Polaris Banking Notes

CHAPTER - 1
IMPORTANT BANKING NOTES

Introduction: Banking and finance are the very important part of an economy of a country.
In this modern period all economies are inter-connected with the global economy. The most
powerful economies in the world are those of USA, china, Japan etc. India is also one of the
emerging economy of the world.
Banking: Banking means accepting for the purpose of lending or investment of deposits of
money from public repayable on demand or otherwise and withdrawable by cheque, draft
order or otherwise. (Source section 56 of banking regulation act 1949)
Banking Regulation Act 1949 = Passed as the Banking companies act 1949 and changed
to banking regulation act 1949 wef. 1.3.1966 (now applicable throughout India)
The act is not applicable
1. Primary agriculture credit societies
2. Co-operative land mortgage banks
3. Non-agriculture primary credit societies.
History of Indian Banking
1.
2.
3.
4.
5.
6.
7.
Bank of Hindustan established in 1770

General bank of India 1786
Bank of Bengal (bank of Calcutta) 1806
Bank of Bombay 1840
Bank of Madras 1843
First joint stock bank Allahabad Bank 1865
Oudh commercial Bank 1881
(This bank failed in 1958)
8. Purely Indian bank Punjab national bank 1895
9. Bank of India 1906
10. Bank of Baroda 1908
11. Central bank of India 1911
12. Imperial bank 1921 (formed after merger of three presidencies banks)
(Central bank function before RBI)
13. Hilton young commission (royal commission on Indian currency and finance)
14. RBI was set up on the basis of the recommendations of the Hilton young
commission.
15. RBI act 1934, RBI started functioning April, 1935
16. Nationalization of the imperial bank of India in 1955 via SBI act
17. SBI associate were established 1959
18. Nationalization of 14 Pvt. Commercial banks on July 19, 1969 (capital base 50 Cr.)
19. Nationalization of 6 Pvt. Commercial banks in 1980
20. New Bank of India which was formed in 1980 was merged with PNB in 1993.
Scheduled Bank: As per sec 2 (e) of RBI Act 1934, a schedule bank means a bank whose
name is included in the 2nd schedule of RBI Act 1934. A schedule bank should satisfy the
conditions laid down in sec 42 (6). It may be
1. A state cooperative bank
2. A company defined in companies act 1956
3. An institution notified by central govt.
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4. A corporation or a company incorporated by or under any law in force.

Scheduled commercial banks all
1.
2.
3.
4.
5.
6.
7.
Nationalized banks
State bank of India and its associates
Regional rural bank (RRBs)
Foreign Banks
Indian private sector banks
Scheduled co-operative banks
Scheduled urban co-operative banks
Non-scheduled Bank
A bank that is not included in the 2nd schedule of RBI is called non-scheduled bank.
Public Sector Banks
All those banks in which share holding of the government is 51% or more, At present all
these banks are public sector banks
1.
2.
3.
4.
5.
All the nationalized banks

SBI and its associates
Regional Rural Banks
IDBI Bank
Bhartiya Mahila Bank
= 19
= 5
= 1
= 1
= 1
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Private Sector Banks: - The share of individuals 26% and up to 74% FDI is allowed. These
are registered under Indian companies act, 1956. They are of two types
1. Old generation Pvt. sector bank
2. New generation Pvt. sector bank
Foreign Banks
Banks with their registered office outside India are called foreign banks. Standard charted is
the largest foreign bank in India.
NAME OF THE BANK
HEAD QUARTER
Central bank of India
Mumbai
Bank of India
Mumbai
Union bank of India
Mumbai
Dena bank
Mumbai
Punjab national bank
New Delhi
Punjab & Sind bank
New Delhi
Canara Bank
Bangalore
Vijaya bank
Bangalore
United bank of India
Kolkata
UCO bank
Kolkata
Allahabad bank
Kolkata
Indian bank
Chennai
Indian overseas bank
Chennai
Bank of Baroda
Vadodara
Bank f Maharashtra
Pune
Andhra bank
Hyderabad
Corporation bank
Mangalore
Oriental bank of commerce
Gurgaon
Specialized Bank:
There are some banks, which cater to the requirements and provide overall support for
setting up business in specific areas of activity.
1. Export import bank of India (1982)
2. Small industrial development bank of India (1990)
3. National bank for agriculture and rural development (1981)
Small Bank & Payment Bank
The idea of small and payment banks was first proposed by the Nachiket More
Committee on financial inclusion.
Small bank will offer both deposits as well as loan products
Payment bank will be used only for transaction and deposits purposes
Minimum paid up capital of each Rs. 100 Crore
Banking Ombudsman
The banking ombudsman scheme enables a forum to bank customers for resolution
of their complaints relating to certain services rendered by banks
RBI introduced this scheme under powers granted U\s 35-A of Banking Regulation
Act 1949.
All scheduled commercial banks; RRBs and scheduled Primary Co-operative banks
are covered under the scheme.
Limit of compensation 10 lakh (other cases)
1 lakh (credit card)
Period of solution of a problem by banks 30 days
Appellate authority is vested with a Deputy Governor of the RBI
Period for appeal is 30 days
Development Bank
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. Development banks are mentioned as under.
1. Industrial finance corporation of India.
2. State financial corporations
NBFC Non Banking Financial companies
A non-Banking financial company is a company registered under the companies act. 1956.
Its principle business is lending, investment in various types of shares\stocks\bonds, its
principle business is receiving deposits under any scheme. The asset size is Rs. 100 crore
or more to be a systemically important NBFC
RBI
It the central bank of the country
It was established on April 1935 with a capital of Rs. 5 crore under RBI Act 1934
It was nationalized on Jan 1, 1949
The governor is the chairman of the board and chief executive of the bank.
RBI financial year is July 1 to June 30
Present Governor is Dr. Raghuram Rajan.
It has two fully owned subsidiaries
1. DICGC Deposit Insurance and Credit Guarantee Corporation of India.
2. BRBNMPL = Bharatiya Reserve Bank Note Mudran Private Limited
Functions of RBI
1. Issuance of Currency: U\s 22 of RBI Act 1934, RBI is the authority in India to issue
currency notes under signature of governor.
2. One rupee note called currency note is issued by the central govt. and signed by
finance secretary.
3. Bankers bank:- It keeps a part of deposits of commercial banks (as CRR) and acts
as lender of last resort by providing financial assistance to banks.
4. Controller of banks:- It issues directions, carries inspection and exercise
management control.
5. Controller of credit : U\s 21 and 35 A, of BR act, RBI can fix interest rates (including
Bank Rate)
Statutory Reserves:- RBI ensures that the banks maintain certain % of their assets
in liquid \ cash form under SLR \ CRR rules.
Collection of information:- RBI collects credit information and can share this
information with other banks.
Maintenance of external value:- RBI is responsible also for maintaining external
value of Indian currency as well as the internal value.
Monetary and credit policy:- RBI control monetary and credit policy
Other activities
1. Licensing of banks
2. Inspection of banks
3. Deposit insurance
4. Inflation control
SEBI Securities & Exchange Board of India.
Established in 1988
SEBI is the apex body and act as regulator and development institution for the capital
market. It has semi-executive, semi-legislative and semi-judicial functions for the three
different players in the capital markets viz.
1. The investors;
2. The market intermediaries
3. The issues of securities
IRDA insurance regulatory and development authority
IRDA is an autonomous apex statutory body which regulates and develops the insurance
industry in India. The IRDA Act, 1999 was passed as per the major recommendation of the
Malhotra Committee report (1994)
Objectives & mission: IRDA serves as an authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance industry.
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CHAPTER 2
IMPORTANT TERMS OF BANKING
Universal banking: universal banking means allowing financial institutions and banks to
undertake all types of banking or development financing activity.
Examples of Activities:
1.
2.
3.
4.
5.
Accepting deposits
Granting loans
Investing in securities
Credit cards
Insurance etc.
Objective: To offer world class financial services by using information technology and cross
selling to reduce cost and increase per customer revenue.
RH khan committee had recommended the concept of universal banking.
Narrow Banking
A narrowing banking is the system of banking under which a bank places its funds in riskfree assets with maturity period matching its liability maturity profile.
Retail Banking
Retail banking sector is characterized by 3 basic characteristics.
1. Multiple products (deposits, credit cards, insurance, investments etc)
2. Multiple delivery channels (call centre, branch, internet and kiosk)
3. Multiple customer group (consumer, small business and corporate)
Door step banking: - The services can be delivered by the banks either through,
1. Own employees
2. Through the agents
Merchant banking:- Merchant banking stands for providing various services relating to
capital market and financing the corporate sector.
Major merchant banking services
1.
2.
3.
4.
5.
6.
Project counseling
Loan syndications
Technology tie-ups
Mutual funds
Portfolio management
Mergers and amalgamations
International banking
Different banks are active in the foreign exchange markets within and outside India. The
different types of services provided by them, for this purpose are international banking
services.
Green Banking:- To make banking processes and the use of IT and physical infrastructure
as efficient and effective as possible, with zero or minimal impact on the environment.
Virtual Banking
Under virtual banking concept, banking services are delivered by way of a computer
controlled system that does not directly involve interface with the customers.
Tele Banking:
It refers to telephone based banking, using any mode of telephone \ mobile, where
customer queries are attended to either by answering machines or Tele callers. No
transaction is allowed in tale-banking. Here only information can be shared about various
bank products\accounts.
Lobby Banking:- Lobby Banking facilities offer the customers an access to an internet
banking kiosk, phone banking, cheque drop facility and Automated Teller machine (ATM), all
set up in a tailor-made lobby like premises.
Para Banking:With the changing time, banks have taken up a variety of other functions such as selling
insurance products, mutual funds, debit\credit card business, accepting variety of fees,
earnest money etc. All these activities form part of Para banking.
Shadow Banking:Banking activities called out by the entities outside the purview of the regular banking
system. Acceptance of deposits and loans made by NBFCs (Non-Banking finance
company)
Electronic Banking:Electronic banking or e-banking is virtual banking or on-line banking.
Following are the e-banking
1.
2.
3.
4.
5.
6.
7.
8.
Smart card
Credit card
ATM
Debit card
Internet banking
Cheque truncation payment systems.
Electronic fund transfer
Mobile banking
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CHAPTER 3
BANKING PRODUCTS
1. Saving bank account:- At present, RBI stipulates all banks to pay a minimum floor
of interest rate on saving bank account at 4% per annum however, it has freed the
upper ceiling; as such the banks are free to determine their interest rates payable on
saving accounts. Interest up to Rs. 10000\- per annum is exempted from income tax.
2. Current Account:- A current account is an account which can be opened by any
individual, a businessman or an organization. This account may also be operated
upon any number of times during a working day. No interest is paid for credit balance
in this account.
3. Time Deposits
1. Fixed Deposit account:- Fixed deposit accounts are opened by the banks for a
minimum period of 7 days and maximum period of 10 years. The banks pay
higher rate of interest on these accounts. Pre-mature withdrawal is restricted but
not totally banned.
4. Sweep accounts: Basically sweep accounts are saving bank account or current
account with facility of fixed deposit interest rate benefits. In these accounts a
specified amount above the minimum balance is reserved as fixed deposit for higher
rate of interest.
5. Dormant and Inoperative accounts:- If an account saving or current account is not
operated for the last six months, it becomes dormant and if not operated for two
years it becomes Inoperative Accounts.
6. Unclaimed account:- if there is no transaction in an account for 10 years or more
the account is classified as an unclaimed account as per the provisions of banking
regulation act, 1949.
7. Nomination facility:- As per section 45 z of the banking regulation act, all bank
deposits can have the facility of nomination as per which the deposit account holders
can nominate any person of any age (even a minor) as their nominee to receive the
amount outstanding in the account, after their death.
Facility of nomination is available in only these types of accounts
1. All deposit accounts
2. Safe custody accounts
3. Safe deposit locker accounts
The facility is not available in any of loan accounts.
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CHAPTER-4
SOME BASIC TERMINOLOGIES
1. Base rate:It is the rate below which a bank is not allowed to charge interest on any loan. All banks
have to declare their base rate publically. In three exceptional cases banks are allowed
to charge a rate lower than base rate:
1. Loan against banks own deposits
2. Loan to banks own staff
3. Loan under differential rate of interest scheme
BPLR (Bench mark prime lending rate): It was introduced wef. 1.7.2010 on the
recommendation of the Deepak Mohanty committee.
2. Spread:- The different between average rate of interest earned and average rate of
interest paid is known as spread.
Net interest income = interest earned interest paid
3. Sub-venation:- it is a kind of subsidy announced by government on interest payable
to banks by the borrowers. Specially given in priority sector lending, agriculture and
self help groups.
4. Margin money (down payment)
When a customer is sanctioned a loan, the bank does not give loan for the full value
of the item to be purchased.
The contribution that the customer is expected to make from his own resources.
Priority Sector:- These are small value loans to farmers for agriculture and allied activities,
micro and small enterprises, poor people for housing, students for education and other low
income groups and weaker sections.
1.
2.
3.
4.
5.
6.
Agriculture
Micro and small enterprises
Education
Housing
Export credit
Others
Targets and sub targets

