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Banking Awareness

INDIAN BANKING

The first bank of limited liability managed by Indians was Oudh Commercial Bank founded in 1881. Punjab National Bank was established in 1894 . Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial banks. Banking crisis during 1913 -1917 and failure of 588 banks in various States during the decade ended 1949 underlined the need for regulating and controlling commercial banks. The Banking Companies Act was passed in February1949, which was subsequently amended to read as Banking Regulation Act, 1949.This Act provided the legal framework for regulation of the banking system by RBI. The largest bank - Imperial Bank of India - was taken over by the RBI in 1955 and rechristened as State Bank of India, followed by inclusion of its 7 Associate Banks in1959. At present SBI has five associate banks. With a view to bring commercial banks into the mainstream of economic development with definite social obligations and objectives, the Government issued an ordinance on 19 July 1969 acquiring ownership and control of 14 major banks in the country. Six more commercial banks were nationalised from 15 April 1980.

Meaning of Bank

Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it.

TYPES OF BANKS

There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

  • Central Bank (RBI, in India)
  • Commercial Banks
    • Public Sector Banks
    • Private Sector Banks
    • Foreign Banks
  • Development Banks (IFCI, SFCs)
  • Co-operative Banks
    • Primary Credit Societies
    • Central Co-operative Banks
    • State Co-operative Banks
  • Specialised Banks (EXIM Bank, SIDBI, NABARD)

Central Bank

bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Government"s banker, maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker"s bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency

COMMERCIAL BANKS

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial Banks
  • Public Sector Banks:

    These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Baroda and Dena Bank, etc

  • Private Sectors Banks:

    In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The ICICI Bank, Axis Bank, Federal Bank etc.

  • Foreign Banks:

    These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlay"s Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991. According to a report by RBI there are 47 Foreign Banks branches in India as on March 31, 2013.

Development Banks

Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society has to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set issued by the ReserveBank of India.

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with Providing refinance to lending institutions in rural areas Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development
Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development
Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development
Acts as regulator for cooperative banks and RRBs

Some of the milestones in NABARD's activities are:
District Rural Industries Project (DRIP) has generated employment for 23.34 lakh persons with 10.95 lakh units in 105 districts.
It was setup with an initial capital of Rs. 100 crore, which is in henced to 4,000 crore in 2013 fully subscribed by the Government of India and RBI.


SUBSIDIARIES OF NABARD

Nab cons :

NABARD Consultancy Services (Nabcons) is a wholly owned subsidiary promoted by National Bank for Agriculture and Rural Development (NABARD) and is engaged in providing consultancy in all spheres of agriculture, rural development and allied areas. Nabcons leverages on the core competence of the NABARD in the areas of agricultural and rural development, especially multidisciplinary projects, banking, institutional development, infrastructure, training, etc., internalized for more than two decades. The Company is registered under the Company's Act, 1956, with an authorized capital of Rs 250 million (US $5.75 million) and paid up capital of Rs 50 million (US $1.15 million). In tune with NABARD's mission to bring about rural prosperity, Nabcons has more than just commercial interest in the assignments it undertakes


NABARD Financial Services Limited, [NABFINS]

is a subsidiary of National Bank for Agriculture and Rural Development (NABARD) with equity participation from NABARD, Government of Karnataka, Canara Bank of India, Dhanalakshmi Bank and Federal Bank. It is a non-deposit taking NBFC registered with the Reserve Bank of India and shall operate throughout India. The main objectives of the Company are to provide financial services in two broad areas of agriculture and microfinance. NABFINS provides credit and other facilities for promotion, expansion, commercialization and modernization of agriculture and allied activities. NBFINS shall engage in the business of providing micro finance sections of the society for securing their prosperity in both rural and urban areas.


NABARD

which is the world renowned apex development bank of our country and pioneered the world's largest microfinance movement, while promoting NABFINS has envisaged that NABFINS shall evolve into a model Microfinance Institution to set standards of governance among the MFIs, operate with exemplary levels of transparency and operate at reasonable/ moderate rates of interest.


Agri Business Finance (AP) Limited (ABFL)

was incorporated under Companies Act., 1956 on 17 February 1997. It is a state specific financial institution registered as Non Banking Finance Company. ABFL was promoted with equity participation from National Bank for Agriculture and Rural Development (NABARD), Andhra Bank, Canara Bank, Govt of Andhra Pradesh, Andhra Pradesh, State Cooperative Bank and few Industrial Houses/individuals from the State. It operates in the state of Andhra Pradesh with its registered office at Hyderabad. It is whole owned subsidiary of NABARD. ABFL was incorporated with the objective of providing credit and to offer facilities for promotion, expansion, commercialization and modernization of enterprises engaged in Agriculture and allied activities. The organization is specifically catering to the long-term investment needs of Agriculture and allied activities since its inception from 1997.

BANKERS INSTITUTE OF RURAL DEVELOPMENT (BIRD)

Established in 1983, at Lucknow, is an autonomous institute promoted and funded by NABARD. BIRD was established primarily to cater to the training needs of RRB personnel. The Institute, has, since 1st April 1992, been catering to the training and information needs of rural bankers through its topical training programs/seminars . The Institute's mandate also includes Research and Consultancy in the related areas



FUNCTIONS OF COMMERCIAL BANKS


The functions of commercial banks are of two types.
(A) Primary functions
The primary functions of a commercial bank includes -> Accepting deposits and Granting loans and advances
Accepting deposits

The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow alongwith the interest earned. If the rate of interest is higher, public feels motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.


