Economy

7 Pillars of Economy for UPSC

1. Basics of Micro & Macro & Indian Economy
a. Class11 Types of Economies LPG reforms
b. Class12- MICRO Selected only Mrunal.org/economy
c. Class12: MACRO - GDP, NNP, National income, Money & banking
2. Banking-Finance
a. Monetary Policy
b. Banking Sector
c. Capital Market
3. Fiscal Policy
a. Budget, Taxation
b. Subsidies
c. Fiscal Deficit
4. International
a. BoP, CAD
b. WTO & other Org.
c. Policies affecting
5. Sectors of Economy
a. Agriculture
b. MSME, Industries
c. Service sector
6. Infrastructure
a. Energy
b. Transport
c. RUR-URBAN
7. HRD
a. Skill Development
b. Poverty line

c. Weaker sections
Monetary Policy
Inflation
Supply inverse Demand (inflation)
Combat Inflation
Reduce Money supply
Tight Money policy
Dear money policy
Increase CRR,SLR
RBI Sell - Open Market Operations(Gsecurities)
Increase Repo Rate (Policy Rate)

Deflation Combat
Increase Money supply
Easy Money policy
Cheap money policy
Decrease CRR,SLR
RBI Buy - Open Market Operations(Gsecurities)
Decrease Repo Rate (Policy Rate)

Monetary Policy: Instruments?

1. Quantitative (General , Indirect) Instruments
a. Reserve Ratios (CRR, SLR)
i. Reserve ratio counted on NDTL ( NDTL =Demand Liabilities + Time
Liabilities)
ii. Demand Liabilities Current Account , Saving Account , Demand Draft ( ~
8000 Billion Rs)
iii. Time Liabilities Fixed Deposits , Recurring Deposits , Cash Certificates ,
Staff security Deposits ( ~78000 Billion Rs)
iv. CRR - 4% , Cant Lend , No profit (Except 1999)
v. SLR 22%, Cash , Gold , RBI approved Securities , Some profit
vi. RBI increase CRR/SLR -> Bank left less money to lend -> interest rate
increase -> less people borrow -> demand decrease -> Price decrease ->
inflation controlled
vii. RBI decrease CRR/SLR -> Bank left more money to lend -> interest rate
decrease -> more people borrow -> demand increase -> Price increase ->
deflation controlled
b. OMO: Open market operations
i. Purchase and sale of government securities by the RBI
ii. To combat inflation RBI Sell government securities to reduce Money From
Market
c. Rates (Repo, RR, Bank, MSF, LAF)
i. Bank Rate Long term loan From RBI without collateral
ii. LAF (Liquidity Adjustment Facility 2000) (Collateral? = Government
Securities (not from SLR))
1. Repo Rate (Police Rate) Short term loan from RBI to Client (SBI
need 100 Cr. so it put its G-Securities to RBI as collateral and lend
money. But this G-securities cant from SLR )
iii. MSF ( Marginal Standing facility )
LAF(Repo)
Minimum 5 Cr.
All Client eligible (Central And State Gov, All
Banks , NBFI )
Can not use SLR quota Securities
R%

MSF
Minimum 1 Cr.
Only Scheduled Commercial Bank e
Can use SLR Quota Securities( but
limit 0.75% Of NTDL )
Repo + 1 %

