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Management for

RBI GRADE B 2017


Phase 2 Exam

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INDEX

Contents
PREFACE ..................................................................................................................................... 5
Management for RBI GRADE B 2017 Phase 2 Exam .................................................... 6
Chapter 1: Management: Its Nature & Scope........................................................................... 7
Chapter 2: The Management Principles .................................................................................. 10
Chapter 3: Planning, Organisation, Staffing, Directing & Controlling.......................... 12
Chapter 4: The Role of a Manager in an Organisation ....................................................... 21
Chapter 5: Leadership: Tasks of a Leader; Leadership Styles; Leadership Theories;
Successful Leader V/s effective Leader ..................................................................................... 22
Chapter 6: Human Resource Development: Concept of HRD; Goals of HRD;
Performance Appraisal, Potential appraisal, Career Planning, Training &
Development ........................................................................................................................................ 26
Chapter 7: Motivation, Morale & Incentives: Theories of Motivation; How
Managers Motivate; Concept of Morale; Factors determining morale; Role of
Incentives in Building up Morale. ................................................................................................ 34
Chapter 8: Communication: Steps in the Communication Process; Communication
Channels; Oral versus Written Communication; Verbal versus non-verbal
Communication; upward, downward & lateral communication; Barriers to
Communication. .................................................................................................................................. 45
Chapter 9: Corporate Governance: Factors affecting Corporate Governance;
Mechanisms of Corporate Governance...................................................................................... 50
Finance for RBI GRADE B 2017 Phase 2 Exam ............................................................ 53
Part 1: Financial System ................................................................................................................. 54
Topic 1: Regulators of Banks and Financial Institutions ............................................... 54
Topic 2: Reserve Bank of India- functions and conduct of monetary policy,
Banking System in India, Financial Institutions – SIDBI, EXIM, NABARD,
NHB, etc. ............................................................................................................................................. 56
Topic 3: Banking System in India ............................................................................................ 61
Part 2: Financial Markets ............................................................................................................... 62
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Part 3: General Topics ..................................................................................................................... 67
Chapter 1: Risk Management in Banking Sector .............................................................. 67
Chapter 2: Basics of Derivatives: Forward, Futures and Swap................................... 72
Chapter 3: Changing Landscape of Banking sector ......................................................... 75
Chapter 4: Financial Inclusion ................................................................................................. 81
Chapter 5: Corporate Governance in Banking Sector ..................................................... 83
Chapter 6: The Union Budget & all other Economic Parts ............................................... 86
Topic 1: The Union Budget ........................................................................................................ 86
Topic 2: Direct and Indirect taxes ........................................................................................... 97
Topic 3: Sources of Non-Tax Revenue ............................................................................... 101
Topic 4: GST .................................................................................................................................. 103
Topic 5: 14th Finance Commission Recommendations .............................................. 105
Topic 6: Fiscal Responsibility and Budget Management Act (FRBM) ................... 107
Chapter 7: Inflation: Definition, trends, estimates, consequences, and remedies
(control): WPI, CPI - components and trends. ..................................................................... 109

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Chapter 1: Management: Its Nature & Scope

What is Management?
According to Harold Koontz & Heinz Weihrich, ―Management is the
process of designing & maintaining an environment in which individuals,
working together in groups, efficiently accomplish selected aims.‖

According to Robert L. Trewelly & M. Gene Newport, ―Management is


defined as the process of planning, organizing, actuating & controlling an
organisation‘s operations in order to achieve coordination of the human &
material resources essential in the effective & efficient attainment of
objectives.‖

According to Kreitner, ―Management is the process of working with &


through others to effectively achieve organisational objectives by efficiently
using limited resources in the changing environment.‖

To sum up, Management, is defined as a process of getting things done


with the aim of achieving goals effectively & efficiently.

Effectiveness & Efficiency


Effectiveness in management is concerned with doing the right task,
completing activities, & achieving goals. Efficiency means doing the task
correctly & with minimum cost. Management is concerned with the efficient
use of the resources, because they reduce costs & ultimately lead to higher
profits.

Characteristics of Management
It is a goal-oriented process.
It is all pervasive which means that the activities involved in managing
an enterprise are common to all organisations whether economic, social
or political.
It is multidimensional as it includes Management of work, Management of
people, & Management of operations.
It is a continuous process.
7
It is a group activity.
It is a dynamic function.
It is an intangible force.

Nature of Management: An art & also a science

Management as an Art
It can be considered as an art because:
A successful manager practices the art of management in the day-to-day
job of managing an enterprise based on study, observation & experience.
There is existence of theoretical knowledge.
There are various theories of management. A manager applies those
scientific methods & body of knowledge to a given situation, an issue or a
problem, in his own unique manner.
A manager applies the acquired knowledge in a personalized & skillful
manner in the light of the realities of a given situation. He is involved in
the activities of the organisation, studies critical situations & formulates
his own theories for use in any given situation.

Management as a Science

It is considered as a Science because of:


Management has a systematized body of knowledge. It has its own
theory & principles that have developed over a period of time.
The principles of management have evolved over a period of time based
on repeated experimentation & observation in different types of
organisations. However, since management deals with human beings &
human behaviour, the outcomes of these experiments are not capable of
being accurately predicted or replicated. Therefore, management can be
called an inexact science.
Since the principles of management are not as exact as the principles of
science, their application & use is not universal. They have to be modified
according to a given situation. However, they provide managers with
certain standardised techniques that can be used in different situations.
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Levels of Management
Top Management: They consist of the senior-most executives of the
organisation. It is a team consisting of managers from different functional
levels, heading finance, marketing etc.

Middle Management: It is the link between top & lower level managers. It
is responsible for implementing & controlling plans & strategies developed
by top management & are also responsible for all the activities of first line
managers.

Supervisory or Operational Management: Foremen & supervisors


comprise the lower level in the hierarchy of the organisation. Supervisors
directly oversee the efforts of the workforce.

Functions of Management
Management is described as the process of planning, organising, directing
& controlling the efforts of organisational members & of using
organisational resources to achieve specific goals. The function includes:

Planning is the function of determining in advance what is to be done &


who is to do it.
Organising is the management function of assigning duties, grouping
tasks, establishing authority & allocating resources required to carry out
a specific plan.
Staffing simply stated, is finding the right people for the right job. A very
important aspect of management is to make sure that the right people
with the right qualifications are available at the right places & times to
accomplish the goals of the organisation.
Directing involves leading, influencing & motivating employees to
perform the tasks assigned to them. This requires establishing an
atmosphere that encourages employees to do their best. Motivation &
leadership are two key components of direction.

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Controlling is the management function of monitoring organizational
performance towards the attainment of organisational goals. The task of
controlling involves establishing standards of performance, measuring
current performance, comparing this with established standards & taking
corrective action where any deviation is found.

Coordination — The Essence of Management


The process by which a manager synchronises the activities of different
departments is known as coordination. Coordination is the force that binds
all the other functions of management. It is the common thread that runs
through all activities such as purchase, production, sales, & finance to
ensure continuity in the working of the organisation.

Chapter 2: The Management Principles

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Principles of Management are the guidelines to action. They denote a cause
& effect relationship. The nature of the POM are as follows:
Universal applicability
General guidelines
Formed by practice & experimentation
Flexible
Mainly behavioural
Cause & effect relationships

14 Principles of Henri Fayol


Henri Fayol (1841-1925) was a French management theorist. The 14
principles propounded by him were discussed in his book, ‗Administration
industrielle et generale‘.

The 14 principles of management given by him are:


1. Division of Work:
2. Authority & Responsibility
3. Discipline
4. Unity of Command
5. Unity of Direction
6. Subordination of Individual Interest to General Interest
7. Remuneration of Employees
8. Centralisation & Decentralisation: The concentration of decision-
making authority is called centralisation whereas its dispersal among
more than one person is known as decentralisation. According to Fayol,
―There is a need to balance subordinate involvement through
decentralization with managers‘ retention of final authority through
centralisation.‖
9. Scalar Chain: An organization consists of superiors & subordinates. The
formal lines of authority from highest to lowest ranks are known as
scalar chain. According to Fayol, ―Organisations should have a chain of
authority & communication that runs from top to bottom & should be
followed by managers & the subordinates.‖

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10. Order: According to Fayol, ―People & materials must be in suitable
places at appropriate time for maximum efficiency.‖ The principle of
order states that ‗A place for everything (everyone) & everything
(everyone) in its (her/his) place‘.
11. Equity: Good sense & experience are needed to ensure fairness to all
employees, who should be treated as fairly as possible,‖ according to
Fayol.
12. Stability of Personnel: ―Employee turnover should be minimized to
maintain organizational efficiency‖, according to Fayol.
13. Initiative
14. Espirit De Corps: Management should promote a team spirit of unity &
harmony among employees, according to Fayol.

Taylor‘s Principles of Scientific Management


Taylor‘s principles of scientific management are — Science, not the rule
of thumb; Harmony not discord; Cooperation not individualism;
Maximum not restricted output; Development of each person to her/ his
greatest efficiency & prosperity.
The techniques of scientific management as per Taylor were —
Functional foremanship; Standardisation & simplification of work;
Fatigue Study; Method Study; Time Study; Motion Study; & Differential
Wage System.

MANAGEMENT INFORMATION SYSTEM


Management Information System (MIS) refers to that system by which
information is collected, processed & presented to management to help it in
making better decisions. A manager makes decisions all the time &
anything which helps improve his decision-making will obviously lead to
better results, & he becomes a better manager.

An effective MIS should be: Timely, Accurate & Relevant.

Chapter 3: Planning, Organisation, Staffing, Directing & Controlling

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Topic 1: Planning

Meaning
Planning means deciding in advance what to do & how to do. It is one of
the basic managerial functions. It involves setting objectives & developing
an appropriate course of action to achieve the decided objectives.

Importance of Planning
It provides directions, reduces risks of uncertainty, reduces overlapping &
wasteful activities, promotes innovative ideas, facilitates decision making &
establishes standards for controlling.

Features of Planning
It focuses on achieving objectives.
It is a primary function of management
It is pervasive, continuous, futuristic & involves decision making
It is a mental exercise.

The Planning Process


1. Setting objectives: Objectives may be set for the entire organization &
each department or unit within the organization.
2. Developing premises: Planning is concerned with the future which is
uncertain & every planner is using conjucture about what might happen
in future.
3. Identifying alternative courses of action: Once objectives are set,
assumptions are made. Then the next step would be to act upon them.
4. Evaluating alternative courses: The next step is to weigh the pros & cons
of each alternative.
5. Selecting an alternative: This is the real point of decision making. The
best plan has to be adopted & implemented.
6. Implement the plan: This is concerned with putting the plan into action.
7. Follow-up action: Monitoring the plans are equally important to ensure
that objectives are achieved.
What are the types of Plans?

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Objectives: Objectives can be said to be the desired future position that
the management would like to reach.
Strategy: A strategy provides the broad contours of an organisation‘s
business. It will also refer to future decisions defining the organisations
direction & scope in the long run.
Policy: Policies are general statements that guide thinking or channelise
energies towards a particular direction.
Procedure: Procedures are routine steps on how to carry out activities.
Rule: Rules are specific statements that tell what is to be done.
Programme: These are detailed statements about a project which outlines
the objectives, policies, procedures, rules, tasks, human & physical
resources required & the budget to implement any course of action.
Budget: A budget is a statement of expected results expressed in
numerical terms. It is a plan which quantifies future facts & figures.

Topic 2: Organising

Organising is the process of defining & grouping the activities &


establishing authority relationships among them.

Process of Organising
The process of organising consists of the following steps:
Identification & division of work
Departmentalisation
Assignment of Duties
Establishing reporting relationships

Importance of Organising:
It is considered important because it leads to division of work, clarity in
reporting relationships, optimum utilization of resources, growth, better
administration & greater creativity.