Grant of loans and advances

The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies according to the purpose and period of loan and also the mode of repayment.


Loans

A loan is granted for a specific time period. Generally commercial banks provide short-term loans. But term loans, i.e., loans for more than a year may also be granted. The borrower may be given the entire amount in lump sum or in instalments. Loans are generally granted against the security of certain assets. A loan is normally repaid in instalments. However, it may also be repaid in lump sum.


Advances

An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day-to-day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.


Types of Advances
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.
  • Cash Credit

    Cash credit is an arrangement whereby the bank allows the borrower to draw amount upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.

  • Overdraft

    Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit may be allowed either on the security of assets, or on personal security, or both.

  • Discounting of Bills

    Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.


(B) Secondary functions

In addition to the primary functions of accepting deposits and lending money, banks perform a number of other functions, which are called secondary functions. These are as follows:

  • Issuing letters of credit, travellers cheque, etc.
  • Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers.
  • Providing customers with facilities of foreign exchange dealings.
  • Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order and demand draft.
  • Standing guarantee on behalf of its customers, for making payment for purchase of goods, machinery, vehicles etc.
  • Collecting and supplying business information.
  • Providing reports on the credit worthiness of customers


NON BANKING FINANCIAL COMPANIES (NBFC)

A Non-Banking Financial Company (NBFC) is a company a) registered under the Companies Act. 1956, b) its principal business is lending, investments in various types of shares/stocks/bonds/debentures/securities, leasing, hire-purchase, insurance business, chit business, and c) its principal business is receiving deposits under any scheme or arrangement in one lump sum or in installments. However, a Non-Banking Financial Company does not include any institution whose principal business is agricultural activity, industrial activity, trading activity or sale/purchase/construction of immovable property. (Section 45 I (c) of the RBI Act, 1934) . One key aspect to be kept in view is that the financial activity of loans/advances as stated in 45 I ( c) , should be for activity other than its own. In the absence of this provision, all companies would have been NBFCs.

NBFCs whose asset size is of Rs.100 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability in our country. The Reserve Bank of India regulates and supervises Non-Banking Financial Companies which are into the business of (i) lending (ii) acquisition of shares, stocks, bonds, etc., or (iii) financial leasing or hire purchase. The Reserve Bank also regulates companies whose principal business is to accept deposits. (Section 45I (c) of the RBI Act, 1934) The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.

SOCIAL BANKING IN INDIA

  • LEAD BANK SCHEME

    To bring about all round development of the rural areas of the country a committee of Mr. Gardgil and Mr. FF Nariman recommended in 1969 that the reponsiblity of fiancial development of different districts of the country may be given to various big banks. Accordingly after consulting the public sector banks operating in the country the Reserve Bank of India assigned different districts to different public sector banks. The bank that was assigned the reponsibility to carry out allround financial development of a district, in co-ordination with the district government authorities became the lead bank for the district. To carry out the development the lead bank cordinates with the district authorities through the District Level Cordination Committee (DLCC) prepares an annual plan and implements the same through the banks operating in the district. It also collects and analyses statistical data of development taking place in the district. While all the lead banks in the country are public sector banks, the lead bank of one district in Rajasthan viz. Mewar is ICICI Bank.

  • REGIONAL RURAL BANKS

    The M.Narisaman committee in 1975 after studying the impact of the Lead Bank Scheme recommended the establishment of rural banks in each district that may be dedicated to rural development. The first Gramin Banks started functioning on 2nd October 1975 under an ordinance and subsquently the Regional Rural Banks Act was passed in 1976. The management of Regional Rural banks was with a public sector bank generally the lead bank of the district. The Regional Rural Bank operates within a given geographical area. The Capital for these banks was contributed by the Central Government (50%), the Sponsor Bank (35%) and the State Government (15%). Initially around 186 Gramin Bank established all over India but now in keeping with the government directive to merge the gramin banks there were 57 gramin banks as on November 2013


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FINANCIAL INCLUSION

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the "sine qua non" (an essential condition) of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy. The former United Nations Secretary General Mr. Kofi Annan on December 29th 2003, while addressing Unesco highlighted that 84% of the world population were not financially included. In 2004 a committe headed by Shri. Haroon Rashid Khan studied the functioning of gramin banks and found that 67% of the Indian population were not financially included. This matter was highlighted in the Reserve Bank of India term policy paper of 2005-2006 and banks were asked to take up financial inclusion for the country. The government of India has initiated a movement called Swabhiman for financial inclusion and had targeted all villages with population of 2000 or above by March 2012 and villages with population of 1000 or above by March 2015. As result to the campaign, States or Union territories like Punducherry, Himanchal Pradesh and Kerala have announced 100% financial inclusion in all the districts. RBI"s vision for 2020 is to open nearly 600 million new customers accounts and service them through a variety of channels by leveraging on IT.