iv. Reverse Repo rate

1. Short term loan from Client to RBI (Means Deposit money in RBI)
2. All Client eligible(Central And State Gov., All Banks , NBFI)
3. Collateral : Government Securities
4. RR = Repo 1% ( dec 2014 : Repo = 8% so Reverse Repo = 7%)
2. Qualitative ( Selective , Direct ) Instruments
a. Margin / LTV (Loan to value ratio (ex. 60% of price of Gold as loan ))
b. Consumer Credit control / Down payment
c. Rationing ( Ex. Priority Sector Lending (PSL) )
Priority Sector Lending ( apply only Commercial Bank )
Target
Desi + Foreign (20+
Below 20 Branches
Branches) Bank
Bank
Agro
18%
No Specific targets
Weaker Sections
10%
No Specific targets
Remaining categories
Whatever left to reach the
No specific targets
under PSL (Housing loan 40% target
, Edu., Small industries ,
Export etc. )
Overall PSL target
40% of net loans given
32%
For Desi and Foreign Bank 20+ Branches:
If targets not archive then remaining Money has to lend to RIDF(Rural infra.
Development Fund). NABARD Manages it. And NABARD pays interest to Bank.
State Gov. get infra. Loan from here.
For Foreign Bank Below 20 Branches:
If targets not archive then remaining Money has to lend to SEDF(Small
Enterprises Development Fund). SIDBI Manages it. Lending to state industrial
finance corporation.
d. Moral Suasion (Ex. RBI advice to Bank)
e. Direct Action (Ex. Penalty if not Maintain CRR/SLR)
Quantitative tools Measures of Money Supply

M0 (Reserve Money)
- Currency in Circulation + Bankers and Others
Deposits with RBI
M1 (Narrow Money)- Currency with people + Demand Deposits (CA SA)
M2
- M1 + Post Office (only savings)
M3 (Broad Money) - M1 + Time Deposits (FD RD)
M4
- M3 + Post office
(Liquidity: M1 > M2 > M3 > M4 )

Limitation of monetary Policy

1. People dont have many investment alternatives. So, Commercial banks have high
deposits.
2. Unorganized money market; Shroff;
3. Lack of financial inclusion.
4. Monsoon uncertainty, cyclone, flood, draughts => Supply side constrains
5. Crude oil, gold import
6. Fiscal deficit, subsidy leakage, Black money, underground economy

7. Solution: Urjit Patel Committee

Committees by RBI

Bimal Jalan
Retired governor
New Bank Licenses
Feb 2014 report given

Nachiket Mor
RBI board of directors.
Financial products for small businessmen and low income household.
Financial inclusion: banking, credit, investment, insurance. + consumer protection

Urjit Patel
Dy. Governor
Revise and Strengthen Monetary policy framework
January 2014 report: Three Major Recommendation:

RBI inflation targets (2-6%) with deadline (4% +/- 2%)

Government should help RBI

Until Now

Stop Subsidy leakage , corruption

Stop administered price (ie. Petrol diesel subsidy )

Fiscal consolidation (ie. Stop extra expenses )

RBIs accountability has to be fixed

RBI Governor posted by RBI Act. So Governor directly accountable

to Government

Govt. can issue directives to RBI in public interest.

Parliaments standing Committee on finance- can summon Governor

Avg. 3-4/year.

Monetary Policy Committee. Decision by Majority Vote

But monetary policy made by Governor alone. (Sign.)

OVERALL No formal accountability mechanism.

Urjit Patel

Focus on WPI
But 60% GDP comes from service
sector.
Multi-targets: reduce inflation, GDP
growth, employment growth.

Focus on CPI (All India Urban + Rural)

Minimum inflation: 2%
Maximum 6%
=4% (+/- 2% band)
Similar system in Mexico, S.Africa,
Israel
Keep Repo > CPI