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Important Terms Related to Organising
Organisational structure is the framework within which managerial &
operating tasks are performed. It can be functional or divisional.
Span of management is the number of subordinates under a superior.
Functional structure is the group activities on the basis of functions.
The advantages of such a structure are specialisation, better control,
managerial efficiency & ease in training employees. The disadvantages
are functional empires, conflict of interest, inflexibility, & restriction in
managerial development.
Divisional structure is the group activities on the basis of products. The
advantages are integration, product specialisation, greater accountability,
flexibility, better coordination & more initiative. The disadvantages are
departmental conflicts, costly process, ignoring of organisational
interests, increase in requirements of general managers.
Formal organisation is designed by the management to achieve
organisational goals. Its advantages are fixation of responsibility, clarity
of roles, unity of command & effective accomplishment of goals. Its
disadvantages are procedural delays, inadequate recognition of
creativity, limited in scope.
Informal organisation arises out of interaction amongst people at work.
Its advantages are speed, fulfillment of social needs, fills inadequacies of
formal structure. Its disadvantages are: disruptive force, resistance to
change & priority to group interests.
Delegation is the transfer of authority from superior to subordinate. It
has three elements: Authority, Responsibility & Accountability.
Importance of delegation is that it helps in effective management,
employee development, motivation, growth & coordination
Decentralisation is delegation of authority throughout the organisation.
Importance of decentralisation is that it helps in development of
managerial talent, quick decision making reducing burden on top
management, development of initiative, growth & better control.

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Topic 3: Staffing

Staffing has been described as the managerial function of filling & keeping
filled, the positions in an organisation structure. This is achieved by, first of
all, identifying requirement of work force,
followed by recruitment, selection, placement, promotion, appraisal &
development of personnel, to fill the roles designed into the organisation
structure.

Need & Importance of Staffing


The staffing function of management fulfills the requirement of the
organisation & finds the right people for the right job.
It is important because of rapid advancement of technology, increasing
size of organisation & complicated behaviour of human beings. The
ability of an organisation to achieve its goal depends upon the quality of
its human resources.
Staffing is an inherent part of human resource management as it is the
practice of finding, evaluating & establishing a working relationship with
people, for a purpose.

Staffing Process
1. Estimating the Manpower Requirements
2. Recruitment: Recruitment may be defined as the process of searching for
prospective employees & stimulating them to apply for jobs in the
organisation.
3. Selection: Selection is the process of choosing from among the pool of the
prospective job candidates developed at the stage of recruitment.
4. Placement & Orientation: Orientation is introducing the selected
employee to other employees & familiarising him with the rules &
policies of the organisation. Placement refers to the employee occupying
the position or post for which the person has been selected.
5. Training & Development

What are the Sources of Recruitment?


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There are two sources of recruitment – Internal & External.
 Internal Sources: Recruitment from within the enterprise. There are two
important sources of internal recruitment, namely, transfers &
promotions.
 External Sources: An enterprise has to tap external sources for various
positions because all the vacancies cannot be filled through internal
recruitment. The commonly used external sources of recruitment are
Direct Recruitment, Casual Callers, Advertisements, Employment
Exchange, Placement Agencies & Management Consultants, Campus
Recruitment, Recommendations of Employees, Labour Contractors,
Advertising on Television & Web Publishing.

Training & Development


Training is any process by which the aptitudes, skills & abilities of
employees to perform specific jobs are increased.
Education is the process of increasing the knowledge & understanding of
employees. It is the understanding & interpretation of knowledge.
Development refers to the learning opportunities designed to help
employees grow.

Training Methods
There are various methods of training. These are broadly categorized into
two groups: On-the-Job & Off-the-Job methods.

On the Job Methods


(i) Apprenticeship Programs
(ii) Coaching
(iii) Internship Training
(iv) Job Rotation

Off the Job Methods


(i) Class Room Lectures/Conferences
(ii) Films
(iii) Case Study (iv) Computer Modelling
(v) Vestibule Training
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(vi) Programmed Instruction.

Topic 4: Directing
Directing is a complex managerial function consisting of all the activities
that are designed to encourage subordinates to work effectively. It includes
supervision, motivation, communication
and leading.

Supervision: It is an element of direction. It can be understood as a process


as well as the functions performed by supervisor (a position at operative
level). Supervision is very important as it is closely linked to overseeing the
work, guiding & ensuring that targets are met by workers & employees.

Motivation: Motivation is the process of stimulating people to action to


accomplish desired goals of organisation. It is an internal feeling of an
individual & leads to goal directed behaviour. Motivation is mainly based
on needs of individuals. It helps individuals & groups in the organisation
for improved performance.

Incentives
Managers offer incentives to employees both financial & non-financial.
Financial incentives are monetary & may be in the form of salary, bonus,
profit sharing, pension etc. Non- financial
incentives provide social & psychological satisfaction. These include status,
promotion, responsibility, job enrichment, job recognition, job security,
employee participation, delegation, empowerment etc.

Maslow‘s Need Hierarchy theory (Motivation Theory)


According to this theory, motivation to be provided depends on needs
which are hierarchical in nature. The needs in this hierarchy have been
classified as physiological needs, safety needs, social needs, egoistic
needs & self-actualisation needs.
It assumes that a satisfied need seldom motivates & only higher-level
need can motivate a person. This theory is relevant even today, as it
focuses on needs which are basis for motivation.
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Leadership: It is the process of influencing people to strive willingly for
group objectives. Some of the qualities of good leader include–courage, will
power, judgement, knowledge, integrity, physical energy, faith, moral
qualities, fairness, vitality, decisiveness, social skills etc.

Communication
Communication refers to process of exchange of ideas between or among
persons & create understanding. Communication process involves the
elements of source, encoding, channel, receiver, decoding & feedback.
In organisations, both formal & informal communications simultaneously
takes place.
Formal communications refers to all official communications in the form
of orders, memos, appeals, notes, circulars, agenda, minutes etc.
Apart from formal communications, informal or grapevine
communications also exist. Informal communications are usually in the
form of rumours, whispers etc. They are unofficial, spontaneous,
unrecorded, spread very fast & usually distorted.

Barriers to Communications
It includes – semantic barriers, organisational barriers, language barriers,
transmission barriers, psychological barriers & personal barriers.

Topic 5: Controlling
Controlling is the process of ensuring that actual activities conform to
planned activities. The importance of managerial control lies in the fact
that it helps in accomplishing organisational goals.
Controlling also helps in judging accuracy of standards, ensuring
efficient utilization of resources, boosting employee morale, creating an
atmosphere of order & discipline in the organisation & coordinating
different activities so that they all work together in one direction to meet
targets.
The process of control involves setting performance standards,
measurement of actual performance, comparison of actual performance
with standards, analysis of deviations & taking corrective action.
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Planning & controlling are inseparable twins of management. Planning
initiates the process of management & controlling completes the process.
Personal observation, statistical reports, breakeven analysis & budgetary
control are traditional techniques of managerial control.
Return on investment, ratio analysis, responsibility accounting,
management audit, PERT & CPM & Management Information System
are modern techniques of managerial control.

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Chapter 4: The Role of a Manager in an Organisation

The characteristic of a professional manager is that his primary concern is


the
organisation or the company with which he works. This is true for all
whether the manager
works for a private or public sector or a multinational company. Manager
should have his company's overall perspective in his mind & all his actions
are guided by the company's objectives. He is responsible for performance
of his team. The role of the manager is:

1. Providing purposeful direction to the firm


2. Managing survival & growth
3. Maintaining firm's efficiency in terms of profit generation
4. Meeting the challenge of increasing competition
5. Managing for innovation
6. Building human organisation
7. Retaining talent & inculcating sense of loyalty
8. Sustaining leadership effectiveness
9. Maintaining balance between creativity & conformity
10. Postponing managerial obsolescence: The problem of managerial
obsolescence is when managers become unproductive, or out of date, or
both. In such situations where lack of motivation seems to be the cause,
the solution lies in redesigning their job content to make it more
meaningful.
11. Meeting the challenge of change
12. Coping with growing technological sophistication
13. Coping with growing public critics & political opposition-both
objective & irrational
14. Maintaining relations with various society segments

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Chapter 5: Leadership: Tasks of a Leader; Leadership Styles; Leadership
Theories; Successful Leader V/s effective Leader

Meaning of Leadership
Leadership is defined as the activity of influencing people to cooperate
towards some goal which they come to find desirable.

Qualities of Good Leader:


Physical features: It is believed that good physical features attract
people. Health & endurance help a leader to work hard which inspires
others to work with same tempo.
Knowledge: A good leader should have required knowledge &
competence.
Integrity: A leader should possess high level of integrity & honesty. He
should be a role model to others regarding the ethics & values.
Initiative: A leader should have courage & initiative. He should not wait
for opportunities come to his way, rather he should grab the opportunity
& use it to the advantage of organisation.
Communication skills: A leader should be a good communicator.
Motivation skills: A leader should be an effective motivator. He should
understand the needs of people & motivate them through satisfying their
needs.
Self Confidence: A leader should have high level of self-confidence.
Decisiveness: Leader should be decisive in managing the work.
Social skills: A leader should be sociable & friendly with his colleagues
& followers.

Chester Barnard added four other qualities of leader which are as follows:
(i) vitality & endurance;
(ii) decisiveness;
(iii) persuasiveness,
(iv) responsibility & intellectual capacity.
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STYLES OF LEADERSHIP

Autocratic or Authoritarian leader


An autocratic leader gives orders and expects his subordinates to obey
those orders. If a manager is following this style, then communication is
only one-way with the subordinate only acting according to the command
given by the manager. This leader is dogmatic i.e., does not change or wish
to be contradicted.

Democratic or Participative leader


A democratic leader will develop action plans and makes decisions in
consultation with his subordinates. He will encourage them to participate in
decision making. This kind of leadership style is more common nowadays,
since leaders also recognize that people perform best if they have set their
own objectives.

Laissez faire or Free-rein leader


Such a leader does not believe in the use of power unless it is absolutely
essential. The followers are given a high degree of independence to
formulate their own objectives and ways to achieve them. The group
members work on their own tasks resolving issues themselves. The
manager is there only to support them and supply them the required
information to complete the task assigned.

LEADERSHIP THEORIES
The important theories of leadership are trait theory, situational theory,
group theory, etc.

Trait Theory
The major question that was always asked was what qualities or traits make
a person a leader. Some believed that leaders are born & are not made. This
is what is popularly called the 'Greatman Theory' of Leadership. These born
leaders possess certain traits & characteristics, certain natural abilities which
allow them to become leaders. The trait approach is particularly concerned

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with identifying the personality traits of leaders. Keith Devis, identifies
four important traits for a successful leader viz., intelligence, social maturity
& breadth, inner motivation & achievement, drive & human relations
attitude.

Group Theory
Group theory emphasises that the leader provides benefits to his followers.
According to this theory, the followers depend upon those leaders who
satisfy their needs. They extend support & cooperation as long as the
leaders satisfy their needs & motivate them to achieve the objectives & goals
of the organisation.

Situational Theory.
This theory believes that leadership emerges from the situation & is
influenced by the situation. As a result, leadership differs from situation to
situation. F.E. Fielder, who is important proponent of this theory, feels that
people welcome leaders because of situational factors.

Sum UP
Autocratic Style: In this style of leadership, the leader has the absolute
authority to take decisions.
Participative Style: In this style of leadership, the employees too
participate in the decision-making process.
Laissez-faire Style: Here, the employees have full freedom to take
decisions, leaders' participation in decision-making is minimal.
Trait Theory: According to this theory, leaders have inborn qualities.
Situational Theory: According to this theory, leadership emerges from
situation & is influenced by situation.
Group Theory: According to this theory, a person is accepted as a leader
as long as he/she satisfies the needs of the groups.

Successful Leadership VS Effective Leadership


A manager always tries to influence the behaviour of the subordinates
through leadership. The subordinate may come up to the expectations of

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the leader or not. Moreover, if the behaviour of the subordinate is
compatible with the expectations of the leader it may due to two reason:
(i) Impact of leader appropriate style or
(ii) Because of the position power of the leader.

In the first case, the leader is effective because he has influenced the
behaviour of the subordinate & the subordinate sees the accomplishment of
his own needs being satisfied by satisfying the goals of the leader & the
organisation. In the second case, the leader is successful but he is not
effective. It is because of the reason that he has received the desired
response from the subordinates but by using his power.

Success of Leadership depends upon:


How the individual or the group behaves.
Position power.
Close Supervision.

