present day, without intrinsic value but decreed (by fiat) to be legal tender by the Government. Fiat money is accepted only as long as people have confidence that it will be accepted as medium of exchange. Definition of a Financial Conglomerate (FC) An FC is defined as a cluster of companies belonging to a Group which has significant presence in at least two financial market segments out of banking business, insurance business, Mutual Fund business and NBFC business (deposit taking and non-deposit taking). The significant presence in each of the market segments is defined as under : Financial Market Segment & Threshold for Significant Presence: Banking business: Included in the top 70% of the segment in terms of asset base Insurance business: Turnover more than Rs.100 crore Mutual Fund business: Included in the top 70% of the segment in terms of asset under management (AUM) NBFC (deposit taking): Included in the top 70% of the segment in terms of deposit base NBFC (non-deposit taking): Asset base more than Rs.2000 crore Financial Closure {World Bank Web Site}

Closure occurs when there is legally binding commitment of private sponsors to mobilize

funding or provide services. The definition of financial or contractual closure varies among types of private

participation as a result of availability of public information: For management and lease contracts, a contract authorizing the commencement of

management or lease service must be signed with the private consortium assuming the operation of the services.

For concession projects, contractual closure is reached when the concession agreement is signed, and the date for taking over the operations is set.

For greenfield projects, financial closure is defined as the existence of a legally binding commitment of equity holders and/or debt financiers to provide or mobilize funding for the full cost of the project. In some cases project construction begins with partial funding. Such projects are included in the database when there is a significant advancement of project construction (25%).

For divestitures (Meaning:The sale by a company of a product line or a subsidiary or a division), the equity holders must have a legally binding commitment to acquire the assets of the facility. Such commitment usually occurs at the signing of the share purchase contract.


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Financial Inclusion : Refers to the delivery of banking service at an affordable cost to the vast sections of disadvantaged and low income groups of the population. The purpose of financial inclusion is to provide access to banking, access to affordable credit and access to free information on money matters. This concept has become a part of public policy so as to make available banking and payment services to the entire population without discrimination. The primary aim is to avoid the pitfalls of financial exclusion in the form of social tension arising from lack of empowerment of the low- income strata of the population. The Size of Financial Exclusion: Out of the 6,00,000 habitations in the country, only about 30,000, or just 5 per cent, have a commercial bank branch. Just about 40 per cent of the population across the country have bank accounts, and this ratio is much lower in the north-east of the country. The proportion of people having any kind of life insurance cover is as low as 10 per cent, and the proportion having non-life insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13 per cent and those having credit cards a marginal 2 per cent. (RBI July 2010 bulletin) Government + RBI initiatives in furthering financial inclusion: First, to improve banking penetration in the north-east, the RBI has asked State

Governments and banks to identify centres where there is need for setting up branches that are full-fledged, offer forex facilities, handle government business and meet currency needs. The RBI will then fund the capital and running costs for five years, provided the State Government concerned is willing to make available the premises and put in place appropriate security arrangements.

Second, Government of India has setup two funds – the Financial Inclusion Fund for meeting the costs of developmental and promotional interventions towards financial inclusion, and the Financial Inclusion Technology Fund for meeting the costs of technology adoption. Each of these funds has an overall corpus of Rs. 500 crore.

Third, the Finance Minister announced in his latest budget that every village in the country with over 2,000 population must have access to banking services by March 2012. Even as the brick – and – mortar branch presence will expand, the big driver going forward will be branchless banking based on the business correspondent (BC) model and leveraging on technology. In order to facilitate this, the RBI has also enlarged the types of entities that can be engaged as BCs.

Aadhar, the Unique Identification Number (UID) Project of Government of India, is headed by Nandan Nilekani. Although the main aim of UID is to provide a unique ID number for everyone in the country, Aadhar will be a powerful instrumentality for helping the poor establishes their identity to meet the banks’ KYC norms. This will reduce cash and noncash transaction costs both to the banks and to the potential customers. The UID is another powerful illustration of harnessing technology for the benefit of the poor.

Fourth, RBI has asked every domestic commercial bank – public and private sector – to prepare its own Financial Inclusion Plan (FIP) and have it approved by its Board. The aim in this respect is twofold. First, each bank should have ownership of its FIP. Second, each bank to build on its comparative advantage.


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The FIPs are meant to be rolled out over the next three years and are required to include indicators for performance evaluation. The main challenge is to ensure that the no-frills accounts actually become operational. Because of dire poverty, the account or the branch services are rarely or minimally used. Banks agreed that, for the FIPs to succeed –

o scalable technology solutions should be in place; o the RRBs should also be core-banking enabled; o business correspondent model coupled with biometric technology needs to be

deployed; o performance criteria of staff should include achievement of financial inclusion

targets; and o connectivity issues need to be sorted out by service providers.

Financial Intermediation : The term is defined as a process of mediation through institutions and instruments between primary savers and lenders, and ultimate borrowers. Financial Markets : Financial markets comprise of financial assets or instruments and financial institutions involved in movements of funds. The important segments of financial markets are (i) organised credit market dominated by commercial banks, (ii) the money market with call/notice money segments forming a significant portion, (iii) capital market consisting of primary and secondary equity markets and term lending institutions, (iv) debt market dealing in public sector bonds and corporate debentures, (v) gilt edged market dealing in government securities, (vi) housing finance market, (vii) hire purchase, leasing finance and other non-banking financial companies,(viii)insurance market, (ix) informal credit market and (x) foreign exchange market. Financial Stability Forum: (RBI press release 17.3.2009) The FSF was established by the G7 finance ministers and central bank governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. The FSF Secretariat is based at the Bank for International Settlements in Basel, Switzerland.The current FSF comprises national financial authorities (central banks, supervisory authorities and finance ministries) from the G7 countries, Australia, Hong Kong, Netherlands, Singapore and Switzerland, as well as international financial institutions, international regulatory and supervisory groupings, committees of central bank experts and the European Central Bank. The Financial Stability Forum (FSF) has decided at its plenary meeting in London on 11-12 March, 2009 to broaden its membership and to invite India as a new member. Other countries invited to become as new members are the G-20 countries that are not currently in the FSF and these, apart from India, are Argentina, Brazil, China, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, Spain and the European Commission.


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Financial Stability : Financial stability broadly refers to the smooth functioning of the key elements (like financial institutions and markets) that constitute the financial system. It describes a steady state in which the financial system effectively performs its key economic functions such as allocating resources and spreading risks as well as settling payments. Financial stability thwarts financial crises. Financial System : This consists of financial institutions, financial instruments and financial markets, providing an effective payments and credit system and channelling of funds from the savers to the investing sectors in the economy. Financial institutions or financial intermediaries mobilise savings of the community and ensure efficient allocation of these savings to high yielding investment projects so that they can offer attractive and assured returns to savers and this process give rise to money and other various financial assets. Standing at the centre of the financial system, the Reserve Bank's aim is to maintain financial stability in the country as an essential ingredient for healthy, safe and successful economy. Fiscal Policy: Refers to Government's policy towards taxation, public debt, public expenditure, appropriation and similar matters having an effect on the private business and economy of the nation as a whole. Taxation and public expenditure policies which are at the centre of fiscal policy, are adopted to help dampen the business cycle swings and contribute to the maintenance of growing economy with high employment and price stability. Fiscal policy is often used to correct the nation's saving investment imbalance and recessionary trends that cannot be managed by monetary policy. Fiscal policy directly affects the financial resources and purchasing power in the hands of the public and hence is an important determinant of aggregate demand. Floating Provisions 'Floating Provisions' are held by the banks & is general in nature and not made against any identified assets. These floating provisions may be treated as a part of Tier II capital within the overall ceiling of 1.25 percent of total risk weighted assets, if such provisions are not netted off from gross NPAs to arrive at disclosure of net NPAs. Principle for creation: The bank's board of directors should lay down approved policy regarding the level to which the floating provisions can be created. The bank should hold floating provisions for 'advances' and 'investments' separately and the guidelines prescribed will be applicable to floating provisions held for both 'advances' & 'investment' portfolios. Principle for utilization: The floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of NPAs or for making regulatory provisions for standard assets. The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board's approval and with prior permission of RBI. The boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary.To facilitate banks' boards to evolve suitable policies in this regard, it is clarified that the extra-ordinary circumstances refer to losses which do not arise in the normal course of business and


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are exceptional and non-recurring in nature. These extraordinary circumstances could broadly fall under three categories viz. General, Market and Credit.

o Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category.

o Market category would include events such as a general melt down in the markets, which affects the entire financial system.

o Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance.

Accounting: Floating provisions cannot be reversed by credit to the profit and loss account. They can only be utilised for making specific provisions in extraordinary circumstances as mentioned above. Until such utilisation, these provisions can be netted off from gross NPAs to arrive at disclosure of net NPAs. Alternatively, they can be treated as part of Tier II capital within the overall ceiling of 1.25 % of total risk weighted assets. Disclosures: Banks should make comprehensive disclosures on floating provisions in the "notes on accounts" to the balance sheet on (a) opening balance in the floating provisions account, (b) the quantum of floating provisions made in the accounting year, (c) purpose and amount of draw down made during the accounting year, and (d) closing balance in the floating provisions account. Provisions for specific advances at higher than prescribed rates: A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. RBI Directive dated 9.4.2009 on floating Provisions: Vide notification dated March 25, 2009 regarding prudential treatment of different types of provisions in respect of loan portfolios, banks have been advised that Floating Provisions cannot be netted from gross NPAs to arrive at net NPAs, but could be reckoned as part of Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets. Vide notification dated 9.4.2009, it has been decided to defer the implementation of the circular dated March 25, 2009. Accordingly, banks will have the choice between either deducting their existing floating provisions from Gross NPAs to arrive at net NPAs or reckoning it as part of Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets. It may be noted that this choice is limited to the financial year 2008-09 only. Mitigating Procyclicality: Use of Floating Provisions (RBI’s Annual Policy 2009-10):The G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency has recommended, as a part of measures to mitigate procyclicality, that capital buffers above minimum requirements and loan loss provisions should be built up in good times in order to enhance the ability of the regulated financial institutions to withstand large shocks. The Reserve Bank has been encouraging banks to build floating provisions as a buffer for the possible stress on asset quality later. It is proposed to issue further detailed guidelines on mitigating procyclicality later this year after FSB, BCBS and Committee on Global Financial System (CGFS) finalise their recommendations in this regard.


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Foreign Exchange Assets Of Banking Sector : Refers to net foreign exchanges of RBI comprising gold coin and bullion, foreign securities and balances held abroad offset by A/C NO:1 of International Monetary Fund with RBI. Foreign currency assets of other banks include balances held abroad in Nostro account etc and investments in eligible foreign securities and bonds less overseas borrowings of banks and non-resident repatriable foreign currency fixed deposits with banks Foreign Exchange Management Act (FEMA) : Replacing the Foreign Exchange Regulation Act (FERA) the Foreign Exchange Management Act was enacted in 1999, the provisions of which are aimed at consolidating and amending the law relating to foreign exchange transactions with a view to facilitate external trade and payments and development of foreign exchange market. This change was brought out in the context of certain developments in the external sector like sizable increase in the foreign exchange reserve, growth in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of Indian investment abroad, increased access to external borrowings and investment in Indian stock market by foreign institutional investors. While FERA laid stress on conservation of foreign exchange and its proper utilisation, FEMA aims at facilitating external trade and promoting orderly development of forex market. FERA was a criminal law where as FEMA is a piece of civil law. Foreign Exchange Market : Under the provisions of RBI Act, the RBI authorises on application, any person to deal in foreign exchange or in foreign securities as authorised dealer. The major participants in the forex market are banks which have been authorised to deal in foreign exchange. Industrial Development bank of India, Industrial Finance Corporation of India, Industrial credit and investment Corporation of India have also been licensed to undertake non-trade transactions incidental to the main business activities. The RBI also issues licences to certain individuals, established firms and hotels to deal in foreign currency and they are known as money changers Foreign Exchange Reserves Of RBI : Accretion to the foreign exchange reserves of the RBI comes from purchase of U.S. Dollar from authorised dealers, aid and loan receipts on Government of India account, International Monetary Fund transactions, purchase of foreign currencies from international institutions and foreign central banks, earnings in the form of interest and discount. The outgo will be mainly on account sale of US.Dollar to authorised dealers on account of Bank's intervention in the market and International Monetary Fund transactions. The bank's foreign reserves are held mainly in balances with foreign central banks, overnight investments, investment in treasury bills, fixed deposits with Bank for International Settlements and major foreign commercial banks, Certificates of Deposits issued by the banks and investments in long term securities of foreign governments, IBRD and Asian Development Bank.


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Forward Exchange Rate : A forward exchange rate is a rate of exchange which is fixed immediately, by means of a forward exchange contract, but the exchange transaction to which it is applicable would take place at some future date as agreed upon. A forward exchange contract is a firm and binding bargain between a bank and its customer, or between two banks, under which one party undertakes to deliver and the other to receive a fixed sum in foreign currency against payment in Indian rupees, on a fixed future date, or between two fixed dates, at a pre determined rate fixed at time the contract is made. Forward exchange operations enable the creditor who has to receive payment of his debt, in terms of a foreign currency, at a future date, to know exactly the value of money he has to receive in terms of his own currency. Similarly, it enables a debtor who has to pay certain amount, at some future date, in terms of a foreign currency, to know precisely the probable cost to him in terms of his own currency. Funding Of Treasury Bills : Funding of treasury bills denotes a process where by short-term treasury bills (including ad hoc treasury bills) are converted into long term securities. This implies extension of the maturity of government debt and results in reduction in the outstanding treasury bills. FIMMDA: FIMMDA stands for the Fixed Income Money Market and Derivatives Association of

India. It is an Association of Commercial Banks, Financial Institutions and Primary Dealers. FIMMDA is a voluntary market body for the bond, Money and Derivatives Markets. The FIMMDA functions as the principal interface with Regulators on issues that impact

these markets; undertakes developmental activities; provides training and development support to dealers and support personnel at member institutions; adopts / develops international standard practices and a code of conduct in the above fields of activity; devises standardized best market practices.

It functions as an arbitrator for disputes, if any, between member institutions and develops standardized sets of documentation.

It also assumes any other relevant role for facilitating smooth and orderly functioning of the said markets.

Fixed Income Securities: These are instruments where the cash flows (interest and principal payments) are according to a predetermined amount of interest, paid on a fixed schedule.

The different types of fixed income securities are Govt. Securities, Corporate bonds, Commercial paper, Treasury bills, STRIPS etc.

Fixed interest rate securities are those in which the interest payable is fixed beforehand. Floating interest rate securities are those in which the interest payable is reset from at pre-determined intervals according to a benchmark.

Example for a Fixed interest rate security is a bond which pays 8% interest semi-annually and example for a floating rate instrument is a bond that pays LIBOR +1.5% semi-annually. Instead of LIBOR, any acceptable benchmark can also be chosen.


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Group - Definition: Presently, the 'Group' is defined as an arrangement involving two or more entities related to each other through any of the following relationships and a 'Group entity' as any entity involved in this arrangement as indicated below : 1. a)Subsidiary - parent (defined in terms of AS 21), 2. b)Associate (defined in terms of AS 23), 3. c)Joint venture (defined in terms of AS 27), 4. d)Promoter-promotee, 5. e)A related party (defined in terms of AS 18), 6. f)Common brand name, and investment in equity shares 20% and above. While the broking arms and housing finance companies belonging to the identified groups are included within the Group, Regional Rural Banks, Depositories, Asset Reconstruction Companies and Associates of SBI have been kept out from the purview of the above definition ‘Green banking’ Although banks are considered environmental friendly and do not impact the environment

greatly through their own ‘internal’ operations, in terms of emissions and pollution, the ‘external’ impact on the environment through their customers’ activities is substantial. Due to its dominant role as a financial intermediary, the banking sector has a major influence over industrial activity and economic growth of the country. The banking sector is also one of the major sources for financing industrial projects such as steel, paper, cement, chemicals, fertilisers, power, textiles, etc, which cause maximum carbon emission. Therefore, the banking sector can play an intermediary role between economic development and environmental protection, for promoting environmentally sustainable and socially responsible investment. Banking of this kind can be termed as ‘green banking’.

In a broader perspective, ‘green banking’ refers to the banking business conducted in such areas and in such a manner that helps the overall reduction of external carbon emission and internal carbon footprint. To aid the reduction of external carbon emission, banks should finance green technology and pollution reducing projects.

Although, banking is never considered a polluting industry, the present scale of banking operations have considerably increased the carbon footprint of banks due to their massive use of energy (eg lighting, airconditioning, electronic/electrical equipments, IT, etc), high paper wastage, lack of green buildings, etc. Therefore, banks should adopt technology, processes and products which result in substantial reduction of their carbon footprint as well as develop a sustainable business.


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Green shoots (26 Jul 2009, ET Bureau) Green shoots is used to refer to signs which indicate recovery of the economy. It draws on

the fact that green shoots which appear above the earth are the first visible signs of growth of a plant. Particularly after a recession, green shoots are welcome as symbols of the fact that the economy is slowly treading the path upward.

In fact, positive economic data and statistics, including recovery of the banks whose failure literally brought on the financial crisis, the consistent rally of stock markets globally, recovery and stabilisation in the prices of commodities like oil and gold and reduction in unemployment among others, have been seen as green shoots. Why have green shoots been in news?

The concept of green shoots seems to have received wide-spread popularity after US Federal Reserve chairman Ben Bernanke spoke of how economic recovery was possible if they succeeded in bringing stability to the financial system.

In fact, Bernanke pointed out that he had already begun to see green shoots in some of the markets where the Fed has managed to revive the process of lending as well as a positive change in the condition of some of the key banks. According to Bernanke, the first sign of actual recovery would be that a large bank is successful in raising private equity.

Govt. of India dated securities (G-secs):

Like Treasury Bills, G-Secs are issued by the RBI on behalf of the Govt. of India. These form a part of the borrowing program approved by the Parliament in the ‘Union

Budget’. G-Secs are normally issued in dematerialized form (SGL). When issued in the physical form they are issued in the multiples of Rs.10,000/-. Normally the dated Govt. Securities, have a period of 1 year to 20 years. Govt. Securities when issued in physical form are normally issued in the form of Stock

Certificates. Such Govt. Securities when are required to be traded in the physical form are delivered by

the transferor to transferee along with a special transfer form designed under Public Debt Act 1944.

The transfer does not require stamp duty. The G-Secs cannot be subjected to lien. Hence, is not an acceptable security for lending

against it. Some Securities issued by RBI like 8.5% Relief Bonds are securities specially notified

and can be accepted as Security for a loan. Earlier, the RBI used to issue straight coupon bonds i.e. bonds with a stated coupon

payable periodically. In the last few years, new types of instruments have been issued. General Line Of Credit (GLC) A General Line of Credit may be defined as an arrangement in which a bank or a vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period. For example, RBI extends a GLC to NABARD under section 17(4E) of the RBI Act to enable it to meet the credit requirement of co-operatives and RRBs.


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Gilts : Term denotes Government securities like Central Government loans and State Government loans. Include government guaranteed bonds like that of IDBI. 'Gilts' is the short form for gilt-edged securities- so called because they carry no risk. Globalisation : This term connotes a process by which the national economy moves towards a single borderless world economy with open market. It implies expansion of markets for goods, services, labour and capital beyond national boundaries. Independence of countries, competition, and dominance of market and private sector characterise the globalisation process. Government Budget-Deficit : Budget deficit broadly represents excess of total expenditures over total receipts with borrowings not included among receipts. The various measures of budget deficit are as follows.

1. Traditional budget deficit: Revenue expenditure +capital expenditure +net domestic lending - revenue receipts + foreign borrowings + domestic borrowings excluding treasury bills.

2. Monetary deficit: This is measured by the changes in Reserve Bank credit to government represented by total RBI holdings of government securities (dated securities and treasury bills) less central governments deposits with the Reserve Bank.

3. Gross Fiscal Deficit: Revenue expenditure +capital expenditure +net domestic lending-revenue receipts +grants (deficit is covered through all borrowings).

4. Net fiscal deficit: Gross fiscal deficit -Net domestic lending. 5. Primary deficit: gross fiscal deficit -net interest payments, i.e. interest payments -

interest earnings 6. Net primary deficit: (non-interest revenue expenditure +capital expenditure)-(non-

interest revenue receipts +grants). Primary deficit concept indicates the extent to which current fiscal actions affects the debt position of Union Government.

Government's Currency Liabilities to Public: Denotes circulation of rupee coins and small coins. Gross Domestic Product (GDP) : Gross Domestic Product is a measure of the total value of final goods and services produced within a country during a given year. Gross domestic product can be measured in two different ways (1) as the flow of final product and (2) as the total cost or earnings of inputs producing output. Each year public consumes a wide variety of final goods and services. Summation of the value spent on these final goods and services will give the GDP in an over simplified example of calculation. Comprehensive definition of GDP would include all final goods and services, like consumption expenditure, private investment, government spending on goods and services and net exports to the rest of the world. In other words GDP is defined as the total money value of the final products produced by the nation. Intermediate products


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are excluded. The second way to calculate GDP is to total the annual flow of factor earnings, wages, interest, rent and profits that are the costs of producing society's final products. This is called the cost or earning approach. Gross National Product (GNP) equals the GDP plus the income accruing to domestic residents less income earned by the foreigners in the domestic economy.

GDP in detail: GDP is defined as the total value of all goods and services produced within that territory

during a given year. GDP is designed to measure the market value of production that flows through the economy.

Includes only goods and services purchased by their final users, so GDP measures final production. Counts only the goods and services produced within the country's borders during the year, whether by citizens or foreigners.

Excludes financial transactions and transfer payments since they do not represent current production. Measures both output and income, which are equal.

Distinguish between GDP and Gross National product GNP: GDP differs from Gross National Product (GNP), in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it. Essentially, GDP = GNP - NFP (net factor payments).

Gross National Income comprises the total value produced within a country (i.e. its gross domestic product), together with its income received from other countries (notably interest and dividends), less similar payments made to other countries.

The GNI consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes.

Nominal GDP measures the value of output during a given year using the prices prevailing during that year. Over time, the general level of prices rise due to inflation, leading to an increase in nominal GDP even if the volume of goods and services produced is unchanged.

Real GDP measures the value of output in two or more different years by valuing the goods and services adjusted for inflation. For example, if both the "nominal GDP" and price level doubled between 1995 and 2005, the "real GDP " would remain the same. For year over year GDP growth, "real GDP" is usually used as it gives a more accurate view of the economy.

Relation between Real GDP and Nominal GDP: Real GDP is calculated using constant prices whereas nominal GDP uses current prices. The difference between the nominal GDP and real GDP is due to the inflation rate in market.

The major limitations of GDP: (a) Doesn't measure quality of life. (b) Doesn't measure standard of living. (c) Price changes. (d) Unpaid labor is not accounted for.

Three Approaches to Measuring GDP: 1. Expenditures Approach: The total spending on all final goods and services

(Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)) // GDP = C + I + G + (X-M)


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2. Income approach (NY = National Income) : Using the Income Approach GDP is calculated by adding up the factor incomes to the factors of production in the society. These include Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest.

3. Value added Approach: The value of sales of goods - purchase of intermediate goods to produce the goods sold.

Group Of 5 Countries (G5) : The Group of 5 consists of the members of the International Monetary Fund whose currencies constitute the Special Drawing Rights: France, Germany, Japan, United Kingdom and United States. Group Of Ten (G10) : The Group of Ten or G10 refers to the group of countries that have agreed to participate in the General Arrangements to Borrow (GAB). The GAB was established in 1962, when the governments of eight International Monetary Fund (IMF) members - Belgium, Canada, France, Italy, Japan, the Netherlands, the United Kingdom and the United States - and the Central Banks of two others, Germany and Sweden, agreed to make resources available to the IMF for drawings by participants. and under certain circumstances, for drawings by non participants. The GAB was strengthened in 1964 by the association of Switzerland, then a non member of the Fund, but the name of the G10 remained the same. G-20 countries: G-20 or Group of Twenty is a forum of Finance Ministers and Central Bank Governors

of biggest industrialized and developing economies. These economies account for 90% of global gross domestic product(GDP), 80% of world trade and 2/3rd of world population. The group discusses the key issues facing the global economy.

The group started meeting in 1999 and the Chairmanship rotates every year. For 2009, Britain is in the Chair and the summit is being held in London during April 2009.

Formation of G-20: The group was formed, when, after the 1997-98, Asian Financial crisis, it was realized by G-7 countries that there was no platform where the issues relating to key developing economies like India and G-7 countries could be discussed.

Members of G-20: Apart from G-7 countries, the other emerging economies like India, China, Russia, Brazil, South Africa, Mexico, South Korea, Argentina, Indonesia, Saudi Arabia, Turkey and Australia, are the members. European Union represents the 20th member. The meetings of G-20 are also attended by IMF and World Bank.

Last summit: London summit is important, considering the current situation of the global economy.

The Pittsburgh gathering was the third summit in a year for the G20, which said it would now be the premier forum for economic cooperation, supplanting the Western-dominated G7 and G8 that were the primary international forums for decades. The move was a clear acknowledgment that fast-growing countries such as China and India now play a much more important part in world growth.


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Haircut The margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction). Hard currency

A freely convertible currency that is not expected to depreciate in value in the foreseeable future. Head & shoulders

In technical analysis, a pattern that results where a stock price reaches a peak and declines; rises above its former peak and again declines; and rises a third time but not to the second peak, and then again declines. The first and third peaks are shoulders, while the second peak is the formation's head. Technical analysts generally consider a head and shoulders formation to be a very bearish indication. Hedging A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss. Hedge fund A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks according to a valuation model. Hedge ratio (delta) For options, ratio between the change in an option's theoretical value and the change in price of the underlying stock at a given point in time. For convertibles, percentage of a convertible bond representing the number of underlying common shares sold against the shares into which bonds are convertible. If a preferred is convertible into 2000 common shares, a 75% hedge ratio would be short (long) 1500 common for every 1000 preferred long (short). Herstatt risk The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to complete its end of the contract. This is also referred to as settlement risk. Hot money Money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears.


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IFSC or Indian Financial System Code: It is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT / RTGS system. This is a 11 digit code with the first 4 characters representing the bank, and the last 6 characters representing the branch. The 5th character is a 0 (zero). IFSC is used by the NEFT/ RTGS system to route the messages to the destination banks / branches. Bank-wise list of IFSCs is available with all the bank-branches participating in NEFT. List of bank-branches participating in NEFT/ RTGS and their IFSCs is available on the website of Reserve Bank of India at http://www.rbi.org.in/scripts/neft.aspx. All banks have also been advised to print the IFSC of the branch on cheques issued by branches to their customers. For net banking customers many banks have also enabled online search / pop-up of the IFSC of the destination bank branch. Import Cover : Level of a country's international reserves in relation to its average monthly import bill. Three months import cover is regarded as an adequate insurance against severe payment difficulties. Impossible Trinity : It stands for theoretical impossibility of having a macroeconomic situation in a country in which all the following three aspects together can coexist, namely (1) pegged exchange rate (2) free capital flows and (3) independent monetary policy. Due to conflicting objectives, an economy cannot achieve monetary independence, exchange rate stability and full financial integration by allowing free capital flows. Free capital flows will affect exchange rates; monetary independence also would affect exchange rates (increase or decrease in domestic money supply will affect exchange rates). Likewise, if a country tries to maintain fixed exchange rate, it has to absorb all the inflows of foreign capital, which in turn will affect the money supply. This will affect the monetary independence because of disturbance to the monetary policy stance. Indian Financial Net Work (INFINET) : This was set up by the Reserve Bank in 1999 through the Institute for Development and Research in Banking and Technology (IDRBT). The purpose is to establish an efficient, safe and dependable communications backbone to cater to the networking requirements of public sector banks and financial institutions. All fund based operations such as electronic fund transfers, centralised fund management scheme, anywhere banking, government securities trading, ATM/Credit transactions, currency chest accounting are done through this. Indirect Quotation : Foreign exchange rate which values the domestic currency in terms of the foreign currency. For example, in London the value of one pound expressed in terms of other currency.


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Infrastructure Lending:

RBI has given the definition of “Infrastructure Lending” in its final guidelines on Commercial Real Estate Exposures as follows: a) Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an

infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, a credit facility provided to a borrower company engaged in developing or operating and maintaining, or

b) Developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature: A road, including toll road, a bridge or a rail system; A highway project including other activities being an integral part of the highway

project; A port, airport, inland waterway or inland port; A water supply project, irrigation project, water treatment system, sanitation and

sewerage system or solid waste management system; Telecommunication services whether basic or cellular, including radio paging,

domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;

An industrial park or Special Economic Zone; Generation or generation and distribution of power; Transmission or distribution of power by laying a network of new transmission or

distribution lines; Construction relating to projects involving agro-processing and supply of inputs to

agriculture; Construction for preservation and storage of processed agro-products, perishable

goods - fruits, vegetables and flowers including testing facilities for quality; Construction of educational institutions and hospitals; Laying down and/or maintenance of gas, crude oil and petroleum pipelines. Any other infrastructure facility of similar nature.

The infrastructure projects are to be financed after ensuring that the project can be run on commercial lines and adequate cash would be generated to repay the loan together with interest. While considering infrastructure proposals, mechanisms like ‘Escrow’, ‘Creation of Debt Service Reserve Account’, Monitoring cash flows through ‘Trust and Retention Account’ and appointment of lenders’ engineers etc. should be explored to ensure better access and control on project cash flows. Definition Of Infrastructure Lending - Modification: April 2010: RBI has reviewed the definition of ‘infrastructure lending' and included ‘Telecom Towers', ‘pipelines carrying minerals and city gas distribution networks' under infrastructure definition.


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Interest Rate Futures (IRFs) IRFs are governed by Interest Rate Futures (Reserve Bank) Directions, 2009. These directions shall come into force with immediate effect.(wef 28.8.2009) Definitions: Interest Rate Futures means a standardized interest rate derivative contract

traded on a recognized stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Interest Rate Futures are permitted on 10-year notional coupon bearing Government of India security or any other product, as may be approved by the RBI from time to time.

Persons resident in India (as defined in FEMA) may purchase or sell IRFs to hedge an exposure to interest rate risk or otherwise.

FIIs, registered with SEBI, may purchase or sell IRFs subject to the condition that the total gross long (bought) position in cash and IRFs markets taken together does not exceed their individual permissible limit for investment in government securities and the total gross short (sold) position, for the purpose of hedging only, does not exceed their long position in the government securities and in IRFs at any point in time.

Very Important: No scheduled bank or such other agency falling under the regulatory purview of the RBI shall participate in the IRFs market without the permission from the respective regulatory Department of the RBI.

Standardized Interest Rate Futures contract shall have the following features : a. The contract shall be on 10-year notional coupon bearing Government of India

security b. The notional coupon shall be 7% per annum with semi-annual compounding. c. The contract shall be settled by physical delivery of deliverable grade securities

using the electronic book entry system of the existing Depositories, namely, National Securities Depositories Ltd. and Central Depository Services (India) Ltd. and Public Debt Office of the RBI.

d. Deliverable grade securities shall comprise GoI securities maturing at least 7.5 years but not more than 15 years from the first day of the delivery month with a minimum total outstanding stock of Rs.10,000 crore.

Interest Rate Futures contracts on instruments shall be traded on the Currency Derivative Segment of a recognized Stock Exchange.

The members registered with SEBI for trading in Currency / Equity Derivative Segment shall also be eligible to trade in IRFs.

Membership for both trading and clearing, in the IRFs segment shall be subject to the guidelines issued by the SEBI.

The position limits for various classes of participants in the IRFs market shall be subject to the guidelines issued by the SEBI.

Risk Management Measures: The trading of IRF contracts shall be subject to maintaining initial, extreme loss and calendar spread margins.

Clearing Corporations / Clearing Houses of the exchanges should ensure maintenance of such margins by the participants.

The RBI may from time to time modify the directions in this regard.


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Inflation: Inflation represents a rise in general level of prices of goods and services over a period of time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services. Price index: To reflect the change in prices of various commodities, a price index is constructed. This index captures the overall rate of price change assigning different weights to different items. For example if the index was at a level of 200 points, a year before and reached a level of 210 points, the inflation rate is 5%. Different price indices: Different people are affected differently by the price change. There are 5 price indices in India whcih include wholesale price index (WPI) represnting Headline Inflation, consumer price index for agricultural labour (CPI-AL), consumer price index for industrial workers (CPI-IW), consumer price index for urban non-manual employees (CPI-UNME )and consumer price index for rural labour (CPI-RL). Normal prices & official inflation : The price paid by consumers for commodities is reflected in consumer price index. These goods such as wheat, pulses and fruits, have higher weightage in consumer indices when compared to the WPI. In the wholesale index, the prices of all commodities are taken into account (where the weightage of individual items included in CPI is low) due to which it reflects a different price level. Effect of inflation : Inflation can have positive and negative effects on an economy. The negative effects include (a) loss in stability in the real value of money (b)uncertainty about future inflation may discourage investment and saving, and (c) high inflation may lead to shortages of goods if consumers begin hoarding. Positive effects include a mitigation of economic recessions and debt relief through reduction in the real level of debt. Interest rates: With an increasing inflation rate, there is increase in general interest rates of deposits/advances, which increases cost of production and sale of various goods and leads to further increase in inflation. How govt. and RBI control inflation : The govt. takes non-monetary initiatives relating to demand and supply side of the real market, such as restriction on exports of commodities, liberalization of import of commodities, steps to increase the production of goods and services, check hoarding etc. RBI initiates monetary measures to check inflation that include curbing the liquidity by increase in CRR and SLR that divert the use of bank deposits to cash and govt. securities. Types of inflation (a) Demand-pull inflation. It is caused by increases in aggregate demand due to increased spending. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. (b) Cost-push inflation: It is also called supply shock inflation and caused by a drop in aggregate supply. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. (c) Built-in inflation: It is induced by adaptive expectations and often linked to the price/wage spiral. It involves workers trying to keep their wages up with prices and firms passing these higher labor costs on to their customers as higher prices, leading to a vicious circle. Phillips curve: A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that some level of inflation could be considered desirable in order to minimize unemployment.


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Inflation : Inflationary price movement means a rise in the comprehensive price index, say, index of wholesale prices. The implication of inflation is that the value of money tends to grow unstable. The inflationary situation is generally featured by (a) rise in prices and cost of living (b) excess of money supply (c) prevalence of restraints on consumption and (d) administrative controls. The classical type of inflation occurs when the money supply increases faster than the output of goods or services. Yet another type of inflation emerges out of the operation of factors of cost evidenced by a more or less constant rise in cost of production which is passed on to consumers. Inflation Measurement : Inflation rate forms part of important macro economic indicators used by policy makers particularly central bankers in policy formulation. Inflation could be measured through three sets of price indices namely, the Whole price indices (WPI), implicit National Income Deflator and Consumer Price Indices (CPI). The WPI is compiled for all commodities as well as major groups and individual commodities and is published on a weekly basis since 1942. Weights are assigned to the commodities/sub-groups/major groups on the basis of the value of the whole sale market transactions at the time of adoption of the base year. The commodities are classified under 3 major groups, (1) primary articles, (2) fuel, power, light and lubricants and (3) manufactured products. This index because of the good frequency of availability helps continuous monitoring. The National Income Deflator, a comprehensive index is derived as a ratio of GDP at current prices to GDP in real terms. It encompasses all the economic activities including services. The CPI reflects the retail prices of selected goods in the commodity market of homogeneous group of consumers. Consumer price indices are separately computed for (1) industrial workers (2) urban non-manual employees and (3) agricultural labourers. The major groups covered are food, pan supary, tobacco, intoxicants, fuel, housing, clothing, bedding, and footwear and miscellaneous items. Inflation Targeting : Inflation Targeting is a monetary policy framework with public announcement of official quantitative target or target ranges for the inflation rate and explicit acknowledgement that low or stable inflation constitute the long run goal of monetary policy. Infrastructure Development Finance Company (IDFC) : For the purpose of fostering the growth of private capital flow for infrastructure facilities like power, roads, railways, highways, waterways, irrigation etc, on a commercially viable basis, the IDFC was established in Chennai as a Limited company in January 1997. It acts as a direct lender and a refinancing agency. The Government of India and Reserve Bank hold 40 percent stake in the company. Other institutions who have participated in the share capital are Industrial Credit and Investment Corporation of India, Unit trust of India and Housing Development Finance Corporation Ltd. The company also promotes debt securitisation and offers credit guarantees.


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Indian Depository Receipts Eligible Companies resident outside India may issue Indian Depository Receipts (IDRs)

through a Domestic Depository. The permission will be been granted subject to compliance with the Companies (Issue of

Depository Receipts) Rules, 2004 and subsequent amendments / SEBI Guidelines, 2000. In case the Issuer is a Financial / Banking company having presence in India, the approval

of the Sectoral Regulator(s) should also be obtained before the issuance of IDRs. Foreign Institutional Investors (FIIs) including SEBI approved sub-accounts of the FIIs,

registered with SEBI and Non-Resident Indians (NRIs) may also invest, purchase, hold and transfer IDRs of eligible companies resident outside India and issued in the Indian capital market, subject to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

Further, NRIs are allowed to invest in the IDRs out of funds held in their NRE / FCNR(B) account, maintained with an Authorised Dealer / Authorised bank.

Automatic Fungibility of IDRs is not permitted. Fungibility means the quality of being capable of exchange or interchange.

IDRs shall not be redeemable into underlying equity shares before the expiry of one year period from the date of issue of the IDRs.

At the time of redemption / conversion of IDRs into underlying shares, the Indian holders (persons resident in India) of IDRs must comply with the provisions of FEMA. Accordingly, the following guidelines must be followed, on redemption of IDRs:

The proceeds of the issue of IDRs must be immediately repatriated outside India. The IDRs issued can be denominated in Indian Rupees. Institute For Development And Research In Banking Technology - (IDRBT) : Set up by RBI at Hyderabad in 1996, the institute is an autonomous centre for development and research in banking technology. This is funded by RBI and is an autonomous centre for promotion of technology solution, adaptation, and absorption of banking technology so as to improve functioning of banking and financial sectors. Inter-bank Participation Certificates As per credit policy announcements in October 1988, RBI had introduced the inter-bank participation certificates (IBPCs) scheme taking into view the recommendations of Working Group on the Money Market (Chairman Shri N.Vaghul). In the year 2007, the investments by banks in IBPCs, on a risk sharing basis, was made eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorised under the respective categories of priority sector and are held for at least 180 days from the date of investment. In August 2009, the RRBs have also been allowed to issue IBPCs. Participation Certificate IBPC is an undertaking given by the bank participating in the advance, allowed by another bank. The credit risk to the extent of participation, shall be of the participating bank, while


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the loan account shall continue to be in the books of the bank issuing the paricipation certificate. The salient features of the Scheme are given below: There will be two types of Participations: I. Inter-Bank Participations with Risk Sharing; and II Inter-Bank Participations without Risk Sharing. The Participations would be strictly interbank confined to scheduled commercial banks. I. Inter-Bank Participations with Risk Sharing The primary objective of the participations is to provide some degree of flexibility in the credit portfolio of banks and to smoothen the working of consortium arrangements. 1. Applicability of the Scheme: The scheme will be confined to scheduled commercial

banks. 2. Period of Participations: The minimum period will be 91 days, while the maximum

period will be 180 days. 3. Rate of Interest: The rate of interest on participations would be left free to be determined

between the issuing bank and the participating bank. 4. Selection of Accounts: Banks will allot IBPCs only in respect of advances classified

under Health Code No. 1 status (presently Standard Accounts). The aggregate amount of such IBPCs in any account should not exceed 40% of the out standings in the account at the time of issue. During the currency of the IBPC, the aggregate amount of IBPC should be covered by the outstanding balance in the account. In case the outstanding balance falls short of the participations outstanding, the issuing bank will reduce the participations to the extent necessary and if need be, issue IBPC for smaller amounts.

5. Accounting: In the case of the issuing bank, the aggregate amount of participations would be reduced from the aggregate advances outstanding. Such transactions will not be reflected in the individual borrower's accounts but will be only netted out in the General Ledger. The participating bank would show the aggregate amount of such participations as part of its advances. The issuing bank will maintain a register to record full particulars of such participations. There will be no privity of contract between the borrower and the participating bank and to avoid any difficulty, banks will incorporate in the cash credit agreement of the borrowers an appropriate clause, permitting the lending bank to shift a part of the advance to any bank, without notice to the borrowers, by way of participations. The agreement may also provide that the issuing bank would continue to represent the participating bank in protecting the latter's interests.

6. Risk: The risk would be deemed to have crystallized when the issuing bank recalls the advances and stops operations in the relative account. In such a case the issuing bank would give due notice to the participating bank intimating the default.

7. Repayment: The issuing bank will normally repay the amount of participations together with interest to the participant bank on the date of maturity, excepting when the risk has materialised. In cases where risk has materialised the issuing bank will take necessary action, in consultation with the participating bank and share the recoveries proportionately.

8. Documentation: All banks wishing to participate in the scheme should subscribe to the "Uniform Code for Participations" prepared by IBA which will spell out clearly their


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inter-se rights and obligations in relation to the securities covered by the advances in question.

9. Transferability: Participations will not be transferable. Il. Inter-Bank Participations without risk sharing The primary objective of this type of Participation is to even out short term liquidity. The participation should be backed by the cash credit accounts of the borrowers. 1. Applicability of the scheme: The scheme will be confined to scheduled commercial

banks only. 2. Period of Participation: The tenure of such Participations will not exceed 90 days. 3. Rate of Interest: The rate of interest would be determined by the two concerned banks. 4. Accounting: The issuing bank will show the amount of participations as borrowing while

the participating bank will show the same under Advances to bank i.e. due from banks. The participations would be treated as part of the net Demand and Time Liabilities and net bank balances for purposes of statutory reserve requirements.

5. Repayment: On the date of maturity, the issuing bank will pay the amount of participations with interest to the participating bank irrespective of the default if any in the advance in question.

6. Transferability: Participation will not be transferable. 7. Reporting: As a result of outstanding Participations being treated as borrowings, the

issuing bank should report such borrowings in the fortnightly return under Section 42(2) of the Reserve Bank of India Act, 1934. The same should be done by including the amount of Participations, by the issuing bank under 'Borrowings from banks' i.e. item l(b) in Form 'A'. The participating bank should include the amount of Participations taken in advances to banks under item III(c) in Form 'A'. The amount of Participations so included in the relative items of Form 'A' should be clearly indicated as a foot-note to the return, showing separately also Participations on risk sharing basis.


