INDEX Topic 1 Introduction 2 Market Forces 3 Monetary policy Reserve bank of India 4 Money Supply Micro finance 5 Financial Inclusion 6 Capital Market SEBI 7 Inflation 8 Fiscal Policy Goods and Services Tax 9 Budget 10 National Income Human development Index 11 Trade Policy Foreign direct investment Special economic zones Exchange rate 12 International institutions World trade organization 13 Poverty 14 Agriculture 15 Industries 16 General Agreement on Trade in Service (GATS) 17 Miscellaneous Page 1 2 5 7 18 20 24 26 32 36 43 48 52 58 64 71 75 81 87 92 97 103 116 122 130 136 0
INDIAN ECONOMY ECONOMY 1. SOCIALISM EQUALITY 2. CAPITALISM LIBERTY French Revolution 1789 gave three points 1. Equality 2. Liberty 3. Fraternity Russian Revolution 1917 Government controlled NonProfitable Mostly adopted by all backward countries Individually controlled Profitable Mostly adopted by all developed/developing countries India has a mixed Economy. India adopted Capitalism in 1991 China adopted Capitalism in 1979 This gap of 12 years remains the gap in Economy. Till 1980, India Economy> Chinese Economy. Economy is allover based on Market Forces. 1
MARKET FORCES Demand = Supply Currency (RBI) Production (more production D>S (more money) more supply) D<S (less money) Inflation (value of money falls) Deflation (value of money rises) RBI (Monetary policy) Go t s Fis al Poli y Liquidity is a condition in which money in the market is kept by the owner and they did not buy anything form market. The degree to which it can be easily converted into cash. 4 3 2 Price Increase # Demand Decrease Demand 1 0 1 2 3 4 Price 2
There is Positive Relation between Supply and Demand Price Exceptions1. Essential Goods = Salt 2. Veblen Goods = Goods which belong to social status More Demand of Veblen goods because their prices are high 3. Giffin Goods = When prices goes up demand of Inferior goods increases. 4. Fashionable Goods I. Monetary Policy:Banking Share Market Inflation II. Fiscal Policy: Budget Several Types of deficits Planned Expenditure Nonplanned expenditure Taxation III. Trade policy: Balance of Payment B.O.P criss Foreign investment SEZS Exchange rate of rupee Full Convertibility of rupee International Institution IMO WTO IBRD IV. National Income: GDP GNP 3
NNP GVA V. Economic Development: Human Development Report Human Development Index DHI GII HPI VI. Poverty: Relative Absoute VII. Unemployment VIII. Planning Planning Commission Finance Commission IX. Agriculture X. Industries 4
MONETARY POLICY BANKING Banking: Currency system came in existence in 1770 Established Bank of Hindustan which was first Bank of India 1881 Awadh commercial Bank First Bank which was run by Indians 1894 Punjab National Bank which was first Indian Bank 1. 2. 3. History of SBI:Bank of Bengal 1806 Bank of Bombay 1840 Bank of Madras 1843 1921 These three presidential Banks were merged and established Imperial Bank of India 1955 It was Partially Nationalized It was given new Name State Bank of India 1959 Princely Banks were made its subsidiary Banks 8 Princely Banks 1961 Bikaner and Jaipur State Banks were merged 2010 State Bank of Indore was merged in SBI 2008 SBI was purchased from RBI By Government of India RBI IDBI 1996 SBI 2008 NABARD 2010 NHB National Housing Bank DICGC According to Regulatory Act 1981, In IDBI 1% of shares Nationalization of Banks: In 1969, Indira Gandhi Government nationalized 14 largest Banks of India, which had capital of 50 crore or more. In 1980, 6 more Banks were nationalized which had 200 crore or more capital. In 1993, New Bank of India was merged in Punjab National Bank. 5
At present, there are 19 Nationalized Banks. Cooperative Banks: Established in 1982 DFI Development Financial Institution Commercial Banks Cooperative Banks Subject of concurrent list Subject of State list These are established by parliamentary Act One Tier Structure These are established by legislative Assembly Act Three Tier Structure 1 State level Apex Bank 2 District level Central Bank 3 Gram Panchayat level Cooperative Society Fixed functioning area NABARD is an apex body No fixed functioning area RBI is an apex body Scheduled Banks: Banks which are included in the second schedule of the RBI Act 1934 Scheduled Banks can issue cheque book and they can get all kinds of financial facilities from RBI They have to follow the rules and regulations of RBI 500 crore capital is required Regional Rural Banks:Established on 2 October 1975 Its major objective is to provide banking facility in the rural areas It is established by central government, state government and commercial banks. Their share is = 60:20:20. No Regional Rural Bank in Goa and Sikkim 6
