The Economic Times ET In The Classroom – Archives – 1 (Economics Concepts Explained) _ INSIGHTS.pdf

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10/3/13 The Economic Times ET In The Classroom Archives 1 (Economics Concepts Explained) | INSIGHTS

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INSIGHTS

JU LY 1 7 , 2 0 1 3 5 : 2 7 PM

The Economic Times ET In The Classroom Ar

(Economics Concepts Explained)

Ar ch iv es -1

Ar ch iv es -2

archives 3

Ar ch iv es 4

Ar ch iv es 5

The Economic Timesnewspaper now and then publishes articles on current economic issues in a questi

the heading ET In The Classroom. Th ey are simple to understand an d remem ber.

Many tough concepts are beautifully expla in ed by th e ET team in these articles. All these articles are f

They are the property of the Economic Times. I have just consolidated all of them here for the benefit o

Complete credit is for The Economic Timesnewspaper for these wonderful articles.

For an IAS aspiran t preparing for th e UPSC civil serv ice examina tion, ET in th e Classroomis a one-s

acquain ted with man y economic jarg on and concepts.

ET in the classroom: What is Islamic finance?

What is Islami c finan ce?

Islamic finan ce refers to a finan cial sy stem that is consistent wit h th e principles of Sharia , the sacred la

from regula r ban king in that it prohibits earning of interest (or r iba) thr ough the business of lending.

indirect association with businesses inv olving alcohol, pork products, firearm s and tobacco. It a lso does

betting an d gam bling .

How does it work?

Islamic finan ce takes the form of Islamic bankin g an d Islamic insur ance, a lso known as Takaful.

Islam ic banking is done in five ways:

1. Mudarabah, a profit-sharing agreement

2. Wadiah, a safe keeping arrangement

3. Mushar akah, or a joint v entur e for a specific business

4. Mur abaha h, cost plus arr angem ent wher e goods are sold with a pre-determ ined mar gin of profit

5. Ijirah, a leasing ar rangement

Takaful is a form of mutu al insura nce based on partn ership and collective sharin g of risk by a gr oup of

How has Islamic banki ng progressed in recent y ears?
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Islamic banking is most prev alent in Malay sia. It is spreading ra pidly in West Asia, wh ere the populati

New global financial centres such as Singapore, Hong Kong, Geneva , Zurich and London hav e made ch

accommodate the Islamic finance industry , which is nearly a trillon dollar in size now.

Indian r egulations do not allow Islamic bankin g but the gover nm ent is considering allowing it.

What rest ricts t he growth of Islam ic finance?

Most banks conducting Islamic operations have a panel of Muslim scholars called Sharia comm ittee or

determ ines whether a product or pra ctice complies with Islamic prov isions. Also, th e accounting is don

is an official standard-setting body known a s the accounting a nd auditing organization for Islamic fina

code makes Islamic banking a v ery niche product.

.

ET in the classroom: Infrastructure debt fund

What is t he Infra str uct ur e debt fund or IDF?

Infrastru cture debt fund is a debt instru ment being set up by th e finance ministry in order to chann el

infrastructure projects which r equire long-term stable capital inv estment. A ccording to the structure

min istry , after consultat ions with stakeholders, infrastru ctur e NBFCs, market regu lators and banks, a

as a trust or as a compan y .

What ha ppens in eit her of th e scenario?

If the IDF is set up as a tru st, it would be a mu tual fu nd, regu lated by Sebi or th e Securities and Exchan

mutu al fund would issue rupee-denominated units of five y ears maturity to raise funds for the PPP, or

projects . In ca se the IDF is set up as fun ds, the credit r isk would be born e by inv estors an d not the IDF.

As a com pan y , i t could be set up by one or m ore sponsors, includin g N BFCs, IFCs or ban ks. It would be a

of 50%, net-owned funds (minim um tier-I equity of 150 crore). It would raise resources through issue o

denomin ated bonds of min imu m fiv e-y ear m atur ity . It would invest in debt securities of only PPP proj

gua ran tee and hav e completed at least one y ear of comm ercial operat ion.