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Internal Capital Adequacy Assessment Process (ICAAP) Under Tier 2 (Supervisory Review) of Basel II, every bank is required to have ICAAP in place on the basis of which RBI shall conduct Supervisory Review and Evaluation Process (SREP). The banks shall have ICAAP, both at the solo level (global position) as well as at the consolidated level. Responsibility for designing and implementation of the ICAAP : It lies with the bank’s board of directors of the bank and with the Chief Executive Officer in the case of the foreign banks with branch presence in India. Important aspects of ICAAP: The board of directors of a bank shall: a) Set the tolerance level for risk; b) Ensure that the senior management of the bank:

i. establishes a risk framework in order to assess and appropriately manage the various risk exposures of the bank;

ii. develops a system to monitor the bank’s risk exposures and to relate them to the bank’s capital and reserve funds;

iii. establishes a method to monitor the bank’s compliance with internal policies, particularly in regard to risk management;

iv. effectively communicates all relevant policies and procedures throughout the bank;

c) Adopt and support strong internal controls; d) Ensure that the bank has appropriate written policies and procedures in place; e) Ensure that the bank has an appropriate strategic plan in place, which, as a minimum,

shall duly outline f) The bank’s current and future capital needs; g) The bank’s anticipated capital expenditure; and h) The bank’s desired level of capital. Submission of the outcome of the ICAAP to the Board: As the ICAAP is an ongoing process, a written record on the outcome of the ICAAP is required to be periodically submitted by the banks to their board of directors. Such written record should include, inter alia, the risks identified, the manner in which those risks are monitored and managed, the impact of the bank’s changing risk profile on the bank’s capital position, details of stress tests/scenario analysis conducted and the resultant capital requirements. The board of directors would be expected make timely adjustments to the strategic plan, as necessary. Report to RBI : Based on the outcome of the ICAAP as submitted to and approved by the Board, the ICAAP Document, should be furnished to the RBI. To begin with, the Document, duly approved by


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the Board, should be sent to the RBI only once a year, for the year ending March 31, but the frequency of submission could be reviewed in due course. The first such submission was required to be for the year ending March 31, 2008 by the banks which migrated to Basel II framework from that date while the remaining banks are to submit their first ICAAP Document for the year ending March 31, 2009, the date from which they would switch over to the Basel II framework. The document should reach the RBI latest by June 30, 2008 in respect of the first set of banks and by March 31, 2009 in respect of the second set of banks, and thereafter, by end of March every year. Review of the ICAAP outcomes: The board of directors are required to, at least once a year, assess and document whether the processes relating the ICAAP implemented by the bank successfully achieve the objectives envisaged by the board. The senior management is also required to receive and review the reports regularly to evaluate the sensitivity of the key assumptions and to assess the validity of the bank’s estimated future capital requirements. In the light of such an assessment, appropriate changes in the ICAAP should be instituted to ensure that the underlying objectives are effectively achieved. International Monetary Fund (IMF): The IMF is an organisation of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty. The role of IMF is to ensure orderly international trade and payments and advise and assist in the matter of macro economic management of its member countries. Its instruments are 1) surveillance, 2) financial assistance to facilitate adjustment and 3) technical assistance and training. Its programmes include 1) short-term stabilisation for financing temporary internal and external imbalances under stand-by arrangements (SBA), 2) structural adjustment programme for medium-term adjustment for macro imbalance of a more fundamental nature requiring stabilisation and structural adjustment. Its facilities include 1) Extended Fund Facility (EFF) 2) Supplementary Financing Facility, 3) Poverty Reduction and Growth Facility, 4) Stand-by Arrangement, 5) Compensatory Financing Facility, 6) Emergency Assistance and 7) Exogenous Shock Facility. Interest Rate : Interest rate is the price of borrowing or "renting" money as an asset with its purchasing power services. As the "renting" of money creates credit, interest is the price of credit. The price of money is the cost of commodity or service bought with money. Intervention : Broad definition of intervention is any sale or purchase of foreign exchange against domestic currency in the exchange market by the Central Bank. Defined narrowly, Central Bank transactions in the foreign exchange market should be called "intervention" only if (i) they are sterilized, i.e. are offset by Central bank transactions that nullify any impact on domestic money creation (unsterilised intervention would then be considered monetary policy); (ii) the


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purpose is to influence the exchange rate. Essentially, intervention consciously seeks to stem the adverse current market trend. Irrevocable Payment Commitments (IPCs): Banks issue Irrevocable Payment Commitments (IPCs) in favour of stock exchanges on behalf of Mutual Funds to facilitate the transactions done by these clients. RBI advise that IPCs are in the nature of non-fund based credit facility for purchase of shares and are to be treated at par with guarantees issued for the purpose of capital market operations. Such exposure of banks will, therefore, form part of their Capital Market Exposure. Banks are also advised that entities such as FIIs are not permitted to avail of fund or non-fund based facilities such as IPCs from banks Issue Department : Issue Department of the Reserve Bank of India is entrusted with the responsibility of obtaining currency notes and coins from the currency printing presses and mints and distributing them to the treasuries, sub-treasuries and the bank's agencies and sub-agencies, maintaining currency chests and small coin depots, removing from chests old and unserviceable notes for destruction in due course after examination. Issue Department is comprised of two sections, the General resource section which arranges for supply of notes and coins from the presses and Government Mint and their withdrawal from circulation, settlement of claims on defective notes, preparation of currency circulation account. The cash section handles the cash transaction and the actual receipt and remittances of cash.


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Jana Shree Bima Yojana – Scheme Guidelines: Jana Shree Bima Yojana is a Death cum Disability insurance scheme by LIC of India. All the Credit Linked Women Self help Group members are eligible to be covered under

the scheme. The premium payable is Rs.200/- per member per year. Members have to pay a premium of Rs.100/- per year and the balance would be met by

Govt. of India The policy is valid only for one year and hence requires renewal every year by paying the

premium. As an add-on benefit, LIC is paying a scholarship of Rs.1200/- per annum, for the

children of the JBY members, who are studying in Ninth to 12th standard (including ITI). The scholarship is paid only to two children of the JBY members. There are 37.44 lakhs of Self Help Groups in India. Five to six lakhs Self Help Groups (SHGs) are being formed every year. Sum assured under the policy: Natural death Rs.30000/- Death due to accident Rs.75000/- Permanent disability due to accident Rs.75000/- Loss of both legs, both hands, both eyes Rs.75000/- Loss of One leg One Hand and One eye Rs.37500/- The policy does not cover the ill health, maternity expenses and the expenses due to

accident. It is a group insurance scheme for the BPL persons living in Rural or urban areas. The members should have completed the age of 18 but below 59 years. Age proof in the form of School certificate/Transfer Certificate/Birth Certificate/Voters' identity Card/Driving license/ration card, / Voter's list/ Any identity card issued by Government or PSU, or a certificate from Public Health Centre ( PHC) or Government hospital , should be produced. Persons below poverty line or Just above the poverty line are eligible to be covered under the policy. Claims must be preferred within 30 days from the date of death/accident.


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Know Your Customer (KYC) : RBI had issued guidelines on KYC standards and Anti-Money Laundering Measures

during November 2004. To ensure uniformity of approach, clarity on the interpretation of the issues involved, RBI entrusted the IBA with the task of preparing broad outlines of a policy framework based on international practices with illustrative examples to serve as a reference guide to the banks.

Accordingly, The IBA had circulated a Model Policy on Anti Money Laundering measures and Know Your Customer standards on March 31, 2005 to be adopted by the respective Boards of the Banks. IBA has also issued Guidance Notes on KYC standards and AML Measures. These guidance notes incorporate salient aspects of the RBI Guidelines on KYC standards and AML measures and obligations of banks under the Prevention of Money Laundering Act, 2002 (PMLA) which have come into force on July 1, 2005.

Purpose: Reserve Bank of India has issued guidelines relating to KYC & AML to: (a) Control financial frauds, (b) Identify money laundering & suspicious activities (c) Scrutiny / monitoring of large value cash transactions in both domestic and foreign currency accounts / transactions. Banks were advised to follow certain customer identification procedure for opening of accounts and monitoring transactions of a suspicious nature for the purpose of reporting it to appropriate authority. These 'Know Your Customer' guidelines have been revisited in the context of the Recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). Detailed guidelines based on the Recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence (CDD) for banks by the Basel Committee on Banking Supervision, with indicative suggestions wherever considered necessary, have been issued have been issued by RBI. Banks have been advised to ensure that a proper policy framework on 'Know Your Customer' and Anti-Money Laundering measures with the approval of the Board is formulated and put in place.

Objective of KYC / AML / CFT guidelines: (a) To prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. (b) To know / understand their customers and their financial dealings better which in turn help them manage their risks prudently.

Know Your Customer: KYC is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. KYC procedure should be the key principle for identification of an individual / corporate opening an account. The customer identification should entail verification through an introductory reference from an existing account holder / a person known to the bank or on the basis of documents provided by the customer.

For the purpose of KYC policy, a 'Customer' is defined as:A person or entity that maintains an account and / or has a business relationship with the bank; One on whose behalf the account is maintained (i.e. The beneficial owner); Beneficiaries of transactions conducted by professional intermediaries, such as stock brokers, chartered accountants, solicitors etc. As permitted under the law, And Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

KYC norms are applicable for: Deposit accounts (All time and demand deposits) // Borrowal clients (Individual and corporate) // Safe deposit lockers. // Money changing


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transactions // Non resident investor making Foreign Direct Investment // All importers / Exporters // RTGS / NEFT / Nepal remittance scheme // Banking correspondents & facilitators // Mobile Banking // Credit / debit / gift / smart cards and marketing agents thereof.

Relaxed KYC norms: These are applicable for NO FRILLS accounts only. KYC Guidelines issued under: Section 35A of the Banking Regulation Act, 1949 and

Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.

KYC PILLARS: (1) Customer Acceptance Policy: (2) Customer Identification Policy: (3) Monitoring the Transactions: (4) Risk Management

Known Holiday/Subsequently declared holiday (FEDAI rules)

Known holiday is defined as one which is known at least seven days before the due date. If at the time of conclusion of a forward contract, the fixed date of delivery or the last

date of option is a Saturday or a known holiday either at the centre in India where the Rupee funds are to be settled or at the centre where the foreign exchange funds are to be delivered, the contract shall be deliverable on the day immediately preceding the Saturday or the holiday provided that day is open for business at both the centres.

Holidays which are not known at least seven days before the due date are to be treated as subsequently or suddenly declared holidays. In such cases the contract shall be deliverable on the next working day when all the centres are open for business.

Known Holiday or suddenly declared Holiday for delivery under the contract are applicable only to transactions related to the Interbank forward transactions and are not applicable to merchant forward contracts.

In the absence of any instructions from the customer, the bank should automatically cancel such expired unutilized forward contracts on the 7th working day after maturity date.

In case such 7th working day happens to be Saturday or Holiday, the automatic cancellation is to be done on the next succeeding working day.

Cancellation charges, if due from the customer, shall be recovered from the customer promptly . However, if the exchange difference is in favour of the customer, the same should not be paid to the customer since the contract is cancelled on account of his default"


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Liberalized Remittance Scheme

The Reserve Bank of India had announced a Liberalized Remittance Scheme (the Scheme) in February 2004 as a step towards further simplification and liberalization of the foreign exchange facilities available to resident individuals. As per the Scheme, resident individuals may remit up to USD 200,000 per financial year for any permitted capital and current account transactions.

Limited Liability Partnership Several expert groups have examined the need for LLP and recommended for enactment of law relating to LLP. These included the Abid Hussain Committee - 1997, Naresh Chandra committee on Private companies and Partnerships, 2003 & the Irani Committee for new company law 2005. The LLP Act 2008 has already comes into force wef 9.1.2009. The LLP Act 2008 covers provisions relating to formation, regulation and other matters relating to LLPs. It is a Body Corporate having legal entity separate from its partners. It shall have perpetual succession. Any change in partnership does not affect the existence, rights and liabilities of LLP. An LLP can sue and be sued by others. It shall have a common seal and can do, own, acquire and sell properties like any

corporate body. Provisions of Indian Partnership Act 1932 shall not apply to LLPs. Individuals & Corporates can become a partner in an LLP. Here, Corporate includes

another LLP (Indian or foreign) also along with Indian or foreign company. Cooperative society cannot become a partner in LLP. Minimum partners - 2; Maximum - The act is silent. (Therefore no restriction on

upperlimit like traditional partnerships). There must be atleast two designated partners who are individuals and atleast one of them

should be a resident in India. If a body corporate is a partner of LLP, then it can nominate an individual as designated partner.

Designated Partner Identification Number is to be obtained from Central Govt. They are responsible for all compliances as required under the LLP Act.

Registration of LLP is compulsory with Registrar of Companies. The name should end with LLP. Any person can apply for ‘reservation’ of name with ROC for a period of 3 months. ROC would register the incorporation document and issue a certificate of incorporation

within 14 days on completion of all formalities specified under the Act. Name of LLP, Registered Office, Regn Number must be mentioned in all invoices,

official correspondence and publications. The rights and duties of partners would be governed by LLP agreement. In the absence

of LLP agreement, Schedule I to the LLP Act would apply. Admission of new partner requires the permission of all partners. Every partner is an agent of LLP but not of other partners. Annual Accounts must be audited and filed with ROC within 60 days. The rights of partner can be transferred wholly or partly in favour of others.


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Existing firms / Public Company / Private Company can be converted into LLP. Winding up may be voluntary or by order of National Company Law Tribunal. Whether income is taxed in the hands of partners or in the hands of LLP is yet to be

clarified by IT Authorities. LLP will be ideal for professionals, Service sector SME units. Budget Feb 2010 Announcement: To facilitate the conversion of small companies into

Limited Liability Partnerships, transfer of assets as a result of such conversion not to be subject to capital gains tax.

Lead Bank Scheme : The scheme is formulated to give shape to the area approach for development. The objective is to bring together concerned institutions like commercial banks, co-operative banks, marketing societies, government departments and state level corporations etc, to formulate and implement a plan for development of banking and extension of credit in each district. Under the scheme various commercial banks have been allotted districts for development. The lead bank will be responsible for identifying centres for branch expansion, prepare branch expansion programme, to survey and identify potential area for development of agriculture, small scale industries, prepare estimate of the credit requirement of the district and deposit mobilisation etc. High Level Committee on Lead Bank Scheme: (21.04.2010 - RBI Annual Policy 2011) On the basis of the recommendations of the High Level Committee on Lead Bank Scheme (Chairperson: Smt. Usha Thorat), the State Level Bankers’ Committee (SLBC) convenor banks were advised on November 27, 2009 that the lead banks should constitute a sub-committee of the District Consultative Committees (DCCs) to draw up a roadmap by March 2010 to provide banking services through a banking outlet in every village having a population of over 2,000. Such banking services need not necessarily be extended through a brick and mortar branch but through any of the various forms of information and communication technology (ICT)-based models, including through business correspondents (BCs). Based on the other recommendations of the Committee, the lead banks/scheduled commercial banks were advised on March 2, 2010 to (i) strengthen various fora under the Lead Bank Scheme; (ii) discuss specific issues enabling and inhibiting financial inclusion in the SLBC/DCC machinery; (iii) set up separate sub-committees to work intensively on specific issues; and (iv) prepare district credit plans/annual credit plans linked with the business plans of the banks. For this purpose, it is proposed to put in place an appropriate monitoring mechanism of the working of the SLBCs/DCCs. Legal Tender : Denotes money recognised as legally acceptable in payment or on account for (in the

absence of contract to the contrary) payment of debts. In a valid tender by a debtor of bank notes which are legal tender in terms of section 26(1) of RBI ACT 1934, if the payment is refused by the creditor, the debtor is discharged from further liabilities, while the debt remains.

The coins issued under the authority of Section 6 of The Coinage Act, 1906, shall be legal tender in payment or on account i.e. provided that a coin has not been defaced and has not lost weight so as to be less than such weight as may be prescribed in its


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case: - (a) coin of any denomination not lower than one rupee shall be legal tender for any sum, (b) half rupee coin shall be legal tender for any sum not exceeding ten rupees, (c) any other coin shall be legal tender for any sum not exceeding one rupee [Section 13 of The Coinage Act, 1906].

Similarly, the One Rupee notes issued under the Currency Ordinance, 1940 are also legal tender and included in the expression Rupee coin for all the purposes of the Reserve Bank of India Act, 1934.

Every banknote issued by Reserve Bank of India (Rs.2, Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000) shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government, subject to provisions of sub-section (2) Section 26 of RBI Act, 1934.

Liberalisation Policy : A policy pursued to steadily and progressively open up the economy by removing or relaxing the controls, licences, permits and other restrictions which governed the functioning of the economy earlier. The thrust of the liberalisation policy which gives freedom to the market forces within a regulatory framework is towards creating competitive environment in the economy so as to improve productivity and efficiency in the system. Liquidity Adjustment Facility (LAF) : LAF is a monetary policy instrument introduced in 2000 to modulate liquidity in the system in the short term and to send interest rate signals to the market. LAF operates through repo and reverse repo transactions. RBI conducts repo to inject liquidity into the system through purchase of government securities with an agreement to sell them at a predetermined date and repo rate. In the reverse repo transaction RBI sells securities with a view to absorb excess liquidity with a commitment to repurchase them at a predetermined reverse repo date and reverse repo rate. Besides the function of day today liquidity management LAF is increasingly used as instrument of stabilisation. Other instruments of liquidity management are Open Market Operations (OMO) in the form of outright purchase/sale of securities and Market Stabilisation Scheme (MSS). Liquidity Aggregates : In order to have an approximate measure of overall liquidity in the economy, wider liquidity measures incorporating the liabilities of non-depository corporations have been evolved. These are: L1==M3+Postal Deposits (excluding National Saving Certificate) L2== L1+Term Money Borrowings, Certificate of Deposits and Term Deposits of Financial Institutions like IDBI, IFCI, Exim Bank, NABARD, SIDBI etc. L3== L2+ Public Deposit with non-banking financial institutions.


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Local Area Banks in the Private Sector With a view to providing institutional mechanisms for promoting rural savings as well as

for the provision of credit for viable economic activities in the local areas, it has been decided to allow the establishment of new local banks in the private sector.

This is expected to bridge the gaps in credit availability and enhance the institutional credit framework in the rural and semi-urban areas.

Scope of Activities: Since these banks are being set up in district towns, their activities will be focussed on the local customers. It is expected that their lendings will be to agriculture and allied activities, SSI, agro-industrial activities, trading activities and the non-farm sector with a view to ensuring the provision of timely and adequate credit to the local clientele in the area of operation. The banks will observe the priority sector lending targets at 40% of net bank credit (NBC) as applicable to other domestic banks. Within the above target these banks will adhere to the requirement of lending at least 25% of their priority sector deployments (10% of NBC) to the weaker sections. This will be monitored strictly and on an ongoing basis.

Registration, Licensing : Scheduling: The bank shall be registered as a public limited company under the Companies Act, 1956. It will be licensed under the Banking Regulation Act, 1949 and will be eligible for including in the Second Schedule of the Reserve Bank of India Act, 1934.

Capital: The minimum paid up capital for such a bank shall be Rs.5 crore. The promoters' contribution for such a bank shall at least be Rs.2 crore. Proposals having diversified share holdings, will be preferred.

The promoters have to bring in the entire minimum capital of Rs.5 crore upfront out of their verifiable own sources of funds. This is a mandatory requirement. The promoters have to submit their latest net worth statements duly verified / certified by a Chartered Accountant. The promoters are required to submit documentary evidence along with Auditor’s certificate in support of having mobilized the minimum initial capital of Rs.5 crore before issue of licence to the LAB.

The contribution towards capital of a LAB by a single family should not exceed 40% of the total paid up capital of the LAB. Proposals having diversified share holdings are preferred.

The entire promoters’ contribution towards equity (including the contribution of friends and relatives) shall carry a 'lock-in' period of three years from the date of issue of licence and at least 40% will be locked in for a further period of two years beyond the aforesaid period of three years subject to review before completion of five years.

Promoters: The promoters of the bank may comprise individuals, corporate entities, trusts and societies. In the application for a banking licence the details of the initial contribution of promoters, and the manner and method through which the minimum share capital of Rs.5 crore will be raised will need to be indicated.

Area of Operation: The area of operation of the proposed bank shall be a maximum of three geographically contiguous districts.

Head Office: The Head Office of the bank will be located at a centre within the area of operation of the bank.

Voting Rights: Voting rights of an individual share holder shall be governed by the ceiling of 10 % of the total voting rights as stipulated in Section 12(2) of the Banking Regulation Act, 1949.

Applicability of Statutes: The bank will be governed by the provisions of the Reserve Bank of India Act 1934, the Banking Regulation Act, 1949 and other relevant statutes.


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However, in regard to its liquidity requirements and interest rates, such banks will be governed by the provisions applicable to Regional Rural Banks established under the Regional Rural Banks Act, 1976.

Prudential Norms: Such a bank shall be subject to prudential norms, accounting policies and other policies as are laid down by RBI. The bank will have to achieve capital adequacy of 8 per cent of the risk weighted assets from the very beginning. Similarly, norms for income recognition, asset classification and provisioning will also be applicable to it from the beginning.

Branch Licensing: The bank shall be allowed to open branches only in its area of operation and in regard to branch licensing, it shall be governed by the existing policy.

Lok Adalat In the recent years, to improve the recovery of bank loans, Govt. of India and RBI have initiated several measures which include prudential norms on NPAs, enactment of RDDB Act (to create Debt Recovery Tribunals), enactment of SARFAESI Act (to enable the banks to enforce security interest without court intervention). One such step was the enactment of Legal Services Authorities Act for creating Lok Adalats. IBA had issued guidelines for taking up of cases for settlement through Lok Adalats. RBI reviewed the position in May 2001 and looking into the advantages in using the Lok Adalats, issued the guidelines to be followed by banks and FIs for making increasing use of the forum of Lok Adalats to settle banking disputes involving smaller loan amounts. What is a Lok Adalats: Lok Adalats is similar to a civil court which can be organised by the State Authority, the Distt. Authority, the Supreme Court Legal Service Committee or High Court Legal Services Committee, at such intervals and places as deemed appropriate. The Lok Adalats are created under Legal Services Authority Act 1987. Jurisdiction and types of case : A Lok Adalats has jurisdiction to determine and arrive at a compromise or settlement between the parties to the dispute. It deals with the cases where (a) the parties to the dispute agree to refer the issue to Lok Adalats; (b) one of the parties approaches the Lok Adalat and Lok Adalat is satisfied that there are chances of settlement. In such case, the Adalat issues notice to the other party; (c) in the opinion of the Lok Adalats, the cognizance of the dispute can be taken. Cases that cannot be taken up: The offences, which are compoundable under any Law, cannot be brought within the purview of the Lok Adalat. This means that the Lok Adalat has no authority of its own to pass judgments. Awards of Lok Adalat: Their awards are in the form of consent decrees and no appeal lies against such Awards and decision is binding on all parties. Procedure and powers: Civil Procedure Code is applicable which means the Lok Adalat can send summons, take evidence on oath, initiate ex-parte proceedings, and determine court procedures. Where compromise is not reached: The case shall be returned back to the court from which the reference was received for continuing with the case, there. RBI Guidelines (May 2001 as amended in 2004) ► Amount - Loan cases involving an amount up to Rs.20 lakh (the amount was enhanced

by RBI from Rs.5 lac on Aug 03, 2004) may be referred to Lok Adalats. ► Borrowers : In order to make a definite impact on reduction of NPAs, all NPA accounts,

both suit filed and non-suit filed, which are in 'doubtful' and 'loss' category can be referred


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to Lok Adalat for settlement. No cut off date has been suggested by RBI since the Lok Adalat is an on-going process.

► Settlement Formula : The settlement formula is flexible and is left to the Board of Directors of each bank/ institution. However, certain essential parameters, as under, should be kept in view:

1. A decree should be sought from the Lok Adalat for the principal amount and interest claimed in the suit, and after full payment of decree amount, a discharge certificate should be issued by the bank / financial institution.

2. As regards recovery of the book dues as on the date the account became NPA or transferred to protested bills account, and interest and other costs charged to the borrower’s account thereafter, the Board of the bank/institution should frame flexible policies in this regard, taking into account the value of security, the repaying capacity of the borrower, and cost of recovery, etc.

3. As regards repayment period, RBI has suggested that the repayment period should be within one to three years.

4. The negotiated agreement with the borrower should contain a default clause in terms of which if the borrower does not pay the installments due regularly, within the repayment period, the entire debt will fall due for payment and bank may initiate legal proceedings.

5. The Lok Adalats settle cases on the spot. The Officers representing the institutions should have sufficient powers to accept the compromises worked out within the policy framework laid down by the Board of Directors of each institution. As the objective of the whole exercise is to settle arrear cases expeditiously, the banker should respond pro-actively to the suggestion of the Presiding Officer of the Lok Adalat.

Organisational arrangements The individual banks and financial institutions should be more pro-active and should take the responsibility of organizing Lok Adalats. The experience of implementation of RBI guidelines issued to public sector banks vide RBI circular dated July 27, 2000 on one-time settlement may be kept in view. The institutions should get in touch with State / District / Taluk level Legal Services Authorities for organizing Lok Adalats. The banks / financial institutions should prescribe clear guidelines to their operating staff and monitor the progress regularly. The banks should report the progress to the Central Office, Reserve Bank of India, at quarterly intervals within one month from the quarters ending March, June, September and December. Reserve Bank of India monitors the progress made by the institutions in effecting recovery under the scheme. The convener banks of State Level Bankers’ Committee (SLBC) and lead banks of districts should give necessary publicity to the Scheme through various modes, under their areas of operations. DRT Lok Adalat Banks can take up matters with Lok Adalats organised by the Debt Recovery Tribunals / Debt Recovery Appellate Tribunals, where outstanding exceed Rs.20 lac. Supreme Court suggestion Supreme Court has suggested that personal loan cases up to Rs.10 lac should preferably settled through Lok Adalats. Advantages - There are no court fees involved when fresh disputes are referred to it. The court fee already paid is refunded if the matter is settled. The settlement is fast. In case of non-payment by the borrower as per Lok Adalat award, the execution of decree can immediately be initiated in the appropriate court.


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London Inter Bank Offered Rate (LIBOR) : LIBOR is the most widely used benchmark or reference rate for short term interest rates. It is compiled by the British Bankers' Association (BBA) and released to the market at about 11.00 a.m. each day. LIBOR is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London inter-bank market. The BBA maintains a reference panel of at least 8 contributor banks. The BBA surveys the panel's market activity and publishes their market quotes on-screen. The top quartile and bottom quartile market quotes are disregarded and the middle two quartiles are averaged: the resulting "spot fixing" is the BBA LIBOR rate. The quotes from all panel banks are published on-screen to ensure transparency. LIBOR fixings are provided in ten international currencies: Pound Sterling, US Dollar, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Euro, Danish Kroner, Swedish Kronor and New Zealand Dollar Low Income Countries : These are countries in which most people have a lower standard of living with access to fewer goods and services than do most people in high- income countries. As per the World Bank's classification these are the countries with per capita Gross National Income of $875 or less in 2005.


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Mobile Banking: (RBI guidelines): 1. Ensure that RBI guidelines on "KYC", "AML" and CFT are made applicable to mobile

based banking services. 2. Provide only Indian Rupee based domestic services. 3. Offer the facility to customers subject to a daily cap of Rs.5000/- per customer for funds

transfer and Rs.10,000/- per customer for transactions involving purchase of goods / services.

4. Restrict the services only to customers of the bank and / or holders of debit / credit cards issued as per the Reserve Bank of India guidelines.

5. Banks may use the services of Business Correspondent appointed in compliance with RBI guidelines, for extending this facility to their customers.

6. Apply RBI guidelines on 'Risks and Controls in Computers and Telecommunications' dated 4th February 1998 mutatis mutandis to mobile banking.

7. File Suspicious Transaction Report (STR) to Financial Intelligence Unit - India (FIUIND) for mobile banking transactions as in the case of normal banking transactions.

8. Put in place a document based registration system with mandatory physical presence of their customers, before commencing mobile banking service unless specifically permitted by RBI.

9. Communicate to the customer the full details of the Terms and Conditions of the service offered.

10. Ensure that the technology used for mobile banking is secure that ensures confidentiality, integrity, authenticity and non-repudiability.

11. Ensure that customers having mobile phones of any network operator are in a position to avail of the service.

12. To ensure inter-operability between banks, and between mobile banking service providers, adopt the message formats like ISO 8583, with suitable modification to address specific needs.

13. Put in place a monthly transaction limit depending on the bank's own risk perception of the customer.

14. Bank may use the existing mechanism for handling customer complaints / grievances for mobile banking transactions as well. However, in view of the fact that the technology is relatively new, set up a help desk and disclose the details of the help desk and escalation procedure for lodging the complaints, on bank's websites. Make such details available to the customer at the time of sign up.

Mobile Banking in India: (RBI Annual Policy 21.4.2010 Uptodate) The use of mobile phone channels for initiation and execution of banking transactions has

been gaining significance the world over. The significance of this channel has been recognised by the Reserve Bank. Accordingly, regulatory guidelines for enabling mobile banking were notified in October 2008. The transaction limits were further relaxed in December 2009. Banks were also permitted to enable small value transactions up to Rs.1,000 without end-to-end encryption. Currently, this channel is used to settle on an average 1.9 lakh transactions of average value 12 crore in a month.

To further encourage the development of other mobile-based products, non-bank entities

were also permitted in August 2009 to issue mobile-based, semi-closed prepaid payment


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instruments, up to Rs.5,000. Non-bank entities can issue such instruments for facilitating payment for goods/services and m-commerce transactions.

The Reserve Bank believes that given the penetration levels of mobile telephony in India,

this could become an important medium for achieving financial inclusion in the country. However, this calls for focused efforts by the banks to partner with mobile service providers. Co-operation rather than competition between these two important stakeholders is the critical need of the hour. Recently, an Inter-Ministerial Group constituted by the Government of India, has made important recommendations for financial inclusion through a bank-led model using the infrastructure already set up by mobile service providers. The Reserve Bank is examining the recommendations of the Group.

Managed Exchange Rates : Refers to a hybrid of fixed and floating exchange rates. In this system the exchange rates are basically determined by market forces but the monetary authorities sometimes fix target zones or targets and influence the exchange rates by selling or buying currencies or changes in the monitory policies. Management Of Exchange Reserves : The official external reserves of the country consists of monetary gold and foreign assets of the Reserve Bank besides the holdings of Special Drawing Rights. The Reserve Bank, as the custodian of the country's foreign exchange reserves, is vested with the duty of managing the investment and utilisation of the reserves in the most advantageous manner. Having regard to the safety and liquidity, the objective of reserve management is to preserve real value and get reasonable level of return. Market Economy : It is an economic system providing for a mechanism for business activities through a system of prices and markets. Market is a mechanism where buyers and sellers of goods and services interact to determine the price and quantity of goods and services. In a market economy no single individual or organisation is responsible for production, consumption, distribution and pricing. Prices coordinate the decision of producers and consumers. Market does not often aid distribution of income that is socially equitable. It may even produce high levels of income and consumption. Market Stabilisation Scheme (MSS) : The Reserve Bank has been usually utilising its investment in government securities for conducting open market operations, repo and reverse repo transactions. With the increased inflow of foreign exchange and the consequent monetary expansion it becomes necessary for RBI to sterilise the monetary impact by mopping up excess liquidity through open market operations. This invariably resulted in depletion of the RBI holding of government securities hampering the control of sterilisation operation. Hence a new scheme called the Market Stabilisation Scheme was introduced in 2004. Under this scheme, Government would issue Treasury Bills and Dated Securities to the RBI for absorbing liquidity in the system.


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Government's cash balances with the RBI would go up correspondingly. The government cannot withdraw the amount, which is held in a separate identifiable cash account with RBI. Securities obtained under the MSS are auctioned by the RBI and the proceeds kept in separate MSS account maintained and operated by RBI. The proceeds kept in the MSS account will be utilised only for redemption of treasury bills and securities. Marking To Market : This is the practice where by the banks are required to value their investment at lower of cost or market value, so that bank's balance sheet presents a realistic picture of the financial health. Micro Finance : The term refers to low value financial services extended by the financial institutions to the poor people. The services broadly include provision for savings, credit, insurance, leasing, money transfer etc to poor and low-income households and their micro enterprises. In India savings and credit aspects of the micro finance have been accorded due consideration so far. Minority Community Presently Minority community includes Muslims, Christians, Sikhs, Neo-Buddhists, Zoroastrians. Margin Money Scheme of NMDFC: ► The NMDFC is operating a Margin Money Scheme. ► Bank finance under the scheme will be up to 60 percent of the project cost. ► The remaining amount of the project cost is shared by NMDFC, the State channelising

agency and the beneficiary in the proportion of 25%, 10%, and 5%, respectively. ► Branches shall participate in the Margin Money scheme evolved by NMDFC and finance

eligible enterprises under Minority Communities under the scheme. Prime Minister's 15 Point Programme for the Welfare of Minorities: ► Objective is to ensure that an appropriate percentage of the priority sector lending is

targeted for the minority communities and that the benefits of various Government sponsored schemes reach the underprivileged, which includes the disadvantaged sections of the minority communities.

► Branches to ensure that within the overall target for priority sector lending and the sub-target of 10% for the weaker sections, sufficient care is taken to ensure that minority communities also receive an equitable portion of the credit.

Monetarism : A school of thought, which holds that money is the major determinant of short-run movement in nominal gross domestic product (GDP) and long-run movements in prices. While monetarists give prime importance to money supply in determining aggregate demand, others


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argue that a wide variety of variants like fiscal policy and net exports of goods and services including money, affect the way economy functions. Monetary Aggregates : Money for policy purposes is defined to include a set of liquid financial assets, which have an impact on the aggregate economic activity. On the basis of two important functions of money viz, medium of exchange and a store of value, the following monetary aggregates have been formulated for monitoring the state of liquidity in the economy. They are arrived at by consolidation of balance sheet of the banking system. M0==Currency in circulation +bankers deposits with the RBI+ other deposits with RBI. M1==Currency with public + Current deposits with banks + Demand liability portion of savings deposits with the banks + "other deposits" with RBI (deposits of quasi government and other financial institution of foreign central banks, provident and gratuity funds etc). M2== M1 + Time liabilities portion of savings deposits with banks + certificate of deposits issued by banks + term deposits (excluding FCNR (B) deposits) with banks maturing within one year. M3== M2+ Term deposits with banks [excluding FCNR (B)] with maturity period exceeding one year + Call borrowings from non -depository financial corporations by the banking system. Monetary Base : Monetary base or high-powered money or reserve money or primary money derives the name from its quality or capacity to serve as a reserve base for creation of deposits, a component of money supply, under the fractional reserve system. Its components are (a) currency with the public (b) bank reserves comprising balances of commercial and cooperative banks with the RBI and cash on hand with banks and (c) other deposits with RBI. Monetary Deepening : Refers to a phenomenon where there occurs a gradual rise in the amount of money in circulation in real terms per unit of output or in the ratio of money supply in real terms to real output. The greater the extent of monetary deepening that occurs in the economy the lower will be the inflationary potential of a given increase in money supply. Monetary Museum : A Museum set up by the Reserve Bank of India in Mumbai to preserve the monetary heritage and depict the history and evolution of money in India. The coinage section spans from the sixth century B.C. to the contemporary Republic of Indian coins, the notes display from the early 19th century and consisting of notes issued by private and semi -Government banks, the Government of India, and the Reserve Bank, and the section on financial instruments depict hundies, cheques, and promissory notes used in India.


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Monetary Policy : Refers to the use of official policy instruments, under the control of the Central Bank to regulate the availability, cost and use of money and credit with the aim of attaining optimum level of output and employment, price stability, healthy balance of payment position and any other goals set by the government. In an expansionary monetary policy, money supply increases causing an expansion in aggregate demand through lower interest rates. This stimulates interest sensitive spending on investment for manufacture of goods, housing, export, business etc. and in turn, acting through multiplier leads to a rise in gross domestic product. The reverse process takes place when monetary policy is tightened. However, in a fully employed economy monetary expansion would primarily raise prices and nominal gross domestic product with little effect on real GDP as the higher stock of money would be chasing the same amount of output. Monetary Policy Lags : Two types of lags are identified. Inside lag and outside lag. Inside lag refers to the lag within the central bank between the time action is needed and the time, action is actually taken. The outside lag refers to the lag between the change in rate of interest and availability of credit and the initial impact on real variables like output and prices. Inside lag could be broken up into the recognition lag and the decision or action lag. The recognition lag represents the lag between the time action is needed and the time the need is recognised by the central bank. The decision lag refers to the lapse of time between the recognition of the need for change in policy and taking of action. Monetary Policy Strategies : Monetary policy aims at price stability, provision of appropriate credit for productive activities and financial stability. There are dilemmas involved in achieving these policy objectives. While providing adequate credit to government and commercial sector, it is to be ensured that inflationary pressures do not build up. Also there is a need to balance the interest cost on public debt with that of commercial credit. In addition, with the liberalisation it becomes necessary at times to tighten monetary policy to avoid speculative pressure on exchange rate. Lastly, in the pursuit of price stability RBI has to look into the aspect of adverse effects of policy actions on balance sheet of the banking system. The process of monetary policy formulation is essentially based on the information of the entire domestic economy as well as developments in international economy. An in-house financial market committee (FMC) set up in 1997 monitors market development and recommends tactical operation to meet development on a day to day basis. Inflation and GDP growth forecasts are provided by an inter-departmental expert group. The Board of Financial Supervision set up in 1994, under the Bank's Central Board is entrusted with the oversight of supervision of commercial and selected cooperative banks and financial institutions and non-banking financial companies. The bank also gets policy advice from technical and Advisory committee on Money and Government Securities Markets, Standing Committee on Financial regulation and other expert working groups.


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Monetary Policy Targets : The objects of monetary policies are price stability (low and stable inflation) economic growth (stabilisation of output around its potential) and financial stability. These are called final targets and are not under direct control of the Central Bank. For example, monetary policy affects inflation not directly but through impacting the aggregate demand in the economy. Therefore, the Central Bank adopts intermediate targets or operating targets for policy which have a stable relationship with the ultimate macro-economic objectives of monetary policy. These intermediate targets could be interest rates, money supply, credit targets etc. Monerary Targeting : It is defined as an official commitment to pursue policies to contain the growth of one or more monetary aggregates (M1 or M3) to a particular rate or within a range of growth rate. It implicitly involves acceptances of some obligations by the monetary authorities to conduct open market operation, constrain government deficit and allow adjustment of interest rates and exchange rates so as to achieve the announced target. Monetary Transmission : Refers to the process through which changes in monetary policy instruments affect the rest of the economy, particularly output and inflation. Monetary policy actions are transmitted to the rest of the economy through changes in financial prices such as interest rates, exchange rates, yields, asset prices, equity prices and financial quantities like money supply, credit aggregates etc. Money Market : Money Market is a market where short- term funds are lent or borrowed. It is a centre for meeting the short-term requirements of borrowers. It is in money market that the central bank comes into contact with the financial sector of the economy as a whole and by influencing the cost and availability of credit, the Bank achieves monetary policy objectives. The RBI is a key constituent of the money market being the residual source of supply of funds. Money Market Mutual Funds (MMMFs) : Represent a short term investment avenue for retail investors, which lies between low bank deposits and higher money market rates. One object is to bring money market instruments within the reach of individuals. RBI regulations permit only banks, financial institutions and their subsidiaries to set up MMMFs. The minimum and maximum size of MMMFs has been specified and only individuals were allowed to invest. The money market instruments and the investment limits for each were also specified. MMMFs come under the regulatory oversight of SEBI and governed by SEBI (Mutual Funds) Regulation 1996.


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Money Multiplier : This expresses the relationship between money supply and reserve money and is a measure that explains the variations in money supply with reference to given quantum of reserve money. Monetisation : The term is prone to a variety of definitions. The concept is used to indicate transition from barter to fiduciary currency, to credit and financial intermediation. It is often referred to indicate the rate of use of money. The term connotes the enlargement of the sphere of use of money and is measured by the proportion of the aggregate value of goods and services that is paid for in money by the purchaser. Moral Suasion : Moral suasion is an instrument of monetary regulation whereby the Central Bank seeks to influence the volume and direction of flow of credit by appeal or persuasion to comply voluntarily with its various guidelines to the banks. Moral suasion may be used in the form of advice on the desirable expansion of bank credit, loan priorities or maintenance of liquid assets etc. Mutilated Currency Notes : A mutilated note is a note of which a portion is missing or a note which is composed of pieces, provided that the note presented is not less than half of the area of the note and that, if the note is composed of a note joined together, each piece is identifiable as part of the same note. Facility exists for exchange of these notes at the offices of RBI and the currency chest branches of the commercial banks subject to certain conditions. Multiple Indicator Approach (MIA) : From mid 1980s to 1997-98, the operating method of monetary policy followed by the RBI was 'monetary targeting with feedbacks'. A crucial assumption of the above framework of monetary policy was the stable relationship between money, output and prices - the money demand function. The above operating method was reviewed in view of the following two major developments: i) liberalistion of financial markets and opening up of the economy and ii) short-term deviation in the relationship between money, output and prices. Over time, it became apparent that besides real income, interest rate also influences the decision to hold money. Hence, from 1998-99 onwards, RBI has been following Multiple Indicator Approach (MIA), in which a number of macroeconomic and financial variables are considered while deciding the monetary policy rather than a single M3 aggregate as in the past. Other variables considered are interest rates, rate of return in different markets, bank credit, fiscal position, foreign trade, capital flows, exchange rate, foreign exchange position, etc. Thus, the exclusive use of broad money as an intermediate target was de-emphasised, but the growth in broad money (M3) continues to be used as an important indicator of monetary policy. The multiple indicator approach provided necessary flexibility to RBI to respond to changes in domestic and international economic and financial market conditions more effectively.


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National Product Or National Income : This is an indicator of economic perfomance of a country in any given period and is the measure of product generated in a country and income accrued from abroad. (National income = Net national product at factor cost = Sum of all the factor payments (wages, salaries, rent, interest, and profit) = The value of all final goods and services, sold/ produced in the economy as whole. Gross national product - depreciation or capital consumption = Net national product at factor cost. Net national product at factor cost + indirect taxes- subsidies = Net national product at market prices. Narasimham Committee : A Committee on Financial System under the chairmanship of M. Narasimham was set up by the Government of India to examine all aspects relating to the structure, organisation, functions and procedures of the financial system and make recommendations with a view to remove the rigidities and weaknesses of the financial system The Committees' recommendations made in November 1991 constitute a landmark in the Banking policy in the country and ushered the banking business into a market oriented system. The RBI has been implementing the key recommendations of the committee since January 1992, which encompassed modifying the policy framework, improving the financial soundness of banks, strengthening institutional framework and strengthening of supervisory mechanism. A second high-level committee on banking sector reforms under the chairmanship of M. Narasimham was appointed by the Government in 1997, to review the record of implementation of financial sector reforms recommended by the first committee and to chart the reforms necessary in the years ahead. The Committee in its report submitted in April 1998 gave wide ranging recommendations to strengthen the banking system and revamp the regulatory and supervisory functions. Negotiated Dealing System (NDS) : NDS, operationalised from February 15, 2002 is a versatile trading platform enabling the

market players like banks, insurance companies, mutual funds to trade in securities, in both through computer mechanism or chat mode for negotiation on the system itself. One important feature of NDS is that it facilitates price-discovery and volume discovery in the government securities market by means of information dissemination in real-time both to market as well as non-market participants. NDS can also be used by members (banks, primary dealers, financial institutions) to report their secondary market transactions in government securities and money market transactions which have been finalised outside NDS The transactions of members in government securities reported through NDS will be taken up for settlement (routed through the Clearing Corporation of India Limited) at RBI.