The financial institutions have taken the following steps to bring in financial inclusion-
  • Publicity- Wide pulicity of the utility of financial service are being done to apprise the rural foik are the important of banks.
  • Basic Saving Bank Deposit Accounts-These accounts are opened on relaxed KYC norms and need not have any balance in them. These accounts were formerly called No frill accounts but were renominated as basic saving bank deposit account by the RBI in September 2012. The main features of the account are
    • The "Basic Savings Bank Deposit Account" should be considered a normal banking service available to all.
    • This account shall not have the requirement of any minimum balance
    • The services available in the account will include deposit and withdrawal of cash at bank branch as welt as ATMs; receipt/credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by Central/State Government agencies and departments;
    • While there will be no limit on the number of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals; and
    • Facility of ATM card or ATM-cum-Debit Card;
  • Kisan Credit Card-

    The banks are providing credit cards to the farmers having land on basis of the annual produce of their land. They amount avialable in the credit card (appropriately named Kisan Credit Card) can be drawn by the farmer any time as per his needs and has to be repaid after reaping the crop in the next croping season. Interest as applicable to agriculture loan are charged on loans given from Kisan Credit Cards. These cards are normally valid for five years.

  • General Purpose Credit Card

    Small consumption loans are given to landless people through general purpose credit card having limits upto Rs. 15,000 and carrying an interest rate of 4%. This loan can be used by the beneficiaries for opening small bussiness.

  • Bussiness Correspondents

    As banks were unable to open branches immediately in all villages they addopted the Bussiness Correspondent model from Jan 2006. In this model persons living near the respective villages who may be educated are used as bank"s commission agents to provide door step banking to the villagers. These persons could be retired employees of banks, post offices, Railways,Armed forces etc. are could even be NGOs or SHGs. They carry with them a hand held computer and through the use of Electronic Smart Card allow withdrawal upto Rs. 10,000 from Saving Bank Accounts or Kisan Credit Cards. They can also open deposit accounts and deposit money in the accounts. The Bussiness Correspondents goes back to his base bank every day updates his computer, submits the relevant accounts

  • Electronic Banking

    To facility financial inclusion banks are also adopting Electronic Banking through the use of biometric Atms and mobile banking.

  • Ultra Small Branches

    In villages serviced by the bussiness correspondent, an officer of the base branch visits the village once in a week and attends to the banking functions that could not be carried out by the bussiness correspondent. He also accepts small loan applications and sanctions them on the spot.


Financial Inclusion Index

On June 25th, 2013 CRISIL, India"s leading credit rating and reasearch company launched an index to measure the status of finacial inclusion in India. The Index-Inclusix is one of its kind tool to measure the extent of inclusion in India right down to each of the 632 districts. CRISIL Inclusix is on scale of 0 to 100 and includes parameters of basic banking services-branch penetration, deposit penetration and credit penetration into one metric. The all India CRISIL Inclusix score is 40%.



Micro finance and Micro Credit

Micro credit is giving a small loan to a person. How ever if the person is trained for the project for which he is taking the loan and financial untilization and then given the loan it is called Micro Finance. Micro Finance = Micro Credit + Financial and Project Literacy



Rural Self Employment Training Institute (RSETI)

These Institutes have been established by the Government of India in almost all districts of the country. These Institutes train the rural youth for agriculture and non-agricultural activities is through residential training of 6 to 10 days. All the expenses of these Institute are brone by the Government of India while it is generally manned by officers of the lead bank. The youth trained by these Institutes are given credit by the banks and this will amount to Micro Finance.



Financial Literacy and Counselling Centre (FLCC)

A working group under Shri. C.P. Swarnkar was constituted on 10th May 2007 to examine the procedures and processes of disbursement of agricultural loans. This group found that rural people were quiet ignorant of the types of agricultural credit facilities available to them. The group recommended the formation of Financial Literacy and Counselling Centre (FLCC) at different rural locations to help the farmers obtain credit facilities easily. These centres are generally manned by retired officers of the banks who are well versed with rural landing.



PRIORITY SECTOR CREDIT

The National Credit Council in July 1968 and the Reserve Bank of India informal study group on statastics relating to advances to priority sector in 1971, recommended that some part of the total credit given by banks should be set a side for priority sector. In terms of the directive of Reserve Bank of India domestic commercial banks, urban cooperative banks and foreign banks with 20 or more branches have to provide 40% of their addjusted net bank credit every year to the priority sector. Out of this 18% have to be set aside to agriculture credit. Foreign banks with less than 20 branches have to provide 32% of their credit to the priority sector.
Description of the Categories under priority sector