Banking Sector

Barter system -> Double coincidence of wants ( Difficult ) -> Money Was Invented
In India
o East India Company ( Presidency Bank )
o Bengal
1806
o Bombay
1840
o Madras
1842
o All 3 Bank right to issue Currency (1861)
o All 3 bank merged as Imperial Bank Of India (1921)
o Imperial Bank of India nationalized as State Bank of India (SBI) (1955)
o Other Bank in History
o 1707 Bank Of Hindustan (But rules are European )
o 1865 Allahabad Bank ( First indian bank)
o 1894 Punjab National Bank (PNB)
o 1906 Bank of India (Mumbai)
o 1906 Corporation Bank (Karnataka)
o 1908 BOB (Gayakwad 3)
o 1908 Punjab-Sind (Punjab)
o 1910 Canara Bank (Karnataka)
o 1911 Central Bank of India (Mumbai)
o 1919 Union Bank (Mumbai)
o 1923 Andhra Bank (Andhra Pradesh)
o 1923 Indian Bank (Tamilnadu)
o 1928 Syndicate Bank (Karnataka)
o 1931 Vijaya (Karnataka)
o 1935 Bank of Maharashtra (Mumbai)
o 1937 Overseas Bank (Tamilnadu)
o 1938 Dena Bank (Mumbai)
o 1943 United Commercial Bank (Bengal)
o 1943 Oriental Bank of Commerce (Punjab)
o 1950 United Bank of India (Bengal)
o By 1930s , 1200 + Bank because od only Company Law.
o in 1930s, because of Great depression , most bank are defaults due to lost in us
share market.
o 1934 RBI
Why needed nationalized bank in post-independence
o SBI, ICICI, PNB, BoB.
o Focus: merchant, industrial houses
o Branch increase YES
o Rural penetration NO
o Help in FYP achievement NO
o Nexus of industrial houses vs banks.
Nationalization of Banks
o 1950 1
Imperial Bank (SBI)
o 1969 14
which bank has 50+ Cr. Deposit
o 1980 6
which bank has 200+ Cr. Deposit

o Today 22(or 27)

21 + ( 1 SBI + 5 Associate Bank ) = 27
Problem Of Nationalization Of Bank
Problem OF High Reserve Ratios
o High cost of credit (loans)
o Business expansion
o Job creation
o Tax-Collection
o Government borrowing: Fiscal deficit
o Exports
o Current Account Deficit
Narsimhan Committee 1 (1991)
o Ex-RBI Governor M.Narsimhan
o Deregulation of interest rate
o Benchmark Prime Lending Rate (BPLR)
o

Base Rate (2010)

o PSL@normal interest rates=> interest subvention

o Debt recovery tribunal => 1993 =>SARFAESI 2002
o Liberal Branch expansion policy =>(25% rural requirement)
o Reduce CRR, SLR=>(15,40)=>(4,22)
o NBFC regulatory framework
o 1992=>SBI shares sold. =>GoI ~60%
o Private + foreign banks=> 1993 =>2001 =>2013
Narsimhan Committee 2 (1998)
o VRS
o Legal reforms for loan recovery. =>SARFAESI 2002
o Computerization, electronic fund transfer, legal framework
o Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
o Permit new private /foreign banks.
o Classification
o Before 1. Banks , 2. NBFI , 3. DFI (Development Financial institutions) ICICI, IDBI, IFCI etc.
o Now 1. Banks , 2. NBFI
3 Round Of Bank Licenses
Guideline
1993
(Narsimhan)

Operational
1994-95

2001
(Narsimhan)
2013
(Bimal Jalan)

2003-04
2014-15

Who?
1. ICICI
2. HDFC
3. UTI=>Axis (07)
4. IDBI
5. Indus
6. DCB
7. Global Trust Bank (2001 scam, OBC)
8. Bank of Punjab=>Centurion bank
9. Centurion Bank=>(HDFC)
10.Times Bank (HDFC)
1. Kotak Mahindra
2. Yes Bank
In principle approval to two applicants:
1. Bandhan Fin. Service and
2. IDFC
in principle approval
Within 18 months
Rs.1000 crore net worth

2013
Budget-2013

2013

25% branches in unbanked rural areas.

Then license under Banking Regulation
Act, 1949

Bhartiya Mahila Bank (100% State Owned)

MBN Rao Panel blue print (Canara)
Nothing new: 80s Pak, Tanzania 2009
Not new even in India- already urban
cooperative banks for women
Board of Director = all women.
Staff, depositor = male + female;
Loan => predominantly to women.
loans up to Rs 1 crore without collateral
small home-based catering businesses
Skill development, financial literacy among
women.

What is financial inclusion?