Effectiveness of Leadership:
Internal shape or predisposition of an individual or a group & thus, it is
attitudinal in nature.
Personal power.
General Supervision.

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Chapter 6: Human Resource Development: Concept of HRD; Goals of
HRD; Performance Appraisal, Potential appraisal, Career Planning,
Training & Development

What is HRD?
It is an organized learning experience within a given period of time with
the objective of producing the possibility of performance change. It is the
process of increasing knowledge, capabilities & positive work attitudes of
all employees working at all levels in a business undertaking.
HRD involves matching of the organizations needs for human resource
with the individual need for personal career growth & development.

What are the Benefits of HRD?


A signal to employees that the company believes they are important.
Motivation to acquire & use new skill for which they will be rewarded.
Commitment by communication to employees the values of an
organization, e.g. quality & customer service & ensuring that they learn
how they should uphold them.
Identification with the Company by helping people to achieve a better
understanding of its aims & policies.
Communication- training can provide effective channel for two- way
communication.
Need satisfaction- training can contribute to the satisfaction of people‘s
need for achievement & recognition.
Job Enrichment – training can enable people to exercise greater
responsibilities.
Change Management – education & training are essential ingredients in a
change management program. They help people to understand why
change is necessary & how they will benefit.

What are the Objectives of HRM?


To enable management to achieve organizational objectives through its
workforce.
To utilize people to their full capacity & potential.

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To foster commitment from individuals to the success of the company
through a quality orientation in their performance & that of the whole
organization.
To integrate human resource policies with business plans & reinforce an
appropriate culture or as necessary reshape an inappropriate culture.
To develop a coherent set of personnel & employment policies which
jointly reinforce the organization‘s strategies for matching resources to
business needs & improving performance.
To establish an environment in which latent creativity & energy of
employees will be unleashed.
To create conditions in which innovation, team-working & total quality
can flourish.
To encourage willingness to operate flexibly in the interest of the
adaptive organization & in the pursuit of excellence.

Terms to look at

Organisation Design: Organisation Design is a primary management


activity involving work division among constituent units and structuring an
organisation into sections and sub sections. It is the first step in
specialisation of tasks & responsibilities in organisations leading to further
sophisticated specifications.

Social Capital: The term social capital is an economic analogy, to determine


the economic potential of social ties. Just as there are physical capital &
human capital, there is social capital which denotes the advantage or the
utility derived out of filial & other human ties. Such social ties have
‗utilitarian value‘ in that they result in tangible & intangible value addition
to societal development.

What is Potential Appraisal?


Companies keep records on the potential of their employees for future
promotion opportunities. The task of identifying potential for promotion
cannot be easy for the appraising manager, since competence of a

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member of staff to perform well in the current job is not an automatic
indicator of potential for promotion. Potential can be defined as ‗a latent
but unrealised ability‘.
The aim of performance & potential assessment is to identify training &
development needs, provide guidance on possible directions in which an
individual‘s career might go, & to indicate who has a potential for
promotion.
In making potential appraisal of managers, levels of talent & ambition
have to be clearly identified.

What are the objectives of Potential Appraisal?


To assess an individual in terms of the highest level of work the individual
will be able to handle comfortably & successfully in future without being
over-stretched. To assist the organization in discharging its responsibility of
selecting & developing managers for the future to ensure continuous
growth of the organization.

What are the Qualities which determine the potential of an employee?


1. Analytical power
2. Creative imagination
3. Sense of reality
4. Capability of taking holistic view from a detached position
5. Effective leadership
6. Persuasiveness: The ability to sell ideas to other people & gain a
continuing commitment, particularly when the individual is using personal
influence rather than ‗management authority‘.

What is Career Planning?


The process by which individuals plan their life‘s work is referred to as
career planning. Through career planning, a person evaluates his or her
own abilities & interests, considers alternative career opportunities,
establishes career goals, & plans practical developmental activities.

What are the Objectives of Career Planning?

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It attracts & retains the right persons in the organisation
It maps out careers of employees suitable to their ability, & their
willingness to be trained & developed for higher positions.
It ensures better use of human resources through more satisfied &
productive employees.
It ensures more stable workforce by reducing labour turnover &
absenteeism.
It utilizes the managerial talent available at all levels within the
organisation.
It improves employee morale & motivation by matching skills to job
requirements & by providing job opportunities for promotion.
It provides guidance & encouragement to employees to fulfill their
potential.
It helps in achieving higher productivity & organizational development.

For progressive career development programme, the organisation should:


a) Clearly communicate the organisation‘s goals & future strategies with the
employees.
b) Create growth opportunities for the employees.
c) Offer financial assistance to the employees.
d) Provide the time for employees to learn.
e) Should give autonomy & independence to its employees.
f) Should make their employees technology competent.

What is Performance Appraisal?


It is the systematic evaluation of the individual with respect to his or her
performance on the job & his or her potential for future development.
It is a formal, structured system of measuring & evaluating employee‘s job,
related behaviour & outcomes to discover how & why the employee is
presently performing on the job & how employee can perform more
effectively in future.

What are the Objectives of Performance Appraisal


 To help to improve the current performance of the employees.
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 To set objectives for individual performance.
 To assess training & development needs.
 To agree plan for employee‘s future development.
 To assess future potential for promotion.
 To counsel employees on their career opportunities.
 To encourage managers to think carefully about the performance of their
staff in general & factors influencing it, including their own style &
behavior.

Why Performance Appraisal is important?


 A tool of employee‘s development & stimulation.
 Important personnel decisions.
 Improvement in human behaviour.
 Performance appraisal works as an evidence.
 A tool in the hands of supervisors.
 Improved quality of supervision.
 Maintenance of industrial relation.

What is the Process of Performance Appraisal?


Establish performance standard.
Then Communicate standards to employees.
After that, the manager should measure the actual performance of its
employees.
Then, Compare actual performance with standard.
Discuss the appraisal with employees.
If necessary initiate corrective actions.

What are the methods of Performance Appraisal?


Traditional methods
Straight ranking method.
Paired comparison method.
Graphic or point method.
Grading method.

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Forced distribution method.
Forced choice description method.
Checklist method.
Field review method.
Modern methods
Management by objectives (MBO).
360-degree feedback.
Assessment center
Behaviourally anchored rating scales (BARS)
Human resource accounting method.

What is Training?
It is any attempt to improve current or future employee performance by
increasing an employee‘s ability to perform through learning or
increasing skill & knowledge.
It is an organized procedure for increasing the skill & knowledge of
people for a definite purpose.
It is the formal & systematic modification of behaviour through learning,
which occurs as a result of education, instruction, & development &
planned experience.

What are the Objectives of Training?


To develop the skill & competences of employees & to improve their
performance.
To help people to grow within organization in order that as far as
possible its future needs for human resource can be met from within.
To reduce the learning time for employees starting in a new jobs on
appointment, transfer or promotion & ensure that they become fully
competent as quickly & economically as possible.
To increase productivity & profitability.
To go for better quality & quantity.

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To improve the culture of the organization.
To prevent obsolescence.
To initiate personal growth & development.

Methods of On the Job Training

(i) Apprenticeship Programmes: Apprenticeship programmes put the


trainee under the guidance of a master worker. These are designed to
acquire a higher level of skill. A uniform period of training is offered to
trainees.

(ii) Coaching: In this method, the superior guides and instructs the trainee
as a coach. The coach or counselor sets mutually agreed upon goals,
suggests how to achieve these goals, periodically reviews the trainees
progress and suggests changes required in behavior and performance.

(iii) Internship Training: It is a joint programme of training in which


educational institutions and business firms cooperate.

(iv) Job Rotation: This kind of training involves shifting the trainee from
one department to another or from one job to another. This enables the
trainee to gain a broader understanding of all parts of the business and how
the organisation as a whole functions.

Off the Job Methods

(i) Class Room Lectures/Conferences: The lecture or conference approach is


well adapted to conveying specific information rules, procedures or
methods.

(ii) Films: They can provide information and explicitly demonstrate skills
that are not easily represented by the other techniques.

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(iii) Case Study: Taken from actual experiences of organisations, cases
represent attempts to describe, as accurately as possible real problems that
managers have faced.

(iv) Computer Modelling: It simulates the work environment by


programming a computer to imitate some of the realities of the job and
allows learning to take place without the risk or high costs that would be
incurred if a mistake were made in real life situation.

(v) Vestibule Training: Employees learn their jobs on the equipment they
will be using, but the training is conducted away from the actual work floor.
Actual work environments are created in a class room and employees use
the same materials, files and equipment. (vi) Programmed Instruction: This
method incorporates a prearranged and proposed acquisition of some
specific skills or general knowledge.

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Chapter 7: Motivation, Morale & Incentives: Theories of Motivation; How
Managers Motivate; Concept of Morale; Factors determining morale; Role
of Incentives in Building up Morale.

Meaning
Motivation means incitement or inducement to act or move. It means the
process of making subordinates to act in a desired manner to achieve certain
organisational goals.

What is Motive, Motivation & Motivators?


Motive: A motive is an inner state that energises, activates or moves and
directs behaviour towards goals. Motives arise out of the needs of
individuals.
Motivation: Motivation is the process of stimulating people to action to
accomplish desired goals. Motivation depends upon satisfying needs of
people.
Motivators: Motivator is the technique used to motivate people in an
organisation. Managers use diverse motivators like pay, bonus,
promotion, recognition, praise, responsibility etc., in the organisation to
influence people to contribute their best.

What are the features of Motivation?


It is an internal feeling.
It produces goal directed behaviour.
It can be either positive or negative.
It is a complex process as the individuals are heterogeneous in their
expectations, perceptions and reactions.

What is the Importance of Motivation?


It helps to improve performance levels of employees as well as the
organisation.
It helps to change negative or indifferent attitudes of employee to
positive attitudes so as to achieve organizational goals.

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It helps to reduce employee turnover and thereby saves the cost of new
recruitment and training.
It helps to reduce absenteeism in the organisation.
It helps managers to introduce changes smoothly without much
resistance from people.

Objectives of Motivation
To make an individual being learn what may regarded as positive
behaviour i.e. desirable behaviour.
To provide opportunities to become a better expert on one's job, to
handle more demanding assignments, to control one's own work rather
than be supervised.

What are the types of Motivation?

a) Negative motivation b) Positive motivation.

Negative Motivation: The traditional form of motivation emphasises more


on authority. This approach consists of forcing people to work by
threatening to fire them if they do not. It believes that man is inherently
lazy, pleasure seeking, despises work. To prevent him from doing so, there
must be close supervision. This approach further assumes that employees'
performance would be increased by fear, which causes the people to act in a
certain way. Because they are afraid of the consequences like, lay-off,
demotions, & dismissals. The approach of negative motivation had proved
to be ineffective as the employees were responding to them perversely.

Positive Motivation
Positive motivation involves the possibility of increased motive satisfaction.
Positive motivation is a process of attempting to influence others to do their
best, & thereby adopting good human relations. It seeks to create an
environment which will make the individual talent flourish & encourages
informal communications positively.

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What are the Motivators which can promote efficiency?
Job enrichment
Delegation of authority
Job security
Status & pride
Participation
Congenial work environment

Maslow‘s Need Hierarchy Theory of Motivation:


This Theory is considered fundamental to understanding of motivation.
Abraham Maslow outlined the elements of an overall theory of motivation.
His theory was based on human needs. He felt that within every human
being, there exists a hierarchy of five needs. These are:
1. Basic Physiological Needs: Are the most basic in the hierarchy and
corresponds to primary needs.
2. Safety/Security Needs: Needs provide security and protection from
physical and emotional harm.
3. Affiliation/Belonging Needs: Needs refer to affection, sense of
belongingness, acceptance and friendship.
4. Esteem Needs: Include factors such as self-respect, autonomy status,
recognition and attention.
5. Self Actualisation Needs: It is the highest level of need in the hierarchy.
It refers to the drive to become what one is capable of becoming. These
needs include growth, self-fulfillment and achievement of goals.

The theory is based on the following assumptions:


People‘s behaviour is based on their needs.
People‘s needs are in hierarchical order, starting from basic needs to
other higher-level needs.
A satisfied need can no longer motivate a person; only next higher-level
need can motivate him.
A person moves to the next higher level of the hierarchy only when the
lower need is satisfied.