  • Agriculture
    • Direct Agriculture:
      Loans to individual farmers [including SHGs or (JLGs),] engaged in Agriculture and Allied Activities. Loans to others [corporates, partnership firms and institutions] for Agriculture and Allied Activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) up to an limit of Rs. 2 crore per borrower (these loans above Rs.2 cr are indirect agriculture loans) for :
      (i) Short-term crop loans. This will include traditional/non-traditional plantations, horticulture and allied activities,
      (ii) Medium & long-term loans for purchase of agricultural ifnple-ments and machinery, loans for irrigation and other developmental activities at farm and development loans for allied activities),
      (iii) Loans for pre-harvest and post-harvest activities viz.spraying, weeding, harvesting, sorting, gracjjng and transporting of their own farm produce.
      (iv) Loans to farmers up to Rs. 50 lakh against pledge / hypothecation of agrl produce (including warehouse receipts) for a period up to 12 months. Such loans to others are indirect agriculture loans,
      (v) Loans to small/marginal farmers for purchase of land for agr.
      (vi) Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral,
      (vii) Export credit for exporting their own farm produce.
    • Indirect agriculture
      1. Loans to corporates, partnership firms and institutions engaged in Agriculture and Allied Activities more than Rs.2 crore Loans upto Rs.5 crore to Producer Companies set up exclusively by only small and marginal farmers for agricultural/allied activities.
      2. Other indirect agriculture loans
      (i) Loans up to Rs.5 crore per borrower to dealers / sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs.
      (ii) Loans for setting up of Agriclinics and Agribusiness Centres.
      (iii) Loans to Custom Service Units to maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and undertake farm work for farmers on contract basis.
      (iv) Loans for construction/running of storage facilities" (warehouse, market yards, godowns and silos), including cold storage units to store agriculture produce/products, irrespective of location. Loan to MSE storage unit will be classified under loans to MSE.
  • Micro and small enterprises include:
    (a) Manufacturing Enterprises (Investment in P&M): Micro max Rs.25 lac. Small Enterprises - Above Rs.25 lac up to Rs. 5 cr.
    (b) Service Sector Enterprises: Micro Enterprises - Max Rs. 10 lakh. Small Enterprises - Above 10 lakh up to Rs. 2 crore.

    (>) Direct Finance
    1. Need based loans to Manufacturing Enterprises and loans up to Rs.5 cr to service enterprises.
    2. Food/agro processing if units satisfy investment criteria.
    3. Export credit to MSE units for export by them.
    4. All loans to Khadi and Village Industries Sector will be classified under sub-target of 60 % for micro enterprises within MSE sector.

    (>>) Indirect Finance -
    (i) Loans to persons assisting decentralised sector in supply of inputs & marketing of outputs of artisans, village cottage industries.
    (ii) Loans to producers in the decentralised sector viz. artisans, village and cottage industries.
  • Education:
    Loans to individuals including vocational courses max Rs.10 lakh for studies in India and Rs. 20 lakh abroad.
  • Micro Credit:
    Provision of credit and other financial services and products of amounts up to Rs.50,000.
  • Housing
    (i) Loans up to Rs. 25 lakh irrespective of location, to individuals for purchase / construction of a dwelling unit per family, excluding loans sanctioned by banks to their own employees,
    (ii) Loans for repairs to damaged dwelling units up to Rs. 2 lakh in rural and semi-urban areas and up to Rs. 5 lakh in urban and metropolitan areas.
    (iii) Loan to a governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of loan component of Rs. 5 lakh per dwelling unit,
    (iv) Loan to a non-governmental agency approved by NHB for refinance for construction / reconstruction of dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of loan component of Rs. 10 lakh per dwelling unit.
  • Others
    1. Loans up to Rs. 50,000 provided directly by banks to individuals;
    2. Loans to distressed persons [other than farmers] max Rs. 50,000 per borrower to prepay their debt to non-institutional lenders. 3. Loans to SHGs / JLGs for agricultural and allied activities. Other loans to SHGs / JLGs up to Rs.
    50,000 to be part of Micro Credit.
    4. Loans sanctioned to State Sponsored Organisations for SC/ST for purchase and supply of inputs to and / or the marketing of the outputs of the beneficiaries of these organisations.


  • INTEREST SUBVENTION SCHEME

    In pursuance of announcement in Budget 2012-13, Govt. of India was to provide interest subvention of 2 % p.a. to Public Sector Banks (PSBs) in case of short-term production credit up to Rs.3 lakh during the year 2012-13. This amount will be calculated on the crop loan amount from the date of disbursement/drawal up to the date of actual repayment or up to the fixed due date, whichever is earlier, subject to a maximum period of one year. The subvention is available on the condition that banks make available at ground level at 7% p.a. rate of interest.

    Additional subsidy: Govt. will also provide additional interest subvention of 3% p.a. to PSBs in respect of those prompt paying farmers who repay their short-term production credit within one year of disbursement/drawal of such loans for a maximum amount of Rs.3 lakh availed of by them during the yeaf from the date of disbursement of the crop loan up to the actual date of repayment or up to the fixed due date, whichever is earlier, subject to a max period of one year from the date of disbursement. The additional subvention will be available only if the effective rate of interest is 4 % p.a. This benefit would not accrue if repayment is after one year of availing the loans. The benefits of interest subvention will also be available to small and marginal farmers having Kisan Credit Card for a further period of up to 6 months post harvest, on the same rate as available to crop loan against negotiable warehouse receipt for keeping their produce in warehouses. Claims in respect of 2% interest subvention and 3% additional interest subvention may be submitted respectively to RBI.



    KHASRA, KHATUNI, KISAN BHAI

    Khasra, Khatuni and Kisan Bhai are documents that establish the ownership and produce of farm land. While Khasra in-corporates the plotwise/seasonwise produce the Khatauni is the discription of plotwise ownership details. The Khasra and Khatuani are now being issued in the form of a consolidated booklet called the Kisan Bhai.