Refinance by IDF would be up to 85% of the total debt cov ered by the concession ag reement. Senior lend

remaining 1 5% for which they could charge a premium from the infrastructure company . The credit

underly ing projects will be borne by IDF. As an NBFC, the fund would be regulated by the Reserv e Ban

Who woul d be t he m ajor i nv estors?

Domestic and offshore inv estors, m ainly pension fun ds and insurance companies, who hav e long-term

to invest in these funds, while banks and financial institutions would act as sponsors.

.

ET in the Classroom: Marginal standing facility

What is t he m ar gin al sta ndi ng facili ty ?

The Reserv e Bank of India in its monetary policy for 2 011 -1 2, int roduced the mar ginal standing facilit

could borrow funds from RBI at 8.25%, which is 1% abov e the liquidity adjustment facility -repo rate ag

securities.

The MSF rate is pegged 100 basis points or a percentage point above the r epo rate. Banks can borrow fu

is a considerable shortfall of liquidity . This measure has been introduced by RBI to regula te short-term


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more effectiv ely.

In the annual policy statement, RBI says: The stance of monetary policy is, among other things, to ma

it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a larg

flows.

What is t he difference bet ween l iqu idi ty adjust men t facilit y-repo rate an d ma rgi nal st an d

Banks can borrow from the Reserv e Bank of India under LAF-repo rate, which stands at 7.2 5%, by pled

over and above the statutory liquidity r equirement of 24%. Though in case of borrowing from the mar

can borrow funds up to one percentage of their net dema nd and time liabilities, at 8.2 5%. Howev er, it

liquidity ratio of 24%.

ET in the classroom: Priority-sector lending

What is priori ty-sector l endi ng?

Banks were assigned a special role in the economic development of the country , besides ensuring the gr

The banking regulator, the Reserve Bank of India, has hence prescribed that a portion of bank lending

activ ities, which it calls the priority sector.

Ar e there m in im um li mi ts?

The limits are prescribed according to the ownership pattern of banks. While for local banks, both the p

hav e to lend 40 % of their n et bank credit, or NBC, to the priority sector as defined by RBI, foreign bank

NBC to the priority sector.

What is net bank credit ?

The net bank credit should tally with the figure reported in the fortnightly return submitted under Se

Bank of India Act, 1934 . However , outstanding deposits under the FCNR (B) and NRNR schemes are ex

for comput ation of priority sector lending ta rget/subtarg ets.

Ar e there specific t ar gets withi n t he pri orit y sector?

Domestic banks have to lend 18 % of NBC to agriculture and 10 % of the NBC has to be to the weaker se

hav e to lend 1 0 % of NBC to the small-scale industries and 12 % of their NBC as export cr edit. Howev er

v ast nu mber of sectors t ha t ban ks ca n l end as priorit y sector. Th e Reserv e Bank ha s a deta iled note of w

sector, which also includes housing loans, education loans and loans to MFIs, among others.

What ha s been th e experi ence so far ?

It has been observ ed that while banks often tend to meet the ov erall priority sector targets, they somet

targets. This is particularly true in case of domestic banks failing to meet their sub-targets for ag ricult

reasons banks often site for n ot lending to this sector is tha t recov ery is often difficult .

Is there any penal action in case of non-achievement of priority sector lending target by a b

Domestic banks hav ing a shortfall in lending to priority sector/ agricu ltur e are allocated amounts for c

Infrastructure Development Fund ( RIDF ) established in Nabard. In case of foreign banks operating in

the priority sector lending targ et or sub-targets, an am ount equiv alent to the shortfall is required to b

y ear.

..

ET in the Classroom: What the Greek crisis means to th


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Why Does the World Want to Sav e Greece?