Total priority sector
= 40 %
Total agriculture
= 18%
Weaker section
= 10%
Foreign bank
= 32%
Rate of interest for loans under priority sector will be as per RBIs directives issued from
time, which is linked to base rate of banks at present.
CGTMSE
Credit guarantee fund trust for micro and small enterprises (CGTMSE)
It is a government body set up to provide insurance cover to the banks which provide
collateral\security free loans of up to Rs Crore to the entrepreneurs in micro and small
sector.
The trust provides cover of up to 80% of amount in default.
Skimming:- it is the illegal copying of information\data from the magnetic strip of a credit or
debit card.
Phishing:- Phishing is a type of online identity theft. It uses fraudulent emails and websites
that are designed to steal your personal data or information such as credit card numbers,
passwords, account data etc.
Kite flying:- kite flying is originally a technical term used for a type of cheque fraud but, this
teerm has now been extended to credit card as well. Kite flying is when your use one or
more credit card to withdraw cash at an ATM as cash advance and pay dues on another
credit card.
Mode of Remittances
1.
2.
3.
4.
5.
6.
Cheque
Draft
Pay order
NEFT
RTGS
ECS
National Electronic Fund transfer

NEFT:- It is a nationwide funds transfer system to facilitate transfer of funds from any bank
branch to any other bank branch. NEFT works on net settlement. Besides, NEFT is a batch
based system. There is no value limit.
RTGS= real time gross settlement is a centralized payment system in which, interbank
payment instructions are processed and settled, on gross basis in a real time environment. It
uses INFINET and SFMS platforms. In India, RTGS was implement wef. March 26, 2004.
SWIFT (Headquarter Brussels, Belgium):The society for worldwide interbank financial telecommunication operates a worldwide
financial messaging network which exchanges message between banks and other financial
institution.
Credit Cards:- The credit card is an electronic mode of payment mechanism which enables
its holder to spend and pay anywhere, anytime without the hassle of carrying money. Banks
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allow credit to the card holder up to a pre-approved limit to which a holder can make
purchases.
Debit Card: - A debit card is a plastic card that provides the cardholder electronic access to
his bank account. The card can be used as an alternative payment method to cash when
making purchases.
Smart Card:- Cards which contain seal value in the form of electronic money which
someone has paid for n advance. These cards look like any other plastic card with an
integrated circuit chip installed
Mobile Banking:- M-banking
transactions, payments, etc.
is a term used for performing balance checked, account
OTP = One time password: - is the latest tool used by banks to fight against cyber fraud.
OTPs are requested by consumers each-time they want to perform transactions using the
online or mobile banking interface. The password expires once it has been used or once its
scheduled life cycle has expired.
Point of Sale POS = any place where a card swipe machine is installed is known as
point of sale terminal.
Core banking solution:- care banking may stand for centralized online real time exchange.
It means a centralized branch computerization model where all the branches of a bank are
connected to a central hub.
Basel III:- The basel committee on banking supervision (BSBS) issued a comprehensive
reform package entitled Based III:
Objective:- (a) to improve banking sectors ability to absorb shocks arising from financial
and economic stress (b) to reduce the risk of spillover from financial sector to the real
economy.
The based III framework is based on 3 components called 3 pillars
1. Minimum capital standards
2. Supervisory review
3. Market discipline
Credit rating:- RBI allows use of ratings by credit rating agencies
Domestic credit rating agencies
1.
2.
3.
4.
5.
6.
Brickwork rating India Pvt. Ltd

Credit analysis and research limited
CRISIL Limited
ICRA Limited
India Ratings and Research Pvt. Ltd.
SME Ratings Ltd. (SMERA)
International Agencies
1. Fitch
2. Moodys
3. Standard & Poors
IFRS = International financial reporting standards
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IFRSs are the principles based set of standards which establish broad rules. These are the
standers and interpretations adopted by the international accounting standards board.
(IASB)
NOFHC = Non-operative financial holding company
GUIDELINES ON LICENSING OF NEW BANKS IN PRIVATE SECTOR
Minimum voting equity capital
Rs. 500 crore
Foreign Shareholding
49%
Prompt Corrective Action:- It is a system under which RBI can initiate a corrective action in
case of a bank which is found to be having low CAR or profit or high NPAs.
Best Practices code (BPC):- Based on the recommendations of Mitra committee, RBI
issued guidelines. The BPC should cover all the functional areas like cash, safe custody of
valuables, deposit accounts, investment portfolio, credit portfolio etc.
Risk Management
The potential loss from a banking transaction, which a bank can suffer due to variety of
reasons
Asset Liability Management: it is the management of structure of balance sheet
(liabilities and assets) to maximize net earning from interest within overall risk preference
present and future) of the bank. ALCO is the top most committee to oversee implementation
of ALM system.
Stress testing in Indian banks
Stress testing is described as the evaluation of a banks financial position under a severe but
plausible scenario, to assist in decision making within the bank. It enables a bank in forward
looking assessment of risks.
Business Process Re-engineering
In the banking industry, the business process re-engineering (BPR) means transforming the
select processes and procedures to empower the bank with contemporary technologies,
business solutions and innovations that enhances the competitive advantage.
It takes into account 4 important aspects; (1) customer (2) competition (3) change
(4) cost
Objectives:- To reduce the transaction process time without sacrificing security aspects,
quality and real time service to clients and extensive propagation of single window concept.
BPR basically aimed at maintaining long term profitability and strengthening the competitive
edge of banks in conforming with transforming market realities.
Corporate Governance and banks:The corporate governance refer to conducting the affairs of a banking organization by
following the best business practices, in such a manner that gives a fair deal to all the stake
holders i.e. shareholders, bank customers, regulatory authorities, society at large,
employees etc.
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The following aspects require special mention while judging the standard of corporate
governance in a banking institution:1.
2.
3.
4.
5.
Constitution of the board of directors,

Transparency,
Policy formulation,
Internal controls
Committees of the board
Money Laundering
It is a process for conversion of money obtained illegally to appear to have originated from
legitimate sources. Indian Parliament passed the prevention of money laundering act 2002
for prevention of money laundering. Offences are cognizable \ non-bailable. Punishment is
imprisonment for not less than 3 years but up to 7 years and fine upto Rs. 5 lac.
Branch Authorization Policy
The opening of new branches and shifting of existing branches of banks is governed by
section 23 of the BR Act 1949. With prior approval of RBI only, the banks can open a new
place of business in India or abroad or change.
Centre classification on the basis of population (census 2011),
Rural Centre
up to 9999
Semi-urban centre
10000 to 99999
Urban centre
100000 to 999999
Metro centre
1000000 two and above

On the basis of tier
Tier 1
100000 and above
Tier 2
50000 to 99999
Tier 3
20000 to 49999
Tier- 4
10000 to 19999
Tier-5
5000 to 9999
Tier-6
less than 5000
Business facilitator / business corner pendent model

For greater financial inclusion and unceasing the outreach of the banking sector,
scheduled commercial banks including RRBs and local area banks (LA Bs) can use the
services of intermediaries in providing financial and banking services through the use of
business facilitator / business correspondent model.
Business facilitator: banks many use the services of intermediaries such as: (a)
NGO/SHGs (b) Farmer clubs (c) Cooperatives post offices (e) insurance agents etc.
Services: - (l) identification of borrows (ii) collection and preliminary processing of loan
applications (iii) savings and other products and other related activities.
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Business Correspondents: - The scheduling RRBs and local area banks (LABs) may
engage business correspondents (BCs) with the approval of their board of directors.
Bank may engage the following individuals / entities.
(i)
(ii)
(iii)
(iv)
Retired bank employees, other retired persons.