The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in government securities was introduced in February 2002.

It facilitates the members to submit electronically, bids or applications for primary issuance of Government Securities when auctions are conducted.

NDS also provides an interface to the Securities Settlement System (SSS) of the Public Debt Office, RBI, Mumbai thereby facilitating settlement of transactions in Government Securities (both outright and repos) conducted in the secondary market.


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Membership to the NDS is restricted to members holding SGL and/or Current Account with the RBI, Mumbai.

In August, 2005, RBI introduced an anonymous screen based order matching module on NDS, called NDS-OM. This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI (Please see answer to the question no.19 about CCIL). Direct access to the NDS-OM system is currently available only to select financial institutions like Commercial Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc.

Other participants can access this system through their custodians, i.e., with whom they maintain Gilt Accounts. The custodians place the orders on behalf of their customers like the urban co-operative banks.

The advantages of NDS-OM are price transparency and better price discovery. Gilt Account holders have been given indirect access to NDS through custodian

institutions. A member (who has the direct access) can report on the NDS the transaction of a Gilt Account holder in government securities. Similarly, Gilt Account holders have also been given indirect access to NDS-OM through the custodians. However, currently two gilt account holders of the same custodian are not permitted to undertake repo transactions between themselves.

Nominal Effective Exchange Rate (NEER) : The multilateral effective exchange rate or trade weighted exchange rate (NEER) is an index number (expressed with a base of 100) of trade weighted nominal exchange rate with respect to a basket of currencies of countries with which the country trades. In other words NEER is the weighted geometric average of bilateral nominal exchange rates of the domestic currency in terms foreign currencies. The weights are normally determined on the basis of country's bilateral trade (exports plus imports) during a chosen period; the weights reflect the importance of other currencies in the home country's total international trade, and helps to ascertain the exchange rate trends of the domestic currency vis-?-vis those of the major trading partners Non-Banking Financial Companies (NBFCs) : An NBFC is an institution which is incorporated under the Companies Act engaged in financial activity like granting of loans and advances, acquisition of shares, leasing, hire purchase, conduct of chit funds etc, and whose principal business should not be agricultural operation, industrial activity, trading or real estate business. The NBFCs are classified into different categories based on their principal business like, equipment leasing, hire purchase financing, loans company, investment company, housing finance company, etc.


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Non-Monetary Liabilities Of Banks : Refer to a source of change in money supply. So named because an addition to these liabilities will have an opposite impact on monetary expansion, unlike the other sources of change which exert positive influence. The net non-monetary liabilities of RBI include paid-up capital and reserves, contingency reserves, exchange fluctuation reserves, RBI employees pension, Provident /guarantee fund, bills payable, other liabilities, IMF a/c no:1 offset by changes in other assets such as premises, loans to staff, debit balances under various heads of accounts, excluding gold held in Banking Department. Net non-monetary liabilities of other banks comprise paid-up capital and reserves, and other net residual items. The net non-monetary liabilities are broadly grouped into "capital account" and "other items (net)" in the presentation of monetary statistics. Non-Performing Assets (NPA) : NPA is defined as a credit facility in respect of which interest or instalment of principal has remained unpaid for a specified period during the year. The banks are not allowed to charge and take to income account the income on all non- performing assets. Nostro Account : Literal meaning of nostro account is "our account with you". Nostro is derived from the Latin term "ours" An account that a bank holds with a foreign bank. These are the accounts opened by banks in India either with their own branches at overseas centres or with any other banks. These accounts are foreign currency accounts. Eg. SBI, Mumbai opens a US. Dollar account with a bank in New York. This is the Nostro account of SBI in US dollar. Similarly, banks can open Nostro accounts in different currencies viz. Pound sterling, Euro, Yen etc., with banks at respective countries. Note Refund Rules : The RBI Act 1935 lays down that the bank may with previous sanction of the Central Government refund the value of any soiled, mutilated, defaced or imperfect notes. The rules framed under the provision of the act for refunding mutilated, lost or defaced notes and passed by the Central Board of Directors of RBI with the previous approval of Central Government, are known as Note Refund Rules. Off-Shore Banking Units : With a view to providing an internationally competitive and hassle-free environment for production for exports the Government of India introduced Special Economic Zones (SEZs). The Government of India also permitted to set up off-shore banking units in these zones. These units are virtually foreign branches of Indian banks but located in India. All banks operating in India authorised to deal in foreign exchange are allowed to open off-shore banking units. The Reserve bank grants exemption from Cash Reserve Ratio requirement to the parent bank in respect of these branches. Banks, however, have to keep Statutory Liquidity Ratio for the branches. The sources for raising foreign currency funds are external. Deployment of funds restricted to lending to units located in SEZs and SEZ developers. The branches are not allowed to deal in Indian rupee. Canara Bank has closed its OBU at Noida in December 2009.


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Off-Site Monitoring And Surveillance (Osmos) : This system providing on-going monitoring of performance of banks was introduced in 1995 with the aim of assessing the financial position of banks between the periods of on-site inspection. Under this banks are required to submit periodical returns to the RBI incorporating data on assets, liabilities, interest rate and liquidity risk, off-balance sheet exposure etc. The exercise involves two-tier approaches (1) analysis of statistical reports and (2) routine discussions with management. Open Market Operation : A monetary policy instrument which is used by the Reserve Bank mainly with a view to affect the reserve base of the banks and thereby the extent of monetary expansion. It also, in the process, helps to create and maintain a desired pattern of yield on government securities and to assist the government in raising resources from the capital market. Under the RBI Act, the RBI is authorised to purchase and sell the securities of the Union Government and State Governments of any maturity and the security specified by the Central Government on the recommendation of Bank's Central Board. Presently the RBI deals only in the securities issued by the Union Government. Open market operations are by way outright sale and purchase of securities through the Securities Department and repo and reverse repo transactions. Open Standards for Financial Inclusion (IBA release January 2010)

‘IBA – IDRBT Technical Committee on Open Standards for Financial Inclusion’ has

been working since February 2009. The first draft of the technical standards specification deals with the smart card based

solution standards which relate to the following areas:

1. The Smart Card Numbering Scheme (19 DIGITS) 2. The Smart Card Operating System: The Committee decided to adopt the SCOSTA

standard since it available free of cost compared to other operating systems that are priced and a licence fee is required

3. The FI Customer Card Data Architecture 4. The FI Terminal Operator Card Data Architecture 5. The Terminal Functionality Specification 6. Key Management System

The draft also deals with a migration path for adoption of these standards and certification for adherence to these standards.

The draft report is now placed in public domain for suggestions and comments by all stake holders. Model of Smart Card based Solution

Each customer is given a smart card with his primary account number and other personal details such as address, nominee details, contact information and transaction history stored within it.


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The smart cards are to be used at bank handheld terminals owned by a bank and operated by business correspondents.

The Terminal Operator Card and the Customer Card are mutually authenticated. The customer is authenticated using the biometric fingerprint of the customer stored in the smart card.

These bank terminals are to have connectivity through any communication channels such as Global System for Mobile communications (GSM), Code Division Multiple Accesses (CDMA), Public Switched Telephone Network (PSTN), Ethernet depending upon the type of connectivity available at the local place of operation.

However connected, the communication finally will reach the back-end intermediate Financial Inclusion Server (held by service provider/Bank).

All customer details and account information including current balance is held by the FI Server which will regularly update the bank host.

The smart card is used for customer authentication, whenever transactions are made at bank terminals.

The solution also requires card lifecycle management, bank terminal lifecycle management, bank terminal operator management, solution provider and bank business rule management.

Out Sourcing By Banks : Outsourcing involves using the service of a third party (either affiliated or external to the corporate entity) to perform activities on a continuing basis that would normally be undertaken by the bank itself. Third party or service provider refers to the entity that is undertaking the outsourced activity on behalf of the bank . The bank will have to ensure effective management of certain risks associated with outsourcing like strategic risk, reputation risk, compliance risk, operational risk, country risk, contractual risk, access risk, systemic risk, etc., so as to avoid damage to bank's business operation, reputation or profitability.

Ownership of Banks: Two Models

Source: RBI’s Report on Trend and Progress of Banking in India 2008-09 There are two models of ownership of banks, namely, the Anglo-Saxon model and Asian

model. The former refers to the model adopted by most of the developed countries, while the

latter can be seen in some of the developing countries, such as India. Under the former model, the key decisions are taken by the top executives almost

independently dictated by short-term considerations, and regulations may not be as stringent as required.

As against this, countries like India have a financial system marked by substantial public sector ownership and a different incentive structure for the top executives. In this model, there is likely to be less financial innovation in the form of complex products and less incentives for risk taking.

Thus, this sector is likely to be less innovative and less efficient but would be steadier. The advantage of this sector during times of crisis is the perceived sovereign backing

which has been amply clear during the current crisis.


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While the former model came under pressure during the recent crisis, the latter model having substantial presence of public sector stood the Indian financial system in good stead.

This was evident from the fact that the NPAs ratio for foreign and new private sector banks increased significantly during 2008-09 as an after-effect of the crisis, the NPA ratio declined for public sector banks during this period and was the lowest among all bank groups.

Public ownership has proved out to be a source of strength rather than a weakness for the Indian banking system.

While discussing the perspectives about the role of public ownership in the banking system, there are certain issues that need to be noted.

First, contrary to the belief that public ownership weakens the allocative efficiency, the analytical exercises by the Reserve Bank indicate that allocative, technical and cost efficiency of the public sector banks has been much higher than the private and foreign banks in India in the recent years.

Secondly, the important aspect of public ownership of financial system in India has been the key role played by banks in the pursuit of social and redistributive objectives of developmental finance, which are vital to an emerging market economy like India.


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Participation Certificate (PC) : The PCs were introduced in 1969 with a basic idea that it would even out the liquidity pressure within money market. This is an instrument which enables a bank to sell to a third party (the transferee) a part or all of an advance made by it to a borrower or client against hypothecation of goods or book-debt. Legally speaking the PC is a deed of transfer. The PC in practice represented a borrower-lender relationship between the PC issuer and the banks /institutions purchasing it. The issuing bank is bound to repay the purchaser bank or participant on maturity irrespective of the position of borrower mentioned in the certificate. There are two types of inter-bank participations: one on risk sharing basis and the other without risk sharing. The maximum amount for which inter-bank participation would be issued is restricted to 40 percent of outstanding advances. Inter-bank participations with sharing is exempted from Statutory Liquidity Ratio and Cash Reserve Ratio. Participatory Notes : These are derivative instruments issued by registered Foreign Institutional Investors (FII) to their clients, who are not directly allowed to buy or sell in Indian markets. Participatory notes are like contract notes and are issued by foreign institutional investors to their overseas clients who may not be eligible to invest in Indian stock market. Foreign institutional investors invest funds on behalf of such investors, who prefer to avoid making disclosures required by various regulators. These clients could be high net worth non-resident individual or Overseas Corporate Bodies or other unregistered units (in India). FIIs use their client's money to buy or sell stocks in Indian market. Returns for clients depend on the gains/loss made by these registered FIIs from Indian markets. Pass Through Certificate ( PTC)

It is a certificate given to an investor against certain mortgaged-backed securities that lie

with the issuer It can be compared to securities like bonds and debentures that may be issued by banks

and other companies to investors The interest that is paid to the issuer on these securities comes to the investor in the form

of a fixed income. Investors in such instruments are usually financial institutions like banks, MFs, &

insurance cos. Difference between pass through certificates and pay through certificates:

In pass through certificate interest earned on the receivables is directly passed on to the holders.

In pay through certificate interest received from the receivables is not passed on to the holder of the unit. Instead the SPV issues new securities to them Securitization:

Many banks and pvt orgnaisations have incomes or receivables that are due to them in lieu of loans or services that they have offered in the past.

Securitisation involves conversion of these incomes or receivables into debt instruments which are then sold to investors.

For this purpose the parent organisation sets up a special purpose vehicle which issues these debt instruments.


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By making these debt instruments available in the market the organisation manages to make their assets liquid and can use these funds for some other productive business.

When an investor buys these debt instruments the investor is given a PTC . However this does not mean that the investor owns the assets. When the original lender recovers money from the original borrower ( as interest or

otherwise) it is then passed on to the SPV which then disburses it to the investor in the form of a fixed income

Performance Guarantee: This is a type of Guarantee that stipulates an obligation to pay for losses which may arise as a consequence of the Applicant failing to fulfill his obligations under the contract. The performance should be satisfactory on many variables such as Time (project should be completed on time), Scope (all works agreed upon should be completed), Cost ( expenses should be within the budget), Quality ( quality of the work should be as per stipulated standards / bench marks) and so on. In Turn-key projects, normally, Performance Guarantees not only cover physical aspects of construction and delivery on time but also aspects such as timely transfer of technology, training of staff, warranty for equipment installed and so on. These Guarantees may be a single all encompassing Guarantee or several specific Guarantees (Training Guarantee, Maintenance Guarantee, Warranty Performance Guarantee and so on). Performance Guarantees should be issued selectively. The past performance of the Applicants, their experience, capacity to execute, financial abilities and all such aspects have to be thoroughly checked during appraisal. RBI has directed that as a general rule, Banks should confine themselves to Financial Guarantees and exercise due caution with regard to Performance Guarantee business. Example: In the case of “Clean Ganga Project”, if the UP Government demands an all encompassing Performance Guarantee from PGIL, the Bank has to verify all aspects as above and then only issue the Guarantee subject to margins and collaterals etc as per the Bank’s policy. Perpetual Debt : To enhance the capital raising options of banks, Reserve Bank of India allows banks to raise Innovative Perpetual Debt Instruments (IPDI), which will be eligible for inclusion as Tier I capital. Such debt will not have any maturity date, i.e. will be perpetual like equity shares. Claims of investors in Perpetual Debt shall be superior to that of equity share investors and subordinated to that of all other investors. Quantum of Perpetual Debt is restricted to 15% of total Tier I capital. Poverty Line : The poverty line, a measure of poverty is fixed in terms of consumption expenditure (per capita monthly consumption expenditure of Rs 49.1 for rural area and Rs 56.6 for urban area at 1973-74 prices or Rs 329.1 and Rs 455.2 monthly per capita expenditure in 1999-2000) at which the norm of adequate nutrition intake (2250 kilocalories per person per day in urban area and 2400 kilocalories per person in rural areas) is realised.


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Pre-Paid Payment Instruments Pre-paid payment instruments are payment instruments that facilitate purchase of goods

and services against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash,

by debit to a bank account, or by credit card. Types: Smart cards, Magnetic stripe cards, Internet accounts, Internet wallets, Mobile

accounts, Mobile wallets, Paper vouchers Issue of Prepaid instruments in India is governed by Payment & Settlement Act-2007 and

RBI guidelines. The pre-paid payment instruments that can be issued are in three categories viz. (i) Closed

system payment instruments (ii) Semi-closed system payment instruments and (iii) Open system payment instruments.

Closed System Payment Instruments: Only for facilitating the purchase of goods and services & no cash withdrawal or redemption. As these instruments do not facilitate payments and settlement for third party services, issue and operation of such instruments are not classified as payment systems.

Semi-Closed System Payment Instruments: These are payment instruments, which are redeemable at a group of clearly identified merchant establishments which contract specifically with the issuer to accept the payment instruments. These instruments do not permit cash withdrawal or redemption by the holder.

Open System Payment Instruments: These are payment instruments, which can be used for purchase of goods and services at any card accepting merchant locations (point of sale terminals) and permit cash withdrawal at ATMs.

Primary Dealers : Primary Dealer means a non-banking financial company, which holds a valid letter of authorisation as a Primary Dealer issued by the Reserve Bank, in terms of the "Guidelines for Primary Dealers in Government Securities Market" dated March 29, 1995, as amended from time to time. In India the primary dealer system was set up in 1995 to strengthen and develop the government securities market and enhance the efficiency of open market operation. Primary dealers can be subsidiaries of scheduled commercial banks, or all India financial institutions or companies under the companies act 1956 engaged predominantly in government securities market and subsidiaries of foreign banks or securities firms. Every PD has to maintain minimum net owned funds of Rs 50 crores deployed daily in the government securities market. They are subjected to certain obligations with regard to bidding, turnover, commitments etc. RBI provides liquidity support to PDs against central government securities.


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Priority Sector Lending Definition of Priority Sector: (RBI Master Cir.1.7.2009) Those sectors, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises will be called as Priority Sectors. History of Lending to Priority Sector 1971 Report submitted by the Informal Study Group on Statistics relating to advances to

the Priority Sectors constituted by the Reserve Bank in May 1971. 1972 The description of the priority sectors was formalized in 1972 on the basis of the

above report 1974 Although initially there was no specific target fixed in respect of priority sector

lending, in November 1974 the banks were advised to raise the share of these sectors in their aggregate advances to the level of 33 1/3 per cent by March 1979.

1980 At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sector to 40 per cent by March 1985.

1980 Subsequently, on the basis of the recommendations of the Working Group on the Modalities of Implementation of Priority Sector Lending and the 20 Point Economic Programme by Banks (Chairman : Dr. K. S. Krishnaswamy), all commercial banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector.

2005 Recommendations made in September 2005 by the Internal Working Group (Chairman : Shri C. S. Murthy), set up by Reserve Bank.

Categories of Priority Sector: (In short) 1. Agriculture and Allied activities (Direct & Indirect) 2. MSE (Direct & Indirect). 3. Micro Credit 4. Education Loans 5. Housing Loans 6. Weaker Section Credit (Incl. to Minorities) 7. State sponsored organizations for SC/ STs.


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Priority Sector: Target / Sub-Targets:

Domestic Commercial Banks Total Priority Sector

40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Total Agricultural Advances

18 per cent of ANBC or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher. Of this, indirect lending in excess of 4.5% of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, will not be reckoned for computing performance under 18 per cent target. However, all agricultural advances under the categories 'direct' and 'indirect' will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Small Enterprise advances

Advances to small enterprises sector will be reckoned in computing performance under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Micro enterprises within Small Enterprises sector*

(i) 40 per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs.5 lakh and micro (service) enterprises having investment in equipment up to Rs.2 lakh;

(ii) 20 per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lakh and up to Rs.25 lakh, and micro (service) enterprises with investment in equipment above Rs.2 lakh and up to Rs.10 lakh. (Thus, 60 per cent of small enterprises advances should go to the micro enterprises).

Export credit Export credit is not a part of priority sector for domestic commercial banks.

Weaker sections

10 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Differential Rate of Interest Scheme

1 per cent of total advances outstanding as at the end of the previous year. It should be ensured that not less than 40 per cent of the total advances granted under DRI scheme go to scheduled caste / scheduled tribes. At least two third of DRI advances should be granted through rural and semi-urban branches.

DIR Target: 1% of previous years Gross Credit (Cir 193/2007 box item)

DIR Branch target: 10 DIR loans per year per branch. (Cir 100/2008) 2/3rd of DIR loans should be routed through Rural & Semi Urban

branches. Not less than 40% of the total DIR advances should go to SC / ST

borrowers


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(*) MSME Targets / Sub-Targets:

Existing Modified vide Cir. 213/2010 60% of SE advances should go to ME. i. 40% of total advances to SE should go to Micro (mfg) Enterprises having investment in P/M up to Rs.5 lacs and Micro (service) Enterprises having investment in equipment up to Rs.2 lac; ii.20% of total advances to SE should go to Micro (mfg) Enterprises with investment in P/M above Rs.5 lac and up to Rs.25 lac, and Micro (Services) Enterprises with investment in equipment above Rs.2 lac and up to Rs.10 lac.

The increase in share of Micro Enterprises in Micro and Small Enterprises lending to 60% should be achieved in stages, viz: a. 50% in the year 2010-11 b. 55% in the year 2011-12 c. 60% in the year 2012-13 The Annual Growth in Number of Micro Enterprises accounts to be 10%.

The above is as per the recommendations of the Prime Minister’s Task Force on Micro, Small and Medium Enterprises (MSMEs) (Chairman: Shri T. K. A. Nair) constituted by the Government of India.

It is further advised that banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs.

Each lead bank of a district may adopt at least one MSE cluster.

Foreign Banks Total Priority Sector Advances 32 per cent of ANBC or credit equivalent amount of Off-

Balance Sheet Exposure, whichever is higher. Agricultural Advances No target. Small Enterprise advances 10 per cent of ANBC or credit equivalent amount of Off-

Balance Sheet Exposure, whichever is higher. Micro enterprises within Small Enterprises sector

Same as for domestic banks.

Export credit 12 per cent of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

Weaker sections & DRI No target.

Priority Sector Lending Certificates’ (PSLCs). More recently, to catalyse the priority sector lending and to dissuade formal financial

institutions from their reluctance to meet the mandatory limits, the Raghuram Rajan Committee report on Financial Sector Reforms (CFSR 2008) proposed the idea of ‘Priority Sector Lending Certificates’ (PSLCs).

The central bank is now in the process of forming a committee to look into the feasibility of launching and operationalising markets for PSLCs. Given the demonstrated ability of markets to cater to various public purposes, a recent example being the creation of a market for Greenhouse Gas (GHG) mitigation through the Kyoto Protocol, no wonder why markets are today viewed as the best conduit for delivering public good.

Inclusion of unorganised moneylenders into the market after appropriately tagging will help not only to pass on the existence of such a cap and trading system in terms of lower rates in the informal lending sector but also to integrate them into formal credit markets. Importantly, the proposed PSLC scheme will remain a step above the ‘Inter-Bank


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Participation Certificates’ (IBPCs), in which the risk of a loan default falls on the acquiring bank.

Therefore, while the ultimate objective behind creation of a target and trade market for PSLC will remain ‘inclusion of the weaker sections into the mainstream financial markets and deliver its benefits’, it is critical to examine the probable, realistic structure of the market, its players, the rules of conduct for the market and its players, and the core instrument, as well as define the information and policy instruments that will help the market achieve its basic objective. Before we get on with the likely market structure, we would just try to understand the basic concept as per the CFSR report and draw an immediate analogy to the existing emissions markets.

Priority Sector Lending Certificates: Working Group (21.4.2010 - RBI Annual Policy): In pursuance of the announcement made in the Second Quarter Review of October 2009,

a Working Group on Introduction of Priority Sector Lending Certificates (PSLCs) (Chairman: Shri V.K.Sharma) was constituted by the Reserve Bank in November 2009 to examine the pros and cons of the recommendation made by the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan) relating to PSLCs and make suitable recommendations on its introduction and their trading in the open market.

In this context, it is proposed to expand the terms of reference of the Working Group to also review the pros and cons of inclusion of bank lending to micro-finance institutions (MFIs) under priority sector lending. The Group is expected to submit its Report by end-June 2010.

Penalties for Non-Achievement of Target / Sub-Target Domestic scheduled commercial banks having shortfall in lending to priority sector

lending target and / or agriculture lending target and / or weaker sections lending target shall be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or Funds with other Financial Institutions, as specified by the Reserve Bank.

The amounts to be deposited by banks, interest rates on deposits, period of deposits, etc., will be communicated to the concerned banks separately by August of each year to enable them to plan their deployment of funds.

Private pools of capital (PPC)

Private pools of capital (PPC) bring significant benefits to the financial markets. For

financial investors, investment in the PPC provides an alternative asset class with the potential for superior returns and portfolio diversification.

At the macroeconomic level, private equity allows capital to flow towards more viable projects and companies, and helps to finance new technologies, thus promoting employment and economic growth.

Private equity including venture capital, and hedge funds are the principal forms of organized PPC.

The survival of the private equity governance model depends on some economic advantages, described over public equity governance model.


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These potential advantages include, (i) the ability to change strategies of the private firm to generate higher returns, (ii) the ability to raise finance at favourable terms and (iii) better alignment of interests between shareholders of private equity firm and managers of the investee firms. However, these pools of capital also present challenges for market participants and policymakers.

Investors, creditors, counterparties, pool managers, and supervisors must be aware of these challenges.

Banks and other financial institutions get involved with PPCs as sponsors, managers, investors, lenders and counterparties to various transactions with them.

Over the past few years until 2007, a combination of solid economic growth and low inflation contributed to sustain particularly benign global financial market conditions, characterised by low interest rates and low volatility. This environment set a worldwide search for yield in motion among large international banks, saving institutions and various types of investment funds. Either portfolio managers or institutional investors seeking to match their guaranteed return policies - have found equity investment in leveraged buyouts- LBO funds attractive despite the inherently illiquid nature of such placements.

Private Equity Fund

Private Equity Fund would mean a Fund which is engaged in the following three broad types of financial activities: Venture capital finance : A seed stage, start-up stage and expansion stage unlisted

investment (including debt support) made by the PEF in the initial capital of a company at the time of implementation of the new / expansion project. It excludes any replacement finance / secondary market purchase.

Buy outs : Investment made in buyouts of existing companies, listed or unlisted. In the case of public-to-private transactions, the transaction should result in removal of the company from the stock exchange.

Other private equity deals : Any other unlisted equity / debt investments made which are not covered in (i) and (ii) above. E.g. Mezzanine finance provided in the form of subordinated debt and equity kickers in the context of leveraged buyouts-LBO transactions; Financing of companies in need of restructuring or facing financial distress.

Provisions: (Different types of NPA Provisions & Prudential Treatment):

RBI has informed that the relative provisions can only be reckoned for the purpose listed there against. (RBI circular 24.3.2009)

Additional Provisions for NPAs at higher than prescribed rates: The regulatory

norms for provisioning represent the minimum requirement. Therefore, banks may voluntarily make specific provisions for NPAs at rates which are higher than the rates prescribed under existing regulations if such higher rates are based on a policy approved by the Board of Directors to provide for estimated actual loss in collectible amount and the policy is consistently adopted from year to year. The additional provisions for NPAs,


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like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs

Excess Provisions on sale of Standard Asset/NPAs: (a) If sale consideration is higher than the book value in respect of Standard Asset, the excess provisions may be credited to Profit & Loss Account. (b) Excess provisions which arise on sale of NPAs can be admitted as Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets.

Provisions for diminution of fair value: Provisions for diminution of fair value of restructured advances, both in respect of Standard Assets as well as NPAs, made on account of reduction in rate of interest and /or reschedulement of principal amount are permitted to be netted from the relative asset.

Floating Provisions: Floating Provisions can be either netted from gross NPAs to arrive at net NPAs, or they could be reckoned as part of Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets.

Provisioning Coverage for Advances (RBI guidelines dt. 1.12.2009) At present, the provisioning requirements for NPAs range between 10 per cent and 100

per cent of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank.

Since the rates of provisioning stipulated by the Reserve Bank for NPAs are the minimum and banks can make additional provisions subject to a consistent policy based on riskiness of their credit portfolios, it has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks.

With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.

Banks should achieve this norm not later than end-September 2010. Banks can also make additional specific provisions subject to a consistent policy based on

riskiness of their credit portfolios, because the rates of provisioning stipulated for NPAs are the regulatory minimum.

It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks.

Currently there is a realisation from a macro-prudential perspective that banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn.

With this in view, there is a need for improving the provisioning cover as the banking system is currently making good profits.

This will enhance the soundness of individual banks, as also the stability of the financial sector.

It has therefore been decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.


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Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses. Banks are advised to compute the PCR as per the annexed format.

Banks should achieve this norm not later than end-September 2010. Also, the PCR should be disclosed in the Notes to Accounts to the Balance Sheet.

Public Debt : Refers to the means by which the government raises resources for financing public expenditure by issuing government securities both long term and short term securities like treasury bills. Internal debt of the Central government includes loans floated on the market, bonds such as prize bonds, bank compensation bonds, treasurry bills and non-negotiable non interest-bearing securities issued to international financial institutions like IMF, IBRD. Apart from this there are "other liabilities" of the Union Government, comprising small savings, state provident funds, postal insurance and life annuity fund etc. These liabilities are also to be serviced through interest payments and redemption on maturity. Government securities are in the form of government promissory notes or in the form of stock certificates. Government promissory note is a negotiable instrument and transferable by endorsement and delivery. Stock can be in the form of book debt which could be held in the form of stock certificate or an account called subsidiary general ledger account. Stock certificate is not negotiable but transferable by execution of transfer deed and registration of change in the name in the books of Public Debt Office of RBI. Thus, public debt consists of total value of accumulated borrowings by the government from the public-house holds, banks, and financial institutions and others. Purchasing Power Parity (PPP) : This refers to a theory of exchange rate based on relative domestic and foreign prices and used as a valuable tool for assessing proper currency valuation and measuring relative competitiveness. The basic proposition of PPP is that identical goods must sell at identical prices in a competitive market place. Otherwise, there will be opportunities for arbitrage. Competition will tend to equalise the price of identical basket of goods in domestic and foreign markets, through movements in exchange rate or through competitive bidding of the price of the commodities. Under PPP, exchange rate is in equilibrium when it equalises the prices of basket of similar goods and services in two countries. The PPP in other words is the ratio of the level of prices abroad to the level of home prices. This measurement called absolute PPP does not often hold true because of quality differences, transportation costs, and other tariffs etc and therefore a relative version of PPP is suggested focussing on changes in prices and exchange rates. This version of PPP predicts that changes in the nominal exchange rates will reflect differences in inflation rates among countries over time. Thus the countries in which inflation is persistently higher than that of the trading partners will experience a devaluation of their currencies.


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Quantitative Credit Ceiling : A tool of credit policy, this involves fixation by the RBI of limits on the extension of non-food bank credit or on the incremental non-food credit-deposit ratio. One rationale of credit ceiling is that while expansion in the aggregate credit should be restrained to a specific amount, individual productive and priority sectors should be assured of adequate credit of an increasing percentage of the incremental growth in credit. Quasi Fiscal Cost Of Reserves : Difference between the interest rate on domestic securities and the rate of return earned on the foreign exchange reserves (adjusted for any exchange rate change). This is called 'quasi-fiscal costs' since the central bank transfers the costs to the sovereign in the form of a reduced surplus.

Qualified Institutional Placement A listed company can issue equity shares, fully and partly convertible debentures, or any

securities other than warrants which are convertible into equity shares to a qualified institutional buyer (QIB)

Apart from preferential allotment, it is the only other method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons.

This method does not involve many of the common procedural requirements like submission of pre-iissue filings to the market regulator.

Requirements of QIP: Listed on an exchange which has trading terminals across the country Minimum public share holdings as per listing agreement Issue minimum 10% of the securities to be issued to MFs At least 2 allottees if the size of the issue is upto Rs. 250 Crs and at least 5 allottees if size

of the issue is over Rs. 250 Crs. No individual allottee is allowed to have more than 50% of the total amt issued Promoters or parties related to promoters are not allowed to subscribe to a QIP issue QIB (Qualified Institutional Buyers) - the investors in QIP are called QIB. They are those institutional investors who are perceived to have the expertise and

financial clout to evaluate and invest in capital markets they include financial institutions, banks, mutual funds, foreign institutional investors

registered with SEBI and also venture capital funds and multilateral financial institutions.


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Real Effective Exchange Rate (REER) : The multilateral trade weighted real effective exchange rate (REER) is a weighted average of real exchange rate in respect of basket of countries with which the country trades; the real exchange rate is obtained by deflating the nominal exchange rates with the relative price differential between the domestic and foreign countries. Thus REER is the weighted average of NEER adjusted by the ratio of domestic price to foreign prices. It is one of the most commonly used indicators of international competitiveness. Since price differential between the trading countries is a factor determining exchange rate of the respective countries, price -adjusted measure (REER) is considered more effective for policy making. REER is a way of measuring the price of foreign goods not just in currency- adjusted terms but also in price level adjusted terms. The Reserve Bank Of India presently compiles and publishes six -country and 36- country indices of NEER and REER. 21.04.2010: RBI Annual Policy 2011 Update: The six-currency trade-based real effective exchange rate (REER) (1993-94=100) appreciated by 15.5 per cent during 2009-10 up to February as against 10.4 per cent depreciation in the corresponding period of the previous year. Recession : Refers to business condition with mild tapering off of economic activity not qualifying to be called phase of depression. The text book definition of recession is two consecutive quarters of declining out put. Recession can also be used to describe any period in which growth falls below an economy's trend growth rate. Regulatory Capital : As per the Basel Accord Regulatory Capital refers to the minimum capital required to be maintained by the bank (regulatory minima) against its risk weighted assets as defined in the 1988 capital accord with subsequent amendments and prescribed by the national supervisor. Repo (Repurchase Obligation) : The Reserve Bank manages day to day liquidity or short term mismatches under different financial market conditions through repo and reverse repo auctions. This, in addition to bringing in stable condition in the money market, sets the pace for short term interest rate. Repo involves two legs of transactions. In the first leg RBI buys securities and injects liquidity by paying cash to the seller. In the second leg RBI releases securities against receipt of money from the counter party. Repo provides a collateralised-funding alternative. The RBI has enabled NBFCs, mutual funds, housing finance companies and insurance companies to undertake repo transactions, through gilt accounts maintained with the custodians.


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Retention Money Guarantee (RMG): Once the Project is completed successfully, the Contractor would want immediate settlement of the bills but the project owner may need time for inspection. In huge projects, the process of handing over charge of the Project itself may take months. Under such circumstances, the Contractor would submit a “Retention Money Guarantee” based on which the final bill will be settled immediately. The Retention Money Guarantee will promise that in case of any defects or infirmities discovered within a given period, the Contractor would compensate or bear the loss. All the Beneficiary has to do is to send a demand to the Issuing Banker. Example: In the “Clean Ganga “project, the UP Government will be the beneficiary of the Retention Money Guarantee submitted by the contractor PGIL. The final bills submitted by PGIL can be settled without any delay. Both parties would benefit from such an arrangement. Reverse Repo : This is opposite of the repo transaction. In the first leg RBI sells securities and absorbs liquidity. In the second leg RBI buys back the securities and releases value equivalent to the amount given in the first leg plus interest at reverse repo rate on the amount given in the first leg. This instrument is used for absorbing liquidity from the system for short periods. Right To Information Act 2005 : The Government of India has enacted the Right to Information Act, 2005 which has come into effect from October 13, 2005. The Right to information under this act is meant to give to the citizens of India access to information under control of public authorities to promote transparency and accountability in these organisations. The Act, under sections 8 and 9, provides for certain categories of information to be exempt from disclosure. The Act also provides for appointment of a Chief Public Information officer to deal with requests for information. The Reserve Bank of India is a public authority as defined in the Right to Information Act 2005. As such, the Reserve Bank of India is obliged to provide information to members of public. Risk Asset Ratio : In 1988 Basel Committee on Banking Supervision prescribed a common minimum capital standard to banking industry of group of 10 countries (G-10) in the context of the need for management of cross border capital flows following oil crisis and international debt crisis. In the adoption of Basel Committee frame work on capital adequacy norms taking into account various element of risks, the RBI decided to introduce a Risk Asset Ratio system for banks in India as a capital adequacy measure .In this system, the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned weights according to perceived risks. Banks have to maintain unimpaired minimum capital funds equivalent to prescribed ratio on the aggregate of risks weighted assets and other exposures continuously. The ratio of capital to risk weighted assets is known as CRAR.


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Risk Adjusted Return On Capital (RAROC) : An approach to relate the return on capital to the riskiness of the investment. Using a hurdle rate (i.e. expected rate of return) a lender can use the RAROC principle to set the target price of a transaction. Risk Adjusted Return on Capital (RARCO) is a concept used in Credit Risk management and is a risk based profitability measurement for analysing risk-adjusted financial performance and providing a consistent view of profitability across portfolios. It is defined as the ratio of risk adjusted return to economic capital or Return on Capital adjusted for expected losses. Risk Based Supervision (RBS) : This exercise essentially involves continuous monitoring and evaluation of risk profiles of the supervised institutions in relation to their business strategy and exposures. The basis of the instruments of RBS will be the supervisory tools used for on-site examination and off-site monitoring under the CAMELS. Risk assessment of the bank is carried out before the on-site inspection process. The strengths and vulnerabilities are identified on an on-going basis. A bank specific supervisory programme is drawn up on the basis of inputs gathered with the help of supervised bank. The periodicity of the inspection is determined having regard to the risk profile of the bank and it covers all identified high- risk areas. Risk Management : The banks operating in the liberalised environment are exposed to different kinds of risks, which can be broadly grouped into business risk and control risk. The important business and control risks are (1) credit risk arising from nature of their business activity (2) market risk in the form of potential erosion in the income or market value arising from the interest rate or foreign exchange rate or equity price or commodity price variation, (3) liquidity risk arising from the inability to meet their liabilities whenever they fall due because of mismatch of flow of funds & (4) operational risks emanating from failed internal process, people or system or from external events and (5) information and technology risks. The banks are required to put in place appropriate risk management policies.


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Safety Net' Schemes (RBI Guidelines): Reserve Bank had observed that some banks / their subsidiaries were providing buyback facilities under the name of 'Safety Net' Schemes in respect of certain public issues as part of their merchant banking activities.

Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price.

In some cases, such schemes were offered suo motto without any request from the company whose issues are supported under the schemes.

Apparently, there was no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as

the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price.

Banks / their subsidiaries have therefore been advised that they should refrain from offering such 'Safety Net' facilities by whatever name called.

Satellite Dealer Satellite Dealer means a financial institution which holds a valid letter of authorisation as a Satellite Dealer issued by the Reserve Bank, in terms of the "Guidelines for Satellite Dealers in Government Securities Market" dated December 31, 1996, as amended from time to time. The system of satellite dealers has since been discontinued with effect from June 1, 2002. Saving : Saving is that part of the disposable income which is not consumed. It amounts to accumulation of wealth through postponement of consumption. Saving and capital formation play a crucial role in economic development. For estimation of domestic saving, the economy is divided into three sectors; the public sector, the private corporate sector (organized sector) and the household sector (unorganized sector). Household sector consists of farm households, unincorporated enterprises engaged in industry, trade, finance, transport etc; charitable trusts and household proper. Public sector savings represent savings of Government administration, departmental commercial enterprises, and non-departmental non-financial and financial enterprises. Savings of household sector, which account for more than 2/3 of gross domestic savings in the country, are in the form of financial assets like currency, bank deposits, life insurance funds, provident funds, investment in shares/debentures, small savings etc; and physical assets such as investments in machinery and equipment, investment in agriculture, non-farm business and inventories held by household sector. The rate of saving is measured as the proportion of gross domestic savings to Gross Domestic Product. Income and interest rates are the major determinants of rate of saving. Scheduled Banks : Banks in the country are broadly classified as scheduled banks and non- scheduled banks. A scheduled bank, which could be either cooperative bank or commercial bank, is one which has been included in the Second schedule of the Reserve Bank of India Act. These banks are eligible for certain facilities such as financial accommodation from RBI and are required to


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fulfil certain statutory obligation. The RBI is empowered to exclude any bank from the schedule whose (1) aggregate value of paid up capital and reserves fall below Rs 5 lakh (2) affairs are conducted in a manner detrimental to the interests of depositors and (3) goes into liquidation and ceases to transact banking business. Securitisation And Reconstruction Of Financial Assets : The government of India enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 to provide among other things, for enforcement of security interest for realisation of dues without the interventions of courts and tribunals. Secured creditors are enabled to authorise their officials to enforce the securities and recover the dues from the borrowers. Since the Act provides for sale of financial assets by banks and financial institution to securitisation companies (SCs) or reconstruction companies (RCs) guidelines have been issued to ensure that the process of asset reconstruction proceeds on sound lines. Segment Reporting (Disclosure norms for Banks - AS 17) While complying with the above Accounting Standard, banks are required to adopt the following : (a) The business segment should ordinarily be considered as the primary reporting format and geographical segment would be the secondary reporting format. (b) The business segments will be 'Treasury', 'Corporate / Wholesale Banking', 'Retail Banking' and 'Other banking operations'. (c) 'Domestic' and 'International' segments will be the geographic segments for disclosure. (d) Banks may adopt their own methods, on a reasonable and consistent basis, for allocation of expenditure among the segments. Seigniorage : Net revenue gained from the issuing of currency and coins. It arises from the difference between the face value of a currency note and the cost of producing, distributing and eventually withdrawing it from circulation. Selective Credit Control : Selective credit control, as distinguished from general credit control is operated to ensure an adequate credit flow to the desired sectors while preventing excessive credit for less essential economic activities. The techniques of selective credit control involves prescribing (1) minimum margin for lending against the value of specified securities (2) ceiling on the level of credit and (3) minimum rate of interest on advances. Selective credit control is usually applied to achieve a reduction in excessive advances against certain sensitive commodities in short supply and to reduce pressure on demand supported by bank credit. Self-Help Groups Or Micro Credit Programme : Defined as a group of individual members who voluntarily come together for a common collective purpose basically for savings and borrowings. In practice these groups are comprised of individual members known to each other coming from the same village,


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community and even neighbourhood (homogenous group) and have certain pre-group social binding factors. Micro credit programme, enabling the poor people to be thrifty and in accessing loans and other financial services, was launched in 1992 with a SHG- BANK linkage arrangement. The poor are encouraged to voluntarily come together to save small amounts regularly and extent small loans among themselves. On attaining maturity to handle their own resources, they are in a position to negotiate with banks for credit facilities. Service Area Approach (SAA) : The Scheme was introduced in April 1989 with a view to bringing about an orderly and planned development of rural and semi-urban areas of the country. Under the scheme all rural and semi-urban branches of banks were allotted specific villages generally geographically contiguous areas with the responsibility to take care of the overall development and the credit needs. The Scheme involves credit planning and monitoring of credit utilisation and enables rural borrowers to have easy access to credit from any bank of their choice at a competitive price. Shredding And Briquetting System : A system for destruction of unusable notes at the RBI. The system cuts the notes into small pieces and then converts them into fine shreds. These shreds are then automatically channelled into the briquetting system which compresses them under high pressure resulting into formation of briquettes. ‘Shut period’ ‘Shut period’ (in government securities market) means the period for which the securities can not be delivered. During the period under shut, no settlements/ delivery of the security which is under shut will be allowed. The main purpose of having a shut period is to facilitate servicing of the securities viz., finalizing the payment of coupon and redemption proceeds and to avoid any change in ownership of securities during this process. Currently the shut period for the securities held in SGL accounts is one day. For example, the coupon payment dates for the security 6.49% GS 2015 are June 8 and December 8 of every year. The shut period will fall on June 7 and December 7 for this security and trading in this security for settlement on these two dates is not allowed. Small Coin Depot : Small coin depots of the Government of India have been established at important branches of commercial banks and treasuries to facilitate distribution of small coins (paise 50 and below). RBI makes arrangements to keep adequate stock of coins at these depots so as to enable the treasury/bank to meet the demand for small coins. Surplus balances of coins are put back to the depots. Any withdrawal from or deposit into a depot is required to be reported to RBI where adjustments are made to the credit or debit to the government.