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To conclude, the Theory focuses on the needs as the basis for motivation.

Herzberg's Two-factor Theory


Frederick Herzberg's two-factor theory, a.k.a. intrinsic/extrinsic
motivation, concludes that certain factors in the workplace result in job
satisfaction, but if absent, they don't lead to dissatisfaction but rather to
no satisfaction at all. The factors that motivate people can change over
their lifetime, but "respect for me as a person" is one of the top motivating
factors at any stage of life.

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He distinguished between: Motivators (e.g. challenging work,
recognition, responsibility) which give positive satisfaction, & Hygiene
factors (e.g. status, job security, salary & fringe benefits) that do not
motivate when present but, if absent, result in demotivation.
The name Hygiene factors is used because, like hygiene, the presence will
not make you healthier, but absence can cause health deterioration. The
theory is sometimes called the "Motivator-Hygiene Theory" or "The Dual
Structure Theory. "

A brief on Motivation Theory named as ―Theory X & Theory Y‖

In 1960, Douglas McGregor formulated Theory X & Theory Y suggesting


two aspects of human behaviour at work, or in other words, two different
views of individuals (employees): one of which is negative, called as Theory
X & the other is positive, so called as Theory Y. According to McGregor, the
perception of managers on the nature of individuals is based on various
assumptions.

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McClelland‘s Need Theory:
McClelland‘s need-theory is closely associated with learning theory,
because he believed that needs are learned or acquired by the kinds of
events people experienced in their environment and culture. He found that
people who acquire a particular need behave differently from those who do
not have. His theory focuses on Murray‘s three needs; achievement, power
and affiliation. They are defined as follows:
a) Need for Achievement
b) Need for Power
c) Need for Affiliation

Vroom‘s Expectancy Theory:


One of the most widely accepted explanations of motivation is offered by
Victor Vroom in his Expectancy Theory‖ It is a cognitive process theory of
motivation. The theory is founded on the basic notions that people will be
motivated to exert a high level of effort when they believe there are
relationships between the effort they put forth, the performance they
achieve, and the outcomes/ rewards they receive.

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Vroom's Expectancy Model of Motivation
Key constructs in the expectancy theory of motivation are:

1. Valence: Valence, according to Vroom, means the value or strength one


places on a particular outcome or reward.

2. Expectancy: It relates efforts to performance.

3. Instrumentality: By instrumentality, Vroom means, the belief that


performance is related to rewards.

Thus, Vroom‘s motivation can also be expressed in the form of an equation


as follows: Motivation = Valence x Expectancy x Instrumentality

How Managers Can Motivate?


Expect the best.
Reward the desired behavior.
Create a ―FUN (Focused, Unpredictable, & Novel) approach.
Reward employees in ways that enhance performance & motivate them.
Tailor rewards.
Focus on revitalizing employees.
Get subordinates to take responsibility for their own motivation.
Play to employees‘ strengths, promote high performance, & focus on how
they learn.

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What is Morale?
'Morale' is an attitude of satisfaction with desire to continue in &
willingness to strive for the goals of an organisation.

What are the types of Morale?

1. Individual & Group Morale:


Individual morale is a single person‘s attitude towards work, environment
etc. Whereas group morale reflects the general attitude of a group of
persons. Group morale is everybody‘s concern & may go on changing with
the passage of time.

2. High or Low Morale:


Morale may be referred to high morale or low morale. In the words of
McFarland, high morale exists when employee attitudes are favourable to
the total situation of a group & to the attainment of its objectives. Low
morale exists when attitudes inhibit the willingness & ability of an
organization to attain its objectives. The words such as zeal, enthusiasm,
loyalty, dependability denote high morale. Low morale may be described
by words like lack of interest, laziness, apathy, bickering, jealousy,
quarrelsome, pessimism, etc.

Morale & Motivation:


Morale & motivation are inter-related but differ from each other. Morale
refers to the attitude of a person towards his work & environment while
motivation is a process to inspire people. Motivation is an inner feeling
which energizes a person to work more for satisfying his unsatisfied
demands. Motivation revolves round needs & incentives while morale
will determine the willingness to co-operate.
Morale is a group phenomenon while motivation is an individual‘s
readiness to work more. Morale is related to the combination of various
factors operating at work but motivation concerns to the job only.

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Motivation helps in mobilizing energy while morale is concerned with
the mobilization of sentiments.

What are the factors that affect Morale?


The Organization
The Nature of Work
The Level of Satisfaction
The Level of Supervision
Concept of Self
Worker‘s Perception of Rewards System
The Employee‘s Age
The Employee‘s Educational Level
The Off the Job Activities of the Employee

Performance Counselling
Performance counseling is basically given by the manager to an
employee exhibiting poor performance. Mostly, counseling sessions take
place when an employee fails to improve his performance even after
receiving an informal notification or advice about the same. Therefore,
formal performance counseling sessions take place to discuss the
problem areas and methodologies to overcome it.

THE COUNSELING PROCESS


Generally, counseling sessions happen in private between the manager
and the employee with an observer/support person attending the
sessions if required.
Effective counseling sessions are characterized by an interactive, two-
way and open communication. The employee is given an opportunity to
explain the reasons for underperformance.
The job standards expected are communicated to the employee and an
action plan for a given timeframe is drafted.
Records of counseling sessions are maintained, duly signed by the
participants

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The manager follows up at regular intervals to ensure that the employee
is progressing as per the plan and the set timelines.

Job Enrichment - Meaning and its Benefits


Job enrichment involves combining various existing and new tasks into one
large module of work. The work is then handed over to an employee, which
means there is an increase in responsibilities and scope. This increase in
responsibility is often vertical. The idea is to group various tasks together
such that natural work units are created.

Job enrichment also opens up a feedback channel for the employees.


Employees are frequently apprised of their performance. This keeps them
on track and helps them know their weak and strong points. Performance
standards are set for the employees themselves and future performances are
matched against the benchmarks. All this without any serious intervention
or involvement of the top management!

Benefits of Job Enrichment


Research studies on job enrichment found out decreased levels of
absenteeism among the employees, reduced employee turnover and a
manifold increase in job satisfaction. There are certain cases however where
job enrichment can lead to a decrease in productivity, especially when the
employees have not been trained properly. Even after the training the
process may not show results immediately, it takes time to reflect in the
profit line.

Fringe Benefits
The term fringe benefits refers to the extra benefits provided to employees
in addition to the normal compensation paid in the form of wage or salary.
Many years ago, benefits and services were labeled ―fringe‖ benefits
because they were relatively insignificant or fringe components of
compensation. However, the situation now is different, as these have, more
or less, become important part of a comprehensive compensation package
offered by employers to employees.
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The main features of fringe benefits, as they stand today, may be stated as
under:
a. They are paid to all employees (unlike incentives which are paid to
specific employees whose work is above standard) based on their
membership in the organization.
b. They are supplementary forms of compensation.
c. They help raise the living conditions of employees.
d. They are indirect compensation because they are usually extended as a
condition of employment and are not directly related to performance.
e. They may be statutory or voluntary. Provident fund is a statutory
benefit whereas transport is a voluntary benefit.

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Chapter 8: Communication: Steps in the Communication Process;
Communication Channels; Oral versus Written Communication; Verbal
versus non-verbal Communication; upward, downward & lateral
communication; Barriers to Communication.

Communication is the process of passing information & message from


one person to another. It involves atleast two persons i.e. a sender & a
receiver. The purpose is to achieve common understanding between the
sender & the receiver.
The communication function as the means by which the activities in the
organisation are coordinated to achieve the organisational goals.

Importance of Communication
 Basis of Decision-Making & Planning.
 Smooth & Efficient Working
 Facilitates Co-ordination
 Increases Managerial Efficiency
 Sound Industrial Relations
 Helps in Establishing Effective Leadership
 Motivation & Morale
 Effective Control
 Job Satisfaction
 Democratic Management
 Public Relations

What is the Purpose of Communication?


Establish & disseminate goals of an enterprise,
Develop plans for their achievements,
Select, develop & appraise members of the organisation,
Lead, direct, motivate & create a climate in which people want to
contribute,
Control performance,
Develop rapport with various agencies & organisations concerned with
the business enterprise.

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What is the Communication Process?
The process of Communication is as follows:
1. The Sender of the Message
2. Channel for Transmission of Message
3. The Receiver of the Message
4. The Feedback
5. Noise & Filters in Communication

Types of Communication
There are two main types of communication in every organisation – formal
& informal communication.
Formal Communication
It refers to official communication which takes place through a chain of
commands. It flows in formally established channels & is concerned with
work related matters.

Categories of Formal Communication


1. Downward Communication: Under this system, the flow of
communication from the top management downward to be operating
level. It may also be called a communication from a superior to a
subordinate. Downward communication consists of plans & policies,
orders & instructions, procedures & rules etc.
2. Upward Communication: It means the flow of information from the
lower levels of the organisation to the higher level of authority. It passes
from subordinate to superior as that from worker to foreman, foreman to
manager. From manager to general manager & so on. This
communication includes opinions, ideas, suggestions, complaints,
grievances, appeals, reports etc.
3. Horizontal Communication: The transmission of information &
understanding between people on the same level of organisation
hierarchy is called the horizontal communication. This type of
communication is also known as lateral or sideward or crosswise
communication. This speeds up information & promotes mutual
understanding.

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Some More Categories of Formal Communication are as follows:
Single chain: This network exists between a supervisor & his
subordinates.
Wheel: In wheel network, all subordinates under one superior
communicate through him only as he acts as a hub of the wheel. The
subordinates are not allowed to talk among themselves.
Circular: In circular network, the communication moves in a circle. Each
person can communicate with his adjoining two persons.
Free flow: In this network, each person can communicate with others
freely. The flow of communication is fast in this network.
Inverted V: In this network, a subordinate is allowed to communicate
with his immediate superior as well as his superiors‘ superior.

Informal Communication
This communication flows through informal channels & may or may not
be work related. Informal communication cuts through the formal
organizational structure. The term ‗grapevine‘ used to describe a network
of informal communication.
Grapevines are present in all organisations. Grapevines flourish because
communication is a natural human tendency. People who know each
other in the organisation talk together informally.
Grapevines carry two types of information: work related and people
related.

Verbal Vs Non-Verbal Communication


The use of words in communication is Verbal communication. The
communication which is based on signs, not on words is Non-verbal
communication.
There are very fewer chances of confusion in verbal communication
between the sender and receiver. Conversely, the chances of
misunderstanding and confusion in non-verbal communication are very
much as the use of language is not done.
In verbal communication, the interchange of the message is very fast
which leads to rapid feedback. In opposition to this, the non-verbal

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communication is based more on understanding which takes time and
hence it is comparatively slow.
In verbal communication, the presence of both the parties at the place of
communication is not necessary, as it can also be done if the parties are at
different locations. On the other hand, for an effective non-verbal
communication, both the parties must be there, at the time of
communication.
In verbal communication, the documentary evidence is maintained if the
communication is formal or written. But, there is no conclusive evidence
in case of non-verbal communication.
Verbal communication fulfils the most natural desire of humans – talk. In
the case of Non-verbal communication, feelings, status, emotions,
personality, etc are very easily communicated, through the acts done by
the parties to the communication.

Oral Vs Written Communication


The type of communication in which the sender transmits information to
the receiver through verbally speaking the message. The communication
mode, which uses written or printed text for exchanging the information
is known as Written Communication.
The pre-condition in written communication is that the participants must
be literate whereas there is no such condition in case of oral
communication.
Proper records are there in Written Communication, which is just
opposite in the case of Oral Communication.
Oral Communication is faster than Written Communication.
The words once uttered cannot be reversed in the case of Oral
Communication. On the other hand, editing of the original message is
possible in Written Communication.
Misinterpretation of the message is possible in Oral Communication but
not in Written Communication.
In oral communication, instant feedback is received from the recipient
which is not possible in Written Communication.