Individual owners of kirana / medical / fair price shops, SHC, No etc. A-BC can be
a be for more than one bank.
Responsibility OBC:- (i) identification of borrows
(ii) Collection and preliminary processing of loan applications
Collection of small value deposits etc.
ULTRA SMALL BRANCHES: These branches may be set up between the base branch and
BC locations for about 8-10 BC unites at a reasonable distance of 3-4 kilometers. These
branches should have minimum infrastructure such as a core banking solution (CBS)
terminal linked to a pass book printer and a safe for cash retention for operating large
customer transactions.
Financial inclusion: financial inclusion is the delivery of financial products, at affordable
costs to sections of disadvantaged and low-income segments of society. As per United
Nations, the goal of financial inclusion is, to ensure access to a full range of financial
services, at a reasonable cost, too ensure continuity and certainty of investment.
RBI set up Rangarajan committee in 2004 to look into financial inclusion.
Financial inclusion first featured in 2005 and Mangalam became the first village in India
where all households were provided banking facilities.
(SVS) Sampoorn Viteeya Samaveshan was launched on Aug. 15, 2014
To ensure access to financial services and timely and adequate credit to weaker
sections and low income groups.
SVS comprises 6 pillars
1. Universal access to banking facilities: each bank to have min. one fixed point banking
outlet to cater to 1000-1500 household.
2. Financial literacy program
3. Providing basic banking account
4. Micro credit availability and creation of credit guarantee fund for coverage of defaults
in such account.
5. Micro insurance: IRDA has created a special insurance policies for weaker section
with a life insurance cover of Rs. 50000/DBT Direct Benefit Transfer: To facilitate DBT for delivery of social welfare benefits by
direct credit to the bank accounts of beneficiaries, banks were advised by RBI to open
accounts for all eligible individuals in camp mode with the support of local government
authorities.
SWABHIMAAN:It is a financial security programme to provide the following services to the rural India:
1. Bring basic banking services to unbanked villages
2. To provide need-based credit and remittance facilities.
3. Increase the demand for credit among the millions of small and marginal farmers and
rural artisans.
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4. To enables Govt. subsidies and social security benefits to be directly credited to

beneficiarys accounts.
Insurance business by banks
On the recommendation of R.N. Malhotra committee, the banks in India can undertake
insurance business either on risk participation basis (called underwriting) by setting up
insurance joint ventures or as agent of insurance companies on fee basis, without any risk
participation (called bancassurance).
Benefits:- it offers an opportunity for banks to increase fee based business for improving
their profits and make utilization of their branch net work and customer base optimally, to
increase the fee-based income.
Bancassurance
Bancassurance stands for distribution of insurance products (both the life and non-life
policies), as corporate agents, through their branches.
Benefit bancassurance: It helps the banks to build synergies between the insurance
business and bank branch network to sell insurance products through banking channels.
CROSS SELLIING
Crossselling stands for offering to the existing and new customer, some additional banking
products, with a view to expand banking business, reduce the per customer cost of
operations and provide more satisfaction and value to the customer.
SUBPRIME LENDING:- also referred to as B-paper, near prime, or second chance
lending. It is a practice followed by lenders in various countries to sanction loan to the
borrowers, who do not sanction loan to the borrowers, who do not qualify for the best market
interest rates, due to certain deficiency in their credit history.
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CHAPTER 5
MONEY MARKETS
Money Market: It is a market for short-term debt securities, such as commercial paper,
repos, negotiable certificates of deposit, and treasury bills with a maturity of one year or less.
Major Money market instruments
1.
2.
3.
4.
5.
6.
7.
Certificate of deposit (CD)

Commercial paper (CP)
Interbank participation certificates
Interbank term money
Treasury bill
Bill rediscounting
Call / notice money
Terms relating to money market

1.
2.
3.
4.
5.
Money market = Market for short-term

Call money = Money lent or borrowed for one day.
Notice money = Money lent or borrowed for a period of 2-14 day.
Term money = Money lent or borrowed for 15 days or more in inter-bank market.
Held till maturity = Securities which are not meant for sale and shall be kept till
maturity.
6. Coupon rate = Specified interest rate on a fixed maturity security fixed at the time of
issue. It cannot be changed during the tenure of the instrument.
7. Treasury operations= Trading in securities in the market.
Short selling in govt. securities
Short sale refers to the sale of securities which a bank does not own i.e. a bank sells to
another bank, a govt. security which the selling bank does not own presently, with the
understanding to deliver the security on a fixed, date.
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Instrument of govt. borrowing

1. Treasury bills
These are the instruments of short term borrowing by the central / state govt. they
are promissory notes issued at discount and for a fixed period. These were first
issued in India in 1917.
2. Objectives:- these are issued to raise funds for meeting expenditure needs and also
provide outlet for parking temporary surplus funds by investors.
These are issued by RBI and sold through fortnightly or monthly auctions at varying
discount rate depending upon the bids.
CMB Cash Management bills
CMB introduced on 11-8-11, is a short term security to be sold by govt. of India to raise
temporary money for cash management needs. CMBs have the generic character of
treasury bills.
Dated Securities:
These are the instruments with tenure over one year. The returns on dated securities are
based on fixed coupon rate akin to corporate bond.
WAYS AND MEANS ADVANCES
Ways and means are temporary overdrafts by RBI to govt. (central & state) under section 17
(5) of RBI Act. WAAs replaced the earlier adhoc T-Bills systems 1-4-1997.
Objective:- WMAs bridge the time interval of mismatch between govt. expenditure an
receipts.
Liquidity Adjustment Facility
LAF was introduced by RBI during June, 2000 in phases; too ensure smooth transition and
keeping pace with technological up gradation. Revised LAF (wef. Oct. 29, 2004) has the
following objectives
The funds are used by the banks for their day to day mismatches in liquidity.
MSF
Marginal standing facility was introduced w.ef. may 9, 2011, by RBI.
Eligibility: Scheduled commercial banks having CA and SGL Account with RBI.
Tenor and Amount: It can be availed up to 2% of NDTL at the end of 2nd preceding
fortnight. It is for one day. On Friday it is for 3 days or more, maturing on the following
working day.
LAF:- RBI introduced term repos of 7 days and 14 day tense in Oct. 2013.. it is in addition to
existing daily LAF & MSF
Market Stabilization Scheme
Effective date:- It is effective from April 2004.
Objectives: Absorption of liquidity generated by forex inflow, from the system.
MSS instruments:- Treasury bills / dated securities etc.
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Certificate of Deposit
This scheme was introduced in July 1989, to enable the banking system to moblies bulk
deposits from the market.
Who can issue:- SCB (except RRBs) all India financial institutions.
Maturity Min 7 days Max 12 Moths
Amount Min Rs 1 Lac, beyond which in multiple of one lac.
Commercial Paper: - CP introduced during 1990, is a short term money market instrument
issued as an unsecured usance promissory note.
Maturity: Min 7 days & Max up to one year
Amount: 5 lakh or multiples
Non-convertible debentures:- NCD is a debt instrument issued by a corporate (including
NBFCs)
Maturity Min 90 days and maximum one year.
Denomination:- Minimum Rs 5 lakh and in multiple of Rs 1 lakh
Derivatives:- As per RBI, derivative means financial instruments to be settled at a future
date, whose value is derived from change in some other variables such as interest rate,
foreign exchange rate, idex of pricing etc.
Option:- It is a contract that provides a right but not impose any obligation to buy or sell a
financial instrument.
Futures:- A futures is a standard contract based on an agreement, to buy or sell an assets
at a certain price at a certain price at certain time.
Forward:- The forward is a contract that is traded off the stock exchange.
Forward is an OTC product.
Forward can be for any odd amount.
SWAP:- A Swap is a contract that binds two counterparties to exchange the different
streams of payments over the specified period at specified rate.
Clearing Corporation of India
Clearing corporation of India ltd was incorporated on 30th of April, 2001, as the
countrys first clearing house for the govt. securities, forex and other related market
segments.
Credit Rating
Agencies
SMERA
7 Standard & Poor
CRISIL
8 Moodys
ICRA
9 Fitch
CARE
18
RATING INDIA
Bricwick rating
Venture Capital:- Venture capital is a source of funds used to finance new proposal / idea
involving new technology or product which are silky but with a potential of high return.
CAPITAL MARKETS IN INDIA
Capital Market is the market for long term funds unlike the money market. Capital market
refers to all the facilities and institutional arrangements for borrowing and lending medium
and long term funds.
Equity Shares: An equity share commonly referred to as ordinary shareholders in the ratio
of their existing holding of shares
Bonus Shares: Shares issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profit earned in the earlier years.
Preference shares:- Owners of these kinds of shares are entitled to a fixed dividend or
dividend calculated at a fixed rate to be paid regularly before dividend can be poid in
respect of equity shares.
Debentures:- An instrument issued by a company bearing a fixed interest rate payable half
yearly on specific dates and principal amount repayable on particular date on redemption.
Bond: - it is normally unsecured, issued by a company, or government agency.
FDI
Foreign Direct Investment is an investment by non-resident entity / person resident outside
India in the capital of an Indian company under schedule 1 of FEM.
FDI Cap 74% Private Sector Banks
FDI Cap 20% Public Sector Banks
(FDI & Portfolio Investment)
Mutual Funds:- Mutual funds are associations or trusts of members of public who wish to
make investment in the financial instruments or assets of the business secotor orcorporate
sector for the mutual benefit of its members.
Dematerialization:- Dematerialization is a process by which the paper certificates of an
investor are taken back by the company / registrar and actually destroyed and equivalent
number of securities are credited in electronic holdings of that investor.
Important recent committees on Banking
1. BPLR
Benchmark prime lending rate
2. Review lead bank scheme
3. Business correspondent model
4. Currency distribution
5. Sound regulation & transparency
=
=
=
=
=
6. Financial sector assessment

7. Estimation of savings and investment
=
=
Deepak Mohaty
Usha Throat
Pvijya Bhaskar Rao
Usha Throat
Dr. rakesh Mohan and Mr. Tiff
Macklem
Dr. Rakesh Mohan
Dr. C. Rangarajan
19
8. Global financial system on capital flows