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Society For World-Wide Inter-Bank Financial Telecommunication (SWIFT) : Stands for international computerised telecommunication network headquartered at La Hulpe, Belgium. It was operationalised in 1977 and operates from more than 100 countries. There are over 4000 member banks. India became a SWIFT member in 1991. Each bank is given a unique code by SWIFT. Soiled Currency Notes : A note which has become limp or which has developed minor cuts due to wear and tear or which is disfigured by oil, colour, ink etc. will be treated as a soiled note. Notes, which have been divided vertically through or near the centre with numbers in tact are, also treated as soiled notes. These notes can be exchanged at the offices of RBI and public sector currency chest branches of private sector banks. Soiled banknotes are banknotes, which have become dirty and limp due to excessive use. A single numbered banknote cut into two pieces but on which the number is intact is now treated as soiled banknote. A double numbered banknote cut into two pieces but on which both the numbers are intact is now treated as soiled banknote. Mutilated banknote is a banknote, of which a portion is missing or which is composed of more than two pieces. Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote. Speed Clearing Speed Clearing refers to collection of outstation cheques through the local clearing. It facilitates collection of cheques drawn on outstation core-banking-enabled branches of

banks, if they have a net-worked branch locally. In CBS environment, cheques can be paid at any location obviating the need for their

physical movement to the Drawee branch. The concept Speed Clearing combines the advantages of MICR clearing with CBS. Cheques drawn on outstation CBS branches of a Drawee bank can be processed in the

Local Clearing under the Speed Clearing arrangement if the Drawee bank has a branch presence at the local centre.

The outstation cheques under Speed Clearing will be paid on T+1 or 2 basis, within 48 hours.

Presenting branches are currently permitted to levy charges at a rate not exceeding Rs.150 per cheque (inclusive of all charges other than Service Tax) for cheques of above Rs. 1 lakh presented through Speed Clearing.


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SPEED-e Currently customers of Canara Bank DP operations (CBDP) are giving manual delivery instructions for the purpose of clearing of their securities. To facilitate internet enabled movement of securities, CBDP has enabled SPEED-e facility offered by NSDL wef 23.12.2008. SPEED-e is a common internet infrastructure provided by NSDL that enables the depository participants to provide enhanced depository services to their clients. Demat account holders of CBDP subscribing to this facility can submit delivery instructions to the DP through SPPED-e website http://SPEED-e.nsdl.com. Instead of submitting delivery instructions slips in paper form. A beneficiary account holder can access SPEED-e through a password or through smart card. They can give instruction to debit their demat accounts in favour of specified Pre-Notified Clearing Member accounts. Password users: Clients seeking registration as password users can submit delivery instructions only in favour of maximum three clearing member pool accounts. To register for a password based access to SPEED-e, clients have to submit the registration form and sign an agreement. DP will authorize the request and thereafter the clients can operate the SPPED-e account. In case of joint holders, a power of attorney favouring any one individual should be given to operate the account. Smartcard users: Clients registered as smart card users can submit both market and off-market transactions as well as freeze / unfreeze their account / ISIN. To register for a smart card based access to SPEED-e, clients have to submit the registration form along with the requisite documents to DP. DP will help the clients to procure a smart card kit, digital signature certificate and PIN from NSDL and then the clients can operate the SPEED-e account after installing the smart card on to the computer. Brokers seeking registration for accessing SPEED-e should register themselves as smart card users only whereas individuals can register for either of the two. Our central DP cell, Bangalore will download the SPEED-e instructions submitted by the clients and process the same. The status of the instructions submitted by the clients can be seen by them through the site any point of time. Special Drawing Rights (SDRs) : The scheme of Special Drawing Rights was devised by the International Monetary Fund in 1969 which provides additional means of international settlement, to the member countries of the Fund. The SDRs are created to generate international liquidity on the basis of deliberate judgement of global need for international reserves. They provide unconditional liquidity since the participants have access to foreign exchange reserves at will. SDRs are intended to supplement gold and carry an absolute gold value guarantee. They cannot be traded in any foreign exchange market but are freely tradable between central banks for acquiring foreign currencies. The participants are obliged to provide their own currencies in exchange of SDRs offered by other participants up to a prescribed limit. SDRs can be used only for balance of


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payment requirements and not for changing the composition of reserves. SDRs form part of the total foreign exchange reserves of the country. Stagflation Stagflation is a combination of inflation, slow economic growth and high unemployment. Stagflation has generally proven to be difficult and costly to eradicate. Stagflation can occur when an economy is slowed by an unfavorable supply shock. Stagflation becomes a dilemma for monetary policy because most actions associated with fighting inflation worsen economic stagnation and vice versa. For example, to increase economic growth if interest rates reduced, to decrease the cost for consumers to buy goods on credit and businesses to borrow to expand production, it can increase economic activity. But it can result in increased inflation. To reduce inflation if interest rates are raised, these increase the cost for consumers to buy products on credit and businesses to borrow to expand production. It can reduce inflation, but result in decreased economic activity. Street financing: A person makes a draft payable in the name of another person from any particular bank for an amount less than Rs 49,000. This person, on whose name the draft is made, further endorses it in the name of another person in lieu of payment for purchase of goods or services. The chain doesn’t end here. The draft is used as a payment cheque without real money changing hands. In the end, there is a specific group of people who deposits these drafts in their bank accounts, and takes a commission of 1-2% to encash them. Sterilisation : Denotes the process whereby the monetary impact of the liquidity generated by accretion to the foreign exchange assets of RBI is neutralised through the use of open market operation or liquidity adjustment facility or cash reserve ratio Supervision : Is a means of ensuring that the banks or financial institutions comply with the prescribed regulations. Supplier’s Credit Credit extended by the overseas supplier to the buyer in India for selling his goods is known as “Supplier’s Credit”.


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"Star Series" Banknote: Fresh banknotes issued by Reserve Bank of India till August 2006 were serially numbered. Each banknote bears a distinctive serial number along with a prefix. The prefix consists of numeral and letter/s. The banknotes are issued in packets containing 100 pieces. The Bank has adopted the "STAR series" numbering system for replacement of defectively printed banknotes, at the printing presses. To begin with, this will be for banknotes of Rs.10, Rs.20 and Rs.50 denomination. The Star series banknotes are exactly like the existing Mahatma Gandhi Series banknotes, but have an additional character viz., a *(star) in the number panel in the space between the prefix and the number. The packets containing these banknotes will not, therefore, have sequential serial numbers, but contain 100 banknotes, as usual. To facilitate easy identification, the bands on such packets clearly indicate the presence of these banknotes in the packet. Statutory Liquidity Ratio (SLR) : Under the provision of Banking Regulation Act governing the banking operations, banks are required to hold liquid assets such as government securities, or other unencumbered approved securities, cash or gold, against their demand and time liabilities in India. This is known as supplementary reserve requirement or secondary reserve requirement. The main objective of this monetary policy instrument is to ensure solvency of commercial banks by compelling them to hold low risk assets up to a stipulated extent. It also helps to regulate the pace of credit expansion to commercial sector. SLR refers to the ratio of holdings of the prescribed liquid assets to total time and demand liabilities.. Statutory Liquidity Ratio (SLR):RBI Guidelines Effective from Jan 23, 2007, RBI can prescribe the SLR in specified assets which shall not be less than such percentage not exceeding 40% of its total demand and time liabilities in India as on the last Friday of the second preceding fortnight. Presently, SCBs are to maintain a uniform SLR of 24% on their total net DTLs w.e.f. fortnight beginning Nov 8, 2008, valued in accordance with the method of valuation specified by the RBI: (a) in cash, or (b) in gold valued at a price not exceeding the current market price, or (c) in unencumbered investment in the following instruments which will be referred to as “statutory liquidity ratio (SLR) securities”: 1. Dated securities issued up to Sept 8, 2009 as listed Notification Sep 8, 2009 2. Treasury Bills of the Government of India; 3. Dated securities of the Govt of India issued from time to time under the market borrowing

programme and the Market Stabilisation Scheme; 4. State Development Loans (SDLs) of the State Governments issued from time to time

under their market borrowing programme; and 5. Any other instrument as may be notified by the Reserve Bank of India. Procedure for Computation of SLR : The procedure to compute total net demand and time liabilities for the purpose of SLR under Section 24 (2) (B) of B.R. Act 1949 is broadly similar to the procedure followed for CRR purpose. Classification and Valuation of Approved Securities : Banks may be guided by the instructions contained in our RBI Master Circular on Prudential Norms for classification, valuation and operation of investment portfolio by banks.


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Penalties: Bank failing to maintain the required SLR, to pay to RBI, the penal interest for that day at the rate of 3% above the Bank Rate on the shortfall and if the default continues on the next succeeding working day, the penal interest may be increased to a rate of 5% p.a. above the Bank Rate for the concerned days of default on the shortfall. Return in Form VIII to be submitted to RBI: Banks should submit to the RBI before 20th day of every month, a return in Form VIII showing the amounts of SLR held on alternate Fridays during immediate preceding month with particulars of their DTL in India held on such Fridays or if any such Friday is a Public Holiday under NI Act, 1881 at the close of business on preceding working day. ii) Banks should also submit a statement as annexure to form VIII giving daily position of (a) value of securities held for the purpose of compliance with SLR and (b) the excess cash balances maintained by them with RBI in the prescribed format. Temporary/Ad-hoc measures : The special 14-day term repo facility for banks through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL, to enable them to meet the liquidity requirements of mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs) has been extended up to March 31, 2010. The forex liquidity to Indian Public and Private sector banks having foreign branches or subsidiaries are provided through forex swaps up to 3 months. Further for funding the swaps, banks can borrow under the LAF for the corresponding tenor at prevailing repo rate. RBI will be prepared to consider any specific relaxation of SLR requirement for the purpose. The facility has been extended up to March 31, 2010. Certification of Correctness of Computation of DTLs: The Statutory Auditors should verify and certify that all items of outside liabilities, as per the bank’s books had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted to RBI for the financial year.


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Tax Haven : An offshore financial centre having legal mechanisms to reduce or eliminate taxes on income, wealth, profits and inheritance or to accumulate tax free income offshore pending repatriation to a taxable jurisdiction. Terms Of Trade : Term expresses the relationship between Unit values of exports and imports at any particular date and changes in them over a period of time. It is a ratio of a country's export prices to its import prices and measures the purchasing power of its exports in terms of the imports. The base measure is the level of export prices divided by the level of import prices; this measure as of a particular date is taken as the base and for measurements at subsequent dates. Usually expressed in the form of an index number, it indicates change in the relative prices over the period. A rise is commonly described as "favourable" movement. A rise in terms of trade may occur because export prices rise faster than imports prices and a given quantity of exports would buy larger imports, than before. Tight Money Policy : Refers to the monetary policy of restraining or reducing the money supply and of raising interest rates. This policy may have the effect of slowing the GDP growth, reducing the rate of inflation or raising the nation's foreign exchange rates. Transferable Development Rights: It means certificates issued in respect of category of land acquired for public purpose either by Central or State Government in consideration of surrender of land by the owner without monetary compensation, which are transferable in part or whole.) As per RBI guidelines, NRIs should not be given loans / advances for trading in Transferable Development Rights (TDRs). Trade Credits for Imports into India Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers' credit or buyers' credit. Suppliers' credit relates to credit for imports into India extended by the overseas supplier, while buyers' credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers' credit and suppliers' credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines. Amount and Maturity: AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year from the date of shipment. For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years from the date of shipment. No roll-over / extension will be permitted beyond the permissible period.


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AD banks shall not approve trade credit exceeding USD 20 million per import transaction. All-in-cost Ceilings: The current all-in-cost ceilings are as under :

Maturity Period All-in-cost ceilings over 6 months LIBOR*

Up to three years 200 basis points * for the respective currency of credit or applicable benchmark

The all-in-cost ceilings also include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any. Treasury Bills : These bills are the main instrument of short-term borrowing by the government and serve

as convenient gilt edged security for the money market. The Reserve Bank, as an agent of the government, sells treasury bills at a "discount". The difference between the amount paid by the tenderer at the time of purchase (less than

face value) and the amount received on maturity represent the amount of interest and known as discount.

These are negotiable securities and can be rediscounted with the Reserve Bank at any time before maturity upon terms and conditions prescribed by the bank.

Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.

Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills. Payments for the T-bills purchased are made on the following Friday. The 91 day T-bills are auctioned on every Wednesday. The T-bills of 182-days and 364-

days tenure are auctioned on alternate Wednesdays. T-bills of 364-days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 day T-bills are auctioned on the Wednesday prior to non-reporting Fridays.

The Reserve Bank releases an annual calendar of T-Bill issuances for a financial year in the last week of March of the previous financial year. The Reserve Bank of India announces the issue details of T-bills through a press release every week.


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Turn-key Turn-key refers to something that is ready for immediate use, generally used in the sale

or supply of goods or services. The term is common in the construction industry, for instance, in which it refers to the

bundling of materials and labor by sub-contractors. In a turnkey business transaction, different entities are responsible for setting up a plant or

equipment (e.g. trains/infrastructure) and for putting it into operation. It can include contractual actions - at least through the system, subsystem, or equipment installation phase. It may also include follow-on contractual actions, such as testing, training, logistical, and operational support. It is often given to the best bidder in a procurement process.

Turnkey projects can also be extended, known as turnkey plus, where there is perhaps a small equity interest by the supplier and it will later on continue its operation through a management contract or licensing.

Turnkey is often used to describe a home built ready for the customer to move in. If a contractor builds a "turnkey home" they frame the structure and finish the interior. Everything is completed down to the cabinets and carpet.

A "turnkey" job by a plumber would include the parts (toilets, tub, faucets, pipes, etc.) as well as the plumber's labor, without any contribution by the general contractors.

This is commonly used in motorsports to describe a car being sold with drivetrain (engine, transmission, etc.) as a racer may prefer to keep the pieces to use in another vehicle to preserve a combination. Similarly, this term may be used to advertise the sale of an established business, including all the equipment necessary to run it, or by a business-to-business supplier providing complete packages for business start-up.

Universal Banking : The term universal banking in general refers to the combination of commercial banking

and investment banking i.e. issuing, underwriting, investing and trading in securities. However, in a very broad sense the term refers to providing a wide variety of financial

services under a single umbrella. Universal banking can be defined as the conduct of a range of financial services

comprising deposit taking and lending, trading of financial instruments and foreign exchange, underwriting of new debt and equity issues, brokerage, investment management and insurance.

Universal banking means providing diverse kind of banking services by banks. Under universal banking, world over, commercial banking and investment banking

activities with both equity and debt are integrated and these services are provided by the same institution under one roof.

There are two models of practicing Universal Banking: Fully Integrated Universal Banking model (FIUB); Financial Conglomerate model (FC)

The FIUB model is being practiced in Germany. Under this model, big banks provide a wide range of banking services including commercial banking, securities related services and insurance business related services etc., under one roof. This model is also known as German type financial model of Universal Banking.

The FC model is being practiced in UK and USA. Under this model, banks are carrying out comprehensive banking activities. However, for providing some specific banking


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services like credit card, insurance etc., and separate subsidiaries are being set up. This model is popularly known as the British American type model of Universal Banking.

According to one school of thought there are four different types of universal banks in the world: (1) Fully Integrated Universal Banks: One institutional entity offering the complete range of services. (2) Partly Integrated Financial Conglomerates: One which offers range of services, but some of the range (for example: mortgage banking, leasing and insurance) are provided through wholly owned or partially owned subsidiaries. (3) Bank Subsidiary Structure: One which focuses essentially on commercial banking and other functions, including investment banking, and insurance, which are carried out through legally separate subsidiaries of the bank. (4) Bank Holding Company Structure: One financial holding company owns both banking and non-banking subsidiaries that are legally separate and individually capitalized in so far as financial services other than banking are permitted by law. The holding company itself happens to be an industrial concern.

Universal Banking In India: In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing long-term resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalisation and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking.

Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Sri. S H Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the issues considered by the Khan Working Group.

The issue of Universal Banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an Universal Bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal Banking, including a case-by-case approach towards allowing domestic financial institutions to become universal banks.

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions., FIs need to formulate a road map for the transition path and strategy for smooth conversion into an universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.


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Value Date : Denotes maturity date of a spot or forward contract Variable Reserve Ratio : An important monetary policy instrument and refers to the Cash Reserve Ratio (CRR) to be maintained by the banks under the provision of RBI Act 1934 and Statutory Liquidity Ratio (SLR) as defined under the Banking Regulation Act 1947. Velocity Of Circulation Of Money : An important aspect of money like the quantity is its velocity which refers to the number of times money is used to buy final output of goods and services. It measures the rapidity with which money changes hands and circulating through the economy during a given period. Income velocity, that is payment for goods and services, is usually measured by dividing national income at current prices for a given year by the sum of total money in circulation. Vostro Account : Vostro account means "your account with me". The counterpart to nostro account is vostro (Latin "yours") which describes the record of an account held by a bank as correspondent on behalf of an overseas bank. These are the accounts opened by banks abroad with the banks in India. They are rupee accounts.


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Ways And Means Advances (WMA) : Under the RBI Act the Reserve Bank provides Ways and Means Advances to the State Governments to help tide over the temporary mismatches in the cash flow of their receipts and payments. While normal WMAs are clean advances, special WMAs are secured advances provided against the security of Government of India dated securities. The normal WMAs are revised every year. No state government is allowed to have an over draft position for more than a stipulated number of working days. If the overdraft persists beyond the stipulated period the RBI suspends the payments. The interest rate on WMA has been linked to repo rate. Since the abolition of the automatic creation of ad-hoc treasury bills in 1997 a system of ways and means advances to the Union Government was introduced to meet the temporary mismatch between the receipts and payments of Union Government. These loans are repayable within three months from the date the advance in terms of the Central government's agreement with RBI in respect of the maximum amount and rate of interest. Weaker Sections: The weaker sections under priority sector shall include the following: a) Small and marginal farmers with land holding of 5 acres and less, and landless labourers,

tenant farmers and share croppers; b) Artisans, village and cottage industries where individual credit limits do not exceed

Rs.50,000; c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY); d) Scheduled Castes and Scheduled Tribes; e) Beneficiaries of Differential Rate of Interest (DRI) scheme; f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY); g) Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavengers (SLRS); h) Advances to Self Help Groups; i) Loans to distressed poor to prepay their debt to informal sector, against appropriate

collateral or group security. j) Loans granted under (a) to (i) above to persons from minority communities as may be

notified by Government of India from time to time. (Cir.197/2007) In States, where one of the minority communities notified is, in fact, in majority, item (j) will cover only the other notified minorities. These States / Union Territories are Jammu & Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep. RBI has decided to take into account, the short fall in lending to Weaker Sections also, as on the last reporting Friday of March of each year, for the purpose of allocating amounts to the Domestic Scheduled Banks for contribution to the ‘Rural Infrastructure Development Fund’ (RIDF) maintained with NABARD or funds with other Financial Institutions as specified by the Reserve Bank of India with effect from April, 2009.


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World Bank : It is one of the United Nations' specialised agencies, comprising 185 member countries. The "World Bank" is the name that has come to be used for the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) These organisations provide low-interest loans, interest free credit, and grants to developing countries. In addition to IBRD and IDA, three other organisations make up the World Bank Group. The International Finance Corporation (IFC) promotes private sector investment by supporting high-risk sectors and countries. The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance (guarantees) to investors in and lenders to developing countries. And the International Centre for Settlement of Investment Disputes (ICSID) settles investment disputes between foreign investors and their host countries. The World Bank Group's mission is to fight poverty and improve the living standards of people in the developing world. It is a development Bank which provides loans, policy advice, technical assistance and knowledge sharing services to low and middle income countries to reduce poverty. The Bank promotes growth to create jobs and to empower poor people to take advantage of these opportunities. World Trade Organisation (WTO) : WTO was established in January 1, 1995 when the Uruguay Round GATT negotiations (1986-94) concluded. It has a membership of 150 countries (more than 90% of world trade). It is the only global international organisation dealing with the rules of trade between nations. Its function is to ensure that trade flows as smoothly, predictably and freely as possible. The heart of the system is the WTO agreements, negotiated and signed by countries and ratified by their parliaments. The goal of WTO is to help producers of goods and services, exporters and importers to conduct their business and thereby improve the welfare of the people. WTO provides legal ground rules for international commerce which is essentially contracts, guaranteeing member countries important trade rights. WTO administers trade agreements and acts as a forum for trade negotiations, settling trade disputes, reviewing national trade policies and assisting developing countries in trade policy issues. The Warwick Commission on International Financial Reform: In Praise of Unlevel Playing Fields India avoided the worst of crisis - Y V Reddy: (BL dt. 28.11.2009 p. 6) The global economic crisis that had paralysed financial markets is now over, said the former RBI Governor, Dr. Y V Reddy. "The crisis is more or less behind us. The worst in the sense, the collapse has been avoided," Dr. Reddy said in his speech at the launch of the Warwick Commission Report on International Financial Reforms."Though the signs of smoke are still there, the exit has started creeping in," he said. Separately, he said that since the collapse was avoided it does not mean that countries should begin to roll back the stimulus. "You need to look at aggregate demand, the nature of the fiscal deficit..... When it comes to exit phases, co-ordination becomes important," he said.


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About Warwick Commission: The Warwick Commission on International Financial Reform is the second of its kind

from the Warwick University, and aims to bring together knowledge from scholars and market practitioners to address issues of global economic importance.

The aim of the Warwick Commissions is to act as an independent autonomous body and bring together an interdisciplinary and experienced team of scholars and practitioners with no specified prior agenda.

The Warwick Commission aims to fuse together scholarly analysis with reflection on what reforms are most needed and most appropriate.

The Warwick Commission on International Financial Reform began its work in January 2009.

Professor Avinash Persaud is the Chairperson of the Commission. The original idea for the Warwick Commissions belongs to Professor Richard Higgott,

our Pro- Vice Chancellor for Research and Founding Director of Warwick’s Centre for the Study of Globalisation and Regionalisation (CSGR).

The current commission is directed by the new Director of CSGR, Professor Leonard Seabrooke, a political economist whose research has concentrated on the connections between financial systems and welfare regimes.

The other 10 commissioners are drawn from five continents and are a diverse group in terms of their academic backgrounds. Many of the commissioners are trained as political economists. Other commissioners are trained as economists.

The Commission also includes a lawyer who specializes in international financial contracts.

The result is a report which tackles the big questions about how to regulate national and international financial systems head on.

The Commission, and its Report, reflect the University of Warwick’s commitment to being involved in important international policy debates, as well as highlighting the impact that rigorous scholarly analysis can have on policy thinking.

In-kind support extended by: Centre for Governance Innovation (CIGI) at the University of Waterloo and the Indian Council for Research on International Economic Relations (ICRIER), as well as the EU Framework-6 Network of Excellence on Global Governance, Regionalisation and Regulation (GARNET), The Centre for Trade, Policy and Law (CTPL) at Carleton University, Ottawa, and the Stiftung Wissenschaft und Politik, in Berlin for logistical and dissemination support.

XBRL (Extensible Business Reporting Language)

Implementation of XBRL (Extensible Business Reporting Language) in the banking and

financial system is a welcome sign as it will not only help in regulatory compliance but also act as an effective tool for Management Information System (MIS) within the organisation.

In general, XBRL reduces the cost of analyzing and reporting business information, helps in effective MIS and increases the speed and efficiency of business decisions.

XBRL as we all know is a standard based electronic format for communication of business and financial data which provides a lot of benefits in the preparation, analysis and communication of business information in different formats; extraction and automatic exchange of the financial data; and enhancing the usability and transparency of financial information reported under existing accounting standards.


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This is helpful in preparation of not only financial statements like balance sheet, profit and loss accounts, flow of funds or financial disclosures, etc. but includes any type of financial reporting, like Basel II system, statutory reporting, regulatory or supervisory reporting systems.

The above is from the Inaugural Address delivered by Smt. Shyamala Gopinath at the CII's BANK(ing)TECH Summit 2009, March 23, 2009, Mumbai.

Yield Curve : Relation between the interest rate and the time to maturity of the debt for a given borrower in a given currency. Yield To Maturity (YTM) : The annual return on a bond from the date of acquisition to the date of maturity. It is the discount rate that equates the present value of cashflows from the bond to the current price of the bond. If the bond is bought at par value the yield to maturity is the same as the nominal yield. If bought at premium, the yield to maturity is less than the nominal yield. If bought at discount the yield to maturity is more than the nominal yield. Zero Coupon Bonds : The regular government bond has a "coupon" (interest bearing certificate) that is payable twice a year. Interest is paid two times a year, and therefore, there are regular cash inflows. Such bonds are normally issued at face value and the redemption value of the bond is also the face value. The subscribers/holders to zero coupon bonds do not receive any interest during the life of the bonds. Instead investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it matures. To put it differently, it is a special type of bond which carries no coupon rate, is sold at a deep discount in relation to its face value, and matures at its face value. The maturity dates on zero coupon bonds are normally long term, ten years, fifteen years or more.

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Different Types of Companies

Public Company Limited by Shares: In terms of section 3(1)(iv) of the Companies Act, 1956 a public company means a company which is not a private company and has a minimum paid-up capital of five lakh rupees or such higher paid-up capital as may be prescribed. A private company which is subsidiary of a public company is also a public company. At least 7 persons are required to form a public company. A prospectus or a statement in lieu thereof has to be filed with the Registrar of Companies

before allotment of shares. It has to obtain Certificate of Commencement of Business from the Registrar of

Companies before it can commence business on incorporation. It has to hold a statutory meeting of members and file a Statutory Report with the

Registrar of Companies. Any member of the public who is willing to pay the price may acquire its shares or

debentures. Its shares are easily transferable and since these can be quoted on a recognised stock

exchange, their liquidity is enhanced. It can have any number of members and it is easy for it to raise capital through public

subscriptions. It can obtain loans from financial institutions and banks. It shall have at least three Directors. Private Company Limited by Shares: A private company, in terms of section 3(1)(iii) of the Act, means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles :

1. restricts the right to transfer its shares, if any; 2. limits the number of its members to fifty; 3. prohibits any invitation to the public to subscribe for any shares in, or debentures of

the company; and 4. Prohibits any invitation or acceptance of deposits from persons other than its

members, directors or their relatives. For calculating the number of members as per (b) above, joint holders of shares is counted as single member and the members who are employees of the company including those who continue to be members after their employment ceased are excluded. It can be registered with a minimum number of 2 members and cannot have more than 50

members (excluding employee and ex-employee members). It cannot invite the public to subscribe to its share capital and has to obtain capital by

private arrangement. It cannot allow free transfer of its shares. Its shares are not quoted on a recognised stock exchange. It cannot invite or accept deposits from persons other than its members, directors or their

relatives.


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Only two signatories to the memorandum of association are sufficient to form a private company.

Any number of employees of a private company can become its members and their number is not counted for the purpose of maximum number of members even when the employees have left the company on retirement or otherwise.

It can commence business immediately on incorporation. It shall have at least two Directors. Unlimited Company: An unlimited company is a company having no limit on the liability of its members. The members of such a company are liable to the full extent of their fortunes to meet the obligations of the company by contributing to its assets in the event of its being wound up. Thus, such a company does not carry the benefit of limited liability which is available to the members of all the other types of company. So far as the risk of the members is concerned, there is no difference between a partnership firm and an unlimited company. The limitation of an unlimited company is that it does not enjoy the benefit of limited

liability for its members. If the business to be carried on by the company does not entail much risk, then such a

company has all other advantages of a corporate personality. An unlimited company can, at any time, re-register as a limited company under section 32

of the Act. The re-registration, however, shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by, to, with or on behalf of, the company before re-registration.

Directorships in an unlimited company are not being counted for the purpose of calculating the maximum number of 15 directorships which a person can hold in terms of section 275 of the Act.

Government Company: If 51 per cent or more of the paid-up share capital of a company is held by the Central Government and/or any one or more State Governments, the company becomes a Government company. A subsidiary of a Government company is also a Government company. The holding of shares by municipal and other local authorities or statutory corporations is, however, not to be taken into consideration for calculating the extent of Government shareholding. A Government company may be a private company or a public company. Law requires minimum of two members to float a private company, one of whom can be the President or the Governor, as the case may be, and the other any officer of the Government. All Government companies are treated as public sector companies. Under section 620 of the Act, the Central Government may, by notification in the Official

Gazette, exempt any Government company from complying with such provisions of the Act as may be specified in the notification.

The auditors of a Government company have to be appointed or re-appointed by the Controller and Auditor-General of India who can conduct supplementary/test audit also.


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Mutual Benefit Company: As per sub-section (1) of section 620A of the Act, ‘Nidhi” or ‘Mutual Benefit Society’ means a company which the Central Government may, by notification in the Official Gazette, declare to be a Nidhi or Mutual Benefit Society, as the case maybe. Thus, for an association or a body corporate to become a ‘Nidhi’ or a ‘Mutual Benefit Society’, the following conditions laid down by section 620A of the Act must be fulfilled: It must be a company as defined under section 3 of the Act. It must be declared to be a ‘Nidhi” or ‘Mutual Benefit Society’ by a notification in the

Official Gazette by the Central Government. Company Limited by Guarantee or a Guarantee Company: A guarantee company is a company having the liability of its members limited by its memorandum of association to such an amount as the members may thereby undertake to contribute to the assets of the company in the event of its being wound up. Guarantee companies are of two types, viz., guarantee company not having share capital and Guarantee Company having share capital. Guarantee company not having share capital – A guarantee company not having share

capital does not obtains initial and working funds from its members, but from some other sources, such as grants, endowments, fees, subscriptions, etc. Institutions started by Government grants or donations from the public can be run by such companies.

Guarantee company having share capital – Where initial working capital is not available through grants, etc., but once the company is set in motion, the normal working funds would be available through fees, subscriptions, charges, etc., received from the services rendered, a guarantee company having share capital may be formed.

Section 25 company: Where a company is formed for promoting commerce, art, science, religion, charity or any other useful

object, and does not intend to pay any dividend to its members but to apply its profits or other income

in promoting its objects, it may apply to the Central Government (now Regional Director, Ministry of Corporate Affairs as a delegate of the Central Government) for license under section 25 of the Act for its registration as a company with limited liability without the addition to its name of the word’ Limited’ or the words ‘Private Limited’, as the case may be.


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Partnership firm and other associations : Registration as a company under Part IX of the Act. Part IX of the Act provides an opportunity to an association of seven or more persons

formed in pursuance of any other law in force in India to get itself registered under the Act as a company limited by shares, or as a company limited by guarantee or as an unlimited company. Even a partnership firm having seven or more partners with a permanent share capital divided into shares of a fixed amount and duly constituted according to the provisions of the Indian Partnership Act, 1932 can be registered as a company under this part.

Incorporation of co-operatives as Producer Companies. Part IXA added by the Companies (Amendment) Act, 2002 provides for incorporation of

co-operatives as producer companies and also for registration of inter-State co-operative societies as producer companies. Any ten or more individuals, each of them being a producer or any two or more producer institutions or a combination of ten or more individuals and producer institutions, desirous of forming a producer company having specified objects and otherwise complying with the requirements of Part IXA and other provisions of the Companies Act, 1956 in respect of registration, may form an incorporated company as a producer company.

***


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Investment Portfolio in Banks: Classification & Valuation Banking business is defined as taking of deposit for the purpose of lending and investment. Banks have huge investment portfolio both in the Govt. securities and as well as non-govt. securities. In the balance sheet, the investments are disclosed in 6 classifications i.e. (a) Government securities, (b) Other approved securities, (c) Shares, (d) Debentures & Bonds, (e) Subsidiaries/ joint ventures and (f) Others (CP, Mutual Fund Units, etc.). Time for deciding the category of investment: Banks are required decide the category of the investment at the time of acquisition/purchase. Classification: The entire investment portfolio of the banks (including SLR securities and non-SLR securities) is classified under 3 categories namely (a) Held to Maturity (b) Available for Sale and (c) Held for Trading. 1. Held to Maturity : The securities acquired by the banks with the intention to hold them

up to maturity, is classified under ‘Held to Maturity (HTM)’ category. The banks can include investments under HTM category, upto 25 % of their total investments.

Excess amount in HTM: Banks are allowed since Sep 2, 2004 to exceed the limit of 25% of total investment under HTM category provided (a) the excess comprises only of SLR securities, and (b) the total SLR securities held in the HTM is not more than 25% of their DTL as on the last Friday of the second preceding fortnight.

The banks may hold the following securities under HTM:

SLR Securities upto 25 percent of their DTL as on the last Friday of the second

preceding fortnight. Non-SLR securities included under HTM as on September 2, 2004. **Fresh re-capitalisation bonds received from the Govt of India towards their re-

capitalisation requirement and held in Investment portfolio. **Fresh investment in the equity of subsidiaries and joint ventures RIDF/SIDBI deposits.

**The investments in these is required to be classified under HTM but is not counted for the purpose of ceiling of 25 % specified for this category.

2. Held for Trading: The securities acquired by the banks with the intention to trade, for taking advantage of the short-term price/interest rate movements is classified under ‘Held for Trading (HFT)’. These securities are to be sold within 90 days. Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.

3. Available for sale: The securities which do not fall within held till maturity and held for trading, are classified under ‘Available for Sale (AFS)’.

Ratio between HFT and AFS: The banks will have the freedom to decide on the ratio of holdings under HFT and AFS. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position.


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Shifting among categories Banks may shift investments to/from HMT with the approval of the Board of Directors

once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from HTM will be allowed during the remaining part of that accounting year.

Banks may shift investments from AFS to HFT with the approval of their Board of Directors/ ALCO/ Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive /Head of the ALCO, but should be ratified by the Board of Directors/ ALCO.

Shifting of investments from HFT to AFS is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions, or extreme volatility, or market becoming unidirectional. Such transfer is permitted only with the approval of the Board of Directors/ALCO/ Investment Committee.

Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. Banks may apply the values as on the date of transfer and in case, there are practical difficulties in applying the values as on the date of transfer, banks have the option of applying the values as on the previous working day, for arriving at the depreciation requirement on shifting of securities.

Valuation 1. Held to Maturity: Investments classified under HTM need not be marked to market and

will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. The banks should reflect the amortised amount in ‘Schedule 13 – Interest Earned : Item II – Income on Investments’, as a deduction. However, the deduction need not be disclosed separately. The book value of the security should continue to be reduced to the extent of the amount amortised during the relevant accounting period. Banks are required to recognise any diminution, other than temporary, in the value of their investments in subsidiaries/ joint ventures, which are included under HTM and provide therefor. Such diminution should bedetermined and provided for each investment individually.

2. Available for Sale: The individual scrips in the AFS category will be marked to market at quarterly or at more frequent intervals. Securities under this category shall be valued scrip-wise and depreciation/ appreciation shall be aggregated for each classification referred to above. Net depreciation shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. The book value of the individual securities would not undergo any change after the marking of market.

3. Held for Trading: The individual scrips in the HTM category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. Consequently, the book value of the individual securities in this category would also not undergo any change after marking to market.


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Market value The ‘market value’ for the purpose of periodical valuation of investments included in the AFS and HFT would be the market price of the scrip as available from the trades/quotes on the stock exchanges, SGL account transactions, price list of RBI, prices declared by Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically. In respect of unquoted securities, the procedure as detailed below should be adopted. 1. Central Government Securities: the prices/ YTM rates put out by the PDAI/ FIMMDA

at periodical intervals. Treasury Bills should be valued at carrying cost. 2. State Government Securities: by applying the YTM method by marking it up by 25

basis points above the yields of the Central Govt Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

3. Other ‘approved’ Securities: by applying the YTM method by marking it up by 25 basis points above the yields of the Central Govt Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

4. Debentures/ Bonds: to be valued on the YTM basis. The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points above the rate applicable to a Government of India loan of equivalent maturity.

5. Zero coupon bonds: To be shown in the books at carrying cost, i.e., acquisition cost plus discount accrued at rate prevailing at the time of acquisition, which may be marked to market with reference to the market value.

6. Preference Shares: on YTM basis. 7. Equity Shares: Should be marked to market preferably on a daily basis, but at least on a

weekly basis. Where current quotations are not available or where the shares are not quoted on the stock exchanges, these should be valued at break-up value (without considering ‘revaluation reserves’, if any) which is to be ascertained from thecompany’s latest balance sheet (which should not be more than one year prior to the date of valuation). In case the latest balance sheet is not available the shares are to be valued at Re.1 per company.

8. Mutual Funds Units: Investment in quoted MF Units should be valued as per Stock Exchange quotations.

9. Commercial Paper: Should be valued at carrying cost. 10. Investments in Regional Rural Banks : To be valued at carrying cost (i.e. book value)

on a consistent basis. Non-Performing Investments (NPI) 1. In respect of securities included in any of the 3 categories where interest/ principal is in arrears, the banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the value of the investment. The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities. 2. An NPI, similar to NPA, is one where : 1. Interest/ instalment (including maturity proceeds) is due and remains unpaid for more

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2. The above would apply mutatis-mutandis to preference shares where the fixed dividend is not paid.

3. For equity shares, in the event the investment in the shares of any company is valued at Re.1 per company on account of the non availability of the latest balance sheet, those equity shares would also be reckoned as NPI.

4. If any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities, including preference shares issued by the same issuer would also be treated as NPI and vice versa. However, if only the preference shares are classified as NPI, the investment in any of the other performing securities issued by the same issuer may not be classified as NPI and any performing credit facilities granted to that borrower need not be treated as NPA.

5. Investments in debentures / bonds, which are deemed to be in the nature of advance would also be subjected to NPI norms as applicable to investments.

6. In case of conversion of principal and / or interest into equity, debentures, bonds, etc., such instruments should be treated as NPA abinitio in the same asset classification category as the loan if the loan’s classification is substandard or doubtful on implementation of the restructuring package and provision should be made as per the norms.

Income recognition 1. Banks may book income on accrual basis on securities of corporate bodies/public sector

undertakings in respect of which the payment of interest and repayment of principal have been guaranteed by the Central Government or a State Govt, provided interest is serviced regularly and as such is not in arrears.

2. Banks may book income from dividend on shares on accrual basis provided dividend on the shares has been declared by the corporate body in its Annual General Meeting and the owner’s right to receive payment is established.

3. Banks may book income from Govt securities & bonds/debentures of corporate bodies on accrual basis, where interest rates are pre-determined and provided interest is serviced regularly and is not in arrears.

4. Banks should book income from units of mutual funds on cash basis. Dematerialised Holding: Banks should settle the transactions in securities as notified by SEBI only through depositories. After the commencement of mandatory trading in demat form, banks would not be able to sell the shares of listed companies if they were held in physical form. In order to extend the demat form of holding to other instruments like bonds, debentures and equities, it was decided that, with effect from October 31, 2001, banks, FIs, PDs and SDs would be permitted to make fresh investments and hold bonds and debentures, privately placed or otherwise, only in dematerialised form. Outstanding investments in scrip forms would have to be converted into dematerialised form by June 30, 2002. As regards equity instruments, banks were required to convert all their equity holding in scrip form into dematerialised form by Dec 31, 2004.


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Budget Glossary ON the budget day, the finance minister tables 10-12 documents. Of these, the main and most important document is the Annual Financial Statement.

ANNUAL FINANCIAL STATEMENT: Article 112 of the constitution requires the government to present to the Parliament a statement of estimated receipts and expenditure in respect of every financial year, April 1 to March 31. This statement is the annual financial statement. The annual financial statement is usually a white 10-page document. It is divided into three parts, Consolidated Fund, Contingency Fund and Public Account. For each of these funds the government has to present a statement of receipts and expenditure. BANKING CASH TRANSACTION TAX (BCTT): Introduced in the 2005-06 budget, BCTT is a small tax on cash withdrawal from bank exceeding a particular amount in a single day. The basic idea is to curb the black economy and generate a record of big cash transactions. This is withdrawn wef 1.4.2009. BUDGET AT A GLANCE: This is obviously a snap shot of the budget, for an easy understanding. Nonetheless, it introduces some new concepts. While receipts are broken down into revenue and capital, unlike the consolidated fund, it shows the centre's net tax revenues. This is because a decent part of the gross tax revenue, as decided by the relevant Finance Commission, flows to the state governments. Budget at a glance also segments expenditure into plan and non-plan expenditure, instead of splitting into revenue and capital. Each of these is then split into revenue account and capital account. Before discussing plan and non-plan expenditure it is important to discuss the concept of the central plan. BHARAT NIRMAN: Bharat Nirman is the current UPA government’s ambitious programme for building infrastructure, especially in rural India. It has six components - irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. In each of these areas, the government has set targets that are to be achieved by the year 2009, within four years of its launch. CONSOLIDATED FUND: This is the most important of all the government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without Parliament's approval. CONTINGENCY FUND: As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500-crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.


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CAPITAL RECEIPT/EXPENDITURE: All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government sells shares (disinvests) in public sector companies, like it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under the capital account. In respect of all the funds the government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a capital budget (capital receipts and capital expenditure). Contingency Fund is clearly not that important. Public Account is important in that it gives a view of select savings and how they are being used, but not that relevant from a budget perspective. The consolidated fund is the key to the budget. CORPORATION TAX: Tax on profits of companies. CUSTOMS: Taxes imposed on imports. While revenue is an important consideration, customs duties may also be levied to protect the domestic industry or sector (agriculture, for one), in retaliation against measures by other countries etc. CENTRAL PLAN: Central or annual plans are essentially the five year plans broken down into five annual instalments. Through these annual plans the government achieves the objectives of the Five-Year Plans. The funding of the central plan is split almost evenly between government support (from the budget) and internal and extra budgetary resources of public enterprises. The government's support to the central plan is called the budget support. CESS: This is an additional levy on the basic tax liability. Governments resort to cesses for meeting specific expenditure. For instance, both corporate and individual income is at present subject to an education cess of 2%. In the last Budget the government had imposed an another 1% cess Secondary and higher education cess on income tax’ to finance secondary and higher education. COUNTERVAILING DUTIES (CVD) : Countervailing duty is a tax imposed on imports, over and above the basic import duty. CVD is at par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a level playing field between imported goods and locally produced ones. An exemption from CVD places domestic industry at disadvantage and over long run discourages investments in affected sectors. Capital budget: The Capital budget makes payment towards assets such as roads, highways and dams and also for purchasing land, building, machinery and equipment. Loans given by the center to various state governments and government-owned companies, as well as any investments made by the government are included in here. These expenses are funded by government receipts or by money received by the government in the form of loans. DIRECT TAX: Traditionally, these are taxes where the burden of tax falls on the person on whom it is levied. These are largely taxes on income or wealth. Income tax (on corporates and individuals), FBT, STT and BCTT are direct taxes.