4 Pillars
1. Banking
Savings & payment-through branches, ATM, cheques, etransfer
2. Credit
Loans at affordable interest rates.
3. Investment mutual funds, pension plans, child investment plans etc.
4. Insurance
Life insurance and non-life (general) insurance.
If absent of Financial Inclusion
1. Unforeseen circumstances
2. Child Labor, human trafficking, prostitution, crimes
3. Money lender- debt trap
4. Ponzi scheme, MLM, Saradha Chit fund
If present of Financial Inclusion
1. Savings into investment
2. In 1960s start financial inclusion : Japan, S.Korea, USA
3. Social harmony, women Empowerment
4. E-Payment: Cashless subsidies, payments, salaries
Jan Dhan Yojana (Controled by Dept of Fin services )
Fin.inclusion attempts in past:

Nationalization of Bank
Regional Rural Bank, Co-operative banks
Business Correspondents Agents
Swabhiman
NPS-Swavlamban
Micro Finance Institute
Bharatiya Mahila Bank

6 pillars strategy:
1. Bank service area to cover 1000-1500 families within 5 kms distance

2. Each family 1 account, rupay debit card, 1 lakh accident cover, 5k overdraft
if good credit history.
3. Financial literacy campaign
4. Credit guarantee fund to cover losses
5. Sell micro insurance product
6. Direct Benefit Transfer to bank account
Small Bank

Can do : Deposit, loan, small area

Loan to: Small farmers, MSME, unorganized sector
Who open : MFI, NBFC can convert
Who open : Even individual with 10 years experience in bank/cooperatives
Who open : NRI can apply with 10 years experience in bank/cooperatives
Cooperative bank cant apply
Cluster preference: North East
Terms: 25% rural branching
Terms: 50% loans to MSME
Terms: Cant setup subsidiaries
Terms: can appoint BCA. But cant become BCA of other bank

Payment Bank

Can do : Only CA SA, Net banking, prepaid cards

Can not do FD/Loan. Invest in Government Securities.
Max balance Rs.1lakh/customer

Small Saving and Kisan Vikas Patra

Post office deposits (1873)

Savings certificates (1959)
o National Small Savings Cert (NSC)
o KVP (minimum Rs.100. New Rs.1000)
o Directorate Small savings, via post office
o Money in farmer welfare schemes
o Doubles money in ~8 years
o 2011: Shaymla Gopinath Committee says KVP used for money laundering
-> Banned
o Budget-2014: announced -> Nov. 2014: re-introduce
1k to 50k denomination
Double @100 months (8 years and 4 months)
id-address proof needed
To purchase
To transfer
PAN card if 50k ore more
Source of income if 10L or more
o
Social
o
o

Indira Vikas patra

security schemes
PPF (1968)
Senior citizen savings scheme

Banking institutions

Commercial (Apply PSL, MSF)

o Public Sector Bank
o Private Sector Bank

o Foreign Bank
o RRB
Co-Operative ( No PSL Apply)
o Urban
o State
o Central
o PACS

NBFI ( Non Banking Financial Institute )

AIFI ( All India Financial Institutions )
o EXIM
Export-Import Bank of India (1982)
Boss: Government of India (100%)
loan/credit/finance to exporters and importers.
promotes cross border trade and investment
o NABARD
National Bank for Agriculture and Rural Development (1982)
BOSS: GoI (99.3%) + RBI (0.7%)
regulatory authority: Coop + RRB
Rural infra. Development fund (RIFD) if PSL not met
Helps State cooperative banks (SCB), (RRBs), MFI, cooperative societies
etc.
farmers, Cottage/handicraft, (SHG)
o SIDBI
Small industries development bank of India (1990)
BOSS: SBI, LIC, IDBI other public sector banks, insurance companies etc.
SIDBI's SEDF= small enterprises development fund. (Foreign banks will
<20 branches, PSL)
MSME sector, finance to State Industrial Development Corporation (SIDC),
State finance corporations and banks
o NHB
National Housing Bank (1988)
Boss: RBI (100%)
apex institution for housing finance in India
Finance to banks and NBFCs for housing projects
RESIDEX index (housing sector-inflation)
PD ( Primary Dealer )
o deal in "primary" market. directly buy G-sec via "auction".
o Can Participate in OMO
o Must get license from RBI.
o Morgan Stanley , Goldman Sachs, JP Morgan Chase, Standard Chartered Bank,
HSBC (Hongkong and Shanghai Banking Corpn. Ltd)
o Even: SBI, BoB, Kotak Mahindra etc.
NBFC ( Non Banking Financial Company )
Bank
RBI gave them license under Banking
regulation Act.