=
Dr. Rakesh Mohan
9. Task force for diamond sector
=
A.K. Bera
10. Development of housing
=
Proof. Amitabb kundu
11. Technological upgradation of RRB
=
G. Srinivarsan
12. Rehabiltio of sick SMEs
=
Dr. K.C. chakrabaty
13. Inflation
=
Dr. Balvant Singh
14. Agriculture Loan
=
C P Swarankar
15. Distress Farmers
=
S.S. Johl
16. Cost of NRI Remittances
=
P.K. Pain
17. Ways and Means Advances
=
M.P. Bezbaruah
18. Rural credit & microficnance
=
H.R. Khan
19. Export Credit
=
Anand Sinha
20. RRBs
=
A V Sardesai
21. Cards
=
R. Gandhi
22. Cooperative Credit
=
Prof. A. Vaidanathhan
23. Debt Restructuring
=
G. Srinivasan
24. Group on internet deployment
=
Prof. A. Vaidyanathan
25. Financial institutions
=
N. Sadasivan
26. Flow of credit to agriculture
=
Prof. V.S. Vyas
27. Flow of credit to SSI sector
=
Dr. A.S. Ganguly
28. Cheque Truncation and E-Cheque
=
Dr. Barman
29. Computer audit
=
A.L. Narasimhan
30. Payment Cystem
=
Dr. R.H. Patil
31. Local area bank
=
G. Ramacharndran
32. International trade in services
=
Deepak Mohanty
33. Electronic money
=
Mr. Zarir . J. Cama
34. Role of credit information bureaus
=
S.R. Jyer
35. Information systems audit policy
=
Dr. R.B. Burman
36. Legal Aspects of Bank Frauds
=
Dr. N.L. Mitra
37. Market Integrity
=
C.R. Muralidharan
38. Cooperative Credit System
=
Jagdish Kapoor
39. Urban Cooperative Bank
=
Madhhav Rao
40. Setting up credit information Burean in India =
N.H. Siddiqui
41. Corporative Debt Restructuring System
=
S. Gopinath committee
42. Priority Sector
=
M V Nair Coommittee
43. Customer Service
=
Talwar Committee
44. Committee on procedures and performance audit on public services
=
Tarapore committee.
45. Export Committee on land leasing
=
T. Haque
Important terms and Ratios used in analysis of bank performance
1. Cash Deposit Ration
2. Return on Equity
Cash in Hand + Balance with RBI

Deposits
Net Profit
Capital + Reserves and Surplus
3. Cost of deposits
4. Cost of borrowings
5. Cost of funds
interest paid on deposits

Deposits
interest provide on borrowings
Borrowings
(IPD + IPB)
Deposit + Borrowing
20
6. Return on advances
7. Net interest margin
=
=
8. Intermediation coast
9. Operating profit
10. Burden
IEA / Advances
Is defined as the total interest
earned less total interest paid.
Is defined as the total operating
expenses
Total earnings less total
expenses, excluding provisions
and contingencies.
The total non-inters expenses
less total non-interest income.
Bit coin = Bit coin launched in 2008, is a digital currency. It is generated through a computer
program and can be converted into cash after being deposited into virtual wallets.
Casino Banking: A practice of commercial banks engaging in unduly speculative or risky
financial activities to record high profit.
Corporate Social Responsibility (CSR)
CSR represents the activities of a company for its sustainability in the long run, that benefit
the community around the company in terms of employment, development of infrastructure
and other development activities.
Provisions of companies Act, 2013 = section 135 of the companies act 2013 has made
mandatory CSR provisions. Compliance of CSR is mandatory, if a company meets any of
the following a criterion.
a. Net worth of Rs. 500/- core or more
b. Turnover of Rs. 1000/- core or more
c. Net profit of Rs. 5 crore or more during any financial year
The company spends at least 2% of average net profit of 3 financial years immediately
preceding.
****##****
21
CHAPTER 6
Credit Policy: For policy purpose the period, the period April Sept is known as slack
season and the Oct to March is called busy season
Bank Rate: - it is defined in sec 49 of RBI Act 1934 as the standard rate at which RBI is
prepared to buy or discount bills of exchange.
Over the year, the repo rate has taken the place of the bank rate and interest rates presently
move in line with the repo rate
NDTL =
Net Demand and Time Liabilities
NPCI =
National Payments corporation of India, NPCI, was set up in Dec. 2008 as an

umbrella organization for operating and managing retail payment systems
CRR: =
CRR refers to the ratio of banks cash reserve balances with RBI with
reference to the banks net demand and time liabilities to ensure the liquidity
and solvency of the scheduled banks.
SLR
Statutory Liquidity Ratio:- Section 24 (2A) of Banking Regulation Act 1949

requires every banking company to maintain in India equivalent to an amount
which shall not, at the close the business on any day, be less than as
prescribed by RBI as a percentage of the total of its net demand and time
liabilities in India, which is known as SLR
22
CIC Credit Information Companies:- A CIC is an independent organization licensed by

RBI that enters into an agreement with banks, NBFCs, as its members and aggregates data
and identity information for individual consumers and business entities, from its members.
Fair practices code for lenders liability
1. Loan application form & acknowledgement
2. Disposal of applications
Exempted accounts where base rate is not applicable
1. DRI Advances
2. Loan to banks own employees
3. Loans to banks depositors against their own deposits.
Fixed Interest Rates:- In case of fixed rates, the interest rate remains same, throughout the
currency of the loan.
Floating Interest Rates:- In case of floating interest, the rate is modified periodically on the
basis of changes in the bench mark interest rate.
Bench mark or anchor rate:- Bench mark rate is the underlying interest rate (may be on
govt. security or money market rate etc.) with which the floating rate is linked. Any change in
this anchor rate would bring change in the floating rate.
Consortium financing:- Under consortium financing, the banks formally join, by way of an
inter-se agreement, to meet the credit needs of the borrowers. There is no ceiling on the
number of banks to participate.
Multiple Banking
In a multiple banking arrangement, the banks allow credit facilities without a formal
arrangement among themselves. They make their own assessment of credit needs.
Credit Risk
The credit risk refers to the possibility of loss that the bank or financial institution may suffer
as a consequence of inability of the counter-party.
NPA
Non-performing assets are those assets which have become out of order in a period of 90
days.
SARFAESI
Securitization and reconstruction of financial assets and enforcement of security interest, Act
2002
CDR
Corporate Restructuring system
40%
Priority Sector Lending

Priority Sector
23
Agriculture
18%
Weaker Section
10%
Foreing Banks Priority Sector
32%
RRBs
60%
Weaker Section
15%
Urban Co-operative
40%
Maximum Rs. 10 lacs
(In India)
Maximum Rs. 20 Lacs
(Abroad)
Education Loan
MICRO FINANCE: - In India, the concept of micro finance, was launched in the year 1992.
As per RBI, the micro finance is the provision of thrift, credit and other financial services and
products of very small amount to the poor in rural, semi-urban and urban areas.
SWAROJGAR CREDIT CARD SCHEME
Scheme prepared by NABARD is implemented by commercial banks, To provide adequate /
timely credit to small artisans and other micro entrepreneurs.
Weavers credit card
Kissan credit scheme 2012
Lead Bank scheme
The lead bank scheme administered by RBI, was introduced in Dec 1969 on the
recommendations of Prof. Gadgil Committee and FKP Bariman committee. The scheme was
reviewed during 2010 by Usha throat committee.
Lead Bank for coordination of activities of banks and other developmental agencies to
promote banks role in overall development of rural sector.
Service Area Approach
The service area approach was implemented wef. 1-9-1989, as a result of recommendations
of PD Ojha committee. The approach is applicable only in rural and semi-urban areas.
Rashtriya Krishi Bima Yojna Presently
CGTME
CREDIT GUARANTEE FUND TRUST FOR MICRO & SMALL ENTEERPRISES
It was set up by govt. of India and SIDBI in Aug 2000 to make collateral free credit facilities,
available to MSEs.
National Equity Fund
To provide equity type support to small entrepreneurs, the national equity fund is being
administered by SIDBI and central Govt.
24
LUCC Laghu Udhami Crediit Card

Govt. launched credit card scheme wef from Nov 12, 2001
CRGFT for low income housing
The credit risk Guarantee Fund Trust for low income housing has been set up as part of
Rajiv Awas Yojna scheme under the Indian trust act, 1882.
PMEGP = Prime Ministers Employment Generation Program launched on 1-4-2008. A credit
linked subsidy scheme.
TRUNCATED CHEQUES
It is a cheque the physical movement of which is stopped in the process of collection /
clearing. In its place it electronic image is used for collecting the payment.
Electronic Cheque
Electronic cheque is a cheque which contains the exact mirror image of a paper cheque and
is generated, written and signed in a secured system ensuring the minimum safety
standards with the use of digital signature.
CTS 2010 Standard:
RBI decided to prescribe certain benchmarks towards achieving standardization of cheques
known as CTS-2010 standard specifications.
Customs = A person who opens an account, which bank accepts with proper introduction..
Bankers obligations
1. Duty to honour cheques of customers.
2. Duty to maintain secrecy of a/an
Information to credit information companies
Information can be given by banks without consent of customers, to credit information
companies, due to provisions of credit information companies.
BCSBI
Banking codes & standards Board of India.
Banking Codes and Standards Board of India was set up on the lines of a similar set up in
UK to oversee the fair practice code evolved by the bankers.
Code of Banks Commitment:- A comprehensive Bankers fair practice code prepared by
IBA (Indian Bank Association) working group is used as a standard by BCSBI.
Banks Code for Customer Service
Banking Codes and Standards Board of India (on July 03, 2006) released the banks code
for customer service which is a voluntary code. It provides protection to the customers and
explains how banks are expected to deal with the customers for their day to day operations.
Consumer Protection Act
25
Consumer protections act was initially enacted during 1986 and implemented wef april 15,
1987 to enable the consumers to enforce his rights as consumer through a simple legal
procedure. It was amended on Dec 17, 2002
Pecuniary (financial) jurisdictions
Distt. Forum
20 lac
State Commission
100 lac
National Commission
Above 100 lac
RBIs guidelines on know your customer (KYC)

The KYC principles, were issued by RBI (Aug 2002) under section 35 (A) of the banking
regulation act, 1949. KYC procedure should be the key principle for identification of an
individual / corporate while opening an account. The customer identification / verification
should be on the basis of documents provided by the customer.
Introduction is not mandatory as clarified by RBI in its circular dated Dec 10. 2012.
UCIC = Unique customer identification code for banks customers in India.
Banks have been advised by RBI (APR 2012) to allot UCIC number to all their customers
while entering into any new relationship in the case of all individual customers to begin with.
The existing individual customers may be allotted unique customer identification code by end
31. 12. 2014.
Basic Saving Bank Deposit Account
Banks have been advised by RBI (Aug 10, 2012) to offer a basic savings bank deposit to
replace the no-frill account which will offer minimum common facilities to all their customers:
1. No minimum balance requirement
2. A/c is a normal banking service for all.
Prevention of money laundering act- obligations of banks
With effect from July 01, 2005, in terms of the rules, under the PMLA, 2002, section 12,
there are certain obligations on banks to preserve and report customer account information,
for which RBI has issued directives (during Jan 2006) U/s 35 A of Banking Regulation Act
1949 & Rule 7 of prevention of money laundering rules as under:
1. Maintenance of records of transactions
2. Preservation of records
3. Reporting of financial intelligence unit- India.
Illiterate person
current account
There is no legal bar on opening of current account but IBA deposit guidelines stipulate that
no current account should be opened in the name of illiterate persons.
Operation in accounts of illiterate persons where the illiterate person wishes to give a
mandate authorizing somebody to operate his account, the mandate should be attested by a
notary public.
RBI directions (June 04, 2008) on accounts of visually challenge (Blind) persons
26
Banks are to ensure that all the banking facilities such as cheque book facility including third
party cheques, ATM, Net banking, locker, retail loans, and credit cards etc. facilities to be
invariably offered to the visually challenged without any discrimination.
Hindu Succession Act, 1956
Womans Property Act, 1874
Indian Succession Act, 1925
INSANE PERSON
Accounts of insane person cannot be opened Right of set off can be exercised in insane
account.
Talwar committee recommendations
1.
2.
3.
4.
5.
Customer service committee at branches to meet quarterly