No one can quantify the damage to the world if Greece is allowed to sink. But few ar e willing to risk it e

origin to the 2008 cr isis. Many economists, policy ma kers and some within centr al banks believe that t

2008 could hav e been r ingfenced, or a t least cushioned, if Lehman was bailed out. But since Lehm an w

not a commercial bank holding savings of millions, Fed and the US government had thought that the c

bank ru ptcy wou ld be conta in ed wit hi n a few blocks of Wall Street, an d no one r eally would lose jobs a n

months we all found out how wrong they were. Today , no one wan ts to take a chan ce with Greece. LeadGreece collapse can star t a fire that will engu lf continents.

How does fear spread when m arket s are in such a stat e?

Banks impacted by a default ma y find themselves cut out from the dollar ma rket the engine of globa

bank s wi ll fin d it v ery diffi cu lt to r oll ov er th eir dolla r asset s as t he other bank s wh ich ar e m ore solv en

them. Thats when th e world outside financia l ma rkets would feel the pinch. Su ppose, a French ban k th

the European subsidiary of an Asian company, or to bank in Asia which, in turn, had extended a dollar

wou ld n ot r oll ov er th e cr edit lin e

Will a defaul t cause a doll ar scarcity?

Banks and companies are already holding on to the dollar. A default w ill only deepen it. Consider the A

line has been pulled bank. It will somehow try to organise the money by pay ing a premium. Having se

fearing that things may turn worse, it will raise more than it needs. When all companies start doing it

Not just banks, corporates in Greece would also default

How will panic boil over to oth er Eur o nations

Speculators will tar get Portu gal, a nd then Italy . The logic is simple: if Germ any & ECB do not help Gre

and Italy sink. Soon th ese will be perceived as basket cases and their bonds, stocks and curr encies will f

short-sellers. That would be a problem as Italy s debt is more than th e combined debt of Portu gal, Spain

So, tim es run ning out for Greece?

Close to $8 billion worth Greek bonds will mature in December. It needs the money before that, failing

IMF is will ing t o lend a little over $8 billion, but only if Greece takes a strin g of au sterity mea sures. IM

wh en it wi ll san ct ion th e loan. Some econ omi sts fea r th e IMF pressu re ca n make thing s difficu lt for Gre

consumption help a country which is already doldrum s

Isnt Germany in a bit of a Catch-22 situat ion

It is. Germa n politicians know that if there was no euro, its currency would hav e gained so mu ch that

been wi ped out. It needs the euro. Bu t conv in cin g Ger man s isn t easy . T hey dont wa nt to ba il out al l Eu

wh o dont work ha rd. Some th in k Gr eece should be ex iled fr om EU for a few y ear s to should pu t t heir ho

ET in the Classroom: Interest rate futures

What is t he i nt erest rate futur es on 91-day tr easury bill?

Interest rate futu res on 91 -day treasury bill are interest rate-driv en deriv ativ e products that help ban

prima ry dealers to hedge their in terest ra te exposure on tr easury bills. Financial institut ions can lock

y ield on t he 91 -day tr easur y at a giv en dat e when c oun ter part ies en ter into t he inter est r at e fu tu res c


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How are they settled?

The 91-day T-bill interest rate futures are cash settled. In case of the 91-day treasury bill, the final set

contract is based on the weighted average price/ yield obtained in the weekly au ction of the 91 -day tr e

expiry of the contract. But in case of interest rate futures on the 10-year benchmark governm ent secu

phy sically settled.

How is the product str uctur ed?

The minimum size of the contract is Rs 2 lakh and the tenor of the contract cannot be more than 12 mo

regulator Sebi, which has designed the product and will superv ise its trading. The m aximum matur ity

months. The initial mar gin is subjected to a min imu m of 0.1 % of the notional va lue of the contra ct on

0.05 % of the notional v alue of the contract th ereafter.

What kind of v olum es ha s th e product gen era ted so far?