NBFC
Registered under Companies Act

RBI supervises them all.

Depends
IRDA: Insurance
Merchant Banks: SEBI
Microfinance: State+RBI

deposit from public

1. time deposit (FDRD)
2. demand deposits (CASA)

They can accept Time deposit. (such

NBFC are called Deposit taking NBFC
But They cannot accept demand
deposits (CA SA).
Not part of Payment settlement, CTS

CRR 4% and SLR 22%

No. Only Deposit taking NBFC. 15% S

PSL 40% / 32%

PSL doesnt apply.

Entry Capital requirement 500 Cr.

commercial bank, small bank 100
crores.

5 Cr. NBFC-MF
Others 2 cr

Bank lends "deposited" money to

someone.
But cannot invest in sharemarket

They also lend money to someone.

(="Finance" Companies)
CAN invest in sharemarket. E.g MF, P
Insurance Cos.

Loan rates linked with Base Rate

system

Depends
Gold Loans= risk factor (15%,
25%)
Not all directly lend.
Shares: dividend. TCS 4, Coal
India 29.
Bonds: 8/12/16%

SARFAESI: loan recovery powers

SARFAESI Only for Housing finance

companies
Gold loan: auction
Bonds: first
Shares: last

NBFC : Source Of Fund :

From clients: insurance, mutual funds.
Borrow from banks
Get finance from NABARD, National Housing bank, SIDBI etc apex
institutions
Can issue of bonds
Very few permitted External Commercial Borrowing (ECB)
NBFC : Classification :
RBI Controlled
Asset Finance Company (AFC)
o loan to buy economically productive assets e.g. truck,
tractor, pumpset, bulldozer, earthmover, etc.
o 2013: $200mn ECB, automatic window.
o SREI Equipment Finance (WHITE LABEL ATM)
Infrastructure Finance Company
o Gives loan for infra. Projects. (IDFC got separate bank
license)
o Rural Electrification Company (REC)
o Rajiv Gandhi Gramin Vidhyutikaran (Power Ministry)
o Rs.3,500 crore through tax-free bonds.

Infrastructure Debt Fund (IDF-NBFC)

o Just like above, but they give very long term loans.
o Can even raise money from abroad.
Investment Co.
Core investment
Loan Company
Factor Company
Chit Fund, Misc.

IRDA Controlled
Insurance companies
Take "premium" from you, invest It in shares/bonds.
Ex. LIC, Bajaj Allianz
NHB Controlled
Housing Finance Companies
They arrange money from variety of sources, lend it to home-loan
seekers
Ex. DHFL, Muthoot Housing finance etc.
SEBI Controlled
Stock Broker, MF
They help buying-selling of shares (of their clients).Earn
commission/brokerage) in between.
Ex. Indiabulls, Sherkhan, Reliance Money
Investment Banks (US term)
Merger, acquisition, Wealth Management; Merchant Banker:
Underwriting
Ex. Kotak Mahindra, Citigroup,Bank of America
Merchant Banking Companies (UK term)
Underwriting, Corporate advising, They lend money to
company via buying its "shares"
Ex. DSP Merrill Lynch, Morgan Stanley, Canara Bank, SBI
capital (separate license)
Venture Capital Fund
They finance start-up companies via equity.
Ex. IFCI, IDG
Department of Company affairs Controlled
Nidhi
One type of 'club'. Borrow money from members, lend it
among the members. mutual benefit funds.
Ex. SOUTH MADRAS BENEFIT FUND ltd.
Microfinance companies
Non-Banking Financial Company - Micro Finance Institution
(NBFC-MFI)
Ex. SKS (Andhra), Cashpor (UP), Ujjivan (Karnataka)