Customer meet: - should be held once in a half year by the branch.
Customer day on 15th of every month to be observed at branches.
Complaint cum suggestion box should be provided at each branch.
Credit of pension on last day of each month.
Recommendations of Goiporia committee Dec 1991

1. Banks may extend business house for all banking transactions except cash, up to
one hour.
2. Facility of instant credit upto cheques Rs. 15000/-3. Nomination should be provided unless customer does not want it.
Minors Accounts
The minor can open saving bank account. It can be operated by the natural guardian or by
minor, if he/she is above the age of 10 years.
INTRODUCTION IN ACCOUNTS
As per RBI Cir date Dec. 10, 2012, introduction from existing account holder of a bank is not
mandatory, when documents of identity and address proof are provided.
Name of Nominee on pass book or FDR
As per RBI master circular Date Nov 3, 2008 on customer service, banks have been advised
to introduce the practice of recording on the face of the passbooks / FDRs the position
regarding availment of nomination facility with the legend Nomination Registered. They
should also indicate the name of the nominee in the passbook / statement of account /
FDRs, in case the customer is agreeable to the same.
Witness in nomination forms
RBI has clarified that signatures in forms DAI, DA2 and DA3 need not be attested by witness
Cash payment of term deposits
Term deposits cannot be paid in cash if the amount is Rs. 20000/- or more (section 269-T of
IT Act). These can be paid only by way of credit to bank account or by way of account payee
crossed demand draft. Similarly in case of interest amount exceeding Rs 10000/- no cash
payment is to be made U/s 40.
27
National Saving Certificates (NSCs)

NSCs are certificates issued by Govt. of India and are available at all post offices.
Maturity 5 and 10 years
Denomination Rs 100, Rs 500, Rs 1000, Rs 5000, Rs 10000/- max amount of investment =
no upper limit who can purchase: individuals, trust and HUF cannot invest.
Public Provident Fund
Account can be opened: by individuals (no joint account HUF, Trust etc. not allowed.
Account can be opened in minors name by either father or mother (one of them only)
Contribution Min Rs 500/= Maximum Rs 100000/- - account can be opened with initial
deposit of Rs 100/Period 15 years. It can be extended by 5 years at the request of the subscriber.
Nomination one or more persons allowed interest is 8.7% (1.4/2013)
Conduct of Government Business
All banks including private banks, conducts Govt. business as agents of RBI.
National Pension System
Central Govt. made NPS mandatory for new recruits (except defense forces) from 1st Jan,
2004 and made it operational from April, 2008..
In Aug 2008, govt. offered NPS to all citizens of India on a voluntary basis.
Features of the Scheme:1. The scheme is voluntary and is open to all citizens of India wef. 1.5.2009.
2. Resident or non-resident between age of 18-55 years can subscribe
3. The amount can be chosen by the subscriber himself. The amount will be (a)
minimum Rs 600 per contribution
(b) Minimum per year Rs. 6000/(c) Minimum no of contributions per year shall be 04.
Swavalamban Scheme
The scheme (Sept 2010) will be applicable to all citizens in the unorganized sector who join
the new pension system.
Under the scheme, govt. will contribute Rs. 1000/- per year to each NPS account. The
benefit will be available only to persons who join the NPS with a minimum contribution of Rs
1000/- and maximum contribution of Rs. 12000/- per annum.
Indian Currency
One rupee note and coins issued by central govt.
Denomination: Presently bank notes are issued in the denomination of Rs 10, 20, 50, 100,
500, 1000, notes of Rs 5000/ and Rs 10000/- can also be printed.
28
Legal Tender: As per provisions of coinage act 1906, bank notes, currency notes and coins
(Rs/and above) are legal tender for unlimited amount. The subsidiary coins (blow Rs) are
legal tenders for sum not exceeding Rs.
Mintage: Mintage of coins is governed by coinage act 1906. Presently coins in the
denomination of 50 (called small coins), one rupee, two rupees, five rupees and ten rupees
(called rupee coins) are available. Coins can be issued up to denomination of Rs 1000/- as
per coinage act 1906.
Discontinuation:-
Issue of 1, 2, 3 paise wef sep 16, 1981

5, 10, 20, 25 wef June 30, 2011
Rupees
1, 2, 5, discontinued
Pre- 2005 Series Bank notes

The banknotes issued before 2005 MG series are called pre 2005 series
banknotes, which do not have the year of printing on the reverse side. On Jan 23, 2014 RBI
decided to withdraw, from circulation, these notes as they have fewer security features.
RBIs clean Note Policy
RBI had announced clean note policy in January 1999. RBI directives
1. Not to staple bank notes
2. Use bands instead of staple pins
3. To exchange soil and mutilated notes
Fraud and Reporting
Banks are required to report to RBI, proper information about frauds. Delay in reporting
makes the banks liable for penal action under section 47 (A) of the BR Act, 1949. Frauds
involving Rs 1 lakh and above.
Minors:
A minor (of Indian domicile) is a person who has not completed 18 years of age as per
section 3 of Indian majority act, 1875 amended wef. Dec 16, 1999. Where a guardian is
appointed by the court (for minors person or property or both) or where a court of ward is
appointed as guardian, a person attains majority on completion of 18 years of age.
Agreement with a minor

As per Sec. 11 of Indian contract act, 1872 a minor is not competent to enter into a contract
and all agreement with a minor are void ab-initio.
Indian Partnership Act 1932
Insurance cover
DICGC is a wholly owned subsidiary of RBI and DICGC Act 1961 provides insurance cover
on the deposits of banks. Each depositor in a bank is insured upto a maximum of Rs
100000/- for, both the principal and interest amount held by him.
29
****##****
CHAPTER 7
FOREIGN EXCHANGE
FEMA
The Foreign exchange management act 1999 was enacted on Dec 02, 1999 to replace
foreign exchange regulation act 1973 (FERA) The act came into force on June 01, 2000
Objectives:1. Facilitating external trade and payments.
30
2. For promoting the orderly development and maintenance of foreign exchange market
in India.
Resident
A person residing in India for more than one hundred and eighty two days during the course
of the preceding financial year.
NRI
=
A person holding Indian passport, who has gone abroad for a gainful
employment, indicating an indefinite period of stay outside India or who is working abroad on
temporary foreign assignments
Foreign Exchange Transactions under FEMA
1.
Current Account :- These transitions are those that are not capital account
transactions and include
a. Foreign trade
b. Education
c. Medical care etc
2. Capital account transactions:- capital account transaction is a transaction which
alters the assets or liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India and include:a. Investment in foreign securities
b. Transfer of immovable property outside India.
Convertibility of Currency
A currency is considered to be convertible if its holder can convert to at any time, into gold or
any other generally acceptable foreign currency at a predetermined fixed rate, without any
restriction from the monetary authority.
Current account convertibility
Full convertibility on current accounts was introduced by RBI on 19.08.1994.
Capital account convertibility:- S.S. Tara pore committee its report (1997) had
recommended a no. of relaxations that can be allowed for such transactions, many of which
have already been implemented.
Foreign Exchange
As per FEMA, the foreign exchange means foreign currency and includes,
1. Deposits, letter of credit
2. Drafts etc.
Exchange Rate: is the rate at which one currency is conversed into another currency.
Foreign Currency Accounts
NOSTRO, VOSTRO, LORO
International Commercial Terms
INCO terms are a series of international sales terms, and widely used in international
commercial transactions.
31
ECB refer to commercial loans in the form of bank loan, buyers credit ECB can be accessed
under two routs
1. Automatic Route
2. Approval Route
NRI Deposit Account
1. FCNR =
2. NRE =
3. NRO =
Foreign Currency Non-Resident

non-resident external
Non-resident ordinary
Accounts of residents
1. Resident foreign currency account (RFC)
2. Resident Foreign Currency (Domestic) Account RFD (D)
3. Exchange Earners Foreign currency account (EEFC Account)
MIBOR
Mumbai Inter- Bank offered Rate
MIFOR
Mumbai inter-bank forward offered rate
LIBOR
London Inter bank offered Rate
EURIBOR
Euro Interbank offered Rate
TIBOR
Tokyo Inter bank offered Rate
SIBOR
Singapore Inter bank offered Rate
Balance of Payment: - BOP is the summary of the economic transactions of the residents
of a country with the non-residents outside India, during a specified period of one year.
Items:1.
2.
3.
4.
5.
6.
7.
8.
9.
Export of goods
Less import of goods
Balance of trade (1-2) surplus deficit)
Export of services (called invisibles)
Import of services (called invisibles)
Net position of invisibles (4-5) (+or 1)
Current account (Total of 3 and 6) (+ pr -)
Net position of capital account
Balance of payment (net of seven and 8)
The balance affects the foreign exchange reserve.