Last week, the avera ge daily tr ading v olume for the 91 -day T-Bill IRF was Rs 360 crore. So far, am ong

introduced the product for trading. The interest rate futures (IRF) on 91 -day TBills clocked a v olume of

National Stock Exchan ge (NSE) on the first day of tra ding last Monday .

What ar e the a dvan tages of the in terest rate futu res?

It is a good hedging tool for banks, primary dealers and mutual funds who have huge exposure to these

such as 91 -day treasury bills. There is no securities transaction tax (STT). The initial margins are also

v olumes for th e pr oduct. Interest r at e fu tu res ca n be used by inv estors to take a dir ect iona l cal l on th e

their existing position.

..

ET in the classroom: Central plan and role of plan pane

ministry

The gov ernments budget exercise usually begins with fixing the contribution of the exchequer to the c

distributed over many schemes, taken together this is the single biggest item of expenditure in the an n

the concept of Central Plan and th e budget support to the plan.

What is cent ra l pl an in the cont ext of th e budget ?

Central or annual plans are essential ly the five y ear plans broken down into five annual installments.

the governm ent achiev es the objectives of the Fiv e-Year Plans. The details of the plan are spelled out in

by th e fina nc e m inister. Bu t t he actu al responsibili ty of al loca tion fu nds j udiciously am ongst m in istr ie

governm ents rests with the Plannin g Commission.

What is gross budget ar y support , or GBS?

The funding of the centra l plan is split almost ev enly between gov ernm ent support (from th e Budget)

budgeta ry resour ces of pu bli c en ter prises. T he gov ernm ent s support to the cen tr al pla n i s ca lled the G

the GBS. In the r ecent y ears the GBS has been slightly more than 50% of the total central plan.

How is the GBS figure arrived at?

The administra tiv e ministries responsible for v arious dev elopment schemes present their dema nds bef

The planning commission ag gregat es and vets these dema nd. It then puts forwa rd a consolidated dema

ministry for the budgetary support it needs from the cental excequer. The amount approv ed by th e fin

than t hat dema nded by the planning comm ission because of the mult iple objectives the North Block ha


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ma king allocations. The planning comm ission in turn a djusts the allocated am ount am ong va rious dem

How do GBS, central plan a nd plan ex penditu re differ?

Central plan includes the GBS and the spending of the public enterprises that do not figure in the budg

gov ernm ents spending on the centr al plan is lim ited to GBS. But the centr e also prov ides funds to state

their r espective plans. This contr ibution, together with the GBS, ma kes up the total plan spending of th

This is about 30% of the total g overnm ent expenditure.

ET in the Classroom: Self-help group

What is a self-hel p group (SHG)?

SHG prima rily comprises mem bers with homogenous social and economic backgrounds. It is a v olunta

of women, ru ral labourers, small far mers an d micr o-enterprises . The concept is akin to the concept of

by th e m em ber s, for th e m em ber s an d of th e m em ber s. The nu m ber of mem ber s could be as less as fiv e

They save an d contribu te to a comm on fund which is used to lend to the m embers. Since they know ea

collateral from each other.

What ar e the goals of an SHG?

An SHG i s seen a s an instr um ent for a ch iev in g a v ar iet y of goals, includin g empower ing women. Dat a

pioneered the concept, shows that 9 0% of members in th e SHG are w omen and m ost of them do not ha v

developing leadership abilities am ong the poor, incr easing school enrolments, improving nu trition and

generally started by non-profit organisations, such as an NGO w ith br oad ant i-pov erty agendas. It is a

micro-lending by comm ercial banks, particularly government-run banks.

What ar e the a dvan tages of finan cing thr ough an SHG?

A poor in div idu al benefit s enor m ously being par t of a n SHG . Raising fin an ce t hr oug h SHGs r educes t r

lenders and borrowers. Lenders hav e to handle only a single SHG account instead of a lar ge nu mber of

accounts, borrowers as part of an SHG cut down expenses on t rav el to the bran ch to get t he loan sanctio

What ar e the differen t wa ys in which ba nks fu nd SHGs?