    CROP LOAN

    The crop loan is provided to meet all expenses involved in raising a particular crop including various agronomic practices.
    Eligibility:-Farmers cultivating owned/Registered leased lands hare croppers.
    Quantum of loan:- As per the scale of finance fixed by the Technical Committee of each district. [Depending on merits of each case, branches may sanction crop Loans 35% more than the scale of finance fixed by district technical committee. In other cases where scale of finance is not specified, the branch - will work out the credit requirements of the farmer. Where loan limit is fixed based on scale of finance approved by Technical Committee, irrespective of loan amount - Nil For others: [where scale of finance is not approved] Up to Rs. 1,00,000/— Nil

    Rate of Interest:-Above Rs. 1,00,000/ 10% to 15%

    Repayment:- Repayment period will be less than one year for all crops except in the case oi long duration crops such as Sugarcane [Pineapple, Banana etc where if will be 12-18 months.

    Security:- Up to Rs, 1,00,000/- DPN. Hypothecation of assets created and crops. Over Rs. 1,00,000."" DPN, Hypothecation of assets created and crops, mongage of land &/or third party guarantee.

    Insurance:- All eligible crops will be covered iiiic"er National Agriculture Insurance Scheme/ Rashtriya Krishi Bima Yojana



    RBI & MONETARY POLICY

    The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.


    MAIN FUNCTIONS
    Monetary Authority
    Formulates, implements and monitors the monetary policy.
    Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
    REGULATOR AND SUPERVISOR OF THE FINANCIAL SYSTEM
    Prescribes broad parameters of banking operations within which the country"s banking and financial system functions.
    Objective: maintain public confidence in the system, protect depositors" interest and provide costeffective banking services to the public.
    MANAGER OF FOREIGN EXCHANGE
    Manages the foreign exchange in accordance with the provision of Foreign Exchange Management Act, 1999.
    Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
    ISSUER OF CURRENCY
    Issues and exchanges or destroys currency and coins not fit for circulation.
    Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
    Developmental role
    Performs a wide range of promotional functions to support national objectives
    Related Functions
    Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
    Banker to banks: maintains banking accounts of all scheduled banks.
    Monetary policy
    Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.
    The goal: achieving specific economic objectives, such as low and stable inflation and promoting growth.
    The main objectives of Monetary Policy in India are:
    Maintaining price stability
    Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth
    Financial stability


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    DIRECT INSTRUMENTS


    Cash Reserve Ratio (CRR)
    The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank.
    Statutory Liquidity Ratio (SLR)

    Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It is the amount which a bank has to maintain in the form of cash, gold or approved securities balance in current account with other commercial bank. The quantum is specified as some percentage of the total demand and time liabilities of a bank. This percentage is fixed by the Reserve Bank of India. Presently the SLR is 23%.

    The 23% is the minimum SLR (the statutory requirements to park their money in government bonds)limit the RBI can fix at present. The move comes ahead of the credit review by the Apex Bank, slated for January 31st. The objectives of SLR are 1) to restrict the expansion of bank credit 2) to augment the investment of the banks in Government securities and 3) to ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in india Indian banks' holdings of government securities (G-Sec) are now close to the statutory minimum banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06.

    While the recent credit boom is a key driver of the decline in banks' portfolios of G-Sec, other factors have played an important role recently. These include (i) interest rate increases; and (ii) changes in the prudential regulation of banks' investments in G-Sec. Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks' income from trading in G-Sec.


    Refinance Facilities
    Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

    INDIRECT INSTRUMENTS


    Liquidity Adjustment Facility (LAF)

    Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral.


    Open Market Operations (OMO)

    Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.


    Market Stabilisation Scheme (MSS)

    This instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short-dated government securities and treasury bills. The mobilised cash is held in a separate government account with the Reserve Bank.


    Repo/Reverse Repo Rate

    These rates under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in other segments of the financial market and the real economy.


    Term Repo’s under Liquidity Adjustment Facility

    On Oct 08, 2013, RBI decided to conduct auctions for Term Repos of 7-day and 14-day tenor, for a notified amount, through variable rate auction mechanism. The details are as under:


    • Term Repo under the Liquidity Adjustment Facility (LAF) for 14 days and 7 days tenors will be introduced for banks (scheduled commercial banks other than RRBs) in addition to the existing daily LAF (repo and reverse repo) and MSF.
    • Term repo auctions will be conducted on CBS (E-KUBER) platform through electronic bidding as is done in the case of OMO auctions.
    • The total amount of liquidity injected through term repos would be limited to 0.50% of NDTL of the banking system
    • The 14 day term repo would be conducted every reporting Friday and the 7 day term repo would be conducted on every non-reporting Friday
    • In case the notified amount for the 14-day term repo is not fully subscribed, a 7-day term repo would be conducted on the following Friday for the remaining un-subscribed amount. In case of full subscription in 14-day term repo, there will be no 7 day term repo auction on following Friday
    • Banks would be required to place their bids with the term repo rate that they are willing to pay to RBI, for the tenor of the repo expressed in percentage terms up to two decimal places.
    • Once the bidding time is over, all the bids would be arranged in descending order of the term repo rates quoted and the cut-off rate would be arrived at the rate corresponding to the notified amount of the auction. Successful bidders would be those, who have placed their bids at or above the cut-off rate.
    • No bids would be accepted at or below prevailing Repo Rate under LAF
    • On the day prior to the auction, RBI will announce the amount to be auctioned under term repo along with its tenor. The minimum bid amount for the auction would be Rs.1 cr and multiples thereof
    • The reversal of term repo would take place at the "start of day" on the day of completion of the term.
    • The eligible collateral for term repo will remain the same as daily LAF repo and MSF i.e. for Central Government Securities on 10% discount and State Government Securities 20% discount.
    • All other terms and conditions as applicable to LAF operations will also be made applicable to term repo, mutatis mutandis. These conditions will, however, be subject to review on a periodic basis.