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FISCAL DEFICIT: When the government's non-borrowed receipts (revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds) fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit. PRIMARY DEFICIT: The revenue expenditure includes interest payments on government's earlier borrowings. The primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit would indicate progress towards fiscal health. The Budget document also mentions the deficit as a percentage of the GDP. This is to facilitate comparison and also get a proper perspective. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy then it is not such a bad thing. Prudent fiscal management requires that government does not borrow to consume, in the normal course. That brings us to the FRBM Act. REVENUE DEFICIT: The excess of disbursements over receipts on revenue account is called revenue deficit. This is an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. When revenue disbursement exceeds receipts, the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap. The FRBM Act, requires the government to reduce fiscal deficit to zero by 2008-09. UNION EXCISE DUTY: Duties imposed on goods manufactured in the country. EXPORT DUTY: This is a tax levied on exports. In most instances the object is not revenue but to discourage exports of certain items. In the last Budget, for instance, the government imposed an export duty of Rs 300 per metric tonne on export of iron ores and concentrates and Rs 2,000 per metric tonne on export of chrome ores and concentrates. FRINGE BENEFIT TAX (FBT): The taxation of perquisites or fringe benefits provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was introduced in the 2005-06 budget. The government felt that many companies were disguising perquisites such as club facilities as ordinary business expenses, which escaped taxation altogether. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites. FRBM ACT: Enacted in 2003, the Fiscal Responsibility and Budget Management Act requires the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government will have to meet all its revenue expenditure from its revenue receipts. Any borrowing would then only be to meet capital expenditure repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09. This is a reasonable limit that allows significant-cant leverage to the government to build capacities in the economy without compromising fiscal stability. It is important to note that since the entire Budget is at current market prices the deficits are also calculated with reference to GDP at current market prices.


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FINANCE BILL: The proposals of government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill. It is the key document as far as taxes are concerned. GRANTS-IN-AID AND CONTRIBUTIONS: The third receipt item in the revenue account is relatively small grants-in-aid and contributions. These are in the nature of pure transfers to the government without any repayment obligation. The disbursements section of the Revenue Account of the consolidated fund lists all the revenue expenditures of the government. These include expense incurred on organs of state such as Parliament, judiciary and elections. A substantial amount goes into administering fiscal services such as tax collection. The biggest item is interest payment on loans taken by the government. Defence and other services such as police also get a sizeable share. INDIRECT TAX: In the case of indirect taxes the incidence of tax is usually not on the person who pays the tax. These are largely taxes on expenditure and include Customs, excise and service tax. Indirect taxes are considered regressive, the burden on the rich and the poor is alike. That is why governments strive to raise a higher proportion of taxes through direct taxes. MARKET STABILISATION SCHEME (MSS): The scheme was launched in April 2004 to strengthen Reserve Bank of India's (RBI) ability to conduct exchange rate and monetary management. The RBI mops up excess liquidity, created, for instance when the central bank buys up huge quantities of dollar inflows to prevent undesirably fast appreciation of the rupee, by selling its stock of government securities to banks. When the RBI began to run short of of government securities that had been issued to meet the government's borrowing requirement, the MSS was launched. These securities are issued not to meet the government's expenditure but to provide the RBI with a stock of securities with which to intervene in the market for managing liquidity. MISCELLANEOUS RECEIPTS: These are primarily receipts from disinvesment in public sector undertakings. The capital account receipts of the consolidated fund public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts make up the total receipts of the consolidated fund. The disbursements on capital account from the consolidated fund: The first part deals with capital expenditure incurred on the various services general services, social services and, economic services. Some of the biggest expenditure items under these heads are defence services, investment in agricultural financial institutions and capital to railways. The second part takes up the public debt (repayments of loans) and various loans made by the government. The consolidated fund has certain disbursements "charged" to the fund. These are obligations that have to be met in any case and, therefore, do not have to be voted by the Lok Sabha. These include interest payments and certain expenditure such as emoluments of the President, salary and allowances of speaker, deputy chairman of the Rajya Sabha, and allowances and pensions of Supreme Court judges. Parliament and so on. This concludes the discussion on consolidated fund.


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MINIMUM ALTERNATE TAX (MAT): This tax on corporate profits was introduced in 1996-97 and has been modified since. If the tax payable by a company is less than 10% of its book profits, after availing of all eligible deductions, then 10% of book profits is the minimum tax payable. Book profits are profits calculated as per the Companies Act, while profits as per the Income Tax Act could be significantly lower, thanks to various exemptions and depreciation. NON-TAX REVENUE: The most important receipts under this head are interest payments (received on loans given by the government to states, railways and others) and dividends and profits received from public sector companies. Various services provided by the government general services such as police and defence, social and community services such as medical services, and economic services such as power and railways also yield revenue for the government. Though Railways are a separate department, all its receipts and expenditure are routed through the consolidated fund. NON-PLAN EXPENDITURE: This is largely the revenue expenditure of the government. The biggest item of expenditure are interest payments, subsidies, salaries, defence and pension. The capital component of the non-plan expenditure is relatively small with the largest allocation going to defence. It is important to note that the entire defence expenditure is non-plan expenditure. We will now take up the various deficits and the components of plan and non-plan expenditure. In the Budget at a Glance, the plan and the non-plan expenditure make up the total government expenditure. This brings us to the concept of deficit. PUBLIC ACCOUNT: This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditure from it are not required to be approved by Parliament. For each of these funds the government has to present a statement of receipts and expenditure. It is important to note that all money flowing into these funds is called receipts, the funds received, and not revenue. Revenue in budget context has a specific meaning. The Constitution requires that the budget has to distinguish between receipts and expenditure on revenue account from other expenditure. So all receipts in, say consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes nonrevenue receipts and expenditure. For understanding these budgets - Revenue and Capital - it is important to understand revenue receipts, revenue expenditure, capital receipts and capital expenditure. PUBLIC DEBT: In normal accounting, debt is a stock, to be measured at a point of time, while borrowing and repayment during a year are flows, to be measured over a period of time. In Budget parlance, however, you'll find public debt receipts and public debt disbursals. These are respectively borrowings and repayments during the year. The difference between the two is the net accretion to the public debt. Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). The internal debt comprises of treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings. PLAN EXPENDITURE: This is essentially the Budget support to the central plan and the central assistance to state and Union Territory plans. Like all Budget heads, this is also split into revenue and capital components.


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PASS-THROUGH STATUS: A pass through status helps avoid double taxation. Mutual funds, for instance, enjoy pass through status. The income earned by the funds is tax-free. Since mutual funds’ income is distributed to unit holders, who are in turn taxed on their income from such investments, any taxation of mutual funds would amount to double taxation. Essentially, it means that the income is merely passing through the MFs and, therefore, should not be taxed. The government allows VC funds in some sectors pass-through status to encourage investments in start-ups. REVENUE RECEIPT/EXPENDITURE: All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the receipts side, taxes would be the most important revenue receipt. On the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure. Salaries, subsidies and interest payments are good examples of revenue expenditure. RECEIPTS in the capital account of the consolidated fund are grouped under three broad heads: public debt, recoveries of loans and advances, and miscellaneous receipts. Revenue budget: This is the budget for revenue expenditure or expenditure not meant for creating assets. It covers salaries of government staff and defense personnel, ministerial perks, expenses for office furniture, state government grants, interest paid on loans among others. This spending is financed from the revenue earned by the government in the form of taxes, duties, receipts, fees and dividends. SECURITIES TRANSACTION TAX (STT): Sale of any asset (shares, property etc) results in loss or profit. Depending on the time the asset is held, such profits and losses are categorised as long term or short term capital gain/loss. In the 2004-05 budget, the government abolished long-term capital gains tax on shares (tax on profits made on sale of shares held for more than a year) and replaced it STT. It is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid/received in a share transaction. SERVICE TAX: It is a tax on services rendered. Telephone bill, for instance, attracts a service tax. While on taxes, let us take a look at an important classification: direct tax and indirect tax, which finds wide mention in the budget. SECURITIES AGAINST SMALL SAVINGS: The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund. SUBVENTION: The term subvention finds a mention in almost every Budget. It refers to a grant of money in aid or support, mostly by the government. In the Indian context, for instance, the government sometimes asks institutions to provide loans to farmers at below market rates. The loss is usually made good through subventions. SURCHARGE: As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33%. In the case of individuals earning a taxable salary of more than Rs 10 lakh a surcharge of 10% is levied on income in excess of Rs 10 lakh. Corporate income is levied a flat surcharge of 10% in the case of domestic companies and 2.5% for foreign companies. Companies with revenue less than Rs 1 crore do not have to pay this surcharge.


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TAXES ON INCOME OTHER THAN CORPORATION TAX: Income tax paid by non-corporate assesses, individuals, for instance. TREASURY BILL (T-BILLS): These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities. VALUE-ADDED TAX (VAT) AND GST: VAT helps avoid cascading of taxes (tax being levied upon a price that includes one or more elements of tax) as a product passes through different stages of production/value addition. The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim is to tax a firm only for the value added by it to the inputs it is using for manufacturing its output and not the entire input cost. VAT brings in transparency to commodity taxation: right now, only the final tax paid by the consumer is apparent to her, while with value added tax generalised to a goods and services tax (GST) that subsumes both central and state level taxation, the entire element of tax borne by a good (or a service) would be represented by the GST paid on it. A GST of 20% might seem high, but it would be about half the actual incidence of tax in most goods at present. WAYS AND MEANS ADVANCE (WMA): One of the many roles of the RBI is to serve as banker for both the Central and State governments. In this capacity, the RBI provides temporary support to tide over mismatches in their receipts and payments in the form of ways and means advances.


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SEBI Terms

Book Building - A process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.

Composite Issues - An issue of securities, by a listed company on a public cum rights basis offered through a single offer document wherein the allotment for both public and rights components of the issue is proposed to be made simultaneously.

Convertible Debt Instrument - An instrument or security which creates or acknowledges indebtedness and is convertible into equity shares at a later date, at or without the option of the holder of the instrument or the security of a body corporate, whether constituting a charge on the assets of the body corporate or not.

Firm Allotment - The allotment on a firm basis in public issues by an issuing company made to Indian and Multilateral Development Financial Institutions, Indian Mutual Funds, Foreign Institutional Investors including non-resident Indians and overseas corporate bodies and permanent/ regular employees of the issuer company.

Green Shoe Option- An option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism which is granted to a company to be exercised through a Stabilizing Agent.

Listed Company- A company which has any of its securities offered through an offer document listed on a recognised stock exchange and also includes Public Sector Undertakings whose securities are listed on a for recognised stock exchange.

Offer Document- The Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue.

Preferential Allotment- An issue of capital made by a body corporate in pursuance of a resolution passed under Sub-section (1A) of Section 81 of the Companies Act, 1956.

Public Issue- An invitation by a company to public to subscribe to the securities offered through a prospectus;

Qualified Institutional Buyers- QIB are the institutional investors that include public financial institutions, a scheduled commercial banks, mutual funds, foreign institutional investors and sub-account registered with SEBI, multilateral and bilateral development financial institutions, venture capital funds, foreign venture capital investors, state industrial development corporations, insurance companies, provident funds with minimum corpus of Rs. 25 crores, pension funds with minimum corpus of Rs. 25 crores, National Investment Fund.

Retail Individual Investor- means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

Retail Individual Shareholder- means a shareholder of a listed company, who a) As on the record date (i.e., the date fixed for the purpose of determining eligible shareholders), is holding shares which, on the basis of the closing price of the shares as on the previous day, are worth up to Rs.1,00,000. b) Applies or bids for securities of or for a value of not more than Rs.1,00,000/-

Rights Issue - An issue of capital under Sub-section (1) of Section 81 of the Companies Act, 1956, to be offered to the existing shareholders of the company through a Letter of Offer.

Underwriting- An agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.


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Price Rigging: When persons acting in concert with each other collude to artificially

increase or decrease the prices of a security. Dividend stripping: is the booking of a notional loss, by which one buys a MF unit

before the dividend record date, the date on which the person eligible for dividends are announced and sells them at a lower price thereafter, taking home, a tax free dividend while still registering a notional loss on sale of MF units. A person shopping around for a short term loss buys a mutual fund unit when it is pregnant i.e. just before the dividend is to be announced. Once it is announced, the market price of the unit dives. The unit holder sells this unit and as a result he earns not only a tax free dividend but also booked a short term loss. The loss so booked = L 2 + public deposits of NBFCs, is then used to set off other short term capital gains, resulting in bringing down the taxable income of investors in the high tax bracket.

Cross Listing: refers to listing of instruments of a company on the stock exchange abroad. The number of such firms in India is still very small although cross listing is growing. Stringent regulatory and accounting process and high listing fees act as impediments for cross listing. US and Japan are the two largest capital markets and cost of listing on NYSE or in Japan runs into hundreds of thousands of dollars. The objectives of cross listing are to increase visibility and create a demand for the companyproducts as well as securities, diversify investors’ base and attain decreased cost of capital and enhance employee relationship in the form of stock ownership.

Circular trading: Circular trading is where the members of an exchange form a cartel and trade among themselves creating huge false volumes and rigging the price of shares, thus misleading the common investors into trap.

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Issues in Primary Market

Initial public offering (IPO): The unlisted companies make fresh issue of shares of securities or they sell existing securities for the first time to the public. These securities are listed on the stock exchange.

Follow-on public offering (FPO): Under this process, the already listed companies make further public issue. They are allowed to do so, when they continuously meet the listing obligations.

Right issues: Under this process, the listed companies may fresh public issue and offer the shares to existing shareholders in a ratio fixed with reference to existing holding of shares, with the shareholders.

Private placements: It is a process when the securities are issued to a select group of investors u/s 81 of Companies Act. A qualified institutional Placement (QIP) is a form of private place which is made to qualified institutional buyers (QIB).

Issue prices: There is no uniform pricing formula for issue of securities, prescribed by SEBI. The prices are fixed by the companies. There are 2 methods for fixation of price. (a) Price fixed by the company in consultation with the lead manager. Such issues are called fixed price issues. (b) A floor price is fixed by the company by giving a 20% price band over the floor price and the issue price is left to the market to be fixed. This price is called the cut-off price and fixed by the issuing company on the basis of price discovery . This is called a book building process.

Book Building: It is the process to assess demand for a particular public issue at various prices, based on which the issue is priced and sold to the investors. In such an issue, retail individual investors, non-institutional investors and qualified institutional buyers are offered the securities in the ratio of 35:15:50. The book runner (lead manager) collects orders from various investors through other participating members. Then he decided the yields to be offered based on the orders received and the yields quoted for them.

Safety net scheme: It is a process under which the investors are provided a facility to sell their holding at a pre-fixed price, if they experience volatile price variations in the stock price, through a buy back arrangement. The buy back is available to original shareholders only and it is limited to fixed no. of shares (say 1000 shares per allottee).

Application for listing: A company can make public issue if it has made an application for listing of securities in the stock exchange.

Issue of securities in dematerialised form: A company shall make public or rights issue if it enters into an agreement with a depository for dematerialization of securities already issued or proposed to be issued to the public or existing shareholders.

Initial Public Offerings by Unlisted Companies: A company may make an IPO if it meets the following conditions: (a) It has net tangible assets of Rs. 3 cr in preceding 3 full years (not more than 50% is held in monetary assets) (b) The company has a track record of distributable profits for at least 3 out of immediately preceding 5 years; (c) The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each); (d) The aggregate of proposed issue and all previous issues in same financial year in size (i.e., offer through offer document + firm allotment + promoters’ contribution through the offer document), does not exceed 5 times its pre-issue networth as per the audited balance sheet of the last financial year.

Public Issue by Listed Companies: A listed company is eligible to make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date:The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters’ contribution through the offer document), issue size does not exceed 5 times its pre-issue net worth as per the audited balance sheet of the last financial year. In case there is a change in the name of issuer company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name is not less than 50% of its total revenue in the preceding 1 full-year period.)

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Applications Supported by Blocked Amount ASBA While subscribing a public issue, a prospective shareholder is expected to send alongwith

his share application, a cheque being the subscription amount, based on which the funds in the account of the prospective shareholders are withdrawn by the company. In case of non-allotment of shares, the company concerned refunds the money through a refund order. Introduced in July 2008, Applications Supported by Blocked Amount (ASBA) Process, is the alternative payment method (optional) for public issue (IPO) application, where the IPO bidding amount (i.e. amount of subscription) remains in investor's account, but is blocked by the bank until allotment is done. Hence, this is an alternative method of payment, for retail individual investors through participating Self Certified Syndicate Banks (SCSB’s).

Objective of ASBA: The objective is (a) to reduce the listing time for IPO shares and (b) to make the refund process cost effective and faster for the companies. (Technically there is no refund because funds remain with SCSB and the money for allocated shares is withdrawn from the investor's account after allotment).

What is ASBA?: ASBA is an application containing an authorization by the investor to block the application money in his bank account, for subscribing to a public issue. Under ASBA, application money shall be debited to the bank account only if application is selected for allotment after the basis of allotment is finalized. In case of rights issue, the money shall be debited to the account after the receipt of instruction from the registrars.

Who can apply through ASBA process? : An individual investor can apply through ASBA process in a public issue through book building route provided he/ she: (a) is a Resident Retail Individual Investor i.e applying for shares/ securities up to Rs.100000/-; (b) is bidding at cut-off, with single option as to the number of shares bid for; (c) is applying through blocking of funds in a bank account with the SCSB; (d) has agreed not to revise his/her bid; (e) is not bidding under any of the reserved categories.

Advantage in applying through ASBA: (a) The investor is not required to pay the application money by cheque in advance. Instead, the investor submits ASBA which accompanies an authorization to block his bank account to the extent of the application money. (b) In ASBA only that much money which is required for allotment of securities, is taken from the bank account only when his application is selected for allotment after the basis of allotment is finalized. (c) The investor continues to earn interest on the application money as the same remains in the account. (d) The entire bank account will not be blocked. Only the amount to the extent of application money authorized in the ASBA will be blocked in the bank account. The balance money, if any, in the account can still be used for other purposes.

Type of issue for ASBA: Investors can make application through ASBA process only in case of book-built public issues which provides for a uniform payment option to the retail individual investors.

Self Certified Syndicate Bank (SCSB): SCSB is a bank which is recognized as a bank capable of providing ASBA services to investors. The list of such banks is available in website of BSE, NSE and SEBI. It is also given in the ASBA application form.

Role of SCSB: After receipt of ASBA, SCSB is expected to ensure (i) blocking of funds in the bank accounts and (ii) uploading the details such as Application number, DP ID,Client ID, Bid Quantity, PAN, in the electronic bididng system of Stock Exchange(s). Further, after close of the bidding period, the SCSB is to send the following aggregate information to the Registrar: (i) Total number of ASBAs uploaded by the SCSB (ii) Total number of shares and total amount blocked against the uploaded ASBAs.


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Process of application: An investor can either fill up the physical ASBA form available with SCSB and submit the same through designed branches of SCSBs or apply electronically through the internet banking facility (if provided by SCSB). The application form for ASBA is different from the existing application form for public issues.

Withdrawal of application under ASBA bids: During the bidding period the investor can approach the same bank to which he had submitted the ASBA and request for withdrawal. After the bid closure period, the investor has to send the withdrawal request to the Registrars, who will cancel the bid and instruct SCSB to unblock the application money in the bank account after the finalization of basis of allotment.

Rejection of application due to wrong information: The investor can approach the concerned SCSB for complaints regarding his ASBA application. SCSB is required to give reply to the investor within 15 days. In case, the investor is not satisfied, he has to write to SEBI thereafter.

Responsibility for errors in the data: In case there is an error by the investor in entering the data in the application form, the investor shall be responsible. In case there is an error by SCSB in entering the data in the electronic bidding system of the stock exchanges, the SCSB shall be responsible.

Failure of the issue: If the issue fails/withdrawn, the SCSB shall unblock the application money from the bank accounts upon receiving instructions from the Registrar.

Other requirements of ASBA: The issuer is required to provide ASBA mode in all public issues though book building, where a uniform payment option is being offered to the retail investors. As for Rights Issues, SEBI has for the time being, enabled ASBA to be used for a few select Rights Issues on pilot basis.

Record keeping: ASBA physical forms may be retained for a period of 6 months with SCSB for redressing complaints if any, of ASBA investor and thereafter the same may be sent to the issuer. As regards electronic ASBA, SCSB need not take print out or submit such print out to Issuer or Registrar.

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Basel II In April 1992, RBI decided to introduce in India, a risk asset ratio system for banks

(including foreign banks), as a capital adequacy measure, to adopt the framework on capital adequacy (Basel I), recommended by Basle Committee on Banking Supervision (BCBS). Under this system, the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned risk weights and banks have to maintain unimpaired minimum capital funds equivalent to a prescribed ratio (called capital adequacy ratio), on

the aggregate of the risk weighted assets and other exposures, on an ongoing basis. In June 2006, the BCBS released a comprehensive version of the revised framework (Basel II) which seeks to adopt more risk-sensitive approaches to capital requirements. The Revised Framework provides a range of options for determining the capital for credit risk and operational risk to allow banks and supervisors to select approaches that are most

appropriate for their operations and financial markets. Three pillars of Basel II: The Basel-2 framework is based on 3 important components called 3 pillars, which include : Pillar-1 : Minimum capital standards, Pillar : 2 Supervisory review and Pillar:3 Market discipline. Pillar -1 (Minimum Capital Standards): Banks are required to maintain capital funds with reference to their risk weighted assets. This is indicated in the form of a ratio called Capital Adequacy Ratio (CAR) or Capital to Risk Assets Ratio (CRAR). For maintaining capital, 3 types of risk are taken into account (a) credit risk (b) market risk and (c) operational risk. Minimum ratio: The minimum ratio that has been suggested in Basel 2 is 8% while in India, the banks are required to maintain it at 9%. While maintaining the minimum total CRAR of 9%, the banks are also to ensure that, Tier I capital should be 6% of risk weighted assets, by 31.03.2010. Further, the minimum capital would be subjected to a prudential floor, which shall be higher of: (a) minimum capital required to be maintained or ( b) a specified percentage of minimum capital required for credit & market risk as per Basel I. Calculation of CAR: The ratio is calculated both for Tier I and for total Capital Fund as under: Tier I CRAR = (Eligible Tier I Capital Funds) / (Credit Risk RWA + Market Risk RWA + Operational Risk RWA) x 100 Total CRAR = (Eligible Total Capital Funds) / (Credit Risk RWA + Market Risk RWA + Operational Risk RWA) x 100


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Components of Capital fund I: There are two tiers of capital fund, namely Tier I and Tier II. While the Tier I (permanent capital or core capital) should be at least 6% to be achieved by 31.3.2010, Tier II (supplementary capital) cannot be more than 50% of the total capital funds. Tier I components: paid-up capital, statutory reserves, other disclosed free reserves capital reserves representing surplus of sale proceeds of assets. Investment Fluctuation Reserve. Innovative Perpetual Debt Instruments (IPDI)** Perpetual Non-Cumulative Preference shares (PNCPS)** **Amount of both not to be more than 40% of Tier I capital. IPDI should not to be more than 15% of Tier I. There is no maturity period but there is call option available to the bank, after 10 years. Tier I capital = Tier I components as above Minus the following: (a) equity investments in subsidiaries, (b) intangible assets, and (c) losses in the current period and those brought forward from previous periods. Tier II components: Un-disclosed reserves and cumulative perpetual preference shares: Revaluation Reserves (at a discount of 55% while determining their value for inclusion in

Tier II capital) General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets: Hybrid debt capital Instruments (say bonds): Subordinated debt (long term unsecured loans: Debt capital instruments Redeemable cumulative preference shares. Redeemable non-cumulative preference shares. Perpetual cumulative preference shares. Risk weighted assets – Fund Based These assets mean fund based assets such as cash, loans, investments and other assets, to which the degree of risk expressed as %age weights is assigned by RBI, under Standardised approach. Non-funded (Off-Balance sheet) Items: These items include letter of credit, bank guarantees etc. The credit risk exposure attached to off-balance sheet items is first calculated by multiplying the face amount of each of the off-balance sheet items by the credit conversion factor. This is then again multiplied by the relevant risk weightage.


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Approaches for risk assets calculation in Basel II: For calculation of risk weighted assets to maintain capital, different approaches have been suggested under Basel II. These approaches are: 1. Credit Risk: Standard Approach, Internal rating Based approach (that comprise

foundation approach & advance approach) 2. Market Risk: Standard Approach (comprising maturity method & duration method),

Internal risk based approach. 3. Operational Risk: Basic Indicator Approach, Standard Approach, Advance

Measurement Approach Implementation: Initially, in India, Standard approach for credit risk, Standard approach-duration method for market risk and basic indicator approach for operational risk have been adopted. Under these approaches the risk weights for different assets are prescribed by RBI and banks cannot change the risk weight. Migration to higher approach: Migration to other approaches is possible with prior permission of RBI. Further, a bank having migrated to a higher approach will not be permitted to revert back to the lower approach. RBI has planned to move to the advanced approaches as per the following time schedule: (Modified on 7.7.2009)

Approach The earliest date of making application to the RBI

Likely date of approval by the RBI

Internal Models Approach (IMA) for Market Risk

April 1, 2010 March 31, 2011

The Standardised Approach (TSA) for Operational Risk

April 1, 2010 September 30, 2010

Advanced Measurement Approach (AMA) for Operational Risk

April 1, 2012 March 31, 2014

Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation as well as Advanced IRB)

April 1, 2012 March 31, 2014

Reporting requirements: 1. Banks are also required to disclose in their balance sheet the quantum of Tier I and Tier II

capital fund, under disclosure norms. 2. Annual return to be submitted by each bank indicating capital funds, conversion of off-

balance sheet/non-funded exposures, calculation of risk -weighted assets, and calculations of capital to risk assets ratio.


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Capital for Credit Risk Under the Standardized Approach for Credit Risk, the risk weightages are prescribed by RBI. These are adopted by the banks without any discretion to modify. This approach is based on ratings from External Credit Rating Institutions for sovereigns, banks and corporates. This approach is found to be more suitable in India, for the time being, in view of lack of historical data and other such factors. Ratings Agencies RBI has identified 4 external domestic rating agencies namely CRISIL, ICRA, CARE & Fitch for use of their rating. The international agencies are Fitch, Moody’s and Standard & Poor’s. Internal Ratings-Based Approach for credit risk As an alternative to standardized approach, the banks can adopt the IRB approach (having two variants i.e. foundation or advanced), with approval from their RBI. This approach is based on bank’s internal assessment of counterparties and exposures through the elements of Unexpected Losses (UL) and Expected Losses (EL). Capital for Market Risk: Market risk is the risk of possible losses in holding, on balance sheet and off-balance sheet positions, due to movements in market prices. The market risk positions, for capital charge requirement, are (a) the risks pertaining to interest rate related instruments and equities in the trading book and (b) foreign exchange risk throughout the bank. The Basle Committee has suggested two broad methodologies for computation of capital charge for market risks (a) standardized method and (b) banks’ internal risk management models method. As per RBI, initially the banks may adopt the standardized method. Under the standardised method there are two principal methods of measuring market risk, i.e. a ‘maturity method’ and a ‘duration method’. Banks are to adopt standardized duration method. Banks are to measure the general market risk charge by calculating the price sensitivity (modified duration) of each position separately. Capital for Operational Risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. This does not include strategic and reputational risk. Some factors for operational risk could be lack of competent management and/or proper planning and controls, incompetent staff, indiscipline, involvement of staff in frauds, outdated systems, noncompliance, programming errors, failure of computer systems, increased competition, deficiency in loan documentation etc.


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Approach : For capital requirement in respect of operational risk, the risk can be measured by adopting any of the three approaches i.e. the Basic Indicator Approach (BIA), Standardized Approach and Advanced Measurement Approach. To begin with, banks have adopted basic indicator approach. Banks which move to Standardized approach or AMA, will not be allowed to move back to BIA. Basic Indicator Approach : As per this method, a bank will have to hold capital, equal to average of previous 3 years’ positive annual gross income (i.e. net intt. income + net non-intt. income), as a fixed %age (denoted alpha i.e. 15%). If there is negative gross income for any year, it will be excluded both from numerator and denominator. Capital requirement = Annual positive gross income for three years x 15% / no. of years for which gross income is positive. Pillar 2 : Supervisory Review Process Supervisory review process (SRP) is intended to ensure that banks have adequate capital

to support all the risk in their business and encourage them to develop and use better risk management techniques in monitoring and managing their risk. Central banks are to evaluate as to how well banks are assessing their capital needs considering their risk profile. The Basel II lays down 4 key principles in regard to the SRP and the principles 2 and 4 deal with the role of the supervisors.

In India, as per RBI directives, the SRP requires all Indian banks to implement an internal process, called the Internal Capital Adequacy Assessment Process (ICAAP), for assessing their capital adequacy in relation to their risk profiles as well as a strategy for maintaining the capital levels. The Pillar 2 requires RBI to subject all the banks to an evaluation process, called Supervisory Review and Evaluation Process (SREP).

ICAAP - It comprises a bank’s procedures and measures to ensure (a) identification and measurement of risks; (b) an appropriate level of internal capital in relation to the bank’s risk profile; and (c) application and further development of suitable risk management systems in the bank.

SREP- It consists of a review and evaluation process adopted by the supervisor, for review and evaluation of the bank’s ICAAP, conducting an independent assessment of the bank’s risk profile, and if necessary, taking appropriate prudential measures and other supervisory actions.

Conduct of the SREP by the RBI: Under the SREP, RBI will assess the overall capital adequacy of a bank through a comprehensive evaluation taking into account all relevant information. The SREP would be conducted by RBI periodically, along with the RBI’s Annual Financial Inspection (AFI) and in the light of the data in the off-site returns received from the banks, in conjunction with the ICAAP document (to be submitted every year to the RBI).


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Pillar 3 : Market Discipline The purpose of market discipline is to complement the Pillar 1 and the Pillar 2. Providing disclosures is an effective means of informing the market about a bank’s exposure to those risks and provides a consistent and comprehensive disclosure framework that enhances comparability. Frequency of disclosures: Banks should provide disclosures, both (a) qualitative and (b) quantitative, as at end

March each year along with the annual financial statements. Banks with capital funds of Rs.100 crore or more should make interim disclosures on the quantitative aspects, on a standalone basis, on their respective websites as at end Sept. Qualitative disclosures may be published on an annual basis.

Banks with capital funds of Rs. 500 crore or more must disclose their Tier 1 capital, total capital, total required capital and Tier 1 ratio and total capital adequacy ratio, on a quarterly basis on their respective websites.

These disclosures pertaining to a financial year should be available on the websites until disclosure of 3rd subsequent annual disclosure is made.

Effective date of disclosures: The first of the disclosures shall be made as on the effective date viz. March 31, 2008 or 2009, as the case may be. Banks are, however, encouraged to make the Pillar 3 disclosures at an earlier date. Implementation of Basel 2 recommendations in India For foreign banks and Indian banks having operations outside India, the implementation started from March 31, 2008 and for other Indian banks, the implementation started from March 31, 2009.

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RBI’s Second Quarter Review of Monetary Policy: Oct 2009 Developments Regarding Basel - II / Risk Management Enhancements to the Basel II Framework:

In July 2009, the Basel Committee on Banking Supervision (BCBS) had finalised

enhancements and revisions in certain areas of the Basel II framework. The enhanced / revised guidance of BCBS is contained in their three documents, viz.,

Enhancements to the Basel II Framework; Revisions to the Basel II Market Risk Framework; and Guidelines for Computing Capital Charge for Incremental Risk in the Trading Book.

It is proposed to issue detailed guidelines as appropriate for implementation by banks operating in India by end-November 2009.

Introduction of Duration Gap Analysis for Asset Liability Management The Reserve Bank had issued guidelines on asset liability management in February 1999,

which, inter alia, covered aspects relating to interest rate risk measurement. These guidelines to banks approached interest rate risk measurement from the 'earnings

perspective' using the traditional gap analysis (TGA). To begin with, the TGA was considered as a suitable method to measure interest rate risk. The Reserve Bank had, however, indicated its intention to shift to modern techniques of

interest rate risk measurement such as duration gap analysis (DGA), simulation and value-at-risk over a period of time, when banks acquire sufficient expertise and sophistication in this regard.

Since banks have gained considerable experience in implementation of the TGA and have become familiar with the application of the concept of duration / modified duration while applying standardised duration method for measurement of interest rate risk in the trading book, this is an opportune time for banks to adopt the DGA for management of their interest rate risk. With this move, banks would migrate to the application of the 'economic value perspective' to interest rate risk management. Accordingly, it is proposed : to issue detailed guidelines on the use of DGA for management of interest rate risk by end-November 2009.

Review of Capital Adequacy Norms for Take-out Financing At present, the credit conversion factor (CCF) for off-balance sheet exposure of the take-

out financing institution, which captures that institution's unconditional commitment during the period up to the take-out event, is 100 per cent.

The CCF for conditional take-out has been fixed at a lower level of 50 per cent reflecting the uncertainty regarding the take-out event due to the conditional nature of the agreement.

The existing capital adequacy treatment of take-out financing is in conformity with the capital adequacy treatment of forward asset purchases under both Basel I and Basel II.

The issue has been reconsidered and it is proposed : to allow banks to build up capital for take-out exposures in a phased manner.


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Commercial Real Estate Exposures:

In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets (NPAs).

Accordingly, it is proposed : to increase the provisioning requirement for advances to the commercial real estate sector classified as 'standard assets' from the present level of 0.40 per cent to 1 per cent.

Review of Adequacy of Loan Loss Provisions: At present, the provisioning requirements for NPAs range between 10 per cent and 100

per cent of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank. Since the rates of provisioning stipulated by the Reserve Bank for NPAs are the minimum and banks can make additional provisions subject to a consistent policy based on riskiness of their credit portfolios, it has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks. With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed: to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. Banks should achieve this norm not later than end-September 2010.

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Risk Management Glossary Asset An asset is anything of value that is owned by a person or business Available for Sale The securities available for sale are those securities where the intention of the bank is neither to trade nor to hold till maturity. These securities are valued at the fair value which is determined by reference to the best available source of current market quotations or other data relative to current value. Back Testing and need for Back Testing

Back tests compare realized trading results with model generated risk measures, both to evaluate a new model and to reassess the accuracy of existing models. Although no single methodology for back testing has been established, banks using internal VaR models for market risk capital requirements must back test their models on a regular basis. Banks should generally back test risk models on a monthly or quarterly basis to verify accuracy. In these tests, they should observe whether trading results fall within pre-specified confidence bands as predicted by the VaR models. Need: If the results of the Back Tests show that the models perform poorly, they should probe further to find the cause (e.g., check integrity of position and market data, model parameters, methodology). Balance Sheet A balance sheet is a financial statement of the assets and liabilities of a trading concern, recorded at a particular point in time. Banking Book The banking book comprises assets and liabilities, which are contracted basically on account of relationship or for steady income and statutory obligations and are generally held till maturity. Bankruptcy remote It means the unlikelihood of an entity being subjected to voluntary or involuntary bankruptcy proceedings, including by the originator or its creditors. Basel Capital Accord The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to develop standardised risk-based capital requirements for banks across countries. The Accord was replaced with a new capital adequacy framework (Basel II), published in June 2004. Basel II is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks face. These three pillars are : (1) minimum


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capital requirements, which seek to refine the present measurement framework (2) supervisory review of an institution's capital adequacy and internal assessment process; (3) market discipline through effective disclosure to encourage safe and sound banking practices Basel Committee on Banking Supervision The Basel Committee is a committee of bank supervisors consisting of members from each of the G10 countries. The Committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide. Basel recognized collateral : Basel II recognizes the following securities as eligible for treatment as credit risk mitigants, if taken either as prime or collateral: Cash Margin, Bank Deposit, Gold Jewellery (benchmarked to 99.99 purity), State Government securities, Central Government securities NSC, Indira Vikas Patras & Kisan Vikas Patras, Debt securities rated, Insurance Policies, Debt securities unrated, Equities (including convertible bonds), Mutual fund securities. Note: It is very pertinent to note that in respect of Standard Assets, Basel II does not recognize Land & Building, Plant & Machinery, Stock and Book Debts as eligible collateral for risk mitigation purposes. Basel recognized guarantor types: State Government, Central Government, ECGC, CGTSI, Public Sector Entities, Banks, Primary Dealers, Corporates. Basic Indicator Approach An operational risk measurement technique permitted under Basel II. The approach sets a charge for operational risk as a fixed percentage ("alpha factor") of a single indicator. The indicator serves as a proxy for the bank's risk exposure. Basis Risk The risk that the interest rate of different assets, liabilities and off-balance sheet items may change in different magnitude is termed as basis risk. Capital Capital refers to the funds (e.g., money, loans, equity, etc.) which are available to carry on a business, make an investment, and generate future revenue. Capital also refers to physical assets which can be used to generate future returns.


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Capital Adequacy A measure of the adequacy of an entity's capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent. For example, under BIS (Bank for International Settlements) rules, banks are required to maintain a certain level of capital against their risk-adjusted assets. Capital reserves That portion of a company's profits not paid out as dividends to shareholders. They are also known as undistributable reserves. Convertible Bond A bond giving the investor the option to convert the bond into equity at a fixed conversion price or as per a pre-determined pricing formula. Core Capital Tier I capital is generally referred to as Core Capital Credit risk Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force marginal risk, marginal risk and settlement risk. Basel II proposes two methods for measurement of Credit Risk. They are 1. Standardized Approach 2. Internal Ratings Based (IRB) Approach. ( 1. Foundation IRB & 2.Advanced IRB) Credit Risk: Standardized Approach: Under this approach, the Basel II accord proposes differential capital requirements depending upon the credit quality of the borrower. The differential risk weights range from 0 %, 20%, 50%, 100 % and 150% would be assigned on the basis of ratings of the borrower. Therefore to adopt this approach Risk Rating of the borrowers is pre requisite. Credit Risk: Internal Ratings Based Approach: A further option of 2 methods exist in this. They are Foundations Approach & Advanced Approach. This approach is based calculation of Expected Losses and Unexpected Losses.


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In turn these are calculated by Probability of Default (PD), Loss Given Default(LGD) and Exposure at Default (EAD). Banks which comply with certain minimum requirements like Comprehensive Credit rating system shall be permitted to adopt the Foundation Approach. Under this approach, the rating system adopted by the banks shall be capable of quantifying the Probability of Default, whereas the LGD and EAD are provided by RBI. Under Advanced Measurement Approach, banks will be allowed to use the internal for calculation of PD, EAD, LGD for assigning the risk weights and they will be validated by RBI. However for adopting the IRB Approach, banks should build up historical data base on the Portfolio quality/Provisioning/Write offs etc. Debentures Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures. Deferred Tax Assets Unabsorbed depreciation and carry forward of losses which can be set-off against future taxable income which is considered as timing differences result in deferred tax assets. The deferred Tax Assets are accounted as per the Accounting Standard 22. Deferred Tax Assets have an effect of decreasing future income tax payments, which indicates that they are prepaid income taxes and meet definition of assets. Whereas deferred tax liabilities have an effect of increasing future year's income tax payments, which indicates that they are accrued income taxes and meet definition of liabilities Delta (?) The delta of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to change in the price of the asset(s) underlying the option(s). Derivative A derivative instrument derives much of its value from an underlying product. Examples of derivatives include futures, options, forwards and swaps. For example, a forward contract can be derived from the spot currency market and the spot markets for borrowing and lending. In the past, derivative instruments tended to be restricted only to those products which could be derived from spot markets. However, today the term seems to be used for any product that can be derived from any other. Duration Duration (Macaulay duration) measures the price volatility of fixed income securities. It is often used in the comparison of the interest rate risk between securities with different coupons and different maturities. It is the weighted average of the present value of all the cash flows associated with a fixed income security. It is expressed in years. The duration of a fixed income security is always shorter than its term to maturity, except in the case of zero coupon securities where they are the same. ECAI:


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ECAI stands for External Credit Assessment Institution. They assign credit risk ratings to the corporates, firms and market entities in order to enable the latter to raise funds or to establish the financial strengths/ credentials. Foreign Institutional Investor An institution established or incorporated outside India which proposes to make investment in India insecurities; provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor. Forward Contract A forward contract is an agreement between two parties to buy or sell an agreed amount of a commodity or financial instrument at an agreed price, for delivery on an agreed future date. In contrast to a futures contract, a forward contract is not transferable or exchange tradable, its terms are not standardized and no margin is exchanged. The buyer of the forward contract is said to be long the contract and the seller is said to be short the contract. Gap risk: These are risks owing to adverse movements in implied interest rate differentials arising

through transactions involving foreign currency deposits, forward contracts, currency swaps, forward rate agreements and through other currency and interest rate derivatives.

Gap Risks arising out of open gaps can be contained with in manageable limits by fixing suitable gap limits.

The size of the Gap limits is usually linked to a certain percentage of the net worth of the bank, as all losses arising out of foreign currency operations will have to be met out of owned funds of the bank.