Banks deal directly with individu al SHGs . They provide financial a ssistance to each SHG for lending t

Al ter na tiv ely , ban ks pr ov ide loan s to SHGs with recom m endat ion from NGOs. Her e the SHGs a re form

agencies, which raise funds from banks. In this, NGOs would organise the poor into SHGs , undertake t

inputs and m arketing and assist in m aintenan ce of accounts.

..

ET in the Classroom: Draft Red Herring Prospectus

A company making a public issue of securities has to file a Draft Red Herring Prospectus with Sebi through

prior to filing a prospectus with the Registrar of Companies.

What is Draft Red Her ring Prospectus?

A c ompan y mak ing a public issue of securit ies h as t o file a Dr aft Red Herring Prospect us ( DRHP) with c

Securities and Exchan ge Board of India, or Sebi, thr ough an eligible mercha nt banker prior to the filin

Registr ar of Com panies (RoCs).


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The issuer company engages a Sebiregistered mercha nt banker to prepare the offer docum ent. Besides

the offer docum ent, the mer chant ba nker is also responsible for ensuring legal compliance. The mercha

issue in reachin g the prospective inv estors by ma rketing th e sam e.

Where i s DRHP av ai la ble?

The offer docum ents of public issues are ava ilable on the websites of merchan t bankers and stock excha

the Sebi website under Offer Docum ents section along w ith it s stat us of processing . The compan y is als

announcem ent about the filing in Eng lish, Hindi and in regional lang uag e newspapers. In case, inv est

incomplete informa tion in the offer document, they m ay send their complaint to the merchant banker

What does Sebi do wit h t he DRHP?

The Indian regulatory framework is based on a disclosure regime. Sebi reviews the draft offer documen

wi th a v iew to en sur e th at adequ at e disc losur es ar e m ade by th e issu er com pany /m erch an t ban ker s in

investors to make an informed inv estment decision in th e issue. It must be clearly understood that Seb

the offer document.

Also, Sebi does not r ecom mend th e sha res or g ua ran tee th e accu racy or a dequ acy of DRHP. Sebi s obser

document are forwar ded to the merchant banker, who incorporates the necessary changes and files the

Sebi, Registrar of Companies (ROC) and stock exchang es. After r eviewin g the DRHP, the mar ket regula

wh ich n eed t o be im plem ent ed by th e com pany . On ce t he observ at ions ar e im plem ented, it gets fina l abecom es RHP (Red Her ring Prospect us).

How is DRHP useful to investors?

DRHP prov ides all the necessary informa tion an inv estor ought to know about the company in order to

It contains details about th e company , its promoters, the project, financia l details, objects of ra ising the

risks involved with inv esting, use of proceeds from the offering, a mong others. However, the document

about th e price or size of the offering .

..

ET in the Classroom: Reserve Bank oversight function

What is t he oversight fun cti on of RBI?

The Bank for International Settlements defines ov ersight as central bank function , whereby the obje

are promoted by m onitoring existing and plann ed sy stems, assessing t hem a gainst th ese objectives and

change .

The three key ways in which oversight activ ity is carried out are through (i) monitoring exist ing and

assessment and (iii) inducing ch ange. In India, the Pay ment a nd Settlement Sy stems Act, 2007 , and t

Sy stems Regulations, 2 008, provide the necessary statutory backing to the Reserv e Bank of India for u

function. The central bank manages the various settlements system, including cash, through currenc

besides v ar ious elec tr onic clear in g ser v ices.

What is El ectr onic Clear ing Service?

It was among the early steps initiated towards moving to a paperless settlement sy stem by the Reserv e

introduced the ECS (Credit) scheme during the 19 90s to handle paym ent requirements like salary , in

corporates and other institutions .