Reserve Bank of India:RBI started functioning on 1 April 1935. It was established by the RBI Act 1934. There was a provision for establishment of Central Bank in Government of India ACT 1935. RBI was founded by the recommendation of Young Hilton committee. From the very beginning it was founded as central bank. It was a private Bank It was nationalized on 1st January 1949 It is an autonomous body It also functioned as a central bank of Burma and Pakistan. Functions of RBI To issue currency notes Two rupee or above value rupee notes are issued by RBI one rupee note and coins are issued by finance ministry But One rupee note and coins are circulated in market by RBI RBI issues currency note by the minimum reserve system RBI has to maintain 200 crore reserve 200 core 115 crore gold 85 crore rupees Foreign Assets In 1956, RBI adopted minimum Reserve System Before it, Proportional Reserve System was used. According to MRS, RBI Reduced its reserves from 515 crore to 200 crore. RBI is a regulatory body for Banking system It frames rules and regulations for banking system and implement them. It works as a Banker of Government of India and arranges all kinds of borrowings for Government of India. DMO Debt Management Office Established in 2008 In future it would arrange borrowings for Government of India. To maintain Forex Reserve At present, RBI has 371 billion Forex Reserves Forex Reserve 7
I. II. III. IV. Foreign Assets Gold Our deposits at IMF( Reserve Tranche IMF) SDR Special Drawing Rights ( issued by IMF, used as an international Currency) To manage the exchange rate of rupee. It provides the facility of clearing house to Banks ( clearing house solve the mutual disputes) To control the liquidity of Market Two types of measures to control the liquidity use by RBI 1. Quantitative 2. Qualitative QUANTITATIVE MEASURES:Tools of RBI: Bank Rate\ CRR Cash Reserve Ratio SLR Statutory Liquidity Ratio Repo Rate Reverse Repo Rate MSF Marginal Standing Facility BANK RATE:Interest Rate at which RBI provides long term loans to the Banks. It is also known as Penal Rate, because the Bank which not maintains the SLR, RBI uses this interest rate as a punishment. 2. CASH RESERVE RATIO: All Banks have to deposit certain percentage of their total liabilities with RBI, on which there is no provision of Interest. It is for emergency conditions At present, CRR is 4 %. 3. SLR: 8
Statutory Liquidity Ratio = 21 % All Banks have to maintain certain percentage of their total liabilities as liquid assets. All Banks have to invest certain percentage of their total liabilities into government securities. LAF Liquidity Adjustment Facility Repo Rate LAF Reserve Repo Rate RBI started this facility in 2000 for adjustment of liquidity In this Repo market was developed 4. REPO RATE: Repurchase Option Repo Market Market in which seller of money always keep option to repurchase his money after a certain time. Under this the Government Securities are kept as a mortgage. In India short term transaction between RBI and Banks comes under the Repo market. Repo Rate Interest Rate at which RBI provides short term loans. 5. REVERSE REPO RATE:Interest Rate at which Banks deposit their money with the RBI for the short term loans. 6. MSF MARGINAL STANDING FACILITY This facility was started in 2000 In which banks can borrow money for overnight from RBI. This Facility is available only in Mumbai. In which bank have to borrow minimum 1 crore rupees, it should be multiple of 1 crore and maximum it can be 2% of total deposits of Bank. It is borrowed to maintain CRR and SLR Its Interest Rate is known as MSF Rate. 7. OPEN MARKET OPERATIONS 9
RBI uses Open Market Operations to control the liquidity of Market. In which it buys and sells the securities. If problem of Inflation arises, then it sells securities and if there is Deflation, than it buys the securities. To control the Inflation, RBI increases all of these. Open Market Operation is comparatively for long term as the Repo Market. As, in Repo Market securities are kept as a mortgage, whereas, in open market operations, securities are either sold or purchased. QUALITATIVE MEASURES:1. Marginal Requirement 2. Consumer credit 3. Rationing of Credit 4. Moral Pressure 1. MARGINAL REQUIREMENT:If there is Inflation, than margin money is increased and viceversa 2. CONSUMER CREDIT:The consumer amount/value of down payment is increased/ decreased. 3. RATIONING OF CREDIT: To fix the limits of lending of Banks in various sectors In case of Inflation, limit of consumer loan is reduced and viceversa 4. MORAL PRESSURE: RBI creates moral pressure on Banks. During the recession, it encourages Banks to give more loans to the consumer and during Inflation, it encourages Banks to control their consumer loans. CALL MONEY MARKET: It is a very short term market. During, day to day business, some Banks faces the shortage of money and on the other hand some Banks have surplus money, and the transactions among the Banks is known as call money market. Its maximum duration is 14 days. 10