****##****
CHAPTER 8
FINANCIAL STATEMENTS & RATIO ANALYSIS
Financial Statements
1. A balance sheet
2. A trading & manufacturing and profit & loss account
32
3. A funds flow statement

4. A cash flow statement
Liabilities:- are the resources which the business mobilizes to acquire assets for earning
income.
Assets:- The assets are the tools with the help of which, income in a business is earned.
The total of liabilities would always be equal to the total of assets.
Current liabilities:- The current liabilities are the liabilities the repayment of which is to be
made within 12 months of date of balance sheet.
Contingent liabilities:- These liabilities are not shown in the body of balance sheet but are
recorded as a footnote. These are also called off-balance sheet items. They are called
contingent because their possibility of becoming a funded liability or not, depend upon the
fulfillment or non-fulfillment of certain conditions.
Current Assets:- These are the assets which are required by the business for the purpose
of re-sale and are recalculating and arise out of usual business dealings. They are held
temporarily for subsequent conversion into cash maximum within a period of 12 months.
Intangible Assets: Certain assets in business dont have any physical presence or in other
words these are just book entries created with certain specific objectives.
Example:
1.
2.
3.
4.
5.
6.
7.
Goodwill
Patents
Copyrights
Trade marks
Formulae
Loss incurred
Preliminary and formation expenses
Depreciation:- Depreciation means decline in the value of an assets as a result of wear and
tear due to actual use, passage of time, fall in market value.
Net working capital = current assets current liabilities
Break Even Point:- it is that level of activity, the total revenue cost is equal to total sale
value or where there is no loss or no profit.
CRR is the portion of deposits which commercial banks have to hold as reserves either in
cash or deposits with central bank.
At present CRR is 4%
Repo rate 7.25 (Now changed to 6.75)
Priority sector norms revised
The reserve bank of India revised priority sector lending norms on April 23, 2015, asking
banks to give 8 % of the total credit to small and marginal farmers, it also widened the
definition of priority sector by including medium enterprises, social infrastructure and
renewable energy.
33
****##****
CHAPTER 9
INFORMATION TECHNOLOGY & BANKING
Computerization in Bank:-
34
1. The process of computerization in Indian banks started when the first Rangaarajan
committee gave its recommendations in the year 1984.
2. The 2nd report of Rangarajan committee in the year 1989 gave the pace to expedite
the computerization.
The Payment and settlement system act 2007
Objective: Regulation and supervision of payment systems and designates RBI as
authority.
Regulations under the Act
1. BPSS Board for regulation and supervision of payment and settlement system, 2008
2. The payment and settlement systems regulation, 2008
Electronic Payment Systems
1. RTGS: - RTGS is a centralized payment system in which, inter-bank payment
instructions are processed and settled, on gross basis in a real time environment. It
uses INFINET and SFMS platforms.
In India, RTGS was implemented wef. March 26, 2004
It is operated by RBI
UTR = Unique Transaction Reference: Each message has to be assigned with a UTR
number and provided in the field transaction identification.
Structure of 22 characters UTR
XXXX
4 character of IFSC of sending participants
is RTGS
Channel of transaction
YYYY MD
Year, Month and date
nnnnnnnn
Sequence number
NEFT: - RBI operationalised the NEFT system during Nov 2005. It is a nationwide funds
transfer system to facilitate transfer of funds from any bank branch to any bank branch.
NEFT works on Net settlement, unlike
RTGS, that works on gross settlement.
NEFT is a batch based system, while
RTGS is an online real time system.
NEFT is an account to account funds transfer system hence, the remitter and beneficiary
should have account.
Operating hours
8 am to 7 pm (M to F)
8 m to 1 pm (Saturday)
AADHAR ENABLED PAYMENT SYSTEM
35
AEPS is a payment service offered by the national payments corporation of Indian to banks
using Aadhaar number and online UIDAI authentication through their respective business
correspondent service centers.
Speed Clearing:- Speed Clearing refers to collection of outstation cheques through the local
clearing.
CFMS:- CFMS was operated and maintained by RBI to enable operations on current
accounts maintained at various offices of the RBI, through standard message formats in a
secure manner.
MICR = Magnetic Ink character Recognition cock MICR technology based mechanized
clearing systems was introduced in 1986. It uses MICR code parameter on cheques as the
basis for clearing. The MICR code structure is as under
000
000
000
City code
bank code
branch code
IFSC = Indian Financial System Code

The IFSC is an 11-digit alpha numeric code based on the pattern followed by the
society for worldwide interbank financial telecommunication. The IFSC format is as under
RBS
AHPAOI
Bank identifier
zero
Branch Identifier
The first 4 digit identify the bank, 5th is numeric kept o) and last 6 characters identify the
bank branch.
IBAN = International Bank account Number (IBAN) IBAN is an international standard for
identifying bank accounts across national borders. It facilitate domestic / cross border inter
bank electronic payment and straight through processing.
MTSS = MTSS is a quick and easy way of transferring personal remittances from abroad to
beneficiaries in India. Under MTSS only inward personal remittances into Indian are
permissible. Outward remittance from India is not permissible.
Cheque Truncation:- Truncation is the process of stopping the flow of the physical cheque,
to the drawer bank branch. The instrument is truncated (i.e. movement of paper cheque is
stopped) at some point, enroute to the drawer branch and an electronic image of the cheque
is sent, along with the relevant information, like the MICR fields, date of presentation,
presenting banks etc.
Benefits of cheque truncation
a.
b.
c.
d.
e.
Speeding up collection of cheques

Enhancing customer service
Reducing scope for clearing related frauds
Minimizing cost of collection of cheques,
Reducing reconciliation.
Multi-city cheques:- All CBS enabled banks have been advised by RBI (Aug 2012) to issue
only payable at par/multi-city CTS 2010 Standard cheques to all eligible customers. Since
such cheques (Paya le at par) are cleared as local cheques in clearing houses, customers
should not be levied extra charges.
36
NPCI NPCI was incorporated in Dec 2008 as a section 25 company under companies act,
with authorized capital of Rs. 300 cr. And paid up capital is Rs. 100 cr.
Rupay is a domestic card scheme launched by NPCI. Rupay is the coinage of two terms
rupee and payment. The pilot launched of rupay debit card was made in March 2012.
ATM Models
Online ATMs: These ATMs are connected to data base of the bank and provide
transactions on real time basis, online.
Offline ATMs: Are not connected to banks data base. Withdrawals are permitted within a
pre-fixed limit irrespective of the amount balance.
Stand alone ATMs: are not connected to any ATM network. The transactions are restricted
to the ATM branch and link branch only.
Networked ATMs: These ATMs are connected an ATM network.
Onsite ATMs: - The ATMs that are installed within the bank branch promises.
Off site ATMs: The ATMs that are installed away from the bank branch promises, such as
in a shopping centre, air port, railway station etc.
White Label ATMs :- RBI permitted (on June 20, 2012)), the non-bank entities incorporated
in India under the companies Act 1956, to set up, own and operate ATMs in India. These are
called White Label ATMs (WLAs). These can be set up after obtaining RBI authorization
(valid for 1 year) under payment and settlement systems act 2007.
Services available at ATMs:
1.
2.
3.
4.
5.
6.
7.
Cash dispension
Account information
Cash deposit
Regulation bill payment
Purchase of Re-load vouchers for mobiles.
Short statement
Loan account inquiry
PIN = Personal identification Number:PIN is the 4 digit numeric password for use at the ATM. The PIN is separately mailed to the
customer. Most bank force the customers to change the pin on the first use.
ATMs for Persons with disabilities:- Banks are to provide all ATMs with ramps so that
wheel chair users with disabilities can easily access them. All new ATMs should be installed
as talking ATMs with Braille keypads wef 1.7.2014.
Electronic Clearing Services
ECS is a mode of electronic funds transfer from one bank account to another bank account
using services of a clearing house for bulk transfers.
Types of ECS: There are two types of ECS called ECS (Credit) and ECS (debit)
Some more about MICR
37
RBI had issued a set of comprehensive guidelines (dec, 06, 2002) for operating the
mechanized cheque processing systems using MICR technology.
Standardization of cheque forms:- The instruments should be printed on MICR grade
quality paper with a read bank of 5/8 in width reserved at the bottom on which essential
particulars occur in special MICR ink.
Cheque Size 8 X 3 2/3
MICR Code Line Structure: The code line occurring in the read band is divided into 5 fields.
1. Cheque serial number :- of 6 numeric digits
2. Sort field or the city / bank / branch code: number consisting of a digits. The first 3
digits represent the city; the next 3 indicate the bank and the last 3 digits signify the
branch. The 9 digit sort code is unique for any bank branch in the country
3. Account number field consisting of 6 digits followed by a delimiter is an optional field.
4. Transaction Code:- field comprising of 2 digits is in all instruments except
government cheques drawn on RBI which has a 3 digit transaction code.
5. The last held represents the amount fields and consists of 13 digits bounded on both
sides by a delimiter. The amount is encoded in paisa without the decimal point.
Mobile Banking
Mobile banking transactions means undertaking banking transactions using mobile phones.
Transaction limit in mobile banking: Transaction upto Rs 5000/- can be without end to
end encryption. Banks can provide fund transfer services which facilitate transfer of funds
from their accounts for delivery in cash to the recipients
Max value shall be Rs 1000/- per transaction
Max value of Rs 25000/- per month per customer.
EBT Electronic Benefit Transfer
EBT is a product offered under financial inclusion,. Which facilitates payments to reach the
intended beneficiaries of govt. sponsored schemes, through bank accounts.
CORE Banking Solution:CBS is the process which is completed in a centralized environment i.e. under which the
information relating to the customers account is stored in the central server of the bank.
MICR Code and IFSC Code on passbook/statement of account
RBI has decided that this information should also be made available in the passbook /
statement of the account holders.
Electronic Signature
The digital signature has been accorded legal sanctity in India thought information
technology act 2000. ES is a means for authentication of an electronic record, in electronic
form, attached to the electronic record, by a person, in whose name the digital signature
certificate is issued.
Credit Cards: A credit card is a plastic card of 8.5 cm x 5.5 cm. The card bears the name
and the account number of the holder and also the date up to which the card holder can
obtain either goods or services
38
Credit Card:- The card holder, uses credit line, makes drawings within the sanctioned limit.
Debit Card: A debit card is also a payment card used to obtain cash, goods and services. In
this card, the card holder uses the balance available in his own deposit account.
Smart Card: A card which contains real value in the form of electronic money which
someone has paid for in advance.
Types of Smart Card
1. Stored value card: These are also known as pre-paid cards or value added cards.
Cards have magnetic stripe or a computer chip in which value is stored.
2. Magnetic Stripe Card: Conventional cards like ATM card, credit card are all
magnetic stripe cards. But the smart cards in the form of magnetic stripe card can
store much more information.
3. Re-loadable cards:- These are the cards where the value is replenished once it is
used.
4. Disposal cards:- These cards have specific value and once the value is used, these
are discarded.
5. Closed cards: The cards the value of which can be used for a specified purpose like
phone cards.
6. Open cards: These can be used for several issues and called electronic purse or
electronic wallet.
7. Electronic purse: The electronic cards have the provision for use of different types
of accounts of the user. This facility is known as electronic purse each having storage
of separate amount.
SWIFT
SWIFT was founded in 1973, as non-profit cooperative organization under Belgian law (with
its HQ in La Hulpe, near Brussels in Belgium), by 239 banks spread over 15 countries.
The objective of SWIFT is to create a unified international transaction processing and
transmission system to meet the ever growing telecommunication needs of the banking
industry. It makes use of encryption and checksum SWIFT undertakes financial liability for
the accuracy & timely delivery of validated messages from the point these enter the network
to the point they leave the network.
SWIFT provides protection against unauthorized access and protection of transmission.
SFMS: Structured Financial Messaging System
SFMS is an electronic data interchange (EDI) system that permits exchange of structured
messages.
Computer Security
The computer security should focus on important aspects such as proper
integrations, accessibility, control and audit ability. The security can be provided by use of
physical methods and by use of logical methods.
As regards the physical methods, the bank can provide guards, video surveillance,
biometric methods, locking up machines and terminals.
As regards the logical methods such as user ID and password, use of smart cards,
cryptography i.e. data encryption etc.
39
Fire wall technology