The ECS (Debit) Scheme was introduced by RBI to provide a faster m ethod of effecting periodic and rep

companies. ECS (Debit) facilitates consumers/subscribers of utility companies to make routine and rep

man dating ban k bran ches to debit their accounts and pass on the money to the compan ies.


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What ar e the v ar ious set tlem ent syst ems & agencies?

National Electronic Funds Transfer (NEFT) System: In November 2005, a more secure sy stem was int

to-one funds tran sfer requir ements of individua ls/corporates . Av ailable across a longer tim e window,

batch set tlem ents a t h our ly inter v al s, t hu s ena bling a n ear real -tim e tr an sfer of funds.

Real-Time Gross Settlement (RTGS): It is a funds tran sfer system wh ere transfer of money ta kes place f

real tim e and on a gr oss basis . Settlement in r eal time m eans paym ent tran saction is not subjec

Gross settlement mean s the tr ansaction is settled on one-to-one basis without bunchin g or netting wi

Once processed, paym ents are final and irrev ocable. This was introduced in 2004 and settles all inter-b

tran sactions above Rs 2 lakh.

Clearing Corporation of India (CCIL): The Corporation, set up in April 2001, play s the Central Counter

securities, the US dollar and the rupee forex exchange (both spot and forward segments) and Collaterise

Obligation (CBLO) markets.

CCIL plays the role of a central counterparty whereby, the contract between a buy er and a seller gets r

between CCIL and each of the tw o par ties. This process is known a s Nov ation . Th roug h nov ation, t h

between th e bu y er an d seller is el im inat ed w ith CCIL subsum ing al l coun ter part y an d cr edit risks.

What does the Nat ional Paymen ts Corporation of Indi a do?

The Reserv e Bank set up th e National Pay ments Corporat ion of India (NPCI), w hich became funct ional

um brella organisation for operating v arious Retail Pay ment Sy stems (RPS) in India. NPCI has taken ov

(NFS) from the Institu te for Dev elopmen t and Researc h in Bank ing Tech nology (IDRBT). The Nat ional

inter-bank network man aged by Eur onet India.

What is an EEFC Account?

Exchange Earners Foreign Currency (EEFC) account is foreign currency-denominated account maint

wi th foreign exc ha ng es. The Reserv e Bank of India in tr oduced thi s schem e in 1 99 2 to en able ex port ers

their foreign exchange receipts in banks without converting it into the local currency . Any person resi

inward remittances in foreign currency or a company with foreign currency earnings can open EEFC

any interest from the deposits and it is a non-interest bearing scheme.

What is t he m inim um balance for EEFC?

This is ty pically a zero-balance account like norm al current accounts. In other words, this means no ac

maintain a n av erage or m inimum balance in the EEFC account.

How does EEFC help ex porter s or in divi dual s earn foreign curren cy receipts?

As t he ac count is m ai nt ai ned in forei gn cu rrenc y , n o depositors ar e pr otect ed fr om exch an ge rat e flu ct

Is th ere any prescribed lim it of deposits in EEFC?

There is no such limit. One can credit his or her entire foreign exchan ge earnings into this account , sub

credits.

Can one take a foreign currency loan and put it in EEFC?

Remitta nces receiv ed on account of foreign cu rrency loan or inv estment received from abroad cant be

What ar e the perm issible credits in thi s account ?

a)Inward remittances receiv ed by an individual


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b)pay ments receiv ed by a 1 00% export-oriented unit, export processing zone, softwar e technology par

technology park

c)pay ments receiv ed in foreign exch ange by a un it in domestic tar iff area for supply of goods to a un it

d)pay ment r eceived by an exporter for an account m aintain ed with an au thorised dealer for the pur p

an a djustm ent of va lue of goods imported aga inst v alu e of goods exported

e)adv ance r emittan ce received by an exporter towar ds export of goods or serv ices

Can one withdr aw in r upees from EEFC account ?