But generally, money is given/taken for one day. Its interest rate is called call rate. It is also known as Reference Rate, because the Central Bank takes the reference of call on rates, when it frames its Monetary Policy. London Is the Wo ld s la gest all o ey a ket. The call rate of London is known as LIBOR London Inter Bank Offer Rate The LIBOR is calculated by BBA (British Bank Association) In 2012, LIBOR scam took place Mumbai is I dia s la gest all o ey a ket The call rate is known as MIBOR PRIORITY SECTOR LANDING: All Banks have to lend at least 40% of their loanable amount to priority sectors and its minimum interest rate can be 12%. Agriculture 18% Small Scale Industries Exporters SC/ST Women Home Loan upto 25 lakh Slum Dwellers NBFCMFI Nonbank finance companies Micro Finance institution. Priority Sector Lending Certificate (PSLCS) On 7th April 2016, RBI issued a notification, in which RBI allowed Banks to buy and purchase priority sector lending certificate. Those banks which lend in priority sector, more than their target, they can sale su h ki ds of e tifi ate. A d those Ba ks hi h a t a hie e the target the priority sector lending can purchase these kinds of certificates. CARBON CREDIT TRADING PSLCS This Facility is started on the basis of Carbon Credit Trading It is issued for four types of PSLCS. 1. Agriculture 2. Small and Marginal Farmers 3. Micro industries 4. General 11
C.A.R (CAPITAL ADEQUACY RATIO) Banks have to maintain certain percentage in the risk assets, it must be of thei a ks o apital The concept of C.A.R is taken from BASEL Standards. BIS (BANK FOR INTERNATIONAL SETTLEMENT) Established in the year 1930. Its headquarter is in BASEL (Switzerland) It is an organization of Central Banks. RBI became its member in the year 1996. It works for the development of Banking Sector. It encourages the research in Banking Sector. It issues direction for the development of Banking Sector which are known as Basel Standards. Till now BASEL I, BASEL II and BASEL III standards have been issued. In India BASEL III standards are being implemented from 2013 2019. NARSIHMAN COMMITTEE 1992 No more Nationalization of Banks. Encouragement should be given to private banks. Foreign Banks should also be encouraged. There should be no discrimination between foreign banks and domestic banks. Government Shareholding in the public sector banks should be reduced to 51% from 100%. Credit Information Bureau should be established. DRT (Debt Recovery Tribunal) should be established. ARF (Assets Reconstruction Fund) should be established or ARC (Assets Reconstruction Company) should be established. Rate of CRR and SLR should be reduced. NARSIHMAN COMMITTEE II 1998 The merger of the banks should be encouraged, so that the Indian Banks can compete with foreign banks. The weaker Banks should not be merged with the stronger Banks. 12
NARROW BANKINGS: Those Banks which do not invest in risky sectors. In the Government shareholding in Public sector banks should be reduced from 51% to 33%. BASEL standards should be implemented. C.A.R should be implemented NBFCshould be implemented. Nonbanking finance company. Computer technology of Banks should be encouraged. BANKING OMBUDSMAN ( LOKPAL) In 1995, RBI appointed 15 Banking Ombudsman in different cities. They hear the complaints of customers against the Banks. They hear the complaints ofscheduled Banks Regional Rural Banks Cooperative Banks NBFCs (complaints regarding finance) Types of Complaints Hidden Charges clearance of DD and cheques If Ba k does t ope a a ou t, e e if a pe so has all do u e ts ith him. If Bank refuses to grant loans. Co plai ts hi h a t e ade:if the matter related is of more than 10 lakhs rupees. O e Yea old atte, o plai ts a t e ade. If DRT is hea i g the atte, that o plai t a t e hea d y the Ba ki g Ombudsman. General complaints Any complaints should be first made or reported to Bank manager, if he does not solve the problem within a month, than you can go to banking Ombudsman. If the Customer is not satisfied by the decision of banking ombudsman than he can go to the deputy governor of RBI and appeal for it. Problems or complaints of Net Banking can be done before Banking Ombudsman. Online complaint can also be made. 13