    BANK RATE

    It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.



    National Electronic Funds Transfer (NEFT)

    National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme.
    For being part of the NEFT funds transfer network, a bank branch has to be NEFT- enabled. Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. Such customers have to furnish full details including complete address, telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without having a bank account. Individuals, firms or corporates maintaining accounts with a bank branch can receive funds through the NEFT system. It is, therefore, necessary for the beneficiary to have an account with the NEFT enabled destination bank branch in the country.
    The NEFT system also facilitates one-way cross-border transfer of funds from India to Nepal. This is known as the Indo-Nepal Remittance Facility Scheme. A remitter can transfer funds from any of the NEFT-enabled branches to Nepal, irrespective of whether the beneficiary in Nepal maintains an account with a bank branch in Nepal or not.
    There is no limit - either minimum or maximum - on the amount of funds that could be transferred using NEFT. However, maximum amount per transaction is limited to Rs.50,000/- for cash-based remittances and remittances to Nepal.
    There is no restriction of centres or of any geographical area within the country. The NEFT system takes advantage of the core banking system in banks. Accordingly, the settlement of funds between originating and receiving banks takes places centrally at Mumbai, whereas the branches participating in NEFT can be located anywhere across the length and breadth of the country. Presently, NEFT operates in hourly batches - there are twelve settlements from 8 am to 7 pm on week days (Monday through Friday) and six settlements from 8 am to 1 pm on Saturdays.



    REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM

    The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time.'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. RBI has operationalized a new ISO 20022 complaint RTGS system october 19-2-2013.
    The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is Rs.2 lakh. There is no upper ceiling for RTGS transactions. Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within two hours of receiving the funds transfer message.
    The remitting bank receives a message from the Reserve Bank that money has been credited to the receiving bank. Based on this the remitting bank can advise the remitting customer that money has been delivered to the receiving bank.
    It is expected that the receiving bank will credit the account of the beneficiary instantly. If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account is reversed.
    The RTGS service window for customer's transactions is available from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 13.30 hours on Saturdays for settlement at the RBI end. However, the timings that the banks follow may vary depending on the customer timings of the bank branches.
    With a view to rationalize the service charges levied by banks for offering funds transfer through RTGS system, a broad framework has been mandated as under:

    • Inward Transactions:Free, no charge to be levied.
    • Outward Transactions: Rs. 2 lakh to Rs. 5 lakh - not exceeding Rs. 30 per transaction
      Above Rs. 5 lakh - not exceeding Rs. 55 per transaction



    DeMat Account

    A DeMat account is one that allows you to buy, sell as well as transact without the need of any paperwork. DeMat accounts are very safe, convenient and secure.
    What is a DeMat Account?
    DeMat is nothing but a dematerialized account. If one has to save money or make cheque payments, then he/she needs to open a bank account. Similarly, one needs to open a DeMat account if he/she wants to buy or sell stocks. Thus, DeMat account is similar to a bank account wherein the actual money is being replaced by shares. In order to open a DeMat account, one needs to approach the Depository Participants [DPs].
    In India, a DeMat account is a type of banking account that dematerializes paper-based physical stock shares. The DeMat account is used to avoid holding of physical shares: the shares are bought as well as sold through a stock broker. In this case, the advantage is that one does not need any physical evidence for possessing these shares. All the things are taken care of by the DPs. This account is very popular in India. Physically only 500 shares can be traded as per the provision given by SEBI. From April 2006, it has become mandatory for any person holding a DeMat account to possess a Permanent Account Number (PAN).


    MARGINAL STANDING FACILITY - SCHEME

    As announced in the Monetary Policy for the year 2011-12, a new Marginal Standing Facility (MSF) is being introduced with effect from May 9, 2011.
    The Scheme will be operationalized on the lines of the existing Liquidity Adjustment Facility - Repo Scheme (LAF - Repo). The salient features of the Scheme are as under:
    This facility is effective from May 9, 2011.
    Eligibility:
    All Scheduled Commercial Banks having Current Account and SGL Account with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.
    Tenor and Amount:
    Under the facility, the eligible entities can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. But for the intervening holidays, the MSF facility will be for one day except on Fridays when the facility will be for three days or more, maturing on the following working day. In the event, the banks' SLR holdings fall below the statutory requirement up to one per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.
    Timing:
    The Facility will be available on all working days in Mumbai, excluding Saturdays between 3.30 P.M. and 4.30 P.M.
    Rate of Interest:
    The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time.
    Discretion to Reserve Bank:
    The Reserve Bank will reserve the right to accept or reject partially or fully, the request for funds under this facility.
    Mechanics of Operations:

    The requests will be submitted electronically in the Negotiated Dealing System (NDS). Eligible members facing genuine system problem on any specific day, may submit physical requests in sealed cover in the box provided in the Mumbai Office, Reserve Bank of India, to the Manager, Reserve Bank of India, Securities Section, Public Accounts Department (PAD), Mumbai Office by 4.30 P.M.
    The NDS provides for submission of single or multiple applications by the member. However, as far as possible only one request should be submitted by an applicant.
    The MSF will be conducted as "Hold-in-Custody" repo, similar to LAF - Repo.
    On acceptance of MSF requests, the applicant's RC SGL Account will be debited by the required quantum of securities and credited to Bank's RC SGL Account. Accordingly, the applicant's current account will be credited with the MSF application amount. The transactions will be reversed in the second leg. In case the second leg falls on a holiday, the reversal date will be the next working day.
    The MSF transactions between Reserve Bank and counter parties which would involve operation of the RC SGL Account would not require separate SGL forms.
    Pricing of all securities including Treasury Bills will be at face value for MSF operations by Reserve Bank. Accrued interest as on the date of transaction will be ignored for the purpose of pricing of securities.
    Minimum Request Size
    Requests will be received for a minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter.
    Eligible Securities
    MSF will be undertaken in all SLR-eligible transferable Government of India (GoI) dated Securities/Treasury Bills and State Development Loans (SDL).
    Margin Requirement
    A margin of five per cent will be applied in respect of GoI dated securities and Treasury Bills. In respect of SDLs, a margin of 10 per cent will be applied. Thus, the amount of securities offered on acceptance of a request for Rs.100 will be Rs.105 (face value) of GoI dated securities and Treasury Bills or Rs.110 (face value) of SDLs.
    Settlement of Transactions
    The settlement of all applications received under the MSF Scheme will take place on the same day after the closure of the window for acceptance of applications.
    SLR and Securities held in Repo SGL Account
    The extant instructions issued by the Department of Banking Operations and Development (DBOD) of the Reserve Bank will apply on the securities offered by scheduled commercial banks for MSF operations.



    BASEL COMMITTEE

    The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. The Committee"s Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.


    NEED FOR SUCH NORMS

    The first accord by the name .Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel II Norms. Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the Reserve Bank of India to implement it from 1 April, 2009.

    Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with global standards and make the banking system in India more reliable, transparent and safe. These Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing cross-border economic & financial transactions.


    FEATURES OF BASEL II NORMS

    Basel II Norms are considered as the reformed & refined form of Basel I Accord. The Basel II Norms primarily stress on 3 factors, viz. Capital Adequacy, Supervisory Review and Market discipline. The Basel Committee calls these factors as the Three Pillars to manage risks.


    Pillar I:
    Capital Adequacy Requirements
    Under the Basel II Norms, banks should maintain a minimum capital adequacy requirement of 8% of risk assets. For India, the Reserve Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. This requirement is popularly called as Capital Adequacy Ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR).
    Pillar II:
    Supervisory Review
    Banks majorly encounter with 3 Risks, viz. Credit, Operational & Market Risks. Basel II Norms under this Pillar wants to ensure that not only banks have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles:
    Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels.
    Supervisors should review and evaluate bank"s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios.
    Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. 19
    Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored.
    Pillar III:
    Market Discipline:
    Market discipline imposes banks to conduct their banking business in a safe, sound and effective manner. Mandatory disclosure requirements on capital, risk exposure (semiannually or more frequently, if appropriate) are required to be made so that market participants can assess a bank"s capital adequacy. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be also published.
    BASEL III The Reserve Bank released, guidelines outlining proposed implementation of Basel III capital regulation in India. These guidelines are in response to the comprehensive reform package entitled "Basel III: A global regulatory framework for more resilient banks and banking systems" of the Basel Committee on Banking Supervision (BCBS) issued in December 2010. The major highlights of the draft guidelines are: Minimum Capital Requirements

    Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs);
    Tier 1 capital must be at least 7% of RWAs; and
    Total capital must be at least 9% of RWAs. Capital Conservation Buffer
    The capital conservation buffer in the form of Common Equity of 2.5% of RWAs. A such minimum Capital Adequacy ratio for banks will be 11.5% after full application of the capital conservation buffer by 31 March 2018.
    Transitional Arrangements
    It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2018.
    Capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2018.
    The implementation schedule indicated above will be finalized taking into account the feedback received on these guidelines.
    Instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022. Enhancing Risk Coverage
    For OTC derivatives, in addition to the capital charge for counterparty default risk under Current Exposure Method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.
    Leverage Ratio
    The parallel run for the leverage ratio will be from January 1, 2013 to January 1, 2018, during which banks would be expected to strive to operate at a minimum Tier 1 leverage ratio of 5%. The leverage ratio requirement will be finalized taking into account the final proposal of the Basel Committee. KNOW YOUR CUSTOMER

    The Reserve Bank of India (RBI) has advised banks to follow "KYC guidelines", wherein certain personal information of the account-opening prospect or the customer is obtained. The objective of doing so is to enable the Bank to have positive identification of its customers. This is also in the interest of customers to safeguard their hard earned money. The KYC guidelines of RBI mandate banks to collect three proofs from their customers. They are