There is no such restriction on withdrawal in rupees of funds held in an EEFC account. However, the am

cant be converted into foreign cu rrency again and re-credited to the account.

Can one make a payment directly from EEFC account?

One can make a direct pay ment from EEFC outside India as per the provisions laid down in FEMA regu

units can also pay in foreign exchange for purchasing goods as per the country s foreign trade policy. A

use the account for pay ing a irfare or hotel expenditure.

..

ET In the Classroom: Making a Case of Financial Inclus

What is a busi ness corresponden t m odel?

In 2006, th e Reserv e Bank of India allowed banks to use non-bank interm ediaries as business corr espon

facilitators, to extend banking a nd other financial serv ices to areas where the banks did not hav e a bric

present. The objective behind it was to aid the process of financia l inclusion and consequently take ban

the country and make them bankable.

What do th ese corr espondent s do?

The business corr espondent is nothing but a bank-in-person, who is auth orised to collect deposits and ex

bank of smal l-ticket sizes. He also recov ers principal inter est of sm al l v alue deposit s, sa le of m icro insu r

pension products, receipt and deliv ery of small v alue rem ittances/other pay ment in strum ents.

Who is eligible t o be a ba nki ng correspondent ?

RBI has allowed a host of entities to act a s business correspondents (BCs) of banks. Th ese inclu de NGOs/

Societies/Trust Acts; societies registered under Mutually -Aided Co-operativ e Societies Acts, or the Co-op

States; Section 2 5 companies, which are not-for-profit companies; companies in which NBFCs, banks, t

corporate entities or t heir holding companies do not hav e equity holdings in excess of 10%; post offices a

ex-serv icemen and retir ed gov ernm ent employ ees.

How is a bu siness facilit at or different from a bu siness correspondent?

Ver y often th e term bu siness corresponden ts i s used in ter ch an geably wit h t he ter m bu siness fac il itat

clear distinction between the two. BFs are allowed to undertake only facilitation serv ices like identifica

and prelimina ry processing of loan applications, including v erification of primar y information, creatin

and other products, processing an d subm ission of applications to banks and promoting and nur tur ing S

recovery and debt counselling. Howev er, facilita tion of these serv ices does not include conduct of banki

the exclu sive fun ction of business correspondents.

..


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ET in the Classroom: Take-out financing

What is t ake-out financin g?

Take-out financing is a m ethod of providing finance for longer duration projects of about 1 5 y ears by b

term loans for 5-7 y ears. It is giv en that the loan will be taken out of books of the financing bank w ithin

institution, thus preventin g any possible asset-liability m ismatch. A fter taking out the loan from bank

offload them to another bank or keep it.

Though internationally this kind of lending has been in existence for m any y ears, it cam e to India only

tenure loans were prima rily introduced to incentiv ise banks to lend to the infrastructu re sector as ban

exposure to long-term loans, and also because they did not hav e adequate resources of similar tenure to

assets.

What does the Reserve Ban k ru le say?

Banks/FIs are free to finance technically feasible, financia lly -viable and bankable projects undertaken

private sector u ndertakings, provided the amount sanctioned is within the ov erall ceiling of the prude

prescribed by RBI for infrastructure financing. They should also hav e the requisite expertise for a pprai

financial viability and bankability of projects.

Which insti tu tions, besides banks, are engaged in thi s practice?

The gov ernment promoted Infrastructur e Development Finance Corporation, by setting aside a corpus

a primar y mandate to promote infrastructure funding. Later, India Infrastructure Finance Company

refinance infrastru ctur e loans of comm ercial banks.

What ar e the problems with take-out financin g?

Though take-out financing is a permissible practice in India, the concept has not taken off in a big way

wa y addresses th e asset-liabil ity issue, r egu la tors stil l w an t ban ks to set a side h ig her capit al for t hei r e

also war y of taking risks such a s construction risks, which m ay delay the project as well as increase its

LIQUID COAL

Did you know coal can be liqu id fuel too?