Gamma (?) The gamma of an option / portfolio of options is the rate of change of the option's / portfolio's delta with respect to the change in the price of the asset(s) underlying the option (s). General Provisions & Loss Reserves Such reserves, if they are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, can be included in Tier II capital. General Market Risk Risk that relates to overall market conditions while specific risk is risk that relates to the issuer of a particular security General provisions and Loss Reserves:


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Out of the general provisions and loss reserves made, some provisions account for known and foreseeable potential losses. After making sufficient provisions to account for all these known losses and foreseeable potential losses, the reserves that are remaining and are not attributable to any identifiable potential loss can be used to meet unexpected loss, and hence can be included in Tier 2 capital. Provisions that can be used to be included in Tier 2 capital are General provisions on Standard assets, Floating provisions, Provisions held for country exposure. There is a limit on the amount of General provisions and Loss Reserves that can be included as Tier 2 capital. The inclusion is permissible only up to a maximum of 1.25 percent of the total risk weighted assets. Hedging Taking action to eliminate or reduce exposure to risk Held for Trading Securities where the intention is to trade by taking advantage of short-term price / interest rate movements. Horizontal Disallowance A disallowance of offsets to required capital used the BIS Method for assessing market risk for regulatory capital. In order to calculate the capital required for interest rate risk of a trading portfolio, the BIS Method allows offsets of long and short positions. Yet interest rate risk of instruments at different horizontal points of the yield curve are not perfectly correlated. Hence, the BIS Method requires that a portion of these offsets be disallowed. Hybrid Debt Capital instruments In this category, fall a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature, which can be considered to affect its quality as capital. Where these instruments have close similarities to equity, in particular when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital. Recently RBI has permitted banks to raise DCI (Debt Capital Instrument) under this category, which is also regarded as 'Upper Tier-2'. These instruments have to fulfill the following conditions: 1. In case the Debt Capital Instruments (DCIs) are issued in Indian Rupees: 2. DCIs should have a minimum maturity of 15 years. 3. In the final guidelines RBI has reiterated that foreign banks operating in India and Indian

banks having operational presence outside India have to adopt The Standardized Approach (TSA) for credit risk, Basic Indicator Approach (BIA) for operational risk and continue to apply the Standardized Duration Approach (SDA) for computing capital requirement for market risk with effect from March 31, 2008.

4. All other commercial banks (except Local Area Banks and Regional Rural Banks) are encouraged to migrate to these approaches not later than March 31, 2009.

Haircuts:


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Banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either, occasioned by market movements. These adjustments are referred to as ‘haircuts’. Thus, there are two types of haircuts, i.e., haircut on exposure, referred as 'He' and haircut on collaterals, referred as 'Hc'.

Haircut on exposure is not actually a "cut" in value but to be "added" to the amount of exposure. Whereas Haircut on collateral is to be deducted from the value of the collateral, as market volatilities may bring down the value of collateral. [It may move up also, but as a conservative basis, B II norms suggest for making haircut adjustment only for possible reduction in value.] Haircut on exposure and haircut on security: Haircut on exposure and haircut on security are to be applied for all collateralized transactions, where the bank desires to avail of credit risk mitigation benefits and apply risk weight on net exposure, i.e. the exposure amount after risk mitigation. Haircut on exposure is added. Haircut on security is deducted. Haircut in case there is a currency mismatch: Currency mismatch arises when the collateral is denominated in a currency different from that in which the exposure is denominated. In such cases, the amount of the collateral is reduced by the application of a haircut, referred as HFX, to take care of exchange rate fluctuation. Banks in India apply a haircut of 8% (as prescribed by RBI) for currency mismatch. The total capital of a banking company is classified into Tier 1 and Tier 2 capital. Innovative perpetual debt instruments (IPDI) IPDI eligible for inclusion in Tier 1 Capital are those instruments that comply with

regulatory requirements, mentioned below: In case the IPDI is issued in Indian Rupees: Maturity: IPDI instruments have perpetual maturity. In other words, the principal

amount is not repayable unless otherwise the issuing bank exercise call option as mentioned below.

Options: IPDI cannot be issued with a put option (i.e., the investor cannot ask the issuer bank to repay the amount during the tenor of the instrument).

However, a call option (i.e., the issuer bank can buy back the instrument from the investor during the tenor of the instrument) can be there, which can be exercised after 10 years of the date of issuance of the instrument subject to prior permission from RBI.

Banks investment in innovative instruments of other banks/ financial institutions will attract 100% risk weight for capital adequacy purpose.

The limits for raising IPDI The total amount of IPDI shall not exceed 15% of total Tier 1 capital as on 31st March

of the previous financial year (after deduction of goodwill, Deferred Tax Assets (DTA) and other intangible assets but before the deduction of investments)

IPDI in excess of the above limit is eligible for inclusion under Tier 2 Capital, subject to maximum limit for holding of Tier 2 capital.


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Interest Rate Risk Risk that the financial value of assets or liabilities (or inflows / outflows) will be altered because of fluctuations in interest rates. For example, the risk that future investment may have to be made at lower rates and future borrowings at higher rates. Interest rate risk as far as financial institutions is concerned, is the risk that the value of its assets & liabilities as also its net interest income may get adversely affected on account of movements in interest rates. Any mismatch in cash flows or repricing dates of assets or liabilities, expose banks NII or NIM to variations. Types of interest rate risks are as follows: (a) Mismatch risk or Gap risk. (b) Basis risk. (c) Yield curve risk. (d) Embedded option risk (e) Price risk. Gap/Mismatch Risk: It is the risk arising due to the difference in the maturity or amount or re-pricing date of assets and liabilities, there by creating exposure to unexpected interest rate fluctuations. Basis Risk: Basis risk is the risk due to the increase in the interest rates of assets and liabilities in different magnitude. Embedded options risk: Embedded options risk consists of premature closure of deposits before their maturity and prepayment of loans and advances. Premature closure of term deposits necessitate the immediate requirement of funds whereas the prepayment may leads to deployment of funds at a lower rate. Reinvestment Risk: The reinvestment risk is the risk of deploying the intermediate cash flows from an asset at a lower rate resulting in lesser income. Interest Rate Risk is managed through: (a) Gap Analysis or Traditional Gap Method (addressing NII aspects) (b) Duration Gap Analysis (addresses economic value aspects) (c) Simulation Method (addressing both earnings & economic value aspects ). Liquidity risk: It is the potential inability to meet banks liabilities as they become due. It arises when the banks are unable to generate cash to cope with a decline in deposits or increase in assets. It originates from the mismatches in the maturity pattern of assets & liabilities. Liquidity risk in banks manifest in different dimensions: Funding Risk – need to replace net outflows due to unanticipated withdrawal/ non

renewal of deposits. Time Risk – need to compensate for non- receipt of expected inflows of funds i.e.

performing assets turning it to non- performing assets. Call Risk – due to crystallization of contingent liabilities and unable to undertake

profitable business opportunities when desirable. Long Position


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A long position refers to a position where gains arise from a rise in the value of the underlying. Market Risk Risk of loss arising from movements in market prices or rates away from the rates or prices set out in a transaction or agreement. Market risk is also defined as “ the risk that the value of on or off balance-sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates & commodity prices. Thus Market risk is the risk to the banks earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange, commodities & equities as well as the volatilities of those prices. Market Risk Management of a bank thus involves management of:

a) Interest rate risk, b) Foreign exchange risk, c) Commodity price risk & d) Equity price risk.

Modified Duration The modified duration or volatility of an interest bearing security is its Macaulay duration divided by one plus the coupon rate of the security. It represents the percentage change in a securities' price for a 100 basis points change in yield. It is generally accurate for only small changes in the yield.

where : MD = Modified duration P = Gross price (i.e. clean price plus accrued interest). dP = Corresponding small change in price. dY = Small change in yield compounded with the frequency of the coupon payment. Modified duration (MD) is a modified version of Macaulay Duration. It refers to the change in value of the security to one per cent change in interest rates (Yield). The formula is

Mortgage-backed Security A bond-type security in which the collateral is provided by a pool of mortgages. Income from the underlying mortgages is used to meet interest and principal repayments.


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Mutual Fund Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. A fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. Net Interest Margin Net interest margin is the net interest income divided by average interest earning assets Net NPA: Net NPA = Gross NPA - (Balance in Interest Suspense account + DICGC / ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held) Nostro accounts Foreign currency settlement accounts that a bank maintains with its overseas correspondent banks. These accounts are assets of the domestic bank. Off-Balance Sheet exposures Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until or unless they become actual assets or liabilities. Example for Off Balance Sheet Items are Outstanding Forward Exchange Contracts, Outstanding Interest Rate Contracts, Guarantees, Letters of Credit etc. These have to be first converted as credit items by applying credit conversion factor given by RBI. Then the appropriate risk weight is to be calculated. Thereafter the weighted risk on ‘On Balance Sheet’ items and ‘Off Balance Sheet’ Items has to be clubbed for calculation of Capital Adequacy. Open position It is the net difference between the amounts payable and amounts receivable in a particular instrument or commodity. It results from the existence of a net long or net short position in the particular instrument or commodity. Option An option is a contract which grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate (exercise price) on or before an agreed date (expiry or settlement date). The buyer pays the seller an amount called the premium in exchange for this right. This premium is the price of the option.


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Operational risk: Operational risk is defined by the Basel Committee as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Suggested approaches to measure the operational risk are: 1. Basic Indicator Approach 2. Standardized Approach and Alternate standardized Approach. 3. Advanced Measurement Approach. Regulatory Retail Portfolio: For classifying loans as Regulatory Retail portfolio the following four criteria have to be satisfied: 1. Orientation criteria: The exposure should be to an individual person or persons or to a

small business (Person means any legal person having contractual capability and includes Individual, HUF, Partnership firm, trust, Pvt. LTD COs, Public Limited COs, Cooperative societies etc. In respect of small business the annual turnover should not exceed RS 50 crores). Hence it is very important that the turnover details are captured without fail in the Customer Master.

2. Product Criteria: The exposure takes the form of revolving credits, lines of credit, personal term loans, leases, small business facilities and commitments.

3. Threshold Criteria: The loan amount to each borrower should not exceed RS 5 crores 4. Granularity Criteria: Aggregate exposure to one borrower should not exceed 0.2% of the

overall retail portfolio of the Bank.

Corporate : All credit exposures above Rs 5 crores which do not fall under any other customer type, irrespective of the constitution of the borrower are to be classified as Corporates.

Revaluation Reserves: Value of assets, typically land & building owned by a Bank are shown in the banks book at the depreciated price, which may be much below the current market value. These assets are revalued to reflect current market value of the assets in the books of the Bank. This gives rise to revaluation reserves. The difference between the book value and the current market value is shown under “Revaluation reserves” and the assets revalued are shown at current market value in the bank’s books instead of depreciated value. For inclusion in Tier 2 capital, the value of revaluation reserves is considered at a discount of 55%. Rho (?) Rho of an option / a portfolio of options is the rate of change in the value of an option / portfolio with respect to change in the level of interest rates.


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Risk The possibility of an outcome not occurring as expected. It can be measured and is not the same as uncertainty, which is not measurable. In financial terms, risk refers to the possibility of financial loss. It can be classified as credit risk, market risk and operational risk. Risk Asset Ratio A bank's risk asset ratio is the ratio of a bank's risk assets to its capital funds. Risk assets include assets other than highly rated government and government agency obligations and cash, for example, corporate bonds and loans. The capital funds include capital and undistributed reserves. The lower the risk asset ratio the better the bank's 'capital cushion' Risk Weights Basel II sets out a risk-weighting schedule for measuring the credit risk of obligors. The risk weights are linked to ratings given to sovereigns, financial institutions and corporations by external credit rating agencies. Securitisation The process whereby similar debt instruments / assets are pooled together and repackaged into marketable securities which can be sold to investors. The process of loan securitisation is used by banks to move their assets off the balance sheet in order to improve their capital asset ratios. Settlement risk: This is the risk of loss arising when a bank performs on its obligation under a contract before the counter party does so. This arises when the defaulting counter party has received the settlement payment, but has yet make the requisite counter payment in foreign currency. This kind of risk is very frequent in international transactions because of time zone differences. Settlement risk is also referred to as Herstatt or Time–zone risk named after the 1974 failure of Bankhaus Herstatt, a bank in West Germany. Short position A short position refers to a position where gains arise from a decline in the value of the underlying. It also refers to the sale of a security in which the seller does not have a long position. Specific risk Within the framework of the BIS proposals on market risk, specific risk refers to the risk associated with a specific security, issuer or company, as opposed to the risk associated with a market or market sector (general risk).


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Special Purpose Vehicle: SPV means any company, trust, or other entity constituted or established for a specific purpose - (a) activities of which are limited to those for accomplishing the purpose of the company, trust or other entity as the case may be; and (b) which is structured in a manner intended to isolate the corporation, trust or entity as the case may be, from the credit risk of an originator to make it bankruptcy remote. “Stress testing” “Stress testing” has been adopted as a generic term describing various techniques used by

banks to gauge their potential vulnerability to exceptional, but plausible, events. The process of stress testing, therefore, involves first identifying potential movements, including which market variables to stress, how much to stress them by, and what time frame to run the stress analysis over. Once these market movements and underlying assumptions are decided upon, shocks are applied to the portfolio. Revaluing the portfolios allows one to see what the effect of a particular market movement has on the value of the portfolio and the overall Profit and Loss.

Need: Stress testing addresses the large moves in key market variables of that kind that lie beyond day to day risk monitoring but that could potentially occur.

Stress tests supplement value-at-risk (VaR). VaR is thought to be a critical tool for tracking the riskiness of a firm’s portfolio on a day-to-day level, and for assessing the risk-adjusted performance of individual business units. However, VaR has been found to be of limited use in measuring firms’ exposures to extreme market events.

This is because, by definition, such events occur too rarely to be captured by empirically driven statistical models. Furthermore, observed correlation patterns between various financial prices (and thus the correlations that would be estimated using data from ordinary times) tend to change when the price movements themselves are large. Stress tests offer a way of measuring and monitoring the portfolio consequences of extreme price movements of this type.

Substitution approach : Substitution approach is followed in awarding capital relief on account of guarantees. That is to say, the risk weight of the guarantor will replace the risk weight of the borrower provided it results in application of a lower risk weight. Thus only guarantees issued by entities with a lower risk weight will provide credit risk mitigation effect in the form of lower capital charge. Subordinated debt Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after other debt has been repaid. Subordinated debt is a debt capital instrument raised by the banks directly from the

market in the form of bonds. These instruments are also called 'Lower Tier 2 Capital'.


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They are called subordinated debt because the claims of the investors in these bonds are settled only after all other claims are settled (except claims of Tier 1 capital holders)

Maturity : Subordinated debts must have a minimum maturity of 5 years. Bonds issued with a initial maturity period of less than 5 years or with a residual maturity

period of less than 1 year cannot be included in Tier 2 capital. Amount raised by the subordinated debt instruments are included while calculating net

demand and time liabilities for reserve requirement calculation. Hence, Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR) to be maintained, on the outstanding amount of subordinated debt.

Any investment in subordinated debt instruments issued by other banks or financial institutions has to be within the ceiling of 10.0% of the bank's (investing bank) total capital.

Banks investment in subordinated debt instruments of other banks/ financial institutions will attract 100% risk weight for capital adequacy purpose.

Limit on inclusion of subordinated debt instrument in Tier 2 capital: Total subordinated debt under Tier 2 capital will be limited to 50% of Tier 1 capital.

Theta: The theta of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to passage of time, with all else remaining the same. It is also called the "time decay" of the option. Tier one (or Tier I) capital A term used to refer to one of the components of regulatory capital. It consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest quality because they are fully available to cover losses. The other categories of capital defined in Basel II are Tier II (or supplementary) capital and Tier II (or additional supplementary) capital. Tier I Capital Paid Up Equity Capital Statutory Reserves Other disclosed free reserves, if any Capital Reserves representing surplus arising out of sale proceeds of Assets Innovative Perpetual Debt instruments (IPDI) (either Indian Currency or Foreign

Currency) Tier two (or Tier II) capital Refers to one of components of regulatory capital. Also known as supplementary capital, it consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from a bank's activities. Tier II's capital loss absorption capacity is lower than that of Tier I capital.


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Tier II Capital Revaluation Reserves (at a discount of 55%) General Provisions and Loss Reserves Subordinated Debt Hybrid Debt Capital Instruments Tier II Capital can not exceed 100% of Tier I Capital Total Subordinated Debt under Tier 2 capital will be limited to 50% of tier I capital Banks have to maintain a Tier I capital of at least 6% (out of 9% total capital). Banks

which are below the 6% level at present have to achieve this ratio on or before March 31, 2010.

Trading Book A trading book or portfolio refers to the book of financial instruments held for the purpose of short-term trading, as opposed to securities that would be held as a long-term investment. The trading book refers to the assets that are held primarily for generating profit on short-term differences in prices / yields. The price risk is the prime concern of banks in trading book. Underwrite Generally, to underwrite means to assume a risk for a fee. Its two most common contexts are: (a) Securities : a dealer or investment bank agrees to purchase a new issue of securities from the issuer and distribute these securities to investors. The underwriter may be one person or part of an underwriting syndicate. Thus the issuer faces no risk of being left with unsold securities. (b) Insurance : a person or company agrees to provide financial compensation against the risk of fire, theft, death, disability, etc., for a fee called a premium. Value at risk (VAR) It is a method for calculating and controlling exposure to market risk. VAR is a single number (currency amount) which estimates the maximum expected loss of a portfolio over a given time horizon (the holding period) and at a given confidence level. It is an estimate, with a predefined confidence interval of how much one can lose from holding a position over a set time horizon. Potential horizons may be one day for typical trading activities or a month or longer for portfolio management. VaR is a single number that tells us what the risk exposure is the next day. It is a figure that tells us what is our loss figure, such that there is a very low probability of the actual loss being greater than the VaR figure.


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Three main methods for calculating VaR: Historical Simulation Approach: This method calculates the change in the value of a

position using the actual historical movements of the underlying asset(s), starting from the current value of the asset. The length of the historical period chosen does impact the results because if the period is too short, it may not capture the full variety of events and relationships between the various assets and within each asset class, and if it is too long, may be too stale to predict the future. The advantage of this method is that it does not require the user to make any explicit assumptions about correlations and the dynamics of the risk factors because the simulation follows every historical move.

Variance-Covariance Method: Also known as the Risk metrics method, which is developed by J P Morgan. In this method, the change in the value of the position is calculated by combining the sensitivity of each component to price changes in the underlying assets, with a variance/covariance matrix of the various components’ volatilities and correlations. It Estimates VaR with equation that specifies parameters such as volatility and correlation.

Monte Carlo Simulation method: The Monte Carlo simulation method calculates the change in the value of a portfolio using a sample of randomly generated price scenarios. Here the user has to make certain assumptions about market structure, correlations between risk factors and the volatility of these factors.

Vega (v) The Vega of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to volatility of the asset(s) underlying the option(s). Venture capital Fund A fund with the purpose of investing in start-up businesses that is perceived to have excellent growth prospects but does not have access to capital markets. Vertical Disallowance In the BIS Method for determining regulatory capital necessary to cushion market risk, a reversal of the offsets of a general risk charge of a long position by a short position in two or more securities in the same time band in the yield curve where the securities have differing credit risks.

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Derivatives - Terminology

Forward Rate Agreement (FRA): A Forward Rate Agreement is a financial contract between two parties to exchange interest payments for a `notional principal’ amount on settlement date, for a specified period from start date to maturity date. Accordingly, on the settlement date, cash payments based on contract (fixed) and the settlement rate, are made by the parties to one another. The settlement rate is the agreed bench-mark/ reference rate prevailing on the settlement date.

Interest Rate Swap (IRS): An Interest Rate Swap is a financial contract between two

parties exchanging or swapping a stream of interest payments for a `notional principal’ amount on multiple occasions during a specified period. Such contracts generally involve exchange of a `fixed to floating’ or `floating to floating’ rates of interest. Accordingly, on each payment date - that occurs during the swap period - cash payments based on fixed/ floating and floating rates, are made by the parties to one another.

Interest Rate Futures (IRF):Interest Rate Future is a standardized, exchange-traded

contract with an actual or notional interest-bearing instrument(s) as the underlying asset. Foreign Exchange Forward: A foreign exchange forward is an over-the-counter

contract under which a purchaser agrees to buy from the seller, and the seller agrees to sell to the purchaser, a specified amount of a specified currency on a specified date in the future - beyond the spot settlement date - at a known price denominated in another currency (known as the forward price) that is specified at the time the contract is entered into.

Currency Swaps: A currency swap is an interest rate swap where the two legs to the

swap are denominated in different currencies. Additionally the parties may agree to exchange the two currencies normally at the prevailing spot exchange rate with an agreement to reverse the exchange of currencies, at the same spot exchange rate, at a fixed date in the future, generally at the maturity of the swap.

Currency Options: A currency option is a contract where the purchaser of the option has

the right but not the obligation to either purchase (call option) or sell (put option) and the seller (or writer) of the option agrees to sell (call option) or purchase (put option) an agreed amount of a specified currency at a price agreed in advance and denominated in another currency (known as the strike price) on a specified date (European option) or by an agreed date (American option) in the future.

Interest Rate Caps and Floors: An interest rate cap is an interest rate option in which

payments are made when the reference rate exceeds the strike rate. Analogously, an interest rate floor is an interest rate option in which payments are made when the reference rate falls below the strike rate.

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Types of Derivatives Risks 1. Credit risk Credit risk is the risk of loss due to a counterparty's failure to perform on an obligation to the institution. Credit risk in derivative products comes in two forms: Pre-settlement risk is the risk of loss due to a counterparty defaulting on a contract during the life of a transaction. The level of exposure varies throughout the life of the contract and the extent of losses will only be known at the time of default. Settlement risk is the risk of loss due to the counterparty's failure to perform on its obligation after an institution has performed on its obligation under a contract on the settlement date. Settlement risk frequently arises in international transactions because of time zone differences. This risk is only present in transactions that do not involve delivery versus payment and generally exists for a very short time (less than 24 hours). 2. Market risk Market risk is the risk of loss due to adverse changes in the market value (the price) of an instrument or portfolio of instruments. Such exposure occurs with respect to derivative instruments when changes occur in market factors such as underlying interest rates, exchange rates, equity prices, and commodity prices or in the volatility of these factors. 3. Liquidity risk Liquidity risk is the risk of loss due to failure of an institution to meet its funding requirements or to execute a transaction at a reasonable price. Institutions involved in derivatives activity face two types of liquidity risk : market liquidity risk and funding liquidity risk. Market liquidity risk is the risk that an institution may not be able to exit or offset positions quickly, and in sufficient quantities, at a reasonable price. This inability may be due to inadequate market depth in certain products (e.g. exotic derivatives, long-dated options), market disruption, or inability of the bank to access the market (e.g. credit down-grading of the institution or of a major counterparty). Funding liquidity risk is the potential inability of the institution to meet funding requirements, because of cash flow mismatches, at a reasonable cost. Such funding requirements may arise from cash flow mismatches in swap books, exercise of options, and the implementation of dynamic hedging strategies. 4. Operational risk Operational risk is the risk of loss occurring as a result of inadequate systems and control, deficiencies in information systems, human error, or management failure. Derivatives activities can pose challenging operational risk issues because of the complexity of certain products and their continual evolution.


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5. Legal risk Legal risk is the risk of loss arising from contracts which are not legally enforceable (e.g. the counterparty does not have the power or authority to enter into a particular type of derivatives transaction) or documented correctly. 6. Regulatory risk Regulatory risk is the risk of loss arising from failure to comply with regulatory or legal requirements. 7. Reputation risk Reputation risk is the risk of loss arising from adverse public opinion and damage to reputation.

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Derivatives: Commonly Used Market Risk Limits 1. Notional or volume limits Limits based on the notional amount of derivatives contracts are the most basic and simplest form of limits for controlling the risks of derivatives transactions. They are useful in limiting transaction volume, and liquidity and settlement risks. However, these limits cannot take account of price sensitivity and volatility and say nothing about the actual level of risk (in capital or earnings terms) faced by the institution. Derivatives participants should not therefore use these limits as a stand-alone tool to control market risk. 2. Stop loss limits These limits are established to avoid unrealized loss in a position from exceeding a

specified level. When these limits are reached, the position will either be liquidated or hedged. Typical stop loss limits include those relating to accumulated unrealized losses for a day, a week or a month.

Some institutions also establish management action trigger (MAT) limits in addition to stop loss limits. These are for early warning purposes. For example, management may establish a MAT limit at 75 percent of the stop loss limit. When the unrealized loss reaches 75 percent of the stop loss limit, management will be alerted of the position and may trigger certain management actions, such as close monitoring of the position, reducing or early closing out the position before it reaches the stop loss limits.

The above loss triggers complement other limits, but they are generally not sufficient by themselves. They are not anticipatory; they are based on unrealized losses to date and do not measure the potential earnings at risk based on market characteristics. They will not prevent losses larger than the stop loss limits if it becomes impossible to close out positions, e.g. because of market illiquidity.

3. Gap or maturity band limits These limits are designed to control loss exposure by controlling the volume or amount of

the derivatives that mature or are repriced in a given time period. For example, management can establish gap limits for each maturity band of 3 months, 6

months, 9 months, one year, etc. to avoid maturities concentrating in certain maturity bands. Such limits can be used to reduce the volatility of derivatives revenue by staggering the maturity and /or repricing and thereby smoothing the effect of changes in market factors affecting price. Maturity limits can also be useful for liquidity risk control and the repricing limits can be used for interest rate management.

Similar to notional and stop loss limits, gap limits can be useful to supplement other limits, but are not sufficient to be used in isolation as they do not provide a reasonable proxy for the market risk exposure which a particular derivatives position may present to the institution.


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4. Value-at-risk limits These limits are designed to restrict the amount of potential loss from certain types of

derivatives products or the whole trading book to levels (or percentages of capital or earnings) approved by the board and senior management. To monitor compliance with the limits, management calculates the current market value of positions and then uses statistical modeling techniques to assess the probable loss (within a certain level of confidence) given historical changes in market factors. There are three main approaches to calculating value-at-risk: the correlation method, also known as the variance / covariance matrix method; historical simulation and Monte Carlo simulation.

The advantage of value-at-risk (VAR) limits is that they are related directly to the amount of capital or earnings which are at risk. Among other things, they are therefore more readily understood by the board and senior management.

The level of VAR limits should reflect the maximum exposures authorized by the board and senior management, the quality and sophistication of the risk measurement systems and the performance of the models used in assessing potential loss by comparing projected and actual results. One drawback in the use of such models is that they are only as good as the assumptions on which they are based (and the quality of the data which has been used to calculate the various volatilities, correlations and sensitivities).

5.Options limits These are specifically designed to control the risks of options. Options limits may include Delta, Gamma, Vega, Theta and Rho limits. Delta is a measure of the amount an options price would be expected to change for a unit

change in the price of the underlying instrument. Gamma is a measure of the amount delta would be expected to change in response to a

unit change in the price of the underlying instrument. Vega is a measure of the amount an option's price would be expected to change in

response to a unit change in the price volatility of the underlying instrument. Theta is a measure of the amount an option's price would be expected to change in

response to changes in the options time to expiration. Rho is a measure of the amount an option's price would be expected to change in response

to changes in interest rates.

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Option Option: An Option is a contract which grants the buyer the right, but not the obligation,

to buy (Call option) or sell (Put option) an asset, commodity, currency or financial instrument at an agreed rate (Exercise price) on or before an agreed date (Expiry or settlement date). The buyer pays the seller an amount called the premium in exchange for this right. This premium is the price of the Option.

Call Option: An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Put Option: An Option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.

Rainbow option is a derivative exposed to two or more sources of uncertainty, as opposed to a simple option that is exposed to one source of uncertainty, such as the price of underlying asset. Rainbow options are usually calls or puts on the best or worst of n underlying assets, or options which pay the best or worst of n assets. Rainbow options are used, for example, to value natural resources deposits. Such assets are exposed to two uncertainties—price and quantity.

American Option: An Option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

European Options: An Option contract that may be exercised only during a specified period of time just prior to its expiration.

At-The-Money: An Option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

In-The-Money: A term describing any Option that has intrinsic value. A call option is in-the-money if the market price of the underlying security is higher than the striking price of the call. A put option is in-the-money if the market price of the security is below the striking price.

Out Of The-Money: An option is Out of -the-money if the strike price of the option is adverse to the market price of the underlying security. A Call option out of -the-money if the market price of the underlying security is lower than the striking price of the call. A put option is out of the-money if market price of the security is higher than the strike price.

Capped Option: This is an option with an established profit cap or cap price. The cap price is equal to the option's strike price plus a cap interval for a Call option or the strike price minus a cap interval for a Put option. A capped option is automatically exercised when the underlying security closes at or above (for a Call) or at or below (for a Put) the Option's cap price.

Leaps: Long-term Equity Anticipation Securities, or LEAPS, are long-term stock or index options. LEAPS, like all options, are available in two types, Calls and Puts, with expiration dates up to three years in future.

Bear Spread: An Option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date. See also Bull Spread.

Bull Spread: An Option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold,


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both generally having same expiration date. Either puts or calls may be used for the strategy.

Butterfly Spread: An Option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.

Box Spread: A type of Option arbitrage in which both a bull spread and a bear spread are established for a near-risk less position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (Call bull spread vs. Put bear spread) or both credit spreads (Call bear spread vs. Put bull spread). Break-Even Point -the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes.

Calendar Spread: An Option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either Puts or Calls may be used.

Intrinsic Value: The value of an Option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise

Expiration Cycle, Date and Time: An expiration cycle relates to the dates on which options on a particular underlying security expire; Expiration date is the day on which an option contract becomes void. Holders of options should indicate their desire to exercise, if they wish to do so, by this date and Expiration time is the time of day by which all exercise notices must be received on the expiration date.

Delta (Δ) of an Option: A Delta of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to change in the price of the asset(s) underlying the option(s).

Gamma (Г) of Options: The Gamma of an option / portfolio of options is the rate of change of the option’s / portfolio’s delta with respect to the change in the price of the asset(s) underlying the option (s).

Rho(ρ) of Options: Rho of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to change in the level of interest rates.

Vega (ν) of Options: The Vega of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to volatility of the asset(s) underlying the option(s).


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Rainbow Option Rainbow option is a derivative exposed to two or more sources of uncertainty, as

opposed to a simple option that is exposed to one source of uncertainty, such as the price of underlying asset.

Rainbow options are usually calls or puts on the best or worst of n underlying assets, or options which pay the best or worst of n assets.

Rainbow options are used, for example, to value natural resources deposits. Such assets are exposed to two uncertainties—price and quantity.

These options are often considered a correlation trade, since the value of the option is sensitive to the correlation between the various basket components.

Some simple options can be transformed into more complex instruments if the underlying risk model that the option reflected does not match a future reality.

In particular, derivatives in the currency and mortgage markets have been subject to liquidity risk that was not reflected in the pricing of the option when sold.

Pricing and Valuation: Rainbow options are usually priced using an appropriate industry-standard model (such as Black-Scholes) for each individual basket component, and a matrix of correlation coefficients applied to the underlying stochastic drivers for the various models. While degenerate cases have simpler solutions, the general case must be approached with Monte Carlo methods. Banks rework CDR terms: (BS dt. 29.5.2009 p. 1)

The clauses on Corporate Debt Restructuring (CDR) are being reworked in view of the huge foreign exchange exposure of several companies, which have already opted for restructuring debt or are on their way to seeking approval for one.

The CDR core body at the IDBI Bank will issue a circular with the changed clauses shortly. This follows discussions among banks which are members of the CDR mechanism over settlement of foreign exchange dues.

These include payment obligations towards foreign currency convertible bonds (FCCBs), forward contracts for hedging business operations and speculative positions taken by companies through exotic derivative products.

Based on the reworked clauses, foreign exchange obligations of a company under CDR will be clubbed as debt whether towards FCCB payments or plain derivative transactions like forward contracts for hedging or exotic products like principal swaps or "rainbow options" (structured forex option on multiple currencies) struck mainly as speculative deals by companies.

Exotic Option In finance, an exotic option is a derivative which has features making it more complex

than commonly traded products (vanilla options). These products are usually traded over-the-counter (OTC), or are embedded in structured

notes. Consider an equity index. A straight call or put, either American or European would be

considered non-exotic (vanilla). An exotic product could have one or more of the following features:

The payoff at maturity depends not just on the value of the underlying index at maturity, but at its value at several times during the contract's life (it could be an Asian option depending on some average, a lookback option depending on the maximum or minimum, a barrier option which ceases to exist if a certain level is


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reached or not reached by the underlying, a digital option, peroni options, range options, etc.)

It could depend on more than one index (as in a basket options, Himalaya options, Peroni options, or other mountain range options, outperformance options, etc.)

There could be callability and putability rights. It could involve foreign exchange rates in various ways, such as a quanto or

composite option. Even products traded actively in the market can have the characteristics of exotic options,

such as convertible bonds, whose valuation can depend on the price and volatility of the underlying equity, the credit rating, the level and volatility of interest rates, and the correlations between these factors.

Exotic options can pose challenging problems in valuation and hedging. Examples: Barrier, CPPI, Cliquet,Compound option,Lookback,Variance swap,Peroni

Options, Unit Contingent Options, Rainbow option, Digital/Binary option,Bermudan options.

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Credit Default Swaps: (RBI Guidelines)

Why CDS was in News? Keeping in view the specifics of the Indian markets, RBI in its second quarter review

(released on 27.10.2009) of annual credit / monetary policy proposed to introduce plain vanilla OTC single-name CDS for corporate bonds for resident entities subject to appropriate safeguards.

Credit risk is one of the material risks to which banks are exposed. Effective management of credit risk is, therefore, a critical factor in banks' risk

management processes and is essential for the long-term financial health of banks. Credit risk management encompasses identification, measurement, monitoring and

control of the credit risk exposures. While banks in India have developed systems and skills for identification, measurement

and monitoring their credit risk exposures, the options available to them for controlling or transferring their credit risks were confined to the traditional means viz. restricting assumption of fresh exposures, outright sale of an existing fund based exposure, obtaining credit guarantee cover, obtaining credit insurance, and securitisation. While banks have been provided the options of managing their interest rate risk and foreign currency risks through the use of derivatives, similar option is not available for managing their credit risks.

Credit derivatives are financial contracts designed to transfer credit risk on loans and advances, investments and other assets / exposures from one party (protection buyer) to another party (protection seller). Transfer of credit risk may be for the whole life of the underlying asset or for a shorter period. The transfer may be for the entire amount of the underlying asset or for a part of it. A credit derivative may be referenced to a single entity or to a basket of several entities. Credit derivatives may also include cash instruments (e.g. credit linked notes) where repayment of principal is linked to the credit standing of a reference asset / entity.

Credit derivatives may be used for a variety of reasons. These include : (a) To reduce capital required to support credit risk exposures; (b) To release credit exposure limits to a counterparty; (c) To reduce concentrations by shedding exposures to a counter-party (without affecting the relationship with the borrower since there is no transfer of title of the asset) or to a sector; (d) To assume exposures to a counter-party or to a sector to diversify risks or to fill gaps in credit quality spectrum;

Types of credit derivatives The credit derivatives products can be broadly classified under the following four types

and may range from plain vanilla products to complex structures.

1. Credit default swaps; 2. Total return swaps; 3. Credit linked notes; and 4. Credit spread options

As part of the gradual process of financial sector liberalization in India, it is considered

appropriate to introduce credit derivatives in a calibrated manner at this juncture.


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The risk management architecture of banks has strengthened and banks are on the way to becoming Basel II compliant, providing adequate comfort level for the introduction of such products. Furthermore, the recent amendment to the Reserve Bank of India Act, 1934 has provided legality of OTC derivative instruments, including credit derivatives.

However, in view of the complexities involved in the valuation, accounting, and risk management aspects of credit derivatives and in view of the evolutionary stage of these skills among the eligible participants, the Reserve Bank has decided to initially allow only plain vanilla credit default swaps which satisfy the following requirements :

o the reference entity shall be a single legal entity, which is a resident; o the reference entity shall be the obligor for the reference asset / obligation and the

deliverable asset / obligation. o the protection buyer and the protection seller shall be resident entities; o the reference asset / obligation and the deliverable asset / obligation shall be to a

resident and denominated in Indian Rupees; o the credit derivative contract shall be denominated and settled in Indian Rupees; o the reference asset / obligation and the deliverable asset / obligation shall be a

tradable financial security or a fundbased credit exposure. Primary Dealers (PDs) may transact in CDS where the reference / deliverable asset / obligation is a corporate debt security; PDs can also have underlying positions as a sold protection.

o The protection buyer / seller shall not transact in credit derivatives with reference assets / obligations or deliverable assets / obligations which they are not permitted to undertake;

The reference and deliverable assets / obligations shall be those which are (a) rated; (b)

the rating is current and maintained by the rating agency; (c) the rating is published in the monthly bulletin of the rating agency; and (d) the rating is included by the rating agency in its transition matrix.

Types of credit event payment The credit event payment made by the protection seller may be made through any one of

the types which is to be specified in the credit derivative contract documentation: physical settlement or cash settlement.

Types of participants Protection buyer: Commercial Banks and Primary Dealers shall be eligible protection

buyers.A protection buyer shall have a credit risk exposure. The credit risk exposure can be by way of an actual credit or a sold position in CDS.

Protection sellers: Commercial Banks and Primary Dealers (subject to extant regulations) shall be eligible protection sellers. RBI will consider allowing insurance companies and mutual funds as protection buyer or protection seller as and when their respective regulators permit them to transact in credit default swaps.


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Settlement methodologies (1) Physically Settled Credit Default Swap: A CDS may specify that on occurrence of a credit event the protection buyer shall deliver

the reference obligation to the protection seller, in return for which the protection seller shall pay the face value of the delivered asset to the protection buyer.

This type of settlement is known as “physical settlement”. This settlement takes place in a CDS where the protection is bought on a specific

reference obligation. It is also possible that the CDS contract may specify a number of alternative obligations

of the reference entity that the protection buyer can deliver to the protection seller. These are known as deliverable obligations and this may apply in a CDS contract where

the protection is bought on the reference entity instead of a specific obligation of the reference entity.

Where more than one deliverable obligation is specified, the protection buyer will deliver the cheapest of the list of deliverable obligations.

This is referred to as the cheapest to deliver contract. This type of settlement is also known as payment of par value. (2) Cash Settled Credit Default Swaps: A CDS may specify that on occurrence of a credit event the protection seller shall pay

difference between the nominal value of the reference obligation and its market value at the time of credit event.

This type of settlement is known as “cash settlement”. This type of settlement is also known as payment of par less recovery. A calculation agent plays an important role in the process of settlement. Credit events: The most important element of a CDS contract is the explicit identification of credit

event(s) that will trigger a credit event payment. Some of the possible credit events are : Bankruptcy / Obligation Acceleration / Obligation

Default / Failure to pay / Repudiation / Moratorium /Restructuring. Definitions of credit events are provided in the 2003 International Swaps and Credit

Derivatives Association, Inc. (ISDA) Credit Derivatives Definitions. The credit events identified in the ISDA definitions attempt to make a comprehensive list

of events that may have an adverse impact on the credit quality of the reference entity or cause an adverse impact on the price of the reference obligation.

The parties to a CDS may include all of those events or select only those that they feel are the most relevant.

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Securitization of Performing Assets - Glossary (RBI guidelines dt.1.2.2006)

"Bankruptcy remote" means the unlikelihood of an entity being subjected to voluntary

or involuntary bankruptcy proceedings, including by the originator or its creditors; "credit enhancement" is provided to an SPV to cover the losses associated with the pool

of assets. The rating given to the securities issued by the SPV (PTCs) by a rating agency will reflect the level of enhancement; (PTC = Pass through Certificates)

A "first loss facility" represents the first level of financial support to a SPV as part of the process in bringing the securities issued by the SPV to investment grade. The provider of the facility bears the bulk (or all) of the risks associated with the assets held by the SPV;

A "second loss facility" represents a credit enhancement providing a second (or subsequent) tier of protection to an SPV against potential losses;

"Liquidity facilities" enable SPVs to assure investors of timely payments. These include smoothening of timing differences between payment of interest and principal on pooled assets and payments due to investors;

"Originator" refers to a bank that transfers from its balance sheet a single asset or a pool of assets to an SPV as a part of a securitisation transaction and would include other entities of the consolidated group to which the bank belongs.

"Securitisation" means a process by which a single performing asset or a pool of performing assets are sold to a bankruptcy remote SPV and transferred from the balance sheet of the originator to the SPV in return for an immediate cash payment;

"Service provider" means a bank that carries out on behalf of the SPV (a) administrative functions relating to the cash flows of the underlying exposure or pool of exposures of a securitization; (b) funds management; and (c) servicing the investors;

"SPV" means any company, trust, or other entity constituted or established for a specific purpose - (a) activities of which are limited to those for accomplishing the purpose of the company, trust or other entity as the case may be; and (b) which is structured in a manner intended to isolate the corporation, trust or entity as the case may be, from the credit risk of an originator to make it bankruptcy remote;

"Underwriting" means the arrangement under which a bank agrees, before issue, to buy a specified quantity of securities in a new issue on a given date and at a given price if no other purchaser has come forward.

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Glossary of Important Terms - Government Securities Market Accrued Interest: The accrued interest on a bond is the amount of interest accumulated

on a bond since the last coupon payment. The interest has been earned, but because coupons are paid only on coupon dates, the investor has not gained the money yet. In India day count convention for G-Secs is 30/360.

Bid Price/ Yield: The price/yield being offered by a potential buyer for a security. Big Figure: When the price is quoted as Rs.102.35, the portion other than decimals

(102) is called the big figure. Competitive Bid: Competitive bid refers to the bid for the stock at the price stated by a

bidder in an auction. Coupon: The rate of interest paid on a debt security as calculated on the basis of the

security’s face value. Coupon Frequency: Coupon payments are made at regular intervals throughout the life

of a debt security and may be quarterly, semi-annual (twice a year) or annual payments. Discount: When the price of a security is below the par value, it is said to be trading at

discount. The value of the discount is the difference between the FV and the Price. For example, if a security is trading at Rs.99, the discount is Rs.1.

Duration (Macaulay Duration): Duration of a bond is the number of years taken to recover the initial investment of a bond. It is calculated as the weighted average number of years to receive the cash flow wherein the present value of cash fl ows are multiplied with the time to that respective cash flows. The total of such values is divided by the price of the security to arrive at the duration. Refer to Box IV under question 27.

Face Value: Face value is the amount that is to be paid to an investor at the maturity date of the security. Debt securities can be issued at varying face values, however in India they typically have a face value of Rs.100. The face value is also known as the repayment amount. This amount is also referred as redemption value, principal value (or simply principal), maturity value or par value.

Floating-Rate Bond: Bonds whose coupon rate is reset at predefined intervals and is based on a pre-specified market based interest rate.

Gilt/ Government Securities: Government securities are also known as gilts or gilt edged securities. “Government security” means a security created and issued by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official Gazette and having one of the forms mentioned in The Government Securities Act, 2006.

Market Lot: Market lot refers to the standard value of the trades that happen in the market. The standard market lot size in the Government securities market is Rs. 5 crore in face value terms.

Maturity Date: The date when the principal (face value) is paid back. The final coupon and the face value of a debt security is repaid to the investor on the maturity date. The time to maturity can vary from short term (1 year) to long term (30 years).

Non-Competitive Bidding in Government Securities: To enable medium and small investors to participate in the auction process without taking the price risk in auctions, the Reserve Bank of India has introduced a facility of non-competitive bidding in dated government securities auctions for select set of investors. Non-competitive bidding means that a person would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid. Thus, he will not have to worry


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about whether his bid will be on or off-the-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially.