It stands for a technique that protects the computer network system from outside
intrusion. It may be remembered that firewall protect the system from outer intrusion and not
from the internal intrusion.
Encryption
When by use of mathematical algorithms, a message is transformed in to an
incomprehensible data, this process is called encryption. It is used to protect data in transit
over the net works from unauthorized interception and manipulation.
Decryption
The reverse of encryption It brings the data into normal form.
Biometric security
The Biometric security refers to automated measurement of individual performance
where the individual performance characteristics are unique to that individual only.
Under biometric security a no. of techniques are used that include.
1. Signature Recognition: How a signature is written for the initial registration and
recognition several signatures are recorded.
2. Finger print recognition:- Finger prints are the images of papillary ridges in the
outer skin layer of fingers, that can be recognized with reasonable accuracy.
3. Palm print recognition:- These are similar to finger-prints except that there is
large area and more extensive features.
4. Voiceprint recognition:- A time history pattern is developed by getting the
prescribed words pronounced.
Eye retina pattern recognition:- Retina patterns are unique to individuals. The verification
devil makes use of an infra-red beam to scan the back of the eye in a circular pattern while
detector measures the reflected light.
Computer Audit
In computer audit, the focus is on collecting and validating evidences to ensure
safeguarding assets, maintaining data integrity, achieving organizational goals of
computerization effectively and ensuring and ensuring effective usage of resources.
Committees on Computerization
1.
2.
3.
4.
5.
Rangarjan committee 1st

Rangarajan Committee 2st
Shere Committee
Saraf committee
Vasudevan committee
1983
1988
1994
1994
1998
Internet Banking In India

Reserve bank of India had set up a working group on internet banking to examine
different aspects of internet banking which focused on three major areas such as technology
and security issues, legals and regulatory and supervisory issues.
40
1. All banks, who propose to offer transactional services on the internet, should obtain
prior approval from RBI. Only such banks which are licensed and supervised in India
and have a physical presence in India will be permitted to offer internet banking
products to residents of India.
2. Technology and Security Standers: Banks should designate a network and database
administrator with clearly defined roles. Bank should have a security policy duly
approved by the board of directors.
3. Legal issues: From a legal perspective, security procedure adopted by banks for
authenticating users needs to be recognized by law as a substitute for signature.
4. Regulatory and supervisory issues: banks will report to RBI every breach or failure of
security systems & procedures.
CYBER LAW (IT Act 2000)
Cyber law in India is based on information technology act 2000 which extends to whole of
India.
The act has been drawn on the lines of model law on electronic commerce adopted
in 1996 by UN commission on international trade law the act has been amended wef Oct
27, 2009.
The major provisions:1. Electronic records or contracts:- The act has legalized the electronic contracts to
make them legally enforceable. Records can be kept in an electronic form
2. Electronic form
3. Digital Signature
Computer Virus:- means any instruction, information, data or program that destroys,
damages, degrades or spoils the performance of a computer system.
RAM: it is a read and write memory and volatile in nature. If information is not saved the
information is lost when computer is shut down.
Ram is of two kinds
1. Dynamic Ram
2. Static RAM
DRAM
SRAM
ROM: Read only memory: It contains information that could be read only and nothing can
be written. Hence it is permanent.
Types
1.
2.
3.
4.
5.
Programmable read only memory (PROM)

Erasable programmable read only memory (EPROM)
Electrically Erasable programmable read only memory (EEPROM)
Non-volatile RAM
Cache memory
Data Base Management

DBM is the maintenance of records and information so that these can be effectively
used with the help of a computer. Data is essential raw material for computer which is made
use of with the help of software and hardware. DBM helps in reading the data removing the
errors, updation of records, sorting and extraction of data from different files.
41
Data ware housing and data mining

Databases are known as data warehouses and the major features of the data stored in a
data ware house are that the data is subject oriented (transactions relating to customers)
data mining is a technique to reveal the strategic information hidden in data warehouse data
warehouse and data mining can be used by banks for various such as loan risk analysis,
portfolio risk analysis, demographic information about customer to focus on different
segments, overall risk analysis etc.
Data Communication
Communication of data from one point to another is an important function which
computers are expected to complete, for which communication network is used.
Basic component of data communication network
1. Transmission devices & interface equipment digital signals are converted into
analog signal for transmission for which modem is used. Modem at the receiving end
converts the analog signals to digital signals.
2. Transmission medium
a. Terrestrial cables
b. Cables and fiber optics
c. Microwave systems
d. Communication satellite
3. Transmission processor
a. Message switches
b. Multiplexers
c. Front end processors
Application of data communication
There is a no. of applications of data communication that fall under one of the
following categories.
a.
b.
c.
d.
Use of external database

Sharing of data files
Use of electronic mail
Bulletin board system
Communication processor
It is imperative in a data communication system that the data moves to the right place
with negligible error at lowest cost. The following equipment may be needed for effective
data communication.
a. Multiplexer
b. Concentrators
c. Front end processors
Protocol
It is a set of rules & procedures to control transmission between two points so that
the receiver can interpret properly, the bit stream transmitted by the sender. These are
technical guidelines that govern the exchange of signal transmission interception between
equipments.
42
Computer Networking
Networking in computer terminology means connecting computers and peripheral
devices in such a way that the networked computers are able to work together. These
networked computers may be located at different places or in the same premises. These
include local area network (LAN), Metropolitan Area network (MAN) or wide Area network
(WAN)
Networking Components
1.
2.
3.
4.
5.
6.
Hubs (Central Connecting device)

Switching hubs (a type of hub, but faster)
Bridges
Routers
Cables
Network adapter cards
Networking Topology (Layout)

1.
2.
3.
4.
Star Network
Ring topology
Bus topology
Hybrid topology
BANKNET
BANK NET is a payment network established by RBI (On the recommendations of
Layer committee) which functions within India and was launched during 1991.
RBI NET
It is a communication system operating over the bank net.
I-Net
I-net owned by Deptt. of Telecommunications is a packet switching public data
network (PSPDN) which was opened in 1983 for slow speed data communication. I-net user
telephone connections and satellite for communication.
NICNET
National Informatics centre network is a part of internet services was set up in 1975
to promote information culture. It provides multiple services to user departments which
include finance, agriculture, industry etc.
INFINET
Indian Financial network, the satellite based VSAT network developed by institute for
development and research in banking technology is fast and secure interbank and interbank
communication system.
E-COMMERCE
E- Commerce refers to buying and selling of goods and services through internet with
business sites on internet offering the customers, buying and selling options.
43
EDI Electronic Data Interchange

In EDI, the data is transmitted between various computer terminals for the purpose of
processing which eliminates paper transactions.
Banks have been using EDI in the form of SWIFT messages. EDI guidelines are
known as communication standards.
VSATs = Very small aperture Terminals
VSATs work with the help of satellite and user small antennas with variable sizes
working like earth stations. VSA terminals can exchange and transmit information through a
large earth station which is called hub station having large size antenna.
Internet Telephony
The Govt. allowed internet telephony wef 01.04.2002. Internet Telephony makes use
of internet protocol (IP) that computers all over the world use to communicate with each
other.
HWAK
HWAK, the Intelligent Auto Teller Systems are special kind of ATMs capable of
thinking for themselves. Its benefits are better customer service.
Computer Glossary
1.
2.
3.
4.
5.
Beep = A sound when computer shows some error.

BIOS = Basic input output system
Buffer= It is an area of memory used for storing messages.
Cell = storage space in a computer memory
CHECKSUM = It is security control in SWIFT that prevents automatic changes during
transmission.
6. Dot matrix printer = A type of printer which prints output in the form of dots.
7. Compiler = A software programme which converts high level language into machine
language.
8. Ethernet = It is a set of LAN Cabling specification and protocols. It is the standard for
LAN
Facsimile = Electronic scanning and transmission of a document image to a remote location

where it is reproduced.
Field = An area on a data storage medium which contains one item of data..
Firewall = A system that restricts access to and from a network. It protects the intranet from
outside intrusion.
Graphic user interface: A visual representation that permits running of programs execution
of commands and interaction with the computer by using a point device like a mouse.
Hexadecimal: Number system having base as 16.
Hybrid computer: A type of computes which contains digital and analog units.
44
Joystick = an input device used to play games.