Coal liquifica tion is seen one of the options to cope up with hig h cr ude oil prices. While av aila bility of co

this process in the energy -scarce scenario, envir onmental concerns and high cost has so far lim ited the

fuel to an insignificant position except in the case of South Africa.

Use of coal for power g enera tion is considered a better option in India as th ere is no consensus am ong po

basic i ssues r ela ted to con v ersion of coal into l iqu id fu el.

Can coal be conver ted int o liqui d fuel?

Yes. Coal can be conv erted in to a sy nt het ic liquid fu el a nd th e pr ocess is kn own as coal-to-liqu id (CTL) w

two different methods to conv ert coal in to liquid fuelsdirect an d indirect liquefaction. Under the direc

to crushed coal a nd liquid is created wit h th e presence of cataly sts.

However, further r efining of this liquid is needed to achieve liquid fuel with high-grade fuel characteri

liquefaction process first gasifies coal using oxyg en, steam heating them to very high tem peratur es. T

and mixed with water.

The liquid fuel that is created can be refined to produce diesel, naphtha, jet fuel, cooking gas and lubric

v ery in ten siv e pr ocess th at requ ir es la rge am oun ts of coa l, wat er an d energy .


11/13



Is CTL commer cially via ble?

Skyrocketing price of oil and concern ov er depleting crude reserves are triggers generating interest in

are in operation in South Africarun by Sasol, the company that pioneered CTL.

Liquid fuel generated from coal caters to 30% of the needs of South Africa. Sasol has patented Fischer T

indirect liquefaction, w hich conv erts sy nthetic ga s, extracted from coal, into oil.

More than 3 0 CTL projects across the world are being studied for feasibility, depending on the quality o

and other local conditions. The initia l inv estment in CTL projects is quite high .

Is India game for CTL?

The govern ment has studied CTL. The Tata Gr oup, in collaboration w ith Sasol, made a presentation on

liquefaction project using Sasols technology to convert hig h-ash Indian coal into liquid fuel with a ca p

day of liquid fuel.

An inter -mi nister ia l g roup ( IMG) exam in ed the proposal. Th e Pla nn in g Comm ission rejected th e idea,

used for electricity generation ra ther th an m aking liquid fuels. The IMD discussion also led to a view th

CTL projects should bid for coal blocks, competing wit h other u sers.

Finally , the govern ment offered three blocks of coal in Orissa with cum ulativ e reserv es of about six bill

private play ers. There were 22 applicants including Reliance Group and the Tatas. The eligibility crit

company should have a minimum net worth of $1 billion, besides having a tie-up with the proven tech

The IMG has to decide which companies would be allowed to implement CTL projects. What is CTLs imp

Green lobbies are fighting against CTL tooth and nail, alleging that Sasol has a questionable env ironm

South Africa. They a dvocate higher investment in renewable resources like wind energy and solar ene

CTL.

Liquefy ing larg e coal reserv es will release huge a mounts of carbon dioxide, a g reenhouse gas. Proponen

gas can be captured and stored underground.

The cost of carbon captur e and storage will impact the economics of CTL. Coal liquification requir es vasthis has led to concerns in water-deficient areas.

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abhishekSeptember 6, 2 013 at 2:51 pm

bh ai saa b, aa pne kitn i zy aa da mehna t k i h ai !

Reply

Vicky..September 1 2, 201 3 at 9:03 am

Sir, Business Standards should be read completely ? Coz i find man y non releva nt th ings.

Reply

INSIGHTSSeptember 12 , 2013 at 11 :05 am
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13/13


No. You dont hav e to read any business newspaper completely. Read its editorials an d opinion pag

too.

Reply

Vicky..September 1 2, 201 3 at 6:07 pm

Sir, I hav e build almost all my basic concepts in economics. Now, only r elyin g on newspapers is sufficneeds to be done ? I will cover th e new india y earbook and economic surv ey w hen itll come next y ear

exam.

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