    Photograph
    Proof of identity
    Proof of address
    What is KYC?
    Know Your Customer - KYC enables banks to know/ understand their customers and their financial dealings to be able to serve them better Who is a customer of the Bank? 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 reputation or other risks to the Bank, say, a wire transfer or issue of a high value demand draft as a single transaction

    CAMEL RATING OF BANKS

    CAMEL model of rating was first developed in the 1970s by the 3 federal banking supervisors of the U.S (the Federal Reserve, the FDIC and the OCC) as part of the Regulators" "Uniform Financial Institutions Rating System", to provide a convenient summary of bank condition at the tirfie of its on-site examination. The banks were judged on 5 different components under the acronym C-A-M-E-L: Capital adequacy, Asset quality, Management, Earnings and Liquidity. The banks received a score of "1" through "5" for each component of CAMEL and a final CAMEL rating representing the composite total of the component CAMEL scores as a measure of the bank"s overall condition. The system of CAMEL was revised in 1996, when agencies added an additional parameter "S" for assessing "sensitivity to market risk", thus making it "CAMELS" that is in vogue today.


    In india the Padhmanabhan Committee (1996) recommended the application of CAMEL RATING for compliance of norms by Indian Banks. Thus CAMELS means
    C- Capital Adequacy
    A- Asset Quality
    M- Management Quality
    E- Earnings
    L- Liquidity
    S- Sensivity to Market Risk

    RBI plans to change system in order to make the process more forward-looking. Indian financial sector would be evaluated under a dynamic risk-based mechanism, an aspect the present CAMELS rating system lacked. RBI proposes to replace CAMELS with INROADS (Indian Risk-Oriented and Dynamic Rating System) from the next round of annual financial inspection.



    MONEY

    Money is a thing that is usually accepted as payment for goods and services as well as for the repayment of debts.


    Types of Money
    Commodity Money -

    Commodity money value is derived from the commodity out of which it is made. The commodity itself represents money and the money is the commodity. For instance, commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, rice, large stones, etc.


    Representative Money -

    Representative Money includes token coins, or any other physical tokens like certificates, that can be reliably exchanged for a fixed amount/quantity of a commodity like gold or silver.


    Fiat Money -

    Fiat money, also known as fiat currency is the money whose value is not derived from any intrinsic value or any guarantee that it can be converted into valuable commodity (like gold). Instead, it derives value only based on government order (fiat).


    Commercial Bank Money -

    Commercial bank money or the demand deposits are claims against financial institutions which can be used for purchasing goods and services.



    Narrow and Broad Money

    Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point of time is called money supply. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4. They are defined as follows -


    M1 = CU + DD
    M2 = M1 + Savings deposits with Post Office savings banks
    M3 = M1 + Net time deposits of commercial banks
    M4 = M3 + Total deposits with Post Office savings organisations

    (excluding National Savings Certificates)
    where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks. The word "net" implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.

    M1 and M2 are known as narrow money. M3 and M4 are known as broad money.These gradations are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.

    ANTI MONEY LAUNDERING

    • Prevention of Money Laundering Act, 2002

      Prevention of Money Laundering Act in Indian Law was passed in 2002, to prevent moneylaundering and to provide for confiscation of property derived from money-laundering. The main objective of this act are to prevent money-laundering as well as to provide for confiscation of property either derived from or involved in, money-laundering.


    • Salient Features
    • Punishment for Money-laundering : The act prescribes that any person found guilty of moneylaundering shall be punishable with rigorous imprisonment from three years to seven years. He could also be liable to fine of upto Rs. 5 lakh.
    • Powers of Attachment of Tainted : Property Appropriate authorities, appointed by the Government of India, can provisionally attach property believed to be "proceeds of crime" for 90 days. Such an order is required to be confirmed by an independent adjudicating authority.
    • Adjudicating Authority : It is the authority appointed by the Central Government. It decides whether any of the property attached or seized is involved in money-laundering.
    • Appellate Tribunal : It is the body appointed by Government of India. It has given the power to hear appeals against the orders of the adjudicating authority and any other authority under the act. Orders of the tribunal can be appealed in appropriate High Court (for that jurisdiction) and finally to the Supreme Court.
    • Special Courts : The trial for the offences mentioned in the act are conducted by a special court, also called "PMLA Court". The Central Government (in consultation with the Chief Justice of the High Court), designates a Session Court as Special Court Any appeal against order passed by PMLA court can directly be filed in the High Court (for that jurisdiction).
    • Burden of Proof : A person, who is accused of having committed the offence of money-laundering, has to prove that alleged proceeds of crime are in fact lawful property.

    Money laundering occurs in three stages
    Placement: refers to the initial point of entry for funds derived from any criminal activities.
    Layering: refers to the creation of a complex network of transactions which attempts to obscure the link between the initial entry point and the end of the laundry cycle
    Integration: refers to the return of funds to the legitimate economy for later extraction.

    SWIFT

    The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions. SWIFT also markets software and services to financial institutions, much of it for use on the SWIFT Net Network, and ISO 9362 bank identifier codes (BICs) are popularly known as "SWIFT codes".

    The majority of international interbank messages use the SWIFT network. As of September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day. SWIFT transports financial messages in a highly secure way, but does not hold accounts for its members and does not perform any form of clearing or settlement.

    SWIFT does not facilitate funds transfer, rather, it sends payment orders, which must be settled via correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

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