Loop = A part of computer progarmme which is repeated a number of times.
Morphing: An animation technique in which one image is gradually turned into another
Nano second: One thousand lac part of one second (one billionth of a second, non-volatile
memory: A type of memory in which contents remain safe even when the electricity.
Memory Units
A byte is a sequence of 8 bits as a single unit of information. A bit is either an on or an off.
On is presented as 1 and off as 0
1024 bytes
1 kilo byte (KB)
1024 KB
1 Megabyte (MB)
1024 MB
1 Gigabyte (GB)
1024 GB
1 Terabyte (TB)
1021 TB
1 Pet byte (PB)
1024 PB
1 Exabyte (EB)
1024 EB
1 Zettabyte (ZB)
1024 ZB
1 Yottabyte (YB)
****##****
45
CHAPTER = 10
ECONOMY
Microeconomics: Microeconomics is that part of economic theory which deals with the
individual parts of economic system such as individual households, individual firms or
industries. Microeconomics refers mostly to the analysis of scarcity and choice problems
facing a single economic unit like a producer or a consumer. Microeconomic theory is called
price theory because it is primarily concerned with the determination of prices of individual
commodities and factors.
Macroeconomics: Macro economics is that part of economic theory which studies the
economy in its totality or as a whole. It is also known as Theory of Income and
Employment.
Important concepts
Economy: An economy is a system that provides people with the means to work and earn a
living in the process of production.
Market Economy: A market economy (capitalist economy) is one in which all economic
activities are organized through the market (through price mechanism)
Centrally planned economy: It is an economy (socialist economy in which all economic
activities are planned and decided by the central planning authority or the government.
Mixed Economy: It is an economy in which public sector and private sector co-exist with
each other.
Central Problem: The basic central problem of an economy is allocation of resources or
making choices among alternative uses of scarce resources. The choice problem finds
expression in the form of three central problems: what to produce, how to produce and for
whom to produce.
Production Possibility curve: is a curve which depicts all possible combinations of two goods
which an economy can produce with available technology and full and efficient use of given
resources. PP curve slopes down from left to right because in a situation of full employment,
production of one good can be increased only after sacrificing some quantity of the other
goods.
Opportunity cost: - opportunity cost of an activity is equal to the value of next best
alternative.
Positive Economic Analysis: - This deal with the things as they are It studies the actual as
they are and analyses cause and effect relationship involved therein.
46
Normative Economic Analysis: It deals with the things as they ought to be. It studies
idealistic situation instead of actual situation and passes moral judgments expressing good
or bad aspects of economic situation.
Consumers equilibrium: - A situation under which a consumer spends his given income
on purchase of a commodity (combination of two goods) in such a way that he gets
maximum satisfaction and he feels no urge to change.
Utility approach: - Utility is the power or capacity of a commodity to satisfy human wants. It
is measured in units of pleasure or utility called utils.
Indifference Curve: - An indifference curve is a curve which shows all those combinations
of two goods that give equal satisfaction to the consumer.
Demand: - Demand for a particular good by a consumer means the quantities of the goods
that he is willing to buy at different prices within a given period of time.
Money Cost: - Money cost of production refers to the money expenditure incurred on hiring
and buying of inputs for producing a given amount of commodity.
Break Even Point: - It is the point at which firms total revenue (TR) is equal to total cost
(TC).
National Income: - is the sum of money value of net flow of all the final goods and services
produced by normal residents of a country during a period of account.
Capital formation: - is the net addition to the capital stock of an economy during a given
period.
Final Goods: - All goods which are meant either (a) for consumption by consumers (b) for
investment by firms are called final goods.
Or
Goods which do not under go any further transformation (change) in the production process
are called final goods.
Per Capita Income: - Per capita income is the average per capita national income. It is
income per head of population.
Factors of Production
1.
2.
3.
4.
Land
Labour
Capital
Entrepreneur
GDP:- the market value of all the final goods and services produced in the domestic territory
of a country by normal residents during an accounting year including net factor income from
abroad.
Fiscal Policy:- Fiscal policy comprises of expenditure policy and taxation policy of the
government.
Main tools of fiscal policy are
1. Expenditure Policy:- The objective of expenditure policy should be to pump more
money in the system that gives a fillip to the demand.
47
2. Revenue policy:- (Reduce tax rate) tax on personal incomes and taxes on
expenditure on buildings etc. should be reduced. If possible tax on lower income
groups be abolished.
3. Deficit financing:- Printing of currency/notes should be encouraged
4. Government (public) borrowing should be discouraged.
Monetary Policy:- Monetary policy is the policy of the central bank of a country to control
credit and money supply.
Government Budget: A govt. budget is an annual financial statement showing item wise
estimates of expected revenue and anticipated expenditure during a fiscal year
Objectives of a Government Budget

1.
2.
3.
4.
5.
6.
Economic growth
Reduction of poverty and unemployment
Reeducation of inequalities
Reallocation of resources
Price stability
Management of public enterprises
Structure of Govt. Budget
Budget Receipt
Budget Expenditure
Revenue
Capital
Revenue
Capital
Receipts
Receipt
Expenditure
Expenditure
Budget Receipts: Budget receipt refers to estimated money receipts of the government
from all the sources during a fiscal year.
Revenue Receipts:
1. Government receipts which neither create liabilities nor
2. Reduce assets are called revenue receipts. These are proceeds of taxes, interest
and divided on govt. investment, cess and other receipts for services rendered by the
government.
1. Capital Receipts:- Government receipts which either
i.
Create liabilities
ii.
Reduced receipt assets are called capital receipts
a. Two examples of capital which create liability are borrowing and raising of
funds from public provident fund and small savings deposits
b. Two examples of capital receipts which reduce assets are disinvestment
and recovery of loans
Budget Receipts
Revenue Receipts
Capital Receipts
Tax Revenue
Direct tax
indirect tax
Non-tax revenue
a. recovery of loans
a. interest receipts
b. disinvestment
48
a. Income tax
a. sales tax b. profits and
b. Corporate tax b. custom duty
c. borrowing
Budget Expenditure
Revenue Expenditure
a.
b.
c.
d.
e.
Capital Expenditure
Payment of interest
Payment of salaries and pensions
Grants and subsidies
Educational and health services
Defense service
a. construction of bedg, roads, bridges

b. purchase of land and machinery
c. investment in shares
d. loans to states and foreign govt.
e. Repayment of loan
Plan Expenditure:- Plan expenditure refers to the estimated expenditure which is provided
in the budget to be incurred during the year on implementing various projects and
programmes included in the plan.
Non-Plan Expenditure:- The estimated expenditure provided in the budget for spending
during the year on routine functioning of the government.
Revenue deficit:- refers to the excess of total revenue expenditure of the government over
its total revenue receipts.
Revenue deficit
total revenue expenditure - total revenue receipts
Fiscal deficit
total expenditure - total receipt excluding borrowing
Primary deficit
Fiscal deficit - interest payment
Fiscal deficit = Total expenditure revenue receipts capital receipt excluding borrowing
How fiscal deficit is met
1. Borrowing form domestic sources
2. Borrowing form external sources
3. Deficit financing (printing of extra currency)
Measures to reduce fiscal deficit
a. Measures to reduce public expenditure
1. A drastic reduction In expenditure on major subsides.
2. Reduction in expenditure bores, LTC, leave encashment
3. Austerity steps to curtail non-plan expenditure.
b. Measures to increase revenue are
1. Tax base should be broaden and concessions and reduction in taxes should be
curtailed
2. Tax evasion should be effectively checked
3. More emphasis on direct taxes to increase revenue
4. Restructuring and sale of shares in public sector units
Balance of Payment
A balance of payment is a systematic record of all economic transactions between residents
of a country and the rest of the world carried out in a specific period of time.
Component of Balance of Payment Account
49
1. Export and import of goods: The must straight forward way in which a country can
acquire foreign currency is by exporting goods... These are called visible items
because goods can be seen, touched and measured.
2. Services rendered, received (Shipping, banking, insurance, tourism, interest,
dividend, etc). Under this head, following types of earnings are included.
1. Non- factor income: Income from shipping, banking, insurance, tourism,
software services is called non-factor income.
2. Investment income (factor income) interest and dividends which citizens of a
country earn on investment abroad. Income from land, bond or share
3. Unilateral transfers:- Gift remittances, indemnities etc. from foreigners)
Indemnities = war indemnities paid by a defeated country
4. Capital receipt and payments: (borrowings, capital repayments, sale of assets,
changes in stock of gold and reserves of foreign currency. Etc.) it records
international transactions which affect assets and liabilities of domestic country
with rest of the world.
Difference between balance of trade and balance of payment (BOP)
a. Balance of trade: it is the difference between the money value of exports
and imports of material goods.
Account of a countrys balance of payment
Credits
Debits
1. Exports of goods
2. imports of goods
3. unilateral transfers
gifts, remittances,
indemnities, etc.
received form
foreignness
4. capital receipts borrowings
From abroad, capital repayments by,
or sell of assets to foreigners
5. imports of goods
6. imports of services
7. unilateral transfers gifts, idemnitters, etc., paid to foreigners
8. Capital payments lending to, capital repayments to, purchase of assets from
foreigners.
The balance of payment comprises two accounts: Current account and capital account
a. Current Account:- The correct account is that account which records imports and
export of goods, services and unilateral transfers during a year.
Components of current account (visible trade)
1.
2.
3.
4.
export and import of goods

export and import of services
unilateral transfers (Non factor & factor service transfer receipts payment
Investment income (income from land, bonds, shares, abroad.
Capital Account:- The capital account of BOP records all such transactions between
residents of a country and the rest of the world which relate to purchase and sale of foreign
assets and liabblilites during a year.
50
Components of capital account

1.
2.
3.
4.
Private transactions
Official transactions = Govt. Transaction
Direct Investment = Acquisition of a firm, house etc.
Portfolio investment = Purchase of share, bond
GATT = The General Agreement on Tariff and Trade was established in 1948 in Geneva to
pursue the objective of free trade in order to encourage growth an development of all
member countries. The principal purpose of GATT was to ensure competition in commodity
trade through the removal or reduction of trade barriers. The first seven rounds of
negotiations conducted under GATT were aimed at stimulating international trade through
reduction in tariff barriers and also by reduction in non-tariff restrictions on imports imposed
by member countries.
WTO: The world trade organization (WTO) was established on 1-1-1995
Finance Commission 2010-15 FC XIII was constituted by the president under article 280 of
the constition on 13 Nov 200. Dr Vijay Kelkar was appointed the chairman of the
commission.
Consolidated Fund:- This is the most important funds. All revenue raised by the govt.
money borrowed and receipt from loans given by the government flow into the consolidated
fund of India. All govt. expenditure is made from is fund. No money can be drawn from this
fund without parliaments approval.
Contingency Fund:- An urgent or unforeseen expenditure is met from this fund. The Rs 500
crore funds is at the disposal of the President. Any expenditure incurred from this fund
requires a subsequent approval from parliament the amount withdrawn is returned to the
fund from the consolidated ted fund.
MAT:- Minimum alternate Tax: This tax on corporate profit was introduced in 1996-97.
10% of the book profits are the minimum
The Finance Commission
Dr Y.V. Reddy
****##****
51

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CHAPTER - 1

IMPORTANT BANKING NOTES

Bank of Hindustan established in 1770

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4. A corporation or a company incorporated by or under any law in force.

All the nationalized banks

Central bank of India

Union bank of India

Punjab national bank

Punjab & Sind bank

United bank of India

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Indian overseas bank

Oriental bank of commerce

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Targets and sub targets

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National Electronic Fund transfer

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is a term used for performing balance checked, account

Brickwork rating India Pvt. Ltd

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Rs. 500 crore

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Constitution of the board of directors,

1000000 two and above

100000 and above

less than 5000

Business facilitator / business corner pendent model

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Retired bank employees, other retired persons.

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4. To enables Govt. subsidies and social security benefits to be directly credited to

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Certificate of deposit (CD)

Terms relating to money market

Money market = Market for short-term

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Instrument of govt. borrowing

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7 Standard & Poor

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6. Financial sector assessment

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8. Global financial system on capital flows

Cash in Hand + Balance with RBI

interest paid on deposits

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Net Demand and Time Liabilities

National Payments corporation of India, NPCI, was set up in Dec. 2008 as an

Statutory Liquidity Ratio:- Section 24 (2A) of Banking Regulation Act 1949

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CIC Credit Information Companies:- A CIC is an independent organization licensed by

Corporate Restructuring system

Priority Sector Lending

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Foreing Banks Priority Sector

Maximum Rs. 10 lacs