There should be an advertisement of banking ombudsman is each branch of the bank. NPA ( NONPERFORMING ASSETS) If Bank does not get principle amount and interest for continuously 90 days than such assets are included in NPA category NPA is of Three Types: 1 Substandard NPA 2 Doubtful NPA 3 Loss NPA SubStandard NPA If Bank does not get principle amount and interest for continuously 90 days. Till one year it is called as SubStandard NPA. After remaining SubStandard NPA for 1 year it comes under Doubtful NPA category. Loss NPA When all possibilities to get the loans back are ended, then the Banks includes it in loss NPA category, but still it is mentioned in the Balance Sheet. Measures taken for this problem: NPA is the major problem of banks and to solve this problem government has made number of efforts such as 1. CIBIL Credit Information Bureau of India Limitation in the year 2000. CIBIL collects the information of the lending of the banks and makes them available for all finance institutions. Collect data from all the Banks. 2. DRT Debt Recovery Tribunal was established in the year 1994. In 1994, Government established 29 DRT and 5 Tribunals. These are specialized Tribunals for banking sector and they were established because of hearing can be done for the matter related to NPA and the matter can be closed soon. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 : In short it is known as Securitization Act 2002 14
On the basis of this act, banks are given rights that after giving the notice of 60 days mortgage assets they can take possession of the property. T i u al o DRT a t gi e stay ithout hea i g a k s lai. On the basis of this Act, there is a provision of establishing ARC (Assets Reconstruction Company). For Solving the problem of NPA, ARC was established. ARC purchases the NPA of banks and disposes it in the market, It first does the reconstruction of the assets and dispose it. Urjit Patel Committee Recommendations 2013 It was constituted in the year 2013. This committee gave its recommendations in the year January 2014. The only objective of RBI should be to control the Inflation. To increase the growth rate, providing ample opportunities, maintain the exchange rate of money. These all should not be the objectives of RBI. CPI should be made the major index in place of WPI. Target inflation should be 4% it can be (+) or () CPI should be gradually controlled There should be a monetary policy committee to frame the monetary policy. There should be five members in the monetary policy committee, three members from RBI, Governor of RBI, Deputy Governor and Executive director. Two Independent Members appointed by the Government of India whose term of office or tenure should be 3 years. They should not hold the post of profit. There should be transparency in the functioning There should one sitting in two months The decision should be taken by the majority. The Governor of RBI Should be the Chairperson of this Committee. The casting of vote is compulsory for all the members. In case of equal vote, Governor has the power of casting vote. If this Co ittee a t o t ol the i flatio fo o ti uous th ee ua te s, then committee has to give clarification. They have to give three clarifications. 1. Why Inflation could not be controlled. 2. The Time within which the inflation could be controlled. 3. How the Inflation would be controlled. Monetary policy should be received within 60 days. 15
Earlier the time period to review the monetary policy was within every 45 days. Government should control its social welfare programmes. Fiscal deficit should also be controlled. The Target of FRBM Act 2003 should be achieved. Therefore, the recommendation of Kelkar Task force should be implemented. The RBI s fu tio to o o o ey fo the go e e t of I dia should be given to DMO. Fixed Income financial Products should be counted as Assets. Bank should give loan against them, so that people invest less in gold. Some of these recommendations have been accepted: CPI has been made the major Index. Targeting Inflation 4% has been done. The review of Monetary Policy is done within the gap of 60 days instead of 45 days. Monetary Policy committee have been formed and now there are 6 members in this committee. Three members are of RBI and three members are from Government. Marginal Cost of Fund Based Lending RateIn April 2016, RBI replaced base rate by MCFBLR. Why it was replaced? Despite edu tio i the Repo Rate, a k did t edu e thei ase ate, a d the efo e the e efit of edu tio did t ea hed to onsumers or investors. Factors affecting the fixing of Base Rate Cost for the fund (Interest Rate given for deposits) Operating Expenses Minimum Rate of Return (profit) Cost of CRR While fixing the Marginal cost of Fund based lending Rate it comprises of the following: 16