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What are the Barriers and Breakdowns in Communication?
Lack of Planning
Unclarified Assumptions
Poorly Expressed Message
Loss of Transmission & Poor Retention:
Poor Listening & Premature Evaluation
Semantic Distortion:
Distrust, Threat & Fear
Insufficient Period for adjustment to Change:
Information Overload

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Chapter 9: Corporate Governance: Factors affecting Corporate
Governance; Mechanisms of Corporate Governance

What is Corporate Governance?


Corporate Governance may be defined ―as a set of systems, processes
and principles which ensure that a company is governed in the best
interest of all stakeholders‖. It is the system by which companies are
directed and controlled. It is about promoting corporate fairness,
transparency and accountability.
It involves a set of relationships between a company‘s management, its
board, its shareholders and other stakeholders.
It deals with prevention or mitigation of the conflict of interests of
stakeholders. Ways of mitigating or preventing these conflicts of interests
include the processes, customs, policies, laws, and institutions which
have impact on the way a company is controlled.

What are the Objectives of Corporate Governance?


A properly structured board capable of taking independent and objective
decisions is in place at the helm of affairs.
The board is balance as regards the representation of adequate number of
non-executive and independent directors who will take care of their
interests and well-being of all the stakeholders;
The board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information.
The board has an effective machinery to subserve the concerns of
stakeholders.
The board keeps the shareholders informed of relevant developments
impacting the company.
The board effectively and regularly monitors the functioning of the
management team.
The board remains in effective control of the affairs of the company at all
times.

What are the Benefits of Corporate Governance?

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Enhanced Performance
Access to Capital
Better Standards
Better Talent Utilization

Factors Affecting Corporate Governance

Regulation and their enforcement


Since corporate governance failures have proved to be harmful not just
for the organizations but also for the economy and the general public at
large as well, there have been public pressures on the government and
regulatory authorities to reform business practices and increase
transparency.
Consequently, it has become a part of the government‘s duty to ensure
accountability and responsibility in corporate behavior.
Effective disposal of this responsibility basically revolves around two
things:
First, the designing of regulatory commands i.e. the regulations and laws
to ensure good corporate governance; and Second is the enforcement of
regulations.

Risk Management & Effective Governance


In today‘s world, frauds are an undeniable fact of business life. Affecting
all types of businesses. New technologies such as the Internet, and the
development of fully automated accounting systems, have increased the
opportunities for fraud to be committed. Once suspected or discovered,
investigating fraud is a specialist task requiring experience and technical
skill and can be very costly. Thus, there is no doubt that fraud is best
prevented, rather than dealt with after the fact. The most effective and
appropriate response to the problem of fraud involves a combination of
risk management techniques.
These techniques include:
Setting up inherent control based upon soft controls that occur
continuously and consistently throughout the organization. Such controls

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should be embedded in normal business practice and be designed in such
a way that they are to a large extent self sustaining; and
Setting up formal control processes of monitoring, reviewing and
reporting

Mechanisms of Corporate Governance


Directors representing private shareholders brought new perspectives to
board deliberations, and the interests of private shareholders began to
have an impact on strategic decisions
The corporate governance ‗structural‘ reform measures included
mandating a higher proportion of independent directors on the boards
Inducting board members with diverse sets of skills and expertise
Setting up of board committees for key functions like risk management,
compensation, investor grievances redressal and nomination of directors.

What is Clause 49
SEBI monitors & regulates corporate governance of listed companies in
India through Clause 49. This clause is incorporated in the listing
agreement of stock exchanges with companies & it is compulsory for
them to comply with its provisions.
Applicable to all Group A companies of the Exchange, as also others with
minimum paid-up capital of Rs. 3 crore or net worth of Rs. 25 crore.

Important Point related to CSR


India has also attempted to integrate ESG & Corporate Social Responsibility
(CSR) issues at the board level, having mandated that every board establish
a CSR committee & that the company spend 2% of net profits on CSR
activities.

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Finance for
RBI GRADE B 2017
Phase 2 Exam

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Part 1: Financial System

Topic 1: Regulators of Banks and Financial Institutions

Financial system in India is regulated by different independent regulators


like RBI, IRDAI, SEBI & other.
The regulators are as follows:
• Reserve Bank of India
• Securities and Exchange Board of India
• Insurance Regulatory and Development Authority of India
• PFRDA
Sectors Regulator
Financial system and Reserve Bank of India
monetary policy
Security Market Securities and Exchange Board of India
Insurance industry Insurance Regulatory and Development
Authority
Pension sector Pension Fund Regulatory and
Development Authority

SEBI
SEBI is the regulator for the securities market in India. It was established in
the year 1988 and was given the statutory powers in 1992 through the SEBI
Act, 1992. The HQ is at Mumbai, Maharashtra. The Current Chairman is
Ajay Tyagi.

IRDAI
Insurance Regulatory and Development Authority of India is an
autonomous, statutary agency tasked with regulating and promoting the
insurance and re-insurance industries in India. It was constituted by the
IRDA Act, 1999. The headquarters is in Hyderabad, Telangana. The current
Chairman is T.S. Vijayan.

PFRDA

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Pension Fund Regulatory and Development Authority is a pension
regulator which was established by Government of India in 2003. It
promotes old age income security by establishing, developing and
regulating pension funds and protects the interests of subscribers to
schemes of pension funds and related matters. PFRDA is responsible for
appointment of various intermediate agencies such as Central Record
Keeping Agency (CRA), Pension Fund Managers, Custodian, NPS Trustee
Bank, etc. The HQ is at New Delhi and Hemant Contractor is currently the
Chairman of the organisation.

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Topic 2: Reserve Bank of India- functions and conduct of monetary
policy, Banking System in India, Financial Institutions – SIDBI, EXIM,
NABARD, NHB, etc.

Reserve Bank of India (RBI)


i. RBI established on April 1, 1935 under RBI Act 1934 (recommendations
of John Hilton Young Commission 1926 – called Royal Commission on
Indian Currency & Finance), is the central bank of the country & was
nationalized w.e.f Jan 01,1949.
ii. Originally it was a shareholders‘ bank which was taken over by the
Central Govt. under Reserve Bank (Transfer of Public Ownership) Act
1948 (paid up capital Rs. 5 cr).
iii. RBI‘s central office is in Mumbai.

Functions of RBI:
Issuance of currency: RBI is the authority in India to issue currency notes
(called bank notes) under signatures of Governor. (One rupee note called
currency note is issued by the Central Govt.&signed by Finance Secretary).
The stock of currency is distributed with the help of currency chests spread
all over the country.
Banker to Govt.: RBI transacts govt. business&manages public debt. SBI or
any other bank is appointed Agent where RBI does not have office. It
provides Ways & Means advances to Govt.
Bankers‘ bank: It keeps a part of deposits of commercial banks (as CRR) &
acts as lender of last resort by providing financial assistance to banks. It
provides export credit refinance, Liquidity Adjustment Facility&Marginal
Standing Facility.
Controller of Banks: An entity which is to conduct banking business in
India has to obtain license from RBI. It acts as controller of banks by
including the banks in 2nd Schedule of the Act. It issues directions, carries
inspection (on-site as well as off-site) & exercises management control.
Controller of credit: RBI can fix interest rates (including Bank Rate) &
exercise selective credit controls. Various tools such as change in cash
reserve ratio, stipulation of margin on securities, directed credit guidelines

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etc. are used for this purpose. It also carries sale&purchase of securities
which are known as open market operations.

Maintenance of external value: RBI is responsible also for maintaining


external value of Indian currency as well as the internal value. Foreign
exchange reserves are held by RBI&it has a wide power to regulate foreign
exchange transactions under Foreign Exchange Management Act (FEMA).

BANKING REGULATION ACT 1949


a) Passed as the Banking Companies Act 1949 (came into force wef
16.3.49&changed to Banking Regulation Act 1949 w.e.f. 01.03.66, it was
made applicable to J & K in 1956 (and now applicable throughout
India).
b) The Act is not applicable to primary agricultural credit societies,
cooperative land mortgage banks&non-agricultural primary credit
societies.

IMPORTANT POINTS ON RBI


 RBI is not expected to perform the function of accepting deposits from
the general public.
 RBI has its headquarters at Mumbai.
 Prime lending rate is decided by the individual banks.
 RBI decides the following rates namely; Bank rate, repo rate, reverse
repo rate&cash reserve ratio.
 The quantitative instruments of RBI are – bank rate policy, cash reserve
ratio & statutory liquidity ratio.
 The objective of monetary policy of RBI is to control inflation;
discourage hoarding of commodities & encourage flow of credit into
neglected sector.
 When RBI is lender of the last resort, it means that RBI advances credit
against eligible securities.
 Government of India decides the quantity of coins to be minted.
 The method which is used currently in India to issue currency note –
minimum reserve system. For issuing notes, RBI is required to hold the
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minimum reserves of Rs. 200 crores of which note less than Rs. 115 crore
is to be held in gold.

POLICY RATES
Current Rates
Bank Rate 6.50%
Repo Rate 6.25%
Reverse Repo Rate 6.00%
CRR 4.00%
SLR 20.50%
MSF 6.50%
Repo Rate
Repo rate is the rate of interest which is levied on Short-Term loans taken by
commercial banks from RBI. Whenever the banks have any shortage of
funds they can borrow it from RBI.

Reverse Repo Rate


This is exact opposite of Repo rate. Reverse repo rate is the rate at which
commercial banks charge on their surplus funds with RBI. RBI uses this tool
when it feels there is too much money floating in the banking system.

SLR Rate
SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to
maintain in the form of cash, or gold or government approved securities
(Bonds) before providing credit to its customers.
It is determined as the %age of total Net Demand&Time Liabilities (NDTL).

BANK RATE
It is defined in Sec 49 of RBI Act 1934 as the ‗standard rate at which RBI is
prepared to buy or rediscount bills of exchange or other commercial papers
eligible for purchase under this act‘.
CASH RESERVE RATIO

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CRR refers to the ratio of bank‘s cash reserve balances with RBI with
reference to the bank‘s net demand&time liabilities to ensure the
liquidity&solvency of the scheduled banks.

FINANCIAL INSTITUTIONS

National Bank for Agriculture&Rural Development


 Established on 12th July 1982 on the recommendation of CRAFICARD
committee (also called as Sivaraman Comittee)
 For Agricultural finance, NABARD is the apex organization.
 Chairman : Dr. Harsha Kumar Bhanwala
 Head Quarters : Mumbai
 Rural Infrastructure Development Fund (RIDF) is operated by NABARD,
instead in April 1995.
 NABARD is the "Micro-Finance Regulatory Authority"

Small Industries Development Bank of India (SIDBI)


 Small Industries Development Bank of India (SIDBI in short) was established
in the year 1990 (Date : 2nd April 1990) under the Small Industries
Development Bank of India Act 1989 as a subsidiary of Industrial
Development Bank of India.
 Chairman- Dr. KshatrapatiShivaji
 Head Quarters : Lucknow

Securities & Exchange Board of India (SEBI)


 It is theregulator for the securitiesmarket in India. SEBI was
initiallyestablished as a non statutory body in April 1988, to regulate
theworking of stock exchange. Later itwas given a statutory status
onApril 1992 via SEBI Act, 1992with the following objectives.
 Chairman- Ajay Tyagi
 Head Quarters : Mumbai

REGIONAL RURAL BANK (RRB):


 Regional Rural Bank Were Set Up By An Ordinance In 1975, Later Replaced
By Rrbs Act, 1976 As Pre Banking Commission Recommendation In 1975.
 Father Of Rrb Is M.Swaminathan.
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 The Govt. Of India Had Appointed A Working Group On Rural Banks
Under The Chairmanship Of Mr. M. Narasimham In 1975. First Rrbs Were
Set Up On 2nd Oct.
 Share Holder Contribution In %: Government Of India 50% Sponsor Bank
35% State Government 15% Total 100%.