Non-Competitive Bidding: Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid. The allotment to the non-competitive segment will be at the weighted average rate that will emerge in the auction on the basis of competitive bidding. It is an allocating facility wherein a part of total securities are allocated to bidders at a weighted average price of successful competitive bid. (Please also see paragraph no.4.3 under the question no.4).

Odd Lot: Transactions of any value other than the standard market lot size of Rs. 5 crore are referred to as odd lot. Generally the value is less than the Rs. 5 crore with a minimum of Rs.10,000/-. Odd lot transactions are generally done by the retail and small participants in the market.

Par: Par value is nothing but the face value of the security which is Rs. 100 for Government securities. When the price of a security is equal to face value, the security is said to be trading at par.

Premium: When the price of a security is above the par value, the security is said to be trading at premium. The value of the premium is the difference between the price and the face value. For example, if a security is trading at Rs.102, the premium is Rs.2.

Price: The price quoted is for per Rs. 100 of face value. The price of any financial instrument is equal to the present value of all the future cash fl ows. The price one pays for a debt security is based on a number of factors. Newly-issued debt securities usually sell at, or close to, their face value. In the secondary market, where already-issued debt securities are bought and sold between investors, the price one pays for a bond is based on a host of variables, including market interest rates, accrued interest, supply and demand, credit quality, maturity date, state of issuance, market events and the size of the transaction.

Primary Dealers: In order to accomplish the objective of meeting the government borrowing needs as cheaply and effi ciently as possible, a group of specialized fi nancial fi rms/ banks are appointed to play the role of specialist intermediaries in the Government security market between the issuer on the one hand and the market on the other. Such entities are generally called Primary dealers or market makers. In return of a set of obligations, such as making continuous bids and offer price in the marketable Government securities or submitting reasonable bids in the auctions, these fi rms receive a set of privileges in the primary/ secondary market.

Real Time Gross Settlement (RTGS) system: RTGS system is a funds transfer mechanism for transfer of money from one bank to another on a “real time” and on “gross” basis. This is the fastest possible money transfer system through the banking channel. Settlement in “real time” means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. “Gross settlement” means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as fi nal and irrevocable.

Repo Rate: Repo rate is the return earned on a repo transaction expressed as an annual interest rate.

Repo/Reverse Repo: Repo means an instrument for borrowing funds by selling securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign


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securities, with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the fund borrowed.

Reverse Repo means an instrument for lending funds by purchasing securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the fund lent.

Residual Maturity: The remaining period until maturity date of a security is its residual maturity. For example, a security issued for an original term to maturity of 10 years, after 2 years, will have a residual maturity of 8 years.

Secondary Market: The market in which outstanding securities are traded. This market is different from the primary or initial market when securities are sold for the fi rst time. Secondary market refers to the buying and selling that goes on after the initial public sale of the security.

Tap Sale: Under Tap sale, a certain amount of securities is created and made available for sale, generally with a minimum price, and is sold to the market as bids are made. These securities may be sold over a period of day or even weeks; and authorities may retain the flexibility to increase the (minimum) price if demand proves to be strong or to cut it if demand weakens. Tap and continuous sale are very similar, except that with Tap sale the debt manager tends to take a more pro-active role in determining the availability and indicative price for tap sales. Continuous sale are essentially at the initiative of the market.

Treasury Bills: Debt obligations of the government that have maturities of one year or less is normally called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/Government. They are instruments issued at a discount to the face value and form an integral part of the money market.

Underwriting: The arrangement by which investment bankers undertake to acquire any unsubscribed portion of a primary issuance of a security.

Weighted Average Price/ Yield: It is the weighted average mean of the price/ yield where weight being the amount used at that price/ yield. The allotment to the non-competitive segment will be at the weighted average price/yield that will emerge in the auction on the basis of competitive bidding.

Yield: The annual percentage rate of return earned on a security. Yield is a function of a security's purchase price and coupon interest rate. Yield fluctuates according to numerous factors including global markets and the economy.

Yield to Maturity (YTM): Yield to maturity is the total return one would except to receive if the security is being held until maturity. Yield to maturity is essentially the discount rate at which the present value of future payments (investment income and return of principal) equals the price of the security.

Yield Curve: The graphical relationship between yield and maturity among bonds of different maturities and the same credit quality. This line shows the term structure of interest rates. It also enables investors to compare debt securities with different maturities and coupons.


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Money and Debt Market Terminology

The commonly used expressions, in the money and debt markets in India and their generally accepted meanings , are as under: Expressions Generally accepted meaning I Bid/Buy The Price at which I am willing to buy I Offer/Sell The Price at which I am willing to sell Quotes/Prices Typically the Dealers quote only the decimal places omitting the

integer part. It is assumed the players know the integer part in the prevailing market price. Example: 1 If on a given day the security 11.40 GOI 2008 is being quoted at a price of around Rs.117.50 then the bid at 45/offer at 55 would mean that the dealer is willing to buy the security at Rs.117.45 and sell it at Rs.117.55. Example: 2 If on a given day the Treasury Bill maturing on 18th October 2002 is being quoted at a yield of around 6.90 then the bid at 95/offer at 90 would mean that the dealer is willing to buy the security at 6.95 and sell it at 6.90. However, the complete price should be used while confirming deals.

Clean price The price of a bond, excluding the accrued interest since the last interest payment date.

Dirty price* The price of a bond, including the accrued interest since the last interest payment date. The is also known as the gross price.

Haircut The difference between the actual market value and the value ascribed to the collateral used in a repo transaction.

Mine I Buy at the Price you have offered Yours I Sell at the Price you have bid Close/Done I conclude the deal at the mutually agreed Price. Two -Way quote Quote which includes both Buy and Sell price

Example: 45/50 indicates that the dealer is willing to buy at Rs.117.45 and sell at Rs.117.50.

Choice - Quote Choice Quote is a single price quoted by a dealer and it means that he/she is willing to Buy as well as Sell at that price. Example: A Quote of ‘5 Choice’ for a security means that the dealer will buy as well as sell at 5 paise.

Final Price No more negotiations. It is the price at which the dealer is willing to close the deal.

Level/Indicative Price Prices quoted by dealers to indicate the level at which they are interested in doing the deal but are willing to negotiate.

Big Figure The integer part of the price. Example: If the ruling price of a security is 117.50, then the Big Figure here is 117.

Figure Price when quoted in integers without the decimal part is known as Figure. Example: When the dealer is willing to deal 11.40 GOI 2008 at 117.00 (when the ruling quote is 116.95/117.05), he will state that he is


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willing to do the deal at Figure. Check "Check" during chat means that the dealer is withdrawing his/her quote

with immediate effect. Check Before Closing (CBC)

"CBC" means that the dealer has the freedom to modify the price and/or amount during the chat. Hence, the counter-party dealer/broker should seek confirmation before concluding the deal.

Pass/No interest/Squared

I am not interested in the deal at the moment.

Referring to securities during chat

Dated Government Securities are generally identified by their coupon and year of maturity. In case of securities having identical coupons in the same year of maturity, the actual nomenclature should be used to differentiate them. Example: 11.50 08, 11.50 10 11.50 GOI 2011, 11.50 GOI 2011A Treasury Bills, Commercial Papers and Certificate of Deposits should be referred to using their date of maturity and the actual nomenclature should be used for confirmation. Example: TB 18/10/02, 364D TB Maturing on 18/10/02 ACC Maturing on 20/12/01, Confirmation calls for full particulars. SBI Maturing on 20/02/02, Confirmation calls for full particulars.

Same day value/ Value today

Settlement to be effected at "t + 0", where t is the trade date.

TOM/Value TOM/Value ‘t + n’

TOM and Value TOM mean that the settlement will be done on the next settlement date. Value ‘t + n’ means that settlement will be done on nth settlement day after the trade date (excluding holiday(s) observed by RBI, Mumbai).

Quantum/Amount It will be assumed that the quote is for the standard market lot of Rs.5 crore,unless otherwise explicitly stated.

I to borrow clean The dealer intends to borrow cash clean (without collateral). I to borrow under Repo

The dealer intends to borrow cash against the collateral of securities.

I to lend clean The dealer intends to lend cash clean (without collateral). I to lend under Repo The dealer intends to lend cash against the collateral of securities. * Question appeared in CAIIB Risk Management Paper November 2009


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Swap Market Terminology

Some of the expressions used in the interest rate swaps market are given below (apart from the typical expressions given above).

Expressions Generally accepted meaning OIS (Overnight Indexed Swap)

Overnight Indexed Swaps benchmarked typically against FIMMDA- NSE MIBOR rates

Two way Quote A two-way quote in the OIS parlance would mean that the dealer is ready to Pay and Receive Fixed Rate. The quote should also specify the tenor. If not otherwise specified the FIMMDA-NSE Overnight MIBOR should be taken as the bench mark. Example: A quote of " 7.60/7.70 for 2 months " indicates the dealer’s willingness to Pay a Fixed Rate of 7.60% and to Receive a Fixed Rate of 7.70% per annum for a period of 2 months.

Mine/I receive I receive the Fixed Rate quoted against paying the Floating benchmark Yours/I pay I pay the Fixed Rate quoted against receiving the Floating benchmark. INR-MIBOR Pay simple Fixed Rate against receipt of overnight Floating Rate for tenors

up to (and including) 1 year. Pay simple semi-annual Fixed Rate against receipt of overnight Floating Rate for tenors of longer than 1 year.

INR-MITOR Pay simple Fixed Rate against receipt of overnight Floating Rate for tenors up to (and including) 1 year. Pay simple semi-annual Fixed Rate against receipt of overnight Floating Rate for tenors of longer than 1 year.

INR-MIFOR Pay annual Fixed Rate against receipt of 3 month Floating Rate for tenors up to (and including) one year. Pay semi-annual Fixed Rate against receipt of 6 month Floating Rate for tenors of longer than one year.

INR-MIOIS Pay annual Fixed Rate against receipt of 3 month Floating Rate for tenors up to (and including) one year. Pay semi-annual Fixed Rate against receipt of 6 month Floating Rate for tenors of longer than one year.

INR-BMK Pay annual Fixed Rate against receipt of annualized Floating Rate for all tenors.

INR-CMT Pay annual Fixed Rate against receipt of annualized Floating Rate for all tenors.

Parameters by default

Market Lot* Rs. 5 Crore Settlement for value at t + 0 Deals entered up to 13.00 hours Settlement for value at t + 1* Deals entered after 13.00 hours

*t+1 will be the default for contracts done in securities, other than Government of India securities. * Question appeared in CAIIB Risk Management Paper November 2009


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Bench Mark Interest Rates….

Benchmark rates such as LIBOR, SIBOR, MIBOR and so on give directions to the markets. A good benchmark reference rate provides the pulse of the market for the day as it is collated

in early market hours from important market participants. These contributors weigh their options on various factors that would drive their lending and

borrowing business during the course of the day and quote their rates nominally. Such benchmark rates have the respect of the market participants and are used widely.

London Inter Bank Offered Rate (LIBOR):

LIBOR is the rate at which major banks in London are willing to lend to each other. It is used to determine the interest rate charged to credit worthy borrowers. LIBOR rates, based on daily quotes at 11 A.M. (London time) from five major London

banks, are fixed rates quoted for specific maturities. The lending rate in the Euromarkets (LIBOR) and the borrowing rate (LIBID), are quoted for

the U.S. Dollar and Eurocurrencies, generally for fixed-term borrowings. LIBOR, also called BBA LIBOR is produced for ten currencies with 15 maturities quoted for each, ranging from overnight to 12 months producing 150 rates each business day. Euro Interbank Offered Rate (EURIBOR):

EURIBOR is used as a reference rate for Euro-denominated forward rate agreements, short term interest rate futures contracts and interest rate swaps, in very much the same way as LIBORs are commonly used for Sterling and US Dollar-denominated instruments.

A representative panel of banks provides daily quotes of the rate for interbank term deposits within the Euro zone, for maturity ranging from one week to one year.

Every Panel Bank is required to directly input its data no later than 10:45 a.m. Central European Time (CET) on each day when the Trans-European Automated Real-Time

Gross-Settlement Express Transfer system (TARGET) is open. At 11:00 a.m. (CET), Reuters will process and publish the Euribor. Singapore Inter-Bank Offered Rate (SIBOR):

The interest rate at which banks located in Asian time zones can borrow funds from other banks located in the region.

In Asia, the SIBOR is used more commonly than the LIBOR. It is set daily by the Association of Banks in Singapore (ABS). SIBOR serves as a benchmark or reference rate for borrowers and lenders that are directly or

indirectly involved in an Asian financial market. Mumbai Inter-Bank Offer Rate (MIBOR):

The National Stock Exchange (NSE) developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market in 1998.

The success of the Overnight NSE, MIBID / MIBOR encouraged the Exchange to develop a bench mark rate for the term money market and it launched the 14-day / 1 month and 3 Month NSE MIBID / MIBOR rates in 1998.


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The MIBID / MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits. To take the process of development further, Fixed Income Money Market and Derivative Association of India (FIMMDA) and NSE (I) Ltd have taken the initiative to co-brand the dissemination of reference rates for the Overnight Call and Term Money Market The product was rechristened as 'FIMMDA-NSE MIBID / MIBOR'.

This benchmark is now jointly disseminated by FIMMDA as well as NSEIL through their websites and other means for simultaneous dissemination of the information as per international practice Collateralized Benchmark Reference Rates (CCBID / CCBOR):

CCIL has been releasing CCBID/CCBOR with effect from March’06. The rates are derived out of orders placed in the Collateralized Borrowing and Lending

Obligations (CBLO) market. CBLO segment has been in the forefront of the short term market for a long time and it leads

the other short term markets like repo and call in setting up the rates. It is the largest short term market in terms of volume. The CCBID / CCBOR rates are released at 10.10AM on the basis of the orders received in

CBLO market by 10.00AM. Mumbai Interbank Forward Offer Rate (MIFOR):

MIFOR was a mix of the London Interbank Offer Rate (LIBOR) and a forward premium derived from Indian Forex markets.

Initially, the intention of MIFOR was for hedging purposes. However, as many corporate entities used MIFOR for currency speculation, RBI, concerned over the potential economic downside risk of speculative off-balance-sheet entities (such as currency swaps), banned the use of MIFOR as a benchmark on May 20, 2005.

However, RBI relaxed the ban later and allowed MIFOR to be used only in interbank related transactions.

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Technology / Internet Banking Glossary Access Products: Products that allow consumers to access traditional payment instruments electronically, generally from remote locations. American National Standards Institute (ANSI) - a standard-setting organization; it is the U.S. representative to the International Standards Organization (ISO). American Standard Code for Information Interchange (ASCII) - a standard code for representing characters and numbers that is used on most microcomputers, computer terminals, and printers. Applet - a small application program that is designed to do a small, specific job. Application - a computer program or set of programs that perform the processing of records for a specific function. Asynchronous Transfer Mode (ATM) - method of transmitting bits of data one after another with a start bit and a stop bit to mark the beginning and end of each data unit. Auditability - the degree to which transactions can be traced and audited through a system. Authentication - the process of proving the claimed identity of an individual user, machine, software component or any other entity. Authorization - the process of determining what types of activities are permitted. Usually, authorization is in the context of authentication : once you have authenticated a user, they may be authorized different types of access or activity. Bandwidth - the transmission capacity of a computer channel or communications line Bastion Host - a system that has been hardened to resist attack, and which is installed on a network in such a way that it is expected to potentially come under attack. Bastion hosts are often components of firewalls, or may be "outside" web servers or public access systems. Biometrics - a method of verifying an individual’s identity by analyzing a unique physical attribute. Browser - a computer program that enables the user to retrieve information that has been made publicly available on the Internet; also permits multimedia (graphics) applications on the World Wide Web. Chip - an electronic device consisting of circuit elements on a single silicon chip. The most complex circuits are microprocessors, which are single chips that contain the complete arithmetic and logic units of computers.


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Chip Card - also known as an integrated circuit (IC) card. A card containing one or more computer chips or integrated circuits for identification, data storage or special-purpose processing used to validate personal identification numbers, authorize purchases, verify account balances and store personal records. Client-Server Network - a method of allocating resources in a local area network so that computing power is distributed among computer workstations in the network but some shared resources are centralized in a file server. Closed Network - a telecommunications network that is used for a specific purpose, such as a payment system, and to which access is restricted (also referred to as a private network). Closed Stored Value System - a system in which value is issued and accepted by either a relatively small group of merchants, or in which the system is limited geographically (i.e., university programs and fare cards for mass transit systems). Code - computer programs, written in machine language (object code) or programming language (source code). Computer Emergency Response Team (CERT) - located at Carnegie-Mellon University, this incident response team offers advisories, which contain enormous amounts of useful, specific security information. Cracker - a computer operator who breaks through a system’s security. This can be legitimate activity, such as to test system security measures. Cryptography - the principles, means, and methods for rendering information unintelligible and for restoring encrypted information to intelligible form (i.e., scrambling a message). Cyber Mall - a set of electronic or digital storefronts linked through a common web site. Database Administrator (DBA) - the individual with authority to control the data base management system. Data Encryption Standard (DES) - U.S. government standard for data encryption method published by the National Institute of Standards and Technology for the encryption of sensitive U.S. government data which does not fall under the category of national security related information. The DES uses a 64-bit key. Data Integrity - the property that data meet with a priority expectation of quality. Data warehouse can be defined as a enterprise wide framework for managing informational data. It is possible to implement data warehousing using Core Banking Solutions. Data bases are known as data warehouses and the major features of the data stored in a data warehouse are that the data is subject oriented, integrated without inconsistencies, in non volatile form and is time variant.


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Data mining – Used to find out the hidden / complex relationships to predict the future trends and behaviours. Helps to be proactive // Helps to give knowledge based decisions. It is possible to have Data mining using Core Banking Solutions. D-Mining is a technique to reveal the strategic information hidden in data warehouse. It is the process of automatically finding patters and relations in large data base. Core components of data Mining: Algorithmic approaches // or // Statistical techniques. Major tools are 5. They are: Associations, Sequences, classifications, Clusters and forecasting. DATA Deduplication (IT Digest Nov 2009) Data De-duplication essentially refers to the elimination of redundant data. In the de-duplication process duplicate data is deleted, leaving only one copy of the data to be stored. However, indexing of all data is still retained should that data ever be required. Deduplication is able to reduce the required storage capacity since only the unique data is stored. For example, a typical email system might contain 100 instances of the same one megabyte (MB) file attachment. If the email platform is backed up or archived, all 100 instances are saved, requiring 100 MB storage space. With Data De-duplication, only one instance of the attachment is actually stored; each subsequent instance is just referenced back to the one saved copy. In this example, a 100 MB storage demand could be reduced to only 1 MB. There are two types of Data de-duplication. 1) Source De-duplication 2) Target De-duplication. Source De-duplication ensures that data ensures that data on the data source is de-duplicated. This generally takes place directly within a file-system and is often referred to as single instance storage. The file system will periodically scan new files creating hashes and compare them to hashes of existing files. When files with same hashes are found then the file copy is removed and the new file points to the old file. Unlike hard links however, duplicated files are considered to be separate entities and if one of the duplicated files is later modified, then using a system called Copy on write a copy of that file or changed block is created. The de-duplication process is transparent to the users and backup applications. Backing up a de-duplicated files system will often cause duplication to occur resulting with the backup being bigger than the source data. Target De-duplication is the process of removing duplicates of data in the secondary store. Generally this will be a backup store such as a Data Repository or a Virtual Tape Library. There are three different ways performing the de-duplication process as 1) Client Backup De-duplication 2) Post process de-duplication and 3) In-line De-duplication. Dedicated - assigned to only one function. Dial-up - the ability of a remote user to access a system by using private or common carrier telephone lines. Digital - referring to communications processors, techniques, and equipment where information is encoded as a binary "1" or "0". Digital Certification - a process to authenticate (or certify) a party’s digital signature; carried out by trusted third parties.


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Digital Signatures - a mathematical encryption technique that associates a specific person with a given computer file and indicates that the file has not been altered since that person signed it; should not be confused with making an electronic representation of a written signature. Distributed Transaction Processing - application processing that involves multiple users requiring concurrent access to a single shared resource. Domain Name - an alphanumeric name for a web site that includes both the online address and online name. Download - to transmit a file or program from a central computer to a smaller computer or a remote site. Electronic Cash - the digital equivalent of dollars and cents (also referred to as digital cash). Electronic Data Interchange (EDI) - the transfer of information between organizations in machine-readable form. Electronic Document - the digital or computer equivalent of paper documents. Electronic Money - monetary value measured in currency units stored in electronic form on an electronic device in the consumer’s possession. This electronic value can be purchased and held on the device until reduced through purchase or transfer. Electronic Purse - a stored value device that can be used to make purchases from more than one vendor. E-mail - messages people send to one another electronically from one computer to another. Encryption (Cryptography) - the process of scrambling data by a device or encoding principle (mathematical algorithms) so that the data cannot be read without the proper codes for unscrambling the data. End-to-end Encryption - the protection of information passed in a telecommunications system by cryptographic means, from point of origin to point of destination. Ethernet - a type of local area network originally developed by Xerox, communication takes place by means of radio frequency signals carried over coaxial cable. File Transfer Protocol (FTP) - a standard way of transferring files from one computer to another on the Internet. Firewall - a system or combination of hardware and software solutions that enforces a boundary between two or more networks. Flowchart - a programming tool to graphically present a procedure by using symbols to designate the logic of how a problem is solved.


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Gateway - a computer that performs protocol conversion between different types of networks or applications. Graphical User Interface (GUI) - a way of communicating with a computer by manipulating icons (pictures) and windows with a mouse. Groupware - software that allows a group of people to work on the same data through a network, by facilitating file sharing and other forms of communication. Hacker - a computer operator who breaks into a computer without authorization, either for malicious reasons or just to prove it can be done. Home Banking - banking services that allow a customer to interact with a financial institution from a remote location by using a telephone, television set, terminal, personal computer, or other device to access a telecommunication system which links to the institution’s computer center. Home Page - a screen of information made available to users through the Internet or a private intranet; it is the "main page" that users are expected to read first in order to access the other pages that comprise the web site. Host - also known as a host computer that is the primary or controlling computer in a computer network, generally involving data communications or a local area network. Hypertext - electronic documents that present information that can be connected together in many different ways, instead of sequentially. Hypertext Markup Language (HTML) - a set of codes that can be inserted into text files to indicate special typefaces, inserted images, and links to other hypertext documents. Hypertext Transfer Protocol (HTTP) - a standard method of publishing information as hypertext in HTML format on the Internet. Incident Response Team - a team of computer experts (internal or external) organized to protect an organization’s data, systems, and other assets from attack by hackers, viruses, or other compromise. Integrated Circuit Card (IC Card) - a plastic card in which one or more integrated circuits are embedded (also called a chip card). Integrated Services Digital Network (ISDN) - a type of all-digital telephone service. ISDN lines provide a connection that can transmit digital data as well as voice, without a modem. International Organization for Standardization/Open Systems Interconnection (ISO / OSI) - an international standard-setting organization. ANSI is the U.S. representative. Internet - a worldwide network of computer networks (commonly referred to as the Information Superhighway).


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Internet Service Provider (ISP) - an entity that provides access to the Internet and related services, generally for a fee. Interoperability - the compatibility of distinct applications, networks, or systems. Intranet - a private network that uses the infrastructure and standards of the Internet and World Wide Web, but is cordoned off from the public Internet through firewall barriers. Issuer - in a stored value or similar prepaid electronic money system, the entity which receives payment in exchange for value distributed in the system and which is obligated to pay or redeem transactions or balances presented to it. Key - A secret value or code used in an encrypting algorithm known by one or both of the communicating parties. Local Area Network (LAN) - a network that connects several computers that are located nearby (in the same room or building), allowing them to share files and devices such as printers. Lock and Key Protection System - a protection system that involves matching a key or password with a specific access requirement. Logging - the storing of information about events that occurred on the firewall or network. Magnetic Stripe - used on debit, credit, and identification cards to store encoded information read by card readers; less secure than computer chip cards. Memory Card - an integrated circuit (IC) card capable of storing information only. Middleware - facilitates the client / server connections over a network and allows client applications to access and update remote databases and mainframe files. National Institute for Standards and Technology (NIST) - an established US agency, within the Department of Commerce to develop technical, management, physical and administrative standards and guidelines for the cost effective security and privacy of sensitive information in Federal computer systems. NIST issues the Federal Information Processing Standards (FIPS). Navigation - moving through a complex system of menus or help files. Network - a group of computers connected by cables or other means and using software that enables them to share equipment and exchange information. A system of software and hardware connected in a manner to support data transmission. Node - any device, including servers and workstations, connected to a network. Also, the point where devices are connected. Non-repudiable Transactions - transactions that cannot be denied after the fact.


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Offline - equipment or devices that are not in direct communication with the central processor of a computer system, or connected only intermittently. Online - equipment or devices that communicate with a computer network. Connections can be direct (as in a LAN using dedicated connections) or indirect (as in using the Internet). Online Scrip - debit accounts on the Internet or other major computer network. Online Service Providers (OSP) - closed network services that provide access to various computer sites Open Network - a telecommunications network to which access is not restricted. or networks for a fee. Open Stored Value System - a system that may be comprised of one or more electronic cash issuers of stored value that is accepted by multiple merchants or entities. Operating System - a program that controls a computer and makes it possible for users to enter and run their own programs Packet Switching - a data transmission method that routes packets along the most efficient path and allows a communication channel to be shared by multiple connections. Password - a unique word or string of characters that a programmer, computer operator, or user must supply to satisfy security requirements before gaining access to the system or data. Password Cracker - a software program designed to conduct an automated brute force attack on the password security controls of an information system by "guessing" user passwords. Password Sniffer - a software program that is illicitly inserted somewhere on a network to capture user passwords as they pass through the system. Payment System - a financial system that establishes the means for transferring money between suppliers and users of funds, usually by exchanging debits or credits between financial institutions. Payment System - a financial system that establishes the means for transferring money between Personal Identification Number (PIN) - a sequence of digits used to verify the identity of a device holder. suppliers and users of funds, usually by exchanging debits or credits between financial institutions. Piggyback (Between-the-lines Entry) - a means of gaining unauthorized access to a system via another user’s legitimate connection. Point of Sale (POS) - a system of terminals that debits or charges a customer’s account and credits or pays a merchant’s account to effect payment for purchases at retail establishments. Prepaid Card - a card on which value is stored, and for which the holder has paid the issuer in advance.


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Privacy - in the context of a payment system, the property that no information which might permit determination of transactions may be collected without the consent of the counterparties involved. Protocols - a standardized set of rules that define how computers communicate with each other. Proximity Cards - cards that can be read from a short distance; mainly used for security and vehicle identification. Public Key Cryptography - type of cryptography in which the encryption process is publicly available and unprotected, but in which a part of the decryption key is protected so that only a party with knowledge of both parts of the decryption process can decrypt the cipher text. Remote Payment - a payment carried out through the sending of payment orders or payment instruments. Repudiation - the denial by one of the parties to a transaction of participation in all or part of that transaction or of the content of the communication. Router - a computer system in a network that stores and forwards data packets between local area networks and wide area networks. Scattering - the process of mixing the integrated circuit (IC) chip components so that they cannot be analyzed easily. Search Engines - software programs that are capable of locating specified information or web sites on the Internet. Secure Electronic Transaction (SET) - a set of standards jointly developed by Visa, MasterCard, and several technologies companies to facilitate secure credit card transactions over the Internet. Secure Hypertext Transfer Protocol (SHTTP) - provides secure communication mechanisms between an HTTP client-server pair. Secure Socket Layer (SSL) - a protocol for providing data security during transmission using data encryption, server authentication, and message integrity. Server - a computer that provides services to another computer (the client). Settlement - an act that discharges obligations with respect to funds or securities transfers between two or more parties. Settlement system - a system used to facilitate the settlement of transfers of funds. Simple Mail Transfer Protocol (SMTP) - a protocol used to transfer electronic mail between computers on the Internet.


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Smart Card - a card with a computer chip embedded, on which financial, health, educational, and security information can be stored and processed. Specification - documents that contain basic detailed data. Spoofing - an attempt to gain access to a system by posing as an authorized user. Standards - the rules under which analysts, programmers, operators, and other personnel in an information service organization work. Stored Value Card - a card that stores prepaid value via magnetic stripe or computer chip. Structured Query Language (SQL) - a query language used to manipulate large databases. System Integrity - the quality that a system has when it performs its intended function in an unimpaired manner, free from deliberate or inadvertent manipulation of the system. System Specification - a baseline specification containing all the essential computer-based business system documentation. It is completed at the end of the Development Phase. System Specification - a baseline specification containing all the essential computer-based business system documentation. It is completed at the end of the Development Phase. Systemic Risk - the risk that the failure of one participant in a funds transfer system, or in financial markets generally, to meet its required obligations will cause other participants or financial institutions to be unable to meet their obligations when due. Systems Analysis - the performance, management, and documentation of the four phases of the life cycle of a business system : study, design, development, and operation. Tamper-evident - the capacity of devices to show evidence of physical attack. Tamper-proof - the proven capacity of devices to resist all attacks. Tamper resistant - the capacity of devices to resist physical attack up to a certain point. Telecommunications - data transmission between a computing system and remotely located devices via telephone lines, cable, or wireless technology. Telnet - a protocol that permits users to access a remote terminal or another computer through a network; widely used on the Internet. Threat Monitoring - the analysis, assessment, and review of audit trails and other data collected for the purpose of searching out system events that may constitute violations or attempted violations of system security. Throughput - the total amount of useful work performed by a data processing system during a given period of time. Topology - the arrangement of nodes usually forming a star, ring, tree, or bus pattern.


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Traceability - the degree to which transactions can be traced to the originator or recipient (also referred to as auditability). Transferability - in electronic money systems, the degree to which an electronic balance can be transferred between devices without interaction with a central authority. Transmission Control Protocol / Internet Protocol (TCP / IP) - a standard format for transmitting data in packets from one computer to another, on the Internet and within other networks. TCP deals with the construction of the data packets while IP routes them from machine to machine. Trap Door - a concealed and unauthorized entrance into a computer operating system, designed by the programmer. Trojan Horse - a program that appears to perform a useful function and sometimes does so quite well but also includes an unadvertised feature, which is usually malicious in nature. Truncation - dropping off part of a character string either to conserve space or because of limited space. Trusted Computer System - a system that employs sufficient assurance measures to allow its use for simultaneous processing of a range of sensitive or classified information. Trusted Third Party - a reputable entity that authenticates one or more parties to an electronic transaction. The authentication process generally involves the issuance and administration of digital certificates. Uniform Resource Locator or Universal Resource Locator (URL) - a way of specifying the location of available information on the Internet. Upload - to transmit a file to a central computer from a smaller computer or a remote location. Usenet - a set of many newsgroups distributed via the Internet. Virtual Corporations - corporations that have no official physical site presence and are made up of diverse geographically dispersed or mobile employees. Virus - a program with the ability to reproduce by modifying other programs to include a copy of itself. It may contain destructive code that can move into multiple programs, data files, or devices on a system and spread through multiple systems in a network. Vulnerability - a weakness in system security procedures, system design, implementation, internal controls, etc., that could be exploited to violate system security. Web Page - a screen of information supporting the home page of a web site. Web Site - the collection of an entity’s home page and other proprietary pages located on the World Wide Web.


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Wide Area Network (WAN) - a communications network that covers a wide geographic area, such as state or country, using high speed long distance lines or satellites provided by a common carrier. World Wide Web (web, www) - a sub network of the Internet through which information is exchanged via text, graphics, audio, and video. Worm - a program that scans a system or an entire network for available, unused space in which to run. Worms tend to tie up all computing resources in a system or on a network and effectively shut it down. Stealing — Physical stealing of username and passwords. Sniffers — Also known as network monitors, this is software used to capture information from the network. This software could capture logon IDs and passwords Guessing Passwords — Using software to test all possible combinations to gain entry into a network. Brute Force — A technique to capture encrypted messages then using software to break the code and gain access to messages, user ID’s, and passwords. Phishing: An attacker calls impersonating as an authorized official from the Bank to gain information or a mail is sent which apparently looks like from genuine source seeking information from customer. Also the links provided in the mails can lead to sites which would steal the personal information of the person who fell prey to such attacks. Spoof sites: These are web sites created by criminals to trick users into giving their personal information. The sites are designed to copy the exact look and feel of the "real" site

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Quick Guide to Common Attacks Denial of Service (DOS/DDOS) A denial of service attack is any attack used to achieve the disruption of any service to

legitimate users DDOS is the ‘distributed’ form of such an attack where many ‘Zombies’ that have been

taken over by hackers launch simultaneous attacks to achieve a more effective denial of service attack

Back Door Any opening left in a functional piece of software that allows ‘unknown’ entry into the

system / or application without the owners knowledge. Many times, back doors are left in by the software creators Spoofing Spoofing is a technique used to gain unauthorized access to computers A hacker must first find an IP address of a trusted host Once this information is gotten, then the hacker can use this information to make the

recipient think that the hacker is the trusted sender In computer networking, the term IP address spoofing or IP spoofing refers to the

creation of Internet Protocol (IP) packets with a forged source IP address, called spoofing, with the purpose of concealing the identity of the sender or impersonating another computing system.

Man in the Middle A Man in the Middle attack is when an attacker is able to intercept traffic by placing

themselves in the middle of the conversation. Man in the Middle attacks involve a malicious attacker intercepting communications and

fooling both parties into believing they are communicating with each other when they are really being watched

The attacker can then do anything to the transmission they are now a part of to include eavesdropping or planting information

Wireless systems are very susceptible to this form of attack. Replay A Replay attack is when a Hacker uses a Sniffer to grab packets off the wire After packets are captured, then the hacker can simply extract information from the

packets like authentication information and passwords Once the information is extracted, the captured data can be placed back on the network or

replayed


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TCP/IP Hijacking This is also called “Session Hijacking” A hacker can take over a TCP session between two machines A popular method is using source-routed IP packets DNS Poisoning DNS Poisoning is when your DNS files are poisoned with bad information In other words, if you have an A record that points to a trusted host, a hacker can change

it and point you in the wrong direction for malicious intent Weak Keys Weak keys are secret keys with a certain value for which the block cipher in question will

exhibit certain regularities in encryption or, in other cases, a poor level of encryption Mathematical Mathematical (or Algebraic) attacks are a class of techniques that rely for their success

on block ciphers exhibiting a high degree of mathematical structure Social Engineering Most times hackers try to attack the actual ‘systems’ to exploit their weaknesses Another form of attack is to exploit ‘end user’ weakness Exploiting the weakness of human nature to get someone to hand over their credentials to

you from either peer pressure or trickery Birthday A birthday attack is a name used to refer to a class of brute-force attacks Please use the link provided to research this deeper. You have to understand hash

functions and password cracking to fully understand this and the link provided will do that

Password Guessing Password Guessing or ‘cracking’ is the attack on authentication credentials for any given

system Brute Force A form of Password Cracking Brute Force attacks will try every single key combination known to crack your password. The only protection against them is to either have a key length too long to crack anytime

in this lifetime, or change the password frequently.


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Dictionary A form of Password Cracking The term ‘dictionary’ comes from the actual book of known words… this is transferred

into a file and loaded into a tool to try to help a hacker to crack your password The defense against this is to not use simple to guess and known dictionary words as

passwords Software Exploitation Attacks against a systems bugs or flawed code Use Hot Fixes and Service packs to fix them War Dialing The process of running modem scanning tools against a PBX or any given dialup modem

for the purpose of penetration. A war dialer is a computer program used to identify the phone numbers that can

successfully make a connection with a computer modem. The program will dial a range of numbers you ask it to dial and will log failure and

success ranges in a database War Driving The process of using an attack tool to penetrate wireless systems from outside the facility

where the wireless system sits A wireless Ethernet card set to work in promiscuous mode is needed to War drive, and

you will also need a powerful antenna if you are going to remain at a distance Buffer Overflow Buffer Overflow attacks take advantage of poorly written code If the code will not check the length of variable arguments then it can be susceptible to

this kind of attack SYN flood SYN Flood attacks exploit the three-way handshaking mechanism of the TCP/IP protocol A large number of half-opened connections is used to deny access to legitimate requestors Smurfing Exploits ICMP Performed by transmitting an echo request packet to a network’s broadcast address with a

spoofed source address The victim is then quickly overwhelmed by a large number of echo replies


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Sniffing Sniffing attacks use protocol analyzers to capture network traffic for password and other

data capture Ping of Death Used to attempt to crash your system by sending oversized packets to a host Ping of death can actually be run from older versions of Windows, Linux and Cisco

routers. Port Scanning Port Scanning is performed by running a vulnerability scanner on a system to see what

open ports are open The second wave of the attack is to then exploit whatever you find via other attacks Chargen A flaw with TCP port 19 where if you connect via the port You can run what’s called a Character Generator attack Fragment Attack An exploit that targets IP fragmentation and reassembly code are common Numerous attacks have been performed upon the premise of overlapping fragments Attacks include: Teardrop / Teardrop2 / NewTear / SynDrop / Bonk / Boink

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Central Vigilance Commission (Source - CVC Website)

The Central Vigilance Commission was set up by the Government in February, 1964 on the recommendations of the Committee on Prevention of Corruption, headed by Shri K. Santhanam, to advise and guide Central Government agencies in the field of vigilance. What is Central Vigilance Commission? CVC is the apex vigilance institution, free of control from any executive authority, monitoring all vigilance activity under the Central Govt and advising various authorities in Central Govt organizations in planning, executing, reviewing and reforming their vigilance work. The Central Vigilance Commission was made a multi member Commission with 'statutory status' with effect from 25th August,1998. It consists of Central Vigilance Commissioner (the Chairperson) and maximum 4 members. The CVC is not controlled by any Ministry/Department. It is an independent body which is responsible only to the Parliament. Organisational set up CVC: CVC has its own Secretariat, Chief Technical Examiners’ Wing (CTE) and a wing of Commissioners for Departmental Inquiries (CDI). Jurisdiction: The jurisdiction of the Central Vigilance Commission extends to all Central Government Departments, Central Government Companies including nationalized Banks and Central Government Organisations. In States,there is either a State Vigilance Commission or Lok Ayukta which is looking after the vigilance matters of the State Governments. Powers and Functions:

To inquire or cause an inquiry or investigation to be made on a reference made by the

central Govt wherein it is alleged that a public servant being an employee of the Central Government or a corporation, established by or under any Central Act, Government company, society and any local authority owned or controlled by that Government, has committed an Offence under the Prevention of Corruption Act- 1988.

To cause an inquiry or investigation to be made into any complaint against any official belonging to the, following category of officials, namely: (a) Group ‘A’ Officers of the Central Government; (b) such level of officers of the Corporations established by or under any Central Act, Government companies, societies and other local authorities, owned or controlled by the Central Government, as that Government may, by notification in the Official Gazette, specify in this behalf, wherein it is alleged that such official has committed an offence under the Prevention of Corruption Act, 1988;

review the progress of applications pending with the competent authorities for sanction of prosecution under the Prevention of Corruption Act 1988;

tender advice to the Central Government, corporations established by or under any Central Act, Government companies, societies and local authorities owned or controlled by the Central Government on such matters as may be referred to it by that Government, said Government companies, societies and local authorities owned or controlled by the Central Government or otherwise;

Exercise superintendence over the vigilance administration of the various Ministries of the Central Government or corporations established by or under any Central Act,


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Government companies, societies and local authorities owned or controlled by that Government.

CVC’s Annual Report: The Annual Report of the CVC brings out the system failures which lead to corruption in various Departments/ Organisations, system improvements, various preventive measures and cases in which the Commission’s advises were ignored etc. Investigations by CVC: The CVC is not an investigating agency. It either gets the investigation done through the CBI or through the Departmental Chief Vigilance Officers. The CVC orders investigation into cases of officials of Central Government Departments/Companies/Organisations only. Corruption cases: The Commission is empowered to enquire or cause inquiries to be conducted in to offences alleged to have been committed under the Prevention of Corruption Act, 1988 by certain categories of public servants. The following categories of public servants are within the advisory jurisdiction of the Commission: (a) Group “A” officers of the Central Government. (b) such level of officers of the corporations established by or under any Central Act, Government companies, societies and other local authorities, owned or controlled by the Central Government, as that Government may, by notification in the Official Gazette, specify in this behalf; Deemed court: The Commission is deemed to be a civil court for the purpose of section 195 of chapter XXVI of the Code of Criminal Procedure, 1973 and every proceeding before the Commission shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purpose of section 196 of Indian Penal Code. Court Powers: The Commission shall, while conducting any inquiry, have all the powers of a civil court trying a suit under the Code of Civil Procedure, 1908 and in particular, in respect of the following matters namely: (a) summoning and enforcing the attendance of any person from any part of India and examining him on oath; (b) requiring the discovery and production of any document; (c) receiving evidence on affidavits; (d) requistioning any public record or copy thereof from any court or office; (e) issuing commissions for the examinations of witnesses or documents; and (f) any other matter which may be prescribed.


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Importance and Features of Domain Name Server (DNS)

Canara Bank IT Digest Nov 2009 A Security concern: Domain Name System (DNS) is an internet service which resolves domain names into IP addresses. Domain names are alphabetic and hence are user friendly. However, internet basically works on IP addresses which are numerical numbers. DNS does the work of translating domain name, into its corresponding IP address. In simple terms, to access our intranet, we use the domain name 'CANNET' and our DNS server matches this domain name with its corresponding IP address which is numerical in nature (e.g. 172.16.32.11). The Authoritative DNS servers are the systems that are configured specifically to return the correct IP address for any name in that domain. Our Bank hosts two DNS Servers (Primary and Secondary), which comprise the domain names of all the services accessed by all our Intranet users across the country and the corresponding IP addresses. Why do we need DNS? As mentioned above, domain names can be used with ease than the IP addresses. Even if we are willing to take the trouble using number based IP addresses, there is the issue of need for informing the change in IP address, every time, the IP address of a particular system/server providing particular service is changed. When we use domain name, we do not really have to worry about knowing the IP addresses and any change in them. We access 'CANNET' site by using the domain name 'http://cannet'. We do not need to worry about the underlying IP addresses of the systems providing the CANNET services on our Intranet. In the similar manner, when we access Yahoo services on Internet, what we use is only domain name i.e., 'yahoo.com' but not any IP Addresses. Even if those IP addresses change, millions of users accessing these services need not know about it. It is the DNS servers associated with particular domains/sites, which will have to know about the IP addresses and any change in it. Further, there is a security concern when IP addresses of systems/servers providing the services are disclosed to all the users. Disclosing of IP Address to all users may increase the possibility malicious activity as various kinds of attacks can be occurred on critical servers as attacker is aware about the IP Address of target system.