Its Main factors are as follows:marginal cost of Fund Negative carry on account of CRR Operating Cost Tenure Premium Operating Expenses and cost for CRR are similar factors in both. Whereas in cost for fund, only interest rate given on deposits was included, but now in marginal cost of fund interest rate on deposits, Repo Rate and different kinds of interest rate on other fund arrangement is also included. Profit has been removed and in place of minimum rate of return Tenure Premium has been included. Tenure Premium or high interest rate for long term loans. MCLR should be revised monthly, it is compulsory to revise MCLR on Monthly basis. Now, with the reduction of Repo rate, bank has to reduce its MCLR. BASE RATE:The minimum interest rate declared by the bank is called base rate. It was started in 2010 Prime lending rate was replaced by base rate The concept of PLR was started in 2004. The concept of MCLR is started in2014. PLR The Interest Rate which was provided to the best customer of the banks. 17
MONEY SUPPLY M1 = Cash with people + Demand deposits with the Bank + other deposits with RBI. M2= M1+ Deposits with Post Office M3 = M1+ Time deposits with the Bank M4 = M3 + Deposits with Post Office There are Four types of Account:1. Current Deposit Account Demand Deposit 2. Saving Deposit Account 3. Recurring Deposit Time Deposit 4. Fixed Deposit NM1 = Cash with people + Demand Deposits with the Banks + other deposits with RBI NM2 = NM1 + Short term time deposits of residents NM3 = NM2 + long term time deposits of residents + Term deposits of the Banks L1 (Liquidity) = NM3 + Post office deposits (National saving certificate are not included in this post office deposits) L2 = L1 + Refinance or financial Institutions (FI) Deposits Borrowings Certificate of Deposit L3 = L2 + NonBanking Finance Company (NBFC) 18
Mo Total currency issued by RBI The date is issued weekly NM1 + NM2 + NM3 They are issued once in 15 days L1 + L2 They are issued monthly L3 They are issued quarterly DICGC ( Deposit Insurance and Credit Guarantee Corporation) Established in the year 1978 Its ownership is with RBI Its objective is to give the insurance on the deposits of the customer with the Banks and it provides guarantee to the credit creation by the Bank. Financial Stability and Development Council (FSDC) Established in the year 2010 Its chairman is Finance Minister Its members are from RBI, SEBI, IRDA ( Regulatory Bodies) Secretaries of Finance Minister and Economic advisor of Finance Minister are its members. Its objective is to provide a common platform for regulatory bodies to resolve their disputes. It does not interfere in the internal affair of the regulatory bodies. It gives advises on financial inclusion It recommends financial inclusion To encourage the stability in financial sector. Prepaid Instruments (PPI) Its objective is to provide payment related facilities to the customer They provide online payment facility They can take maximum 50,000 deposits They do t le d o ey a d do ot gi e loa s They do not provide the facility of cash withdrawal They follow the norms of KYC (Know Your Customer) They do t follo CRR a d SLR, the efo e Na hiketa Mo Co ittee criticized it and in place of it payment bank should be established instead of PPI Payment Bank Established in the year 2015 To establish a payment bank 100 crore capital is needed 19
Promoters capital amount should be 40% and after 12 years it can be reduced to 26% They Provide online Payment facility to their customers They can take maximum 1 lakh deposit They Provide debit card, therefore cash withdrawal can be done They a t le d o ey They do not provide credit card They follow the norms of CRR The 75% of remaining amount have to be invested in SLR as Government securities. The remaining 25 % amount to be deposited in the Banks. Small Banks Established in the year 2015 To establish a small bank 100 crore capital is required The promoters share in it should be 40% It gives small loans to smallscale Industries, microindustries and small farmers. This Banks provides 50% of its total amount as 25 lakh or less amount of loans. Remaining 50% amount of money can be lended in which one loan can be more tha lakh. But its si gle loa a t e o e tha % of its total loan. These banks would lend 25 lakhs or less amount of loan of its 50% amount. Small Banks should lend minimum 75% of their loanable amount