EXIM BANK:
 The Export-Import (EXIM) Bank of India is the principal financial
institution in India for coordinating the working of institutions engaged
in financing export&import trade.
 It is a statutory corporation wholly owned by the Government of India.
 It was established on January 1, 1982 for the purpose of financing,
facilitating&promoting foreign trade of India.
 Chairman- Yaduvendra Mathur
 Head Quarters : Mumbai

NATIONAL HOUSING BANK (NHB)


 The National Housing Bank (NHB), the apex institution of housing
finance in India, was set up as wholly owned subsidiary of the Reserve
Bank of India.
 The bank started its operations from July 1988.
 NHB is a subsidiary bank of Reserve Bank of India.
 National Housing Bank was established under section 6 of National
Housing Bank Act (1987).
 The headquarters of NHB is in New Delhi.
 Chairman: Shri Sriram Kalyanaraman

ECGC
 Export Credit Guarantee Corporation of India. This organisation
provides risk as well as insurance cover to the Indian exporters.
 Chairman- GeethaMuralidhar
 Head Quarters : Mumbai

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Topic 3: Banking System in India

SCHEDULED BANK
a) As per Sec 2 (e) of RBI Act, a scheduled bank means a bank whose name
is included in the 2nd schedule of RBI Act 1934.
b) A scheduled bank should satisfy the conditions which include paid-up
capital&reserves requirement of not less than Rs. 5 lac, satisfaction of
RBI that the affairs will not be conducted by the bank in a way to
jeopardize the interests of the depositor. (Commercial, Rural&many
State Coop Banks are classified as Scheduled Banks).
c) A bank that is not included in the 2nd Schedule of RBI is called Non-
scheduled Bank.

Total No. of Banks (As per IBA Website)


Total PSBs: 21
Total Private Sector Banks: 24

If we include Payment and Small Bank (6) then it is 30.


RRB‘s: 56
Foreign Banks: 44
Cooperative Banks: 42

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Part 2: Financial Markets

MONEY MARKET
It is a market for short-term debt securities, such as commercial paper,
repos, negotiable certificates of deposit & Treasury Bills with a maturity of
one year or less.

CAPITAL MARKETS IN INDIA


It is the market for long term funds. It refers to all the facilities
&institutional arrangements for borrowing & lending medium & long term
funds.

Money Market VS Capital Market


Money Market Capital Market
 Market for short term  Market for long term financial assets
financial assets
 Maturity period less than one  Maturity period beyond one year
year
 Deals over the counter  Deals at stock exchange
 No. of players limited  No. of players unlimited
 Regulated by RBI  Regulated by SEBI

Major money market Instruments


Certificate of Deposit (CD)
Commercial Paper (CP)
Inter Bank Participation Certificates
Inter Bank term Money
Treasury Bills
Bill Rediscounting
Call/Notice Money

Terms relating to Money Market


Call Money Money lent or borrowed for one day
Notice Money Money lent or borrowed for a period of 2-14 days.

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Term Money Money lent or borrowed for 15 daysto 1 year.
Yield to maturity Expected rate of return on an existing security
purchased for the market.
Coupon Rate Specified interest rate on a fixed maturity security
fixed at the time of issue.

CALL/NOTICE MONEY MARKET OPERATIONS


Under call money market, funds are transacted on overnight
basis&under notice money market, for 2 days to 14 days.
Participants include banks (excluding RRBs)&Primary Dealers (PDs),
both as borrowers&lenders. Non-bank institutions are not permitted in
the call/notice money market with effect from August 6, 2005.
Calculation of interest payable is based on FIMMDA‘s (Fixed Income
Money Market&Derivatives Association of India) Handbook of Market
Practices.

INSTRUMENT OF GOVT. BORROWING


To meet the temporary receipt&expenditure mismatch, govt. obtains over
draft from RBI under Ways & Means Advances. For short term liquidity, it
issues cash management bills, treasury bills of 91 days, 182 days&364 days
maturity. For long term funds, it uses dated securities in the form of
bonds/long term loans.

TREASURY BILLS
These are the instruments (in the form of promissory notes) of short term
borrowing by the Central govt., first issued in India in 1917.

Investors: Treasury bills can be purchased by any one (including


individuals) except State govt.

Denomination: Minimum amount of face value Rs. 25000&in multiples


thereof. There is no specific amount/limit on the extent to which these can
be issue or purchased.

Maturity: 91 days, 182 days&364 days.


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Rate of interest: Treasury bills are zero coupon securities. They are issued
at a discount & redeemed at face value at maturity. The return to the
investors is the difference between the maturity value or the face value (that
is Rs. 100) & the issue price.

Cash Management Bills (CMB)


CMB introduced on 11.08.11, is a short term security to be sold by Govt. of
India to raise temporary money for cash management needs.
1. The tenure is less than 91 days but the notified amount&date of issue
depends upon the temporary cash requirement of the Govt.
2. It is issued at discount to the face value through auctions, as in the case
of the Treasury Bills.

DATED SECURITIES
These are long term securities & carry a fixed or floating coupon (interest
rate) paid on the face value, payable at fixed time periods (half-yearly).
The tenor of dated securities can be up to 40 years.
Public Debt Office of RBI acts as the registry/depository of Govt.
securities & deals with the issue, interest payment & repayment of
principal at maturity.

WAYS & MEANS ADVANCES (WMAs)


WMAs were introduced as per an agreement between RBI & Govt. WMAs
are temporary overdrafts by RBI to govt. (Central & State) under Section
17(5) of RBI Act. WMSs replaced the earlier ad hoc T-Bills system.

Objective – WMAs bridge the time interval of mismatch between govt.


expenditure & receipts.
These are not a source of finance.
Duration : 10 consecutive working days for Central Govt.&14 days for State
Govt.

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OTHER MONEY MARKET INSTRUMENTS

CERTIFICATE OF DEPOSIT
This scheme was introduced in July 1989, to enable the banking system to
mobilize bulk deposits from the market, which they can attract at
competitive rates of interest.
Who can issue Scheduled commercial banks (except RRBs) & All India
Financial Institutions within their ‗Umbrella limit‘.
CRR/SLR Applicable on the issue price in case of banks
Investors Individuals (other than minor), corporations, companies,
trusts, funds, associations etc.
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1
year&maximum 3 years).
Amount Min: Rs. 1 lac, beyond which in multiple of Rs. 1 lac
Int. Rate Market related. Fixed or floating
Loan Against collateral of CD not permitted
Nature Usance Promissory note. Can be issued in
Dematerialisation form only wef June 30, 2002

COMMERCIAL PAPER
i. CP introduced during 1990, is a short term money market instrument
issued as an unsecured usance promissory note&privately placed.
ii. Who can issue Commercial paper (CP): Companies, primary dealers
(PDs)&all-India financial institutions (FIs).
iii. A company is eligible to issue CP if:
(a) Its tangible net worth, as per latest audited balance sheet, is not less than
Rs. 4 crore.
(b) Sanctioned working capital limit by bank/s or all-India financial
institution/s;
(c) The borrower accounts are classified as a Standard Asset by financing
bank/s/ institution/s&‗
(d) Minimum credit rating from SEBI approved credit rating agency (CRA)
is A3. Rating should not be due for review.
iv. Maturity : Min 7 days & max upto one year

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v. Amount: Min Rs. 5 lakh or multiples thereof.

MERCHANT BANKING
Merchant banking stands for providing various services relation to capital
market & financing the corporate sector. The Merchant Bankers provide
consultancy to the corporate sector on the issues like finance, capital
structure & investment, mergers, takeover & amalgamations, establishing
coordination between the government & the corporate sector.

CAPITAL MARKETS IN INDIA


a) It refers to all the facilities & institutional arrangements for borrowing &
lending medium & long term funds.
b) It is segregated into (i) gilt edged market&(ii) the industrial securities
market.
c) The gilt edged market refers to the market for govt. & semi-govt.
securities which are traded in the market in stable value & are sought
after by banks & other institutions.
d) The industrial securities market refers to the market for shares &
debentures of old as well as new companies. This market is further
divided as primary market & secondary market.
 The primary market refers to the setup which helps the industry to raise
funds by issuing different types of securities, which are issued directly
to the investors, both individual & institutions.
 The secondary market refers to the network for subsequent sale &
purchase of securities, after these are issued.

Masala-Bonds
Masala Bonds are the bonds issued for rupee-denominated borrowings by
Indian entities in overseas markets.

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Part 3: General Topics

Chapter 1: Risk Management in Banking Sector

Maintaining a trade-off between risk and return is the business of risk


management. Risk management in the banking sector is a key issue linked
to financial system stability.

What is a Risk?
A risk can be defined as an unplanned event with financial consequences
resulting in loss or reduced earnings. Two most important developments in
the banking sector because of which banks have to emphasise on risk
management:

Deregulation: It has given banks more autonomy in areas like lending,


investment, interest rate structure etc. As a result of these developments,
banks are required to manage their own business themselves and at the
same time maintain liquidity and profitability.

Technological innovation: Technological innovations have provided a


platform to the banks for creating an environment for efficient customer
services as also for designing new products. This has also increased the
diversity and complexity of risks, which need to be managed professionally
so that the opportunities provided by the technology are not negated.

Major Risks in Banking Sector

Liquidity Risk: Liquidity risk is the risk of a bank not being able to have
enough cash to carry out its day-to-day operations.

Interest Rate Risk: The risk of an adverse impact on Net Interest Income
(NII) due to variations of interest rate may be called Interest Rate Risk. It is
the exposure of a Bank‘s financial condition to adverse movements in
interest rates.

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Market Risk: Basel Committee on Banking Supervision defines market risk
as the risk of losses in on- or off-balance sheet positions that arise from
movement in market prices. Market risk is the most prominent for banks
present in investment banking.

Credit or Default Risk: It usually occurs because of inadequate income or


business failure. Credit risk signifies a decline in the credit assets‘ values
before default that arises from the deterioration in a portfolio or an
individual‘s credit quality.

Operational Risk: Basel Committee on Banking Supervision defines


operational risk ―as the risk of loss resulting from inadequate or failed
internal processes, people & systems or from external events. Operational
risk, the risk in all banking transactions.

Other Risks
Strategic Risk: Strategic Risk is the risk arising from adverse business
decisions, improper implementation of decisions or lack of responsiveness
to industry changes.

Reputation Risk: Reputation Risk is the risk arising from negative public
opinion. This risk may expose the institution to litigation, financial loss or
decline in customer base.

Role of RBI in Risk Managements in the Banks

RBI has been using CAMELS rating to evaluate the financial soundness of
the Banks. CAMELS Model consists of six components namely Capital
Adequacy, Asset Quality, Management, Earnings Quality, Liquidity and
Sensitivity to Market risk.

After the evolution of the BIS prudential norms in 1988, the RBI took a
series of measures to realign its supervisory and regulatory standards and
bring it at par with international best practices.
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Finally, it was in the year 1999 that RBI recognised the need of an
appropriate risk management and issued guidelines to banks regarding
assets liability management, management of credit, market and operational
risks. The entire supervisory mechanism has been realigned since 1994
under the directions of a newly constituted Board for Financial Supervision
(BFS), which functions under the aegis of the RBI, to suit the demanding
needs of a strong and stable financial system.

A process of rating of banks on the basis of CAMELS in respect of Indian


banks and CACS (Capital, Asset Quality, Compliance and Systems &
Control) in respect of foreign banks has been put in place from 1999.

Basel Norms
Basel is a city in Switzerland. It is the headquarters of Bureau of
International Settlement (BIS), which fosters co-operation among central
banks with a common goal of financial stability and common standards of
banking regulations.
Basel guidelines refer to broad supervisory standards formulated by this
group of central banks - called the Basel Committee on Banking Supervision
(BCBS). The purpose of the accord is to ensure that financial institutions
have enough capital on account to meet obligations and absorb unexpected
losses.

Basel I: The Basel Capital Accord


In 1988, BCBS introduced capital measurement system called Basel capital
accord, also called as Basel 1. It focused almost entirely on credit risk. It
defined capital and structure of risk weights for banks. The minimum
capital requirement was fixed at 8% of risk weighted assets (RWA). RWA
means assets with different risk profiles.

Basel II: The New Capital Framework


In June 2004, Basel II guidelines were published by BCBS, which were
considered to be the refined and reformed versions of Basel I accord. The

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guidelines were based on three parameters, which the committee calls it as
pillars. - Capital Adequacy Requirements: Banks should maintain a
minimum capital adequacy requirement of 8% of risk assets - Supervisory
Review: According to this, banks were needed to develop and use better
risk management techniques in monitoring and managing all the three
types of risks that a bank faces, viz. credit, market and operational risks -
Market Discipline: This need increased disclosure requirements. Banks need
to mandatorily disclose their CAR, risk exposure, etc to the central bank.
Basel II norms in India and overseas are yet to be fully implemented.

Basel III Norms


a) The Basel Committee is the primary global standard-setter for the
prudential regulation of banks & provides a forum for cooperation on
banking supervisory matters. Its mandate is to strengthen the
regulation, supervision & practices of banks worldwide with the
purpose of enhancing financial stability. Stefan Ingves, Governor
of Sveriges Riksbank (SWEDEN), is the Chairman of the Basel
Committee.
b) Basel III or Basel 3 released in December, 2010 is the third in the series of
Basel Accords. These accords deal with risk management aspects for
the banking sector.
c) According to Basel Committee on Banking Supervision "Basel III is a
comprehensive set of reform measures, developed by the Basel
Committee on Banking Supervision, to strengthen the regulation,
supervision & risk management of the banking sector".
(d) Basel 3 measures aim to:
 Improve the banking sector's ability to absorb shocks arising from
financial & economic stress, whatever the source
 Improve risk management & governance
 Strengthen banks' transparency & disclosures.

Three Pillars of Basel 3


 Pillar 1: Minimum Regulatory Capital Requirements based on Risk
Weighted Assets (RWAs):

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Maintaining capital calculated through credit, market & operational risk
areas (mainly that capital which can absorb risk.)
 Pillar 2: Supervisory Review Process:

Regulating tools & frameworks for dealing with peripheral risks that bank
face.
 Pillar 3: Market Discipline:

Increasing the disclosures that banks must provide to increase the


transparency of banks

Important Facts related to BASEL 3


 Minimum Ratio of Total Capital To RWAs--10.50%
 Minimum Ratio of Common Equity to RWAs--4.50% to 7.00%
 Tier I capital to RWAs--6.00%
 Core Tier I capital to RWAs--5.00%
 Capital Conservation Buffers to RWAs--2.50%
 Leverage Ratio--3.00%
 Countercyclical Buffer--0% to 2.50%

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Chapter 2: Basics of Derivatives: Forward, Futures and Swap

Derivative Instruments
A derivative is an instrument whose value is derived from the value of one
or more underlying, which can be commodities, precious metals, currency,
bonds, stocks, stocks indices, etc. Four most common examples of derivative
instruments are Forwards, Futures, Options and Swaps.

Forward Contracts
A forward contract is a customized contract between two parties, where
settlement takes place on a specific date in future at a price agreed today.
The main features of forward contracts are:
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of
contract size, expiration date and the asset type and quality.
The contract price is generally not available in public domain.
The contract has to be settled by delivery of the asset on expiration date.
In case the party wishes to reverse the contract, it has to compulsorily
go to the same counter party, which being in a monopoly situation can
command the price it wants.

What are Futures?


Futures are exchange-traded contracts to sell or buy financial instruments or
physical commodities for a future delivery at an agreed price. There is an
agreement to buy or sell a specified quantity of financial instrument
commodity in a designated future month at a price agreed upon by the
buyer and seller.
4. What is the difference between Forward Contracts and Futures
Contracts?

Basis Futures Forwards


Nature Traded on organized Over the Counter
exchange
Contract Standardized Customised

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Terms
Liquidity More liquid Less liquid
Margin Requires margin payments Not required
Payments
Settlement Follows daily settlement At the end of the period.
Squaring off Can be reversed with any Contract can be reversed
member of the Exchange. only with the same counter-
party with whom it was
entered into.

Options
An Option is a contract which gives the right, but not an obligation, to buy
or sell the underlying at a stated date and at a stated price. While a buyer of
an option pays the premium and buys the right to exercise his option, the
writer of an option is the one who receives the option premium and
therefore obliged to sell/buy the asset if the buyer exercises it on him.

Options are of two types - Calls and Puts options:


―Calls‖ give the buyer the right but not the obligation to buy a given
quantity of the underlying asset, at a given price on or before a given future
date.
―Puts‖ give the buyer the right, but not the obligation to sell a given
quantity of underlying asset at a given price on or before a given future
date. All the options contracts are settled in cash.

Further the Options are classified based on type of exercise. At present the
Exercise style can be European or American.
American Option - American options are options contracts that can be
exercised at any time upto the expiration date. Options on individual
securities available at NSE are American type of options.
European Options - European options are options that can be exercised
only on the expiration date. All index options traded at NSE are European
Options.
What is the Expiration Day?

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It is the last day on which the contracts expire. Futures and Options
contracts expire on the last Thursday of the expiry month. If the last
Thursday is a trading holiday, the contracts expire on the previous trading
day.

In- the- money options (ITM) - An in-the-money option is an option that


would lead to positive cash flow to the holder if it were exercised
immediately. A Call option is said to be in-the-money when the current
price stands at a level higher than the strike price.

At-the-money-option (ATM) - An at-the money option is an option that


would lead to zero cash flow if it were exercised immediately. An option on
the index is said to be ―at-the-money‖ when the current price equals the
strike price.

Out-of-the-money-option (OTM) - An out-of- the-money Option is an


option that would lead to negative cash flow if it were exercised
immediately. A Call option is out-of-the-money when the current price
stands at a level which is less than the strike price.

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Chapter 3: Changing Landscape of Banking sector

Currency Features of Rs.500 & Rs. 2000 Notes


In order to make the country corruption free and curb black money, the PM
of India Shree Narendra Modi discontinued the currency of Rs1000 and
Rs500 from circulation and replacing it with a new currency of Rs2000 and
Rs500. The new currency notes have so many interesting facts and features
like colour, dimensions, language etc. One question on the dimension of
new notes was also asked in the Bank of Baroda Exam held recently. So, it
becomes important to know about the details of new currency notes
of RBI. Here are the details of new currency notes of Rs2000 and Rs500:

Rs500 Note
The new Rs500 notes in the Mahatma Gandhi (New) Series are different
from the previous series in colour, size, theme, location of security features
and design elements. The size of the new note is 66mm x 150mm. The
colour of the notes is stone grey and the predominant new theme is Indian
heritage site - Red Fort. Denomination numeral is in Devnagari. Guarantee
clause, Governor's signature, RBI emblem shifted towards right. Ashoka
pillar emblem is on right. 15 languages are written on the reverse side of
Note. For visually impaired, Circle with Rs. 500 in raised print on the right
and Bleed lines on left and right in raised print. Swachh Bharat logo with
slogan is on the reverse side of the Note.

Rs2000 Note
The Reserve Bank of India has introduced new design banknotes in the
denomination of Rs2000 as part of Mahatma Gandhi (New) Series. The size
of the new note is 66mm x 166mm. The new denomination has motif of
the Mangalyaan on the reverse, depicting the country's first venture in
interplanetary space. The base colour of the note is magenta. The note has
other designs, geometric patterns aligning with the overall colour scheme,
both on the obverse and the reverse. Denomination numeral is in
Devnagari. For visually impaired, Rectangle with Rs.2,000 in raised print

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on right and Seven angular bleed lines in raised print. Swachh Bharat logo
with slogan is on the reverse side of the Note.

A Brief on NPCI
National Payments Corporation of India (NPCI) is an umbrella organization
for all retail payments system in India. NPCI was incorporated in December
2008 & the Certificate of Commencement of Business was issued in April
2009. The authorized capital was pegged at Rs 300 crore & paid up capital
was Rs 100 crore. The Board constitutes of Shri Balachandran M as the
Chairman, & Shri A. P. Hota, Managing Director & Chief Executive Officer,
NPCI.

A Brief on BHIM
Bharat Interface for Money is an app that lets you make simple, easy &
quick payment transactions using Unified Payments Interface (UPI).
This can be done using just Mobile number or Virtual Payment Address
(VPA). Currently it is available in 12 languages.
A Virtual Payment Address (VPA) is a unique identifier which you can
use to send & receive money on UPI.
Amount of money that can be sent using BHIM is uptoRs 10,000 per
transaction & a maximum of Rs 20,000 per day for one bank account.

A Brief on UPI- 2016


Unified Payments Interface is an instant payment system developed by
NPCI. UPI is built over the IMPS infrastructure & allows you to
instantly transfer money between any two parties' bank accounts.
UPI-PIN is a 4-6 digit pass code you create/set during first time
registration with this App.
At present, the upper limit per UPI transaction is Rs. 1 Lakh.

Immediate Payment Service (IMPS)


It was launched in 2010. IMPS offers an instant, 24X7, interbank electronic
fund transfer service through mobile phones.

Overview of *99# Service


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*99# service launched by NPCI, which works on Unstructured
Supplementary Service Data (USSD) channel. This service was launched in
2014. Banking customers can avail the service by dialing *99#, a ―Common
number across all Telecom Service Providers (TSPs)‖ on their mobile phone
& transact through an interactive menu displayed on the mobile screen.

Overview of *99*99# Service


*99*99# is a USSD (Unstructured Supplementary Service Data) based value
added service from NPCI that facilitates the customers to check the status of
his/her Aadhaar number seeding/linking in the bank account. The service
works across all GSM service providers & brings together the diverse
ecosystem partners such as Banks & TSPs (Telecom Service Providers).

MMID
MMID stands for Mobile Money Identifier. MMID is a 7-digit code issued
by the bank to their customers for availing IMPS.

A Brief on QSAM
*99*99# service, is alternatively known as QSAM (Query Service on
Aadhaar Mapper). Using this service, a person can check the Aadhaar
seeding/linking status in his/her bank account.

A Brief on NACH
NPCI implemented ―National Automated Clearing House (NACH)‖ for
Banks, Financial Institutions, Corporates & Government, is a web based
solution to facilitate interbank, high volume, electronic transactions which
are repetitive & periodic in nature. NACH System can be used for making
bulk transactions towards distribution of subsidies, dividends, interest,
salary, pension etc. for bulk transactions towards collection of payments
pertaining to telephone, electricity, water, loans, investments in mutual
funds, insurance premium etc.
NACH‘s Aadhaar Payment Bridge (APB) System, developed by NPCI has
been helping the Government & Government Agencies in making the Direct
Benefit Transfer scheme a success.

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BBPS
Bharat Bill Payment System (BBPS) will function as a tiered structure for
operating the bill payment system in the country under a single brand
image. National Payments Corporation of India (NPCI) will function as the
authorized Bharat Bill Payment Central Unit (BBPCU), which will be
responsible for setting business standards, rules & procedures for technical
& business requirements for all the participants. Payments may be made
through the BBPS using cash, transfer cheques, & electronic modes.

A Brief on Specified Bank Notes (Cessation of Liabilities) Act 2017


Government of India notified the Specified Banknotes (Cessation of
liabilities) Act 2017.The SBNs cease to be the liabilities of the Reserve
Bank under Section 34 of the RBI Act & cease to have the guarantee of
the Central Government.
In terms of Section 5 of the Act, with effect from December 31, 2016 no
person shall knowingly or voluntarily hold, transfer or receive any specified
banknotes. After the expiry of grace period, holding of not more than 10
notes in total, irrespective of denomination or not more than 25 notes for the
purpose of study/ research/ numismatics is permitted. In terms of Section
7, contravention of Section 5 shall be punishable with fine which may
extend upto 10,000 INR or five times the face value of the SBNs involved in
the contravention, whichever is higher. The limit of exchange for NRIs will
be Rs. 25000/-.

Small Finance Banks


The objective is to further financial inclusion by (a) provision of savings
vehicles, (b) supply of credit to small business units; small&marginal
farmers; micro&small industries; & other unorganised sector entities,
through high technology-low cost operations.
It shall primarily undertake basic banking activities of acceptance of
deposits & lending to unserved & underserved sections including small
business units, small&marginal farmers, micro&small industries &

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unorganised sector entities. The minimum paid-up equity capital is Rs.
100 crores.
The promoter's minimum initial contribution to the paid-up equity
capital of such small finance bank shall at least be 40 %&gradually
brought down to 26 % within 12 years from the date of commencement
of business of the bank.

Payments Banks
The objective is to further financial inclusion by providing (i) small
savings accounts(ii) payments/remittance services to migrant labour
workforce, low income households, small businesses, other unorganised
sector entities&other users.
Scope of activities: Acceptance of demand deposits. Payments bank
will initially be restricted to holding a maximum balance of Rs. 100,000
per individual customer.
The payments banks cannot undertake lending activities. Apart from
amounts maintained as Cash Reserve Ratio (CRR) on its outside
demand&time liabilities, it will be required to invest minimum 75 % of
its "demand deposit balances" in SLR eligible. The minimum paid-up
equity capital shall be Rs. 100 crore.
The promoter's minimum initial contribution to the paid-up equity
capital of such payments bank shall at least be 40 % for the first five
years from the commencement of its business.

Important Details related to SBI Merger

Merger of Associates of SBI and Bhartiya Mahila Bank (BMB) on 01st April
2017 with State Bank of India (SBI) was a historic move in the history of
India. SBI is not only the largest Public lender of India but also the most
reliable and Employment providing organization of the country. Here is all
the relevant information that you must know before appearing the
examinations.
1. 1st April was the record date in India as the merger of State Bank of
India took place (SBI) with five of its associate banks and Bhartiya
Mahila Bank. The five associate banks are State Bank of Bikaner and
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Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore
(SBT), State Bank of Hyderabad (SBH) and State Bank of Patiala (SBP).
2. SBI has rebranded its corporate website as "bank.sbi" from the earlier
sbi.co.in.
3. The background to the SBI signboard has been changed from white to
―inky blue‖ and SBI will be written in a new font called Effra.
4. The designing and rebranding of SBI logo has been done by a company
called Design Stack.
5. The SBI logo symbolizes its role of a custodian that will keep customers‘
money safe.
6. With the merger, State Bank of India has entered the league of 'Top 50
Global Banks' with a balance sheet size of Rs. 41 trillion. SBI was earlier
placed at 54th rank globally but after the merging it moved to 44th
position making it in the top 50 leading banks globally.
7. The last time such a rebranding exercise was undertaken in 1971, after
the government nationalized banks under former Prime Minister's
Indira Gandhi regime.
8. Post-merger, SBI‘s market share will increase to nearly 22 per cent from
17 per cent.
9. After the merger the tagline of SBI has remained same i.e. "Banker to
every Indian".
10. The total customer base of the bank reaches 37 crore with a branch
network of around 24,000 and nearly 59,000 ATMs across the country.
The merged entity now has a deposit base of more than Rs 26 lakh-crore
and advances level of Rs 18.50 lakh crore.

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Chapter 4: Financial Inclusion

Financial inclusion involves


1) Give formal banking services to poor people in urban & rural areas.
2) Promote habit of money-savings, insurance, pension-investment among
poor-people.
3) Help them get loans at reasonable rates from normal banks. So they
don‘t become victims in the hands of local moneylender.

Some Important initiatives for Financial Inclusion


 Lead banking scheme (LBS).
 No frills account.
 BSBDA
 Business Correspondents (BC) system.
 Swabhiman Campaign
 PMJDY

Lead Bank Scheme


 The Lead Bank Scheme, introduced towards the end of 1969, envisages
assignment of lead roles to individual banks (both in public
sector&private sector) for the districts allotted to them.
 A bank having a relatively large network of branches in the rural areas
of a given district&endowed with adequate financial&manpower
resources has generally been entrusted with the lead responsibility for
that district. Accordingly, all the districts in the country have been
allotted to various banks.
 The lead bank acts as a leader for coordinating the efforts of all credit
institutions in the allotted districts.

No Frill Account
 'No Frills 'account is a basic banking account. Such account requires
either nil minimum balance or very low minimum balance. Charges
applicable to such accounts are low.

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 The RBI in 2005-06 called upon Indian banks to design a ‗no frills
account‘ – a no precondition, low ‗minimum balance maintenance‘
account with simplified KYC (Know Your Customer) norms.
 But all the existing ‗No-frills‘ accounts opened were converted into
BSBDA in compliance with the guidelines issued by RBI in 2012.

BSBDA

In 2012, RBI introduced BSBDA. Some important points are:


 This account shall not have the requirement of any minimum balance.
 The services available in the account will include: deposit&withdrawal
of cash at bank branch as well as ATMs; receipt/credit of money
through electronic payment channels or by means of deposit/collection
of cheques drawn by Central/State Government agencies&departments;
 While there will be no limit on the number of deposits that can be made
in a month, account holders will be allowed a maximum of four
withdrawals in a month, including ATM withdrawals.
 Facility of ATM card or ATM-cum-Debit Card.

Business Correspondent
 Business correspondents are bank representatives. They personally go
to the area allotted to them&carry out banking. They help villagers to
open bank accounts, in banking transactions etc.

Business Correspondents get commission from bank for every new account
opened, every transaction made via them, every loan-application processed
etc.

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Chapter 5: Corporate Governance in Banking Sector

The Corporate Governance Policy (‗Policy‘) provides the framework under


which the Board of Directors operates. It includes Bank‘s corporate
structure, culture, policies and the manner in which it deals with various
stakeholders. The Policy also addresses the responsibilities, authority and
administration of the Board of Directors. Further, it also includes the
responsibilities of the Principal Officer and defines the reporting
relationships.

The timely and accurate disclosure of information regarding the financial


situation, performance, board constitution, ownership of the Bank etc. is an
important part of Corporate Governance.

Corporate Governance arrangements are those through which an


organisation directs and controls itself and the people associated with it.
The Policy is normally reviewed once in two years and modified, when
deemed necessary, to ensure proper alignment with best practices in
Corporate Governance.

Corporate Governance is a process that aims to meet Stakeholder‘s


aspirations and societal expectations. It is not a discipline imposed by a
Regulator, but is a culture that guides the Board, Management and
Employees to function towards best interest of Stakeholders.

Basel Committee for Banking Supervision- Corporate Governance


Principals for Banks
Corporate governance principals prescribed under BASEL norms by Bank
for International Settlements (BIS)

Principle 1: Board‘s overall responsibilities


The Board has overall responsibility for the bank, including approving and
overseeing management‘s implementation of the bank‘s strategic objectives,

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governance framework and corporate culture. The Board is also responsible
for providing oversight of senior management.

Principle 2: Board qualifications and composition


Board members should be and remain qualified, individually and
collectively, including through training, for their positions. They should
understand their oversight and corporate governance role and be able to
exercise sound, objective judgment about the affairs of the
bank.

Principle 3: Board‘s own structure and practices


The board should define appropriate governance structures and practices
for its own work, and put in place the means for such practices to be
followed and periodically reviewed for ongoing effectiveness.

Principle 4: Senior management


Under the direction and oversight of the board, senior management should
carry out and manage the bank‘s activities in a manner consistent with the
business strategy, risk appetite, remuneration and other policies approved
by the board.

Principle 5: Governance of group structures


In a group structure, the board of the parent company has the overall
responsibility for the group and for ensuring the establishment and
operation of a clear governance framework appropriate to the structure,
business and risks of the group and its entities. The board and senior
management should know and understand the bank group‘s organisational
structure and the risks that it poses.

Principle 6: Risk management function


Banks should have an effective independent risk management function,
under the direction of a chief risk officer (CRO) or equivalent, with
sufficient stature, independence, resources and access to the board.

Principle 7: Risk identification, monitoring and controlling


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Risks should be identified, monitored and controlled on an ongoing bank-
wide and individual entity basis. The sophistication of the bank‘s risk
management and internal control infrastructure should keep pace with
changes to the bank‘s risk profile, to the external risk landscape and in
industry practice.

Principle 8: Risk communication


An effective risk governance framework requires robust communication
within the bank about risk, both across the organisation and through
reporting to the board and senior management.

Principle 9: Compliance
The bank‘s board of directors is responsible for overseeing the management
of the bank‘s compliance risk. The board should establish a compliance
function and approve the bank‘s policies and processes for identifying,
assessing, monitoring and reporting and advising on compliance risk.

Principle 10: Internal audit


The internal audit function should provide independent assurance to the
board and should support board and senior management in promoting an
effective governance process and the long-term soundness of the bank.

Principle 11: Compensation


The bank‘s remuneration structure should support sound corporate
governance and risk management.

Principle 12: Disclosure and transparency


The governance of the bank should be adequately transparent to its
shareholders, depositors, other relevant stakeholders and market
participants.

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Chapter 6: The Union Budget & all other Economic Parts

Topic 1: The Union Budget

What is Budget?

Budget is an Annual financial statement of the estimated receipts and


expenditure of the Government for the financial year. (1st April –31st
March). It is presented by the Union Finance Minister in the parliament.

Why do we need Budget?


The Budget is formulated to optimally allocate the Government‘s resources
to different sectors and schemes, so that the broad objectives of the
government could be achieved. It presents government‘s proposed
revenues and expenditure for the coming financial year.

How is the Budget Prepared in India?


Budget is prepared by the Budget Division, Department of Economic
Affairs, Ministry of Finance.
a) The budget division issues an annual budget circular to all the Union
Government ministries/ departments containing guidelines on how to
prepare budget estimates.
b) The Ministries/departments prepare and present their estimates for
budget allocation.
c) The ministries also provide the estimates for their revenue receipts in
the current financial year and next financial year to the finance ministry.
d) The finance minister then examines the proposals received from various
ministries and makes necessary changes, if any. The finance minister
also consults the prime minister, and briefs the Union Cabinet, about the
budget.
e) The budget division then consolidates all the estimates received and
prepares the budget documents.

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This year, it was the first time that the Railway budget was presented with
the Union Budget.

Now, let discuss all the important points related to this year‘s Budget
Proposals.

Finance Minister Shri Arun Jaitley presented the Union Budget 2017-18
which focused on 10 broad themes which are:
farmers, rural population, youth, poor and health care for the
underprivileged; infrastructure; financial sector for stronger institutions;
speedy accountability; public services; prudent fiscal management; tax
administration for the honest.

Budget Post Demonetisation


Demonet. is expected to have a transient impact on economy.
It is a bold & decisive measure and will lead to higher GDP growth.
The effects of it will not spillover to the next fiscal.

Budget Proposals related to Agriculture Sector


Rs. 10 lakh crores as credit to farmers with 60 days interest waiver will
be provided.
NABARD fund increased to Rs. 40,000 crores.
Govt. will set up mini lab in Krishi Vigyan Kendras for soiling.
Dedicated micro irrigation fund will be set up for NABARD with the
initial corpus of Rs 5,000 crores.
Irrigation Fund corpus has been increased from Rs. 20,000 crores to Rs.
40,000 crores.
With a better monsoon, agriculture is expected to grow at 4.1% in the
current year.
The coverage of Fasal Bima Yojana will be increased from 30% of
cropped area in 2016-17 to 40% in 2017-18 and 50% in 2018-19. The
Budget provision for this Yojana increased to Rs. 9,000 crores.
The coverage of National Agricultural Market (e-NAM) will be
expanded from the current 250 markets to 585 APMCs.

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A Dairy Processing and Infrastructure Development Fund would be set
up in NABARD with a corpus of Rs. 8,000 crores over 3 years. Initially,
the Fund will start with a corpus of Rs. 2,000 crores.

Budget Proposals related to Rural Population


Mission Antyodaya will be launched to bring one crore households out
of poverty and to make 50,000 gram panchayats poverty free by 2019,
the 150th birth anniversary of Gandhiji.
During 2017-18, 5 lakh farm ponds will be taken up.
Budget provision under MGNREGA in 2017-18 has been increased to
Rs. 48,000 crores. This is the highest ever allocation for MGNREGA.
Pradhan Mantri Gram Sadak Yojana (PMGSY) roads has accelerated to
reach 133 km roads per day in 2016-17, as against an average of 73 km
during the period 2011-2014. FM have provided a sum of Rs. 19,000
crores in 2017-18 for this scheme. With the contribution of States, the
total amount of Rs. 27,000 crores will be spent on PMGSY in 2017-18.
Proposed to complete 1 crore houses by 2019 for the houseless and those
living in kutcha houses.
Allocation for Pradhan Mantri Awaas Yojana – Gramin increased from
Rs. 15,000 crores in BE 2016-17 to Rs. 23,000 crores in 2017-18.
Allocation of Rs. 