How DNS works? DNS is based on the client/server architecture. Web browser functions as a DNS client (also called DNS resolver) and issues requests to your DNS servers when navigating a website. When a DNS server receives a request not in its database, it temporarily transforms from a server to a DNS client. The server automatically passes that request to another DNS server. Eventually the request arrives at a server that has the matching name and IP address in its and the response flows back client


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How to implement DNS setting on client PC There is need of change in network setting in local area network to point it to DNS servers. Primary and Secondary Servers setting must done to make PC enable to connect to DNS servers for resolving domain name for requested web based package. Client setting can be performed through the script or manual method also. DNS script and manual configuration methods are provided on CANNET. It provide the methods of running script and steps to check proper DNS setting and manual setting steps for various Windows based operating system Web Browser must be configured to by-pass proxy server for Bank's corporate WAN IP Addresses. Cookies and temporary files must be deleted from temporary folder to enable web browser to get domain name record from DNS server for particular web application Advantages of DNS – (Importance and Features) 1) DNS Provide a fast and name based access to web based packages working in our bank. 2) Currently, there are more than 170 web based packages are working in bank which are

being used throughout bank. 1. Remembering the IP Address of all the packages is not possible for an ordinary computer

user. DNS provide the functionality to access these packages through name rather than IP address.

3) IP Address is the network entity. IT should not be revealed to everyone. By providing the access of web based packages IP Address information is available with end users. While DNS hides IP Address from end user as he is not concerned about IP Address because he is accessing the package through name rather than IP Address.

4) DNS allow the flexibility in changing the IP Address of package as user dose not need to bother about any IP Address as he access the package by name only.

5) Local Cache on Client PC enables to resolve domain name from PC itself as if client will send all request then performance of PC web page access and DNS server may degraded.

6) DNS reduce the probability of risk associated with external attack on banks inside network as most of external attacks are IP address based and external user will be completely unaware about that which critical application is using what IP Address.

7) DNS can work as a load balancer for web application which is hosted on multiple servers.

8) Primary and Secondary server architecture of DNS server allows the implementation of fail-over option in Domain name system setup.


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Mergers, Acquisitions, Amalgamations & Alliances - Basics With a view to strengthen and sustain themselves, the business organisations, quite often, go in for different types of structural re-engineering which may be in the form of merger, acquisition or amalgamation. Objectives: The objective of such structural change can be (a) diverisifcation of activities, (b) removal of bottlenecks, (c) improvement in profitability, (d) better customer service, (e) achievement of economies of scale and size (f) bringing different entities into single control, etc. Merger: The merger is a combination of two companies into one larger company. In a merger, one corporate entity losses its identity and gets merged into another corporate entity. A merger is voluntary action and involves stock swap or cash payment, to the shareholders of the merged company. Differnt types of mergers Horizontal merger: This is a merger of companies in direct competition with each other

and/or share similar product lines and markets. Vertical merger: In this merger, there is a customer and company or a supplier and a

company relationship before merger (for example the merger of a cone supplier with an ice cream maker).

Market-extension merger: It is a merger of two companies that sell the same products in different markets.

Product-extension merger: When two companies selling different but related products in the same market, merge.

Congeneric merger/concentric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship (example - merger of a bank and a leasing company).

Reverse merger: When a smaller firm acquires management control of a larger or long established company and keeps its name for the combined entity, it is known as a reverse takeover. It is used as a mode for going public, without the expense and time required for an IPO.

Acquisitions: An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target company’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Acquisition usually happens by purchase of a smaller company by a larger one. Alliances: An alliance is a formal and mutually agreed commercial collaboration between different companies. The alliance partners integrate business resources for mutual benefit, but continue to be separate entities. The alliance partners synergize their strengths for mutual benefit. An alliance is considered to be a good strategy for market expansion. Merger and amalgamation: According to the Oxford Dictionary, 'amalgamation' means merging of two or more business concerns into into one and 'merger' means 'combining of two commercial companies into one'. Under the Halsbury’s Laws of England,


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‘amalgamation’ is defined as “a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company”. Thus, the two concepts are, substantially, the same. Demerger: On the other side, the terms “demerger”, “spin-off” and “spin-out” are used to indicate a situation where one company splits into two or more, generating a second company separately listed on a stock exchange.

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International Organisation for Standardisation (ISO) International Organisation for Standardisation (ISO tells suppliers and manufacturers what is required of quality oriented management system. ISO stands for International Organisation for Standardization. ISO Certification ensures a set of standard practices adopted by our branches particularly relating to extending services to our customers. The certificate covers all the major activities of the branch having direct contact with the customers. Series of standards i.e. ISO 9000, ISO 9001, ISO 9002, 9003, 9004 are issued Different series are issued for different activities/category In case of Banks it is ISO 9001, which is issued for service industry. The entire ISO activities centre around the caption "DOCUMENT WHAT YOU DO &

DO WHAT YOU DOCUMENT". The entire activity focuses towards offering quality service to our clients.

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Business Process Re-Engineering (BPR) BPR, which is a multi-dimensional tool, utilizes several methods to examine processes from a holistic perspective, transcending the narrow borders of specific functions. It can be defined as “The activity by which an enterprise reexamines its goals and how it achieves them, followed by a disciplined approach of business process redesign. It involves reinventing of processes within a business and the use of information technology to bring about major changes and cost savings in an organization's structure” Objective: The basic objectives of BPR are to reduce transaction process time without sacrificing security aspects, quality and real time service to customers and extensive propagation of single window concept. Even for common day-to-day functions such as account opening, loan origination, and customer service, business processes take different shapes and forms. Through BPR continual improvement could be made to remove wasteful process steps, reduce cycle times, and maximize the value to both the customers and the bank. For example, relationship management is a pivotal interaction where spending "face time" with customers and prospects is critical to customer satisfaction and revenue growth. By employing the concept of BPR to offload routine activities from relationship managers and route exceptional situations appropriately, banks are maximizing the productivity of a precious resource. Besides freeing up time, the streamlined workflows provide a straightforward focus on demanding and complex customer needs. Another important aspect is the credit approval process, as this often involves analyzing several customer facilities, obtaining information from third parties, and transiting through multiple control and sign-off steps. Redesigning facilitates the credit administration process to remove duplicative steps and automate these manifold approval steps for optimal responsiveness. A few major aspects which need to be reckoned in BPR relate to the

Need for standardization Need for high levels of security Once both the above are achieved, the next logical approach would be towards

communication and networking Need for a technology plan which has to be periodically monitored and also upgraded. Need to address the issue of Human Relations in a computerised environment Sharing of technology experiences and expertise.

In all BPR is a fundamental shift in the way of doing business. BPR attempts to find new ways of doing work. Value-creation for the customer is the leading factor for BPR and information technology often plays an important enabling role.

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Total Quality Management (TQM) TQM means Total Quality Management; Imperfections in the organizations may be at managerial level, working levels, systems level, motivational level, activity level and result level, resulting in problems. Therefore, any quality achievement becomes a mere achievement in isolation, if talked partially in bits and fractions. Quality aspects have to be dealt at all levels, not as "part" of the "whole", but as "whole" itself. Similarly if there is TQM is any branch/office, entire functioning there may conceive different well defined segments manned by definite mix of people consisting of workmen, officers, managers. Each person of each cadre is a "measured unit" knowing full well of responsibilities and co-operations. Any replacement of that unit should be automatic, smooth and professional with full know of volume, sensitivity standard-check tests, pending tasks, future action plants, etc. Management need not mean "structure" alone, but also "situations" in which context; anybody can be manager in the informal sense to manage the emerging situations and challenges well. Quality need not be mere PRODUCTS, but also PROCESS, and PEOPLE in the spirit of TQM. TQM has to achieve PERFORMANCE in terms of results; PRODUCTION in terms of efficiency and PROFITABILITY in terms of surplus generations. TQM has to create not only SATISFIED CUSTOMER but also DELIGHTED CUSTOMER. Customer satisfaction is possible if there is inbuilt process of: a) UNDERSTANDING – customer preferences, expectations b) RESPONSIVE – to customer needs and aspirations c) DELIVERY – in terms of customer specifications d) CUSTOMER-INTERFACES/COMMUNICATIONS – at frequent intervals. TQM implies Total-Customer-Orientation, which include INTERNAL-CUSTOMER meaning working staff at various levels of working unit. Here again, the staff should be not only SATISFIED-STAFF but also DELIGHTED-STAFF. TQM though aims at final product, i.e., Customer; it is equally concerned with Quality of process and people within. External customer can not be taken care of, if the Internal-Customer is not taken care of. Internal customers constitute the process-links and who are in receipt of another's outputs within the organisation. Each staff (internal-customer) has to receive some input to give an output. Similarly each department has to receive some inputs from the other departments to give some output. Independency and inter-dependency are well "meant" for the success of TQM, so that the external customer is served well with quality image and quality product. The TQM thus warrants meeting the requirements of external-customers, which calls for process-orientation. E.g. Advances Section has to conceive of their customers, which are branches in need of sanctioning of advances proposals in right time for right quantum with "after sales service". Each department and staff thus have to be clear of their buyers and sellers, to function as "Performance-Production-Profit" oriented quality-unit in its quantifiable delivery. With or without ISO-9000 Certification TQM can be implemented for bettering the results and resources. TQM can be successful, if there is TQL, i.e., Total Quality Leadership.

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Definition of Robbery, Dacoity, Theft and Burglary Theft: (Section 378 of the Indian Penal Code 1860): Whoever, intending to take dishonestly any movable property out of the possession of any person without that person's consent, moves that property in order to such taking, is said to commit theft. Robbery (Section 390 of the Indian Penal Code, 1860) In all robbery there is either theft or extortion. When theft is "robbery", if in order to the committing of the theft, or in committing the theft, or in carrying away or attempting to carry away property obtained by the theft, the offender, for that end, voluntarily causes or attempts to cause to any person death or hurt or wrongful restraint or fear of instant death or of instant hurt, or of instant wrongful restraint. When extortion is robbery- Extortion is "robbery" if the offender, at the time of commiting the extortion, is in the presence of the person put in fear, and commits the extortion by putting that person in fear of instant death or instant hurt, or of instant wrongful restraint to that person, or to some other person, and, by so putting in fear, induces the person so put in fear then and there to deliver up the thing extorted. Dacoity: (Section 391 of the Indian Penal Code 1860) When five or more persons conjointly commit or attempt to commit a robbery, or where the whole number or persons con-jointly committing or attempting to commit a robbery, and persons present and aiding such commission or attempt, amount to five or more , every person so committing, attempting or aiding is said to commit 'dacoity'. Burglary: (Source: Halabury's Laws of England, Fourth Edition, pp. 683 Vol. II para 1274) A person is guilty of burglary if (1) he enters any building or part of a building as trespasser and with intent to commit any of certain specified offences, or (2) having entered any building or part of a building as a trespasser he steals or attempts to steal anything in the building or that part of it or inflicts or attempts to inflict on any person in it any grievous bodily harm. The specified offences are offences of stealing anything in the building or part of a building in question, of inflicting on any person in it any grievous bodily harm or raping any woman in it, and of doing unlawful damage to the building or anything in it. Definition of bank fraud: (By BD Narang Committee on Large Value frauds)

During the course of deliberations with CMDs / EDs / CVOs and other senior officials of different banks, it emerged that perception of bank fraud varied from bank to bank and person to person. The variance was even sharper in cases of borrowal accounts where the instances of removal and disposal of hypothecated goods without bank's knowledge are quite common. Similarly, depletion of stocks and its value, cash loss incurred by the borrower, undertaking


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of a new but connected activity, diversion of funds, etc. were viewed differently by different banks. It is therefore, evident that there has been considerable variance in reporting of frauds in borrowal accounts by banks. In the circumstances, it was generally felt that it is desirable to evolve a working definition of bank fraud. The Group deliberated on this issue and came out with the following definition.

A bank fraud is a deliberate act of omission or commission by any person carried out in the course of a banking transaction or in the books of account maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monitory loss to the bank.

For the sake of convenience and simplicity it is clarified that, transactions broadly having one or more of the following features may be categorised as bank fraud;

1. Shortage of cash. 2. Fraudulent encashment of drafts / cheques / travellers cheques, dividend warrants, etc. 3. Fraudulent endorsement of cheques, drafts, bills etc. with an intention of conversion to

encash the same. 4. Opening bogus bank accounts in the name of non-existing persons. 5. Collecting fake instruments with or without connivance of bank staff. 6. Siphoning off funds through the fake telegraphic / mail transfers, unauthorised debits of

impersonal accounts and / or concealment of any unauthorised transaction by manipulating entries in the books of accounts.

7. Creation of fixed deposits, credit balances and issuance of drafts, pay orders, stock invest etc. without consideration.

8. Sudden disappearance of stocks as compared to the figures shown in the previous statement.

9. Fudging of financial statements. 10. Issuance of letters of credit, bank guarantees and DPGs etc. without recording liability in

the books of accounts. 11. Discounting of forged trade documents or documents without underlying trade

transactions. 12. Transgression of the delegated authority and its concealment from the competent

authority resulting in loss to the bank. 13. Misuse of computer code and breach of security of computer systems.

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Project Appraisal : Terminology Discounted Cash Flow method: This method is developed from the fact that money has got time value and payments /

receipts of cash at different periods of time cannot be compared in absolute terms. This is because a rupee to be received one year hence could not be invested unit it is

received. Therefore, it is less valuable than a rupee received today. In other words, there is a price for waiting to receive the benefits. It is therefore clear that

present value is more than future value of a sum of money. This difference is not due to general fall in the value of money on account of inflation but

due to rates of interest operating. Under DCF technique the cash flow (both outflow and inflow) are reduced to their

present worth before the project is evaluated for its financial viability. There are 3 methods of appraisal based on DCF. They are: Net present value (NPV) //

Profitability Index or Benefit cost ratio // Internal Rate of Return. Net Present Value: Under this method, the elements of time regarding cash flow are taken into account. Both

benefit and cost are discounted at the pre determined rate, which is chosen on the basis of cost of the capital and NPV is derived as a surplus of discounted benefits over the discounted costs.

In other words, NPV is the surplus of the present value of benefits over the present value of costs.

For a project to be viable, NPV should be positive. An investor at the time of taking a decision for investment evaluates the series of future

cash flows with the technique of discounting. The value of the series of future cash flow is equated by the process of discounting at a

specific rate and the total of the discounted equated values is more than the relative investment, the project merits for consideration.

Profitability Index or Benefit cost ratio If an investor has before him a few mutually alternate proposals and each project

indicates the net positive present value, the investor applies then the technique of profitability index for selection of projects.

Profitability Index = Present value of future cash flow // Present value of Investment. For the project to be selected / considered viable BCR must be more than one. Internal Rate of Return - IRR: While NPV and BCR indicate whether the project gives a higher return when compared

to predetermined cut off rate, IRR gives the actual rate of return on investment. In case of NPV and BCR calculations, a pre-determined discount rate is assumed on the

basis of cost of capital. In working out IRR no such predetermined discount rate is considered, because IRR itself

is defined as the discount rate at which the present value of project benefits and costs become equal.


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The benefits and costs discounted at IRR would thus yield an NPV of Zero and a BCR of one.

In appraising the project, the IRR is compared with the cost of the capital and if IRR exceeds the cost of the capital, the project becomes viable.

The IRR may be worked out by a process of trial and error or with the help of PC (preferably through Micro Soft Excel package).

Pay back method: A Method of Project Appraisal The object of this method is to ascertain the period required for recovering the entire investment made in a project. The cash inflow includes net operating profit after adding back to it the amount of depreciation on fixed assets and amortization of intangible assets, if any, less income-tax payable during the year. The cash inflow is accumulated, year by year, until it equals the original investment. The length of time required for total cash inflow to recover the original investment is called the pay-back period. Although the calculation of payback period is simple, it ignores the time value of money and does not take into account the income which may be received beyond the payback period. Sometimes, a project having higher pay back period may be better than lower pay back period owing to higher return after payback period. Average rate of return method: A Method of Project Appraisal Under this method, the entire life of a project is taken into account, unlike the pay back period. An average of the annual net operating profits (after depreciation) for the entire life of the project is taken and rate of return on original investment and average investment is calculated. Average investment of one year can be ascertained by taking the average of opening and closing, during the life of a project, book value of investments in the year. The grand average of such average investments of all the years is obtained to know the average investment for the project. Average profit is divided by original investment and average investment to get the rate of return on them. Critical Path Method (CPM): This method is evolved to solve scheduling problems in industrial projects. CPM is basically a technique to reduce the time required to implement a project. By breaking the project in terms of activities and functions and by fixing their time sequence, it is possible to isolate the most critical activities in project and to compute the critical path schedule for their implementation. The main thrust of CPM analysis is on time cost relationships and it seeks to determine the project schedule which minimises total cost. Some of the assumptions in working CPM are: Activities and functions of a project can be grouped for their implementation Grouping of activities reduces time but leads to enhanced direct costs because of factors

like overtime payments and wastage. It involves fixation of time schedule for each activity. The costs required for a project could be classified into direct and indirect costs - direct

costs for direct material and indirect costs towards insurance and such other costs.


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Project Evaluation and Review Technique (PERT): PERT technique is normally used in projects involving new technology and it is probabilistic in nature. PERT is a total system and consists of setting up a schedule of dates for various stages and exercise of management control mainly through project status reports on its progress. Comparison of CPM and PERT Networks: While CPM determines the time and cost of the activity to complete in schedule time, the

PERT techniques outlines the probability of completion of the activity. The main thrust of CPM analysis is time-cost relationships whereas PERT is on

shortening and controlling project time. CPM analysis was developed for projects which are relatively risk free and PERT

analysis was developed for projects characterized by uncertainty. Both the techniques assume that sufficient resources are available for assignment of

projective activities. LIER: Lending Institution Engineer’s Report. Break Even Analysis: The BEP indicates the volume of sales which the unit must achieve in order to cover its

total costs. At this stage the unit merely recovers the total cost. It is possible to recover the fixed costs only when the sales proceeds of the unit are in excess of marginal or variable cost. The difference is called contribution. It is so called because it contributes to the recoupment of fixed cost and ultimately to the profit.

If the unit can sell more than the break even volume, it earns profit provided the sale proceeds of the additional unit are more than the variable costs thereof.

The higher the volume of sales, the large is the amount of profit as every contribution after the BEP level adds to the total revenue of the unit. In the case of a unit producing more than one product, the profits depend upon a proper balance of selling price, product mix, volume and costs.

BE analysis is done to ascertain at what point of sales the unit breaks even, at what percentage of installed capacity and what point of time the sale is achieved.

The unit through its cost of production and profitability statements would be furnishing the proposed level of production during each year (capacity utilization) for, which it would be possible to ascertain at what point of time and at which level the unit is likely to achieve break even.

Hence, each and every item of the statement should be critically examined in relation to the production projected. If the cost is underestimated, higher profit may be projected which may not materialize.

If the cost is overestimated, profit may be shown less, but actual profit may be more. In any case, if the production and sales do not take place as projected, the rephasement of installments may have to be done.

While the financial rations measure only the past performance of the enterprise, they do not adequately measure the future requirement. Here, break even analysis comes in handy to measure the future “cost and revenue relationship” and also helps to determine


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the minimum level of production. With this, the unit can also plan its future working capital requirement.

CVP Analysis / Break Even Analysis: Some formulae: Marginal cost = Prime costs + Variable Overheads. Contribution = Sales – Marginal costs. Profit = Contribution – Fixed costs Profit + Fixed costs = Sales – Marginal costs Margin of safety = Sales – BEP Margin of safety in % = (Actual Sales – Sales at BEP) X 100 / Actual sales BEP in units = Fixed costs / Contribution per unit. BEP in rupees = BEP in units X Selling Price. Sales at BEP = (Fixed cost X Sales ) // (Sales – Variable Cost) With BEP analysis, the following points could also be answered: 1. What is the minimum level at which the unit should operate at given cost and price to

start generating profit? 2. How many units must be sole to earn the projected profit? 3. What should be the sales to attain the given percentage of profit? 4. What is the effect on BEP and profits for a certain percentage increase or fall in selling

price? 5. What is the effect on BEP and profits of a certain percentage increase or fall in variable

costs arising out of price of raw materials? 6. What is the effect on BEP and profit of a certain percentage rise or fall in fixed costs? BE analysis is useful in the following areas also: 1. Determining product mix. 2. Make or buy decisions. If the variable cost is less than the price that has to be paid to an

outside supplier, it may be better to manufacture than buy. 3. Fixation of repayment schedule. When once a unit breaks even, repayment towards TL

can begin and until the unit reaches break even, a repayment holiday could be considered.

***


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Balance Sheet Terms & their Meaning Authorised capital: This is the maximum amount of capital that a company can raise as

per its Memorandum of Association. It is expressed in terms of no. of shares, face value of the share and total amount.

Issued capital: It is that part of the authorised capital for which subscription is invited from the prospective shareholders by the company. It is not necessary that the company should issue the entire amount of authorised capital at a time.

Subscribed capital : The face value of those shares that are subscribed by the shareholders out of the issued capital is called subscribed capital. This can be equal to the amount of issued capital. If oversubscription situation arises, the company will either refund the excess amount or will exercise 'green shoe option' in case the terms of issue permit.

Paid-up capital: The amount of capital actually paid by the share-holder towards the called/ subscribed capital. If amount is not fully called by the company, the amount will be less than subscribed capital.

Green shoe option: The option with the company to retain a part of the oversubscribed amount as per terms of the issue.

Bonus shares: These are issued by a company to the debit of general reserves. These do not affect the net worth.

Rights issue: These are new shares issued to the existing shareholders on a rights basis. With rights issue, change takes place in net worth since there is fresh infusion of funds as net worth.

Net worth: The net-worth stands for the paid-up capital + reserves of the company. These are the funds owned by the promoters of the business.

Capital reserves: The reserves which are not available for distribution among shareholders. These reserves are built out of such earnings of the company that do not come from normal trading activities (example - share premium reserve).

General reserves: The reserves available for distribution among the shareholders. These reserves are created out of undistributed profits.

Tangible Net worth: To see the exact worth of the business, the bankers take into account the tangible net worth which is calculated as net worth – intangible assets.

Contingent liability: These are the liabilities which may or may not arise. For example if a firm gives guarantee to a bank for the loan of its allied firm. If the allied firm defaults, the guarantee given, will be converted into an actual liability. This is shown as footnote of balance sheet.

Intangible asset: The assets which have notional value only. These assets are written off by the firms out of the future profits. These may include pre-operative expenses, patents etc.

Non-current assets: The assets that are neither current assets nor fixed or fictitious assets. The special feature of such assets is that these do not become cash in the next 12 months. These may include loans given, security deposits, investments etc.

Cash profit: When net profits are seen without taking into account the amount of depreciation. In other words these are profits before depreciation. these are calcualted as net profit + depreciation

Cash loss: When the net losses are calculated without taking into account the amount of depreciation. In other words these are the losses before depreciation and are calculated as

net loss – depreciation Gross profit: The gross profits are calculated as net sales less cost of sales.


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Long term sources: These are the liabilities which will continue with a firm for a long time period. These are calculated as net worth + long term liabilities.

Short term sources: These are the liabilities which will continue with the firm for a short period up to 12 months. These are also known as current liabilities

Long term uses: The funds that have been invested on a long time basis. These include fixed assets + non-current assets + intangible assets

Short term uses: The funds that have been invested in short term assets. These are represented by current assets.

Current liabilities: The liabilities which have either become due for payment or shall fall due for payment within 12 months of date of balance sheet (trade creditors, bank overdraft).

Current Assets: The assets which change their shape/ form within 12 months and converted into cash. These are also called working capital or gross working capital (cash, stocks, debtors etc.).

Quick assets: Assets which are either ready cash or can be converted into cash quickly (cash and bank balances, fixed deposits in banks, current receivables or book debts, marketable and quoted govt. or non-govt. securities). These are also calculated as current assets less stocks and prepaid expenses.

Profit or Loss: The profits made by a firm are included in its net worth as general reserve. On the other hand, the loss becomes intangible assets, as accumulated loss. It can be also be reduced from amount of capital.

TL installments: Installment of term loan payable in 12 months are taken as current liability only for calculation of current ratio and quick ratio.

Net block: Original cost of fixed assets less depreciation. Cost of production: Consumption of raw materials (including stores) and spares, power

and fuel, direct labour, repair and maintenance, other manufacturing expenses plus opening balance of stock in process and minus closing balance of stock in process.

Cost of sales: Cost of production plus opening stock of finished goods minus closing stock of finished goods.

Operating profit: Net sales minus cost of sales minus interest and selling, general and administrative expenses.

Net profit before tax: Operating profit plus other income minus other expense Net profit after tax: NPBT ± Deferred tax – Current tax =NPAT Retained profit: Net profit minus dividend paid / declared Net sales: Gross sales minus excise duty and returns Total current assets: Inventory, Receivables (including Bills discounted) and all other

current assets which are cashable in next 12 months plus prepaid expenses. Total current liabilities: All liabilities which are payable in next 12 months including

TL installments payable in next 12 months, if any.. Net working capital: NWC = Total CA - Total CL OR NWC = TNW+ (TL-FA-NCA) Working capital gap: Total CA - CL Other than bank borrowings Total outside liabilities: Total Liabilities as per B/s - Net worth Net Worth: Capital + Reserves + Surplus Tangible Net worth: Net worth - accumulated losses and intangible assets.

***


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Ratio Formulae

Liquidity Ratios Current Ratio Current Assets

Current Liabilities Fixed Assets Coverage Ratio Capitalized project cost

Amount of term loan Loan to Value Ratio - LTV Actual liability of loan x 100

Market value of assets Leverage Ratios

Total Debt Ratio Total outside liabilities Tangible net Worth

Debt Equity Ratio Long Term Debt Tangible Net worth

Bank borrowings Bank Borrowings Net sales

Overall Interest Coverage Ratio Aggregate profit + Interest on TL+Depreciation+Tax Aggregate interest on term loan

Overall DSCR PAT+Deprn.+Interest on TL TL installments+Int. on TL

Return on Capital Employed PAT+Int on TL+Taxes TNW+TL

Activity Ratios: Raw material Turnover Closing stock of RM x 365 or 12

RM consumed Stores & Spares turnover Closing stock of stores & spares x 365 or 12

Stores & spares consumed WIP turnover Closing stock of WIP x 365 or 12

Cost of production FG turnover Closing stock of FG x 365 or 12

Cost of sales / COGS Creditors Turnover Sundry creditors for goods x 365 or 12

Purchases Debtors turnover Sundry debtors & receivables x 365 or 12

Net Sales Total Inventory turnover Closing stock of Inventoryx 365 or 12

Cost of sales / COGS

Profitability Ratios: Gross Profit Ratio Gross Profit x 100

Net Sales Net Profit Margin Net Profit x 100

Net Sales Operating profit Margin Operating profit x 100

Net Sales PBT margin Profit before tax x 100

Net Sales LLR = Loan Life Ratio. Loan Life Ratio is a concept which is used internationally in project financing activity. LLR = Present value of total Available Cash Flow during loan life period divided by Maximum amount of Loan. LLR can be used to arrive at the sustainable debt in a restructuring exercise. A benchmark LLR of 1.4, which would give a sufficient cushion to the amount of loan to be serviced, may be considered adequate.


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Uniform Customs And Practice For Documentary Credits (UCPDC – 600) or (UCP – 600)

RBI has approved this. Contains 39 articles and 12 e-Articles Can be used for Stand by LCs also. Documentary credits are also referred as Letters of Credit. (LC). For uniformity of rules we have Uniform customs and practices for documentary credits

(UCPDC) – 2007. Publication – 600 (Called as UCPDC – 600 or UCP -600). UCP – 600 is wef 1.7.2007 UCPDC is evolved by ICC. International Chamber of commerce. Important Articles: In UCP 600, the word “revocable” does not exist. All credits are irrevocable even if there

is no indication to that effect. All LCs are irrevocable only. (Whether expressly mentioned or not)

Banks are responsible for handling of documents only and not for verifying the genuinity of documents. (Not responsible for goods, performance, delays,etc.)

For examination of documents – 5 banking days maximum can be taken. (Article 14b) Presentation of documents must be made by or on behalf of the beneficiary not later than

21 calender days after the date of shipment if mentioned otherwise in LC but in any event not later than the expiry date of the credit. (Article 14 (c))

The terms beginning , middle and end of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day of the month, all dates inclusive.

FORCE MAJEURE: A Bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism or by any strikes or lockouts or any other causes beyond its control. A Bank will not, upon resumption of its business, honor or negotiate under a credit that expired during such interruption of its business.

UCP – 600 - Interpretations For the purpose of these rules: 1. Where applicable, words in the singular include the plural and in the plural include the

singular. 2. A credit is irrevocable even if there is no indication to that effect. 3. A document may be signed by handwriting, facsimile signature, perforated signature,

stamp, symbol or any other mechanical or electronic method of authentication. 4. A requirement for a document to be legalized, visaed, certified or similar will be satisfied

by any signature, mark, stamp or label on the document which appears to satisfy that requirement.

5. Branches of a bank in different countries are considered to be separate banks. 6. Terms such as “first class”, “well known”, “qualified”, “independent”, “official”,

“competent” or “local” used to describe the issuer of a document allow any issuer except the beneficiary to issue that document.

7. Unless required to be used in a document, words such as “prompt”, “immediately” or “as soon as possible” will be disregarded.


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8. The expression “on or about” or similar will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included.

9. The words “to”, “until”, “till”, “from” and “between” when used to determine a period of shipment include the date or dates mentioned, and the words “before” and “after” exclude the date mentioned.

10. The word “from” and “after” when used to determine a maturity date exclude the date mentioned.

11. The terms “first half” and “second half” of a month shall be construed respectively as the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.

12. The terms “beginning”, “middle” and “end” of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day of the month, all dates inclusive.

*** Forex Terminology

NOSTRO ACCOUNT: Our Account in Foreign Currency with Foreign Correspondent Abroad

VOSTRO ACCOUNT: Foreign Correspondent's account with us in Rupees. LORO ACCOUNT: Their Nostro Account with You or third party account LLOYD’S CERTIFICATE: Sea Worthiness of the Vessel SGS Clause : Merchandise is the same and quality is same as mentioned in the invoice is

certified by them. GR FORM : Export Declaration by exporter to custom authorities (in duplicate) (for

physical exports and floppies/CDs etc) SOFTEX : Export Declaration form for Software Export ( in Triplicate) SDF : Statutory Declaration Form by Exporter where Electronic Data Interchange system

is introduced in Customs Office- in place of GR form Free On Board (FOB) : To deliver goods on board named by buyer CIF (Cost, Insurance, Freight) Upto named destination paid by exporter GR, SDF forms are to be surrendered to Bank by exporters with in 21 days GR not required for trade samples, publicity materials, software upto USD 25,000 or

Rs.5lakh Indian rupees. In respect of advance payment received for exports, actual shipment should take place

within 1 year. ECNOS rate of interest (Export Credit Not Otherwise Specified) is BPLR + 2% AVALISATION means Co-Acceptance of Bills. SUPPLIER’S CREDIT: Credit extended by the overseas supplier to the buyer in India

for selling his goods is known as “Supplier’s Credit”. BUYER’S CREDIT: The buyer in India will have to avail either a rupee loan from any

bank in India or Foreign Currency Loan from a Bank or Financial Institution in India or abroad to settle the bill of the Seller on sight terms.

Asian Clearing Union – 8 Countries – Sri Lanka, Pakistan, Bangladesh, Nepal, Bhutan, Iran, Myanmar, India

Importer-Exporter Code is allotted ;by DGFT Form A1 required for Import exceeding US D 500 Form A2 other than Import exceeding USD 5000

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URR - 725 (ICC uniform rules for bank to bank reimbursement

under documentary credits - updated Icc brochure no. 725 ) At present Uniform Rules for Bank to Bank Reimbursements under documentary credit

are covered under URR 525. Accordingly, bank branches are required to incorporate a clause in LCs established by

them, stating that "This documentary credit is subject to Uniform Rules for Bank to Bank Reimbursements under documentary credit ICC Publication No.525". Now, we are informed by FEDAI that ICC's Uniform Rules for Bank to Bank

Reimbursement under documentary credit (URR) have been updated to bring the same in conformity with UCP 600.

The updated text - URR 725 has been approved by ICC, and the same has come into effect from 1st Oct. 2008.

URR 725 contains number of technical changes from the existing version of URR 525.

Some of the technical changes introduced are in respect of Article 1, 6, 9 & 11 of URR 525.

"Issuing bank" means the bank that has issued a credit and the reimbursement authorization under that credit.

"Reimbursing bank" means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

"Reimbursement authorization" means an instruction or authorization independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursement bank.

"Reimbursement undertaking" means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank's reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.

A reimbursing bank shall have a maximum of three banking days following the day of receipt of the reimbursement claim to process the claim. A reimbursement claim received outside banking hours will be deemed to be received on the next following banking day.

When a reimbursing bank has not issued a reimbursement undertaking and a reimbursement is due on a future date: the reimbursement claim should not be presented to the reimbursing bank more than ten banking days prior to such predetermined date.

If a reimbursement claim is presented more than ten banking days prior to the predetermined date, the reimbursing bank may disregard the reimbursement claim. If the reimbursing bank disregards the reimbursement claim, it must so inform the claiming bank by tele-transmission or other expeditious means without delay.

If the predetermined reimbursement date is more than three banking days following the day of receipt of the reimbursement claim, the reimbursing bank has no obligation to provide notice of non-reimbursement until such predetermined date, or no later than the close of the third banking day following the receipt of the reimbursement claim plus any additional period mentioned in (a) (i) above, whichever is later.

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Cheque Truncation

Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch.

The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc.

Thus with the implementation of cheque truncation, the need to move the physical instruments across branches would not be required, except in exceptional circumstances.

This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques.

The CTS project envisages a safe, secured, faster and effective system for clearing of the cheques.

In the CTS the presenting bank will capture the data & images of the cheques using their Capture System which is internal to them. They have to meet the specifications and standards prescribed for data and images.

To ensure security, safety and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the system.

The banks will send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks.

For that purpose RBI will be providing the banks software called the Clearing House Interface (CHI) that will enable them to connect and transmit data in a secure way and with non-repudiation to the Clearing House (CH).

The Clearing House will process the data and arrive at the settlement figure for the banks and send the required data to payee/drawee banks for processing at their end.

The drawee/payee banks will use the same CHI mentioned earlier for receiving the data and images from the Clearing House. It will be the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments.

What are the image specifications in the CTS? Imaging of cheques can be based on various technology options. The cheque images can be black and white, Grey Scale or coloured. Black and White images do not reveal all the subtle features that are there in the cheques. Coloured Images increase storage and network bandwidth requirements. So it was decided that the electronic images of truncated cheques will be in gray scale technology. There will be three images of the cheques i.e. front grey, front black & white and back black & white which will be made available to member banks. The image specifications are: Image Type Minimum DPI Format Compression Front Gray Scale 100 DPI JFIF JPEG Front Black & White 200 DPI TIFF CCITT G4 Reverse Black & White 200 DPI TIFF CCITT G4 The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).


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CTS: How the image and data transmitted over the network is secured? The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to payee bank will be ensured using the Public Key Infrastructure (PKI). The CTS is compliant to the requirement of the IT Act, 2000. It has been made mandatory for the presenting bank to sign the image & data from the point of origin itself. The image and data are secured using the PKI through out the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank. The PKI standards used are in accordance with the appropriate Indian acts and practices of IDRBT which is the certifying authority for banks & financial institutions in India. The standards defined for the PKI are as followed:

hash algorithm SHA-1 padding algorithm pkcs#1 RSA asymmetric encryption with 1024 bit key length Triple DES (3DES, TDES) symmetric encryption with 168 bit key length Certificates in x.509v3 format

CTS: Benefits could be summarized as: a) Faster clearing cycle; b) Better reconciliation/verification process c) Better Customer Service . Enhanced Customer Window d) T+0 for Local Clearing and T + 1 for inter-city clearing. e) Elimination of Float - Incentive to shift to Credit Push payments. f) The jurisdiction of Clearing House can be extended to the entire country. No Geographical Dependence g) Operational Efficiency will benefit the bottom lines of banks . Local Clearing activity is a high cost no revenue activity. h) Minimizes Transaction Costs. i) Reduces operational risk by securing the transmission route. What is an IRD? Under CTS, after the capture of the image, the physical cheque would be warehoused with the presenting bank. In case the beneficiary or any other connected persons require the instrument, the payee bank could issue a copy of the image, under its authentication, which is called Image Replacement document. It is a legally recognized replacement of the original cheque for re-presentment. The provisions of NI act (Section 81(3) of the NI Act as amended) also permit the usage of such IRD.

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Death Claim Terminology Testamentary Succession / disposition: The property of the deceased is distributed by way of either testamentary disposition or

intestate disposition. Testamentary succession / disposition means distribution of the property of the deceased

based on will. When a person leaves a will / codicil bequeathing his property, it is known as

testamentary disposition. On the other hand, when a person dies without any will, the property will be

distributed/inherited by the legal heirs as per the succession Law by which the deceased was governed.

Disposition of property in this manner is known as Intestate disposition or Intestate succession.

Will ‘WILL’ mean the legal declaration of the intention of the testator (one who makes the

will) with respect to his property, which he desires to be carried into effect after his death (Section 2(h) of Indian Succession Act, 1924).

It includes codicil also. A will comes into operation only on the death of the testator. A will can be revoked at any time by the testator during his lifetime. A will is ambulatory in the sense that it is effective only from the date of death of the

testator and till such time, it has no effect and it can be changed or revoked by the testator.

If there is any mistake in a Will, it cannot be rectified by any Court of Law. No consideration is required for making a will.

A will may be made: (a) For disposal of the property of the testator after his death and for appointing an executor (b) For appointing a testamentary guardian; (c) For exercising a power of appointment; (d) For revoking or altering a previous Will.

The power of appointment in item (c) refers to the right of holder of an office or estate to nominate a person to succeed him on his death. For example, a head of a Mutt may appoint his successor to the Mutt.

A minor is legally incompetent to make a will and a will by minor is not a legal declaration.

A declaration in a will should relate to the property of the testator, which he intends to dispose of. If the declaration contains no such information, it is not a will.

A will may be in any form. It may be written in any language and no technical words are necessary. It may be written in ink or pencil.

A will need not be stamped as it is exempted from stamp duty. A will shall be attested by two or more witness in the presence of the testator. A will is not rendered void merely for the reason that it is witnessed by any of the

beneficiaries under the will.


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Codicil: A codicil means an instrument made in relation to a will and explaining, altering or

adding to its dispositions and shall be deemed to form part of the Will (as per Section 2(b) of Indian Succession Act, 1925).

While obtaining a Probate, a codicil alone will not be admitted to Probate when the will is lost and the terms of the codicil will be incapable of being carried out without knowledge of what was in the lost will.

If the existence of the will is not proved, the codicil will not be admitted to Probate. A codicil is of a similar nature to a will as regards both its purpose and the formalities

relating to it. But, in general, it is supplemental to and considered as annexed to a will previously made, being executed for the purpose of adding to, varying or revoking the provisions of that will.

Probate: A probate means a copy of a will certified under the seal of a court of competent

jurisdiction with a grant of administration to the estate of the testator (Section 2(f) of Indian Succession Act 1925).

A probate is conclusive as to the representative title of the Executor to represent the estate.

It is also conclusive proof as to the due execution of the Will and as to the genuineness of the Will.

The effect of grant of the Probate is that it establishes the factum of the Will and the legal character of the Executor and all the property both movable and immovable of the deceased Testator vests in the Executor as from the date of the death and as long as the grant stands, the Executor is the legal representative of the deceased.

Executor: Executor means a person to whom the execution of the last will of a deceased person is,

by the Testator’s appointment confided (Section 2 (c) of the Indian succession Act 1925). Executor means the executor or the administrator of a deceased person.

Court shall not recognize the rights of an Executor unless he has obtained Probate of the Will under which he claims. However, under Section 213 of the Indian Succession Act, the estates vests in the Executor by virtue of the Will and from the date of the death of the Testator.

A period of seven clear days is required to pass after the death of the person dying leaving a Will or Codicil, before Probate can be granted.

The office of an Executor or Administrator is not assignable; nor does it survive after the death of a sole executor or administrator, in favour of his heirs.

Letters of Administration: These include any letters of administration, whether general, with a copy of the Will

annexed, or limited in time or otherwise. Letters of administration are also granted under Section 232 of the Indian succession Act. When a person dies leaving a ‘Will’ without appointing an executor or if the executor

appointed by the Will is legally incapable or refuses to act or who has died before the


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testator or before he has proved the Will, an administrator can be appointed only by a competent court as distinguished from an executor who can be appointed only by a person by his Will or Codicil.

Administrator: An administrator means a person appointed by a competent authority to administer the

estate of a deceased person when there is no executor (Section 2 (a) of Indian Succession Act, 1925).

If a person governed by this Act dies without leaving a Will, (i.e. intestate), a person is appointed to administer his estate, as provided in Section 218 and 219 of the Act.

The person so appointed is called an administrator. A property of the deceased does not vest in him until the grant is made. But, in order to

prevent injury being done to the estate of the deceased, the legislature has adopted a doctrine of relation back that, upon the grant being made, the title of the administrator relates back to the time of the death of the intestate.

An administrator is not a legal representative until the grant of letters of administration is made.

Guardian: Guardian means a person having the care of the person of a minor or his property or both. There are different types of guardians, viz., Natural guardian, Testamentary Guardian, Court Appointed guardian and De-fecto Guardian.

Guardian Ad Litem:

A guardian appointed by the competent court to be the guardian of the minor to look after

the interest of the minor in a particular suit/legal proceedings. Such guandian ad litem is appointed after hearing the father and mother or other guardian of the minor if any. In case both the father and mother are not alive, only a person appointed by the Court can act as guardian for the minor.

Natural guardian of a Minor: Hindu/Christians: Father is the natural guardian of his minor sons/daughters and if the

father is not alive, mother of the minor shall be natural guardian. Mother of a Hindu Minor can act as natural guardian even if father is alive in the

following circumstances: (a) Where the father and mother are agreed to that effect (b) Where the father is totally indifferent to the matters of the minor (c) The father is physically unable to take care of the minor because he is staying away from the minor or because of his physical or mental incapacity.

Guardian of an illegitimate child: Mother will be the natural guardian and after her, the father.

A minor is incompetent to act as guardian of any minor except his own wife or child, or , where he is the managing member of HUF, the wife or child of another minor member of that family.

Even if father or mother is alive, some other person could be appointed as guardian by the court under exceptional circumstances such as the interest of the father or the mother being in conflict with the minor’s interests, ill-treatment of the minor by the father or mother.

Documents

Banking Glossary Shabta Ratna 17072010