to private sector lending. Micro Finance The financial activities done at microlevel are included in Micro finance. Its objective is to provide small loans and collect the small savings and provide small insurance facility. The economist of Bangladesh Mohammad Yunus made the concept of Microfinance popula a d his i stitutio as a ed as G a i Ba k. By the help of Self Help Group (SHG) provided small loans. He was awarded the Nobel Prize for peace. Later on, this MicroFinance became popular in India. Many farmers did suicide in India, due to which these micro finance companies came into Limelight. RBI imposed restrictions on the functioning of Micro Finance Company and Malegam committee was formed in 2011. 20
Recommendations given by Malegam committee: There should be a new category as NBFCMFI who do micro finance There should be a separate Ombudsman for NBFC likewise, there should be a separate credit information bureau for these companies They can lend money to the families which have less than 50,000 Income. Single loan should not be more than 25,000. A family can borrow money from maximum two companies. No mortgage loan should be provided There should be no harassment done on farmers. Maximum interest should be 24%. NBFCMFI should be included in the priority sector lending. MUDRA BANK Micro unit development and Refinance Agency Bank (or mudra bank) is a new institution set up by the Government of India for development of micro units and refinance of MIFs to encourage entrepreneurship in India and to provide the findings to the noncorporate small business sector. It provides loans at low rates to microfinance institutions and nonbanking financial institutions. It was launched by Prime Minister Narendra Modi on 8 April 2015 The Bank will classify its clients into three categories and the maximum allowed loan sums will be based on the category, to signify the stage of growth and funding needs of Micro units or entrepreneurs. Shishu Allowed loans upto Rs 50,000 Kishor Allowed loans upto Rs 5 lakh Tarun Allowed loans upto Rs 10 lakh Mudra Bank will need two type of Product like refinance for the micro units having loan requirement from Rs 50,000 to 10 lakh and support of Micro Finance Institutions for on lending. Mudra Bank is refinancing through state level institutions, Mudra Bank will deliver loans through NBFCs, MFIs, Rural Banks, district Banks, Nationalized Banks, Private Banks, Primary lending Institutions and other intermediaries. There is no fixed interest rate in Mudra loan Benefits of Mudra Banks: Providing low cost funding for MFIs. Priority for SMEs in lending. 21
It will increase liquidity and access for funds for small scale business. Introduce appropriate technologies to assist in the process of efficient lending, borrowing and monitoring distributed capital. NBFCMFI RBI has given a separate category to NBFCMFI To start a NBFCMFI the minimum capital should be 5 crore and minimum 2 crore capital for NorthEast States. 85% qualifying assets must be of its total capital. Qualifying Assets The loan which is given to people having Income of 100,000 in urban and Semiurban areas. The loan should not exceed more than 1 lakh The loan must be given without conditions. The loan amount does not exceed 60,000 in first cycle and 100,000 in successive cycle/installments The return of loan should not be less than 24 months (for loans of 15,000 and more). The aggregate amount of loans given for income generation is not less than 50% total loans given by the NBFC. Loan is repayable on weekly, fortnight or monthly installments at the choice of borrower. Remaining 50% assets, there is no restrictions on it. Those institution which does not qualify as NBFCMFI should not extend loans to microfinance sectors. Exceeding 10 % of loan its total assets. Interest Rate Cost of fund + Margin The margin of large NBFCMFI should be 10% The margin of small NBFCMFI should be upto 12% Those NBFCMFI whose assets is more than 100 crore rupees, loan exceeding portfolio of 100 crore rupees, comes under large NBFCMFI. Small NBFCMFI The loan exceeding portfolio is less than 100 crore. The Average of commercial banks base rate х 2 Cost of fund + 10% margin 22
The rate among these two, whichever among them is lower becomes the interest rate. NBFCMFI can charge differential rate of interest to its customers but the diffe e e a t e o e tha %. NBFCMFI can charge only three types of charges Interest Rate Processing charges, which can be 1% of total amount. Insurance The way of the returning the money or the repayment of loan should be simple. It has been included in priority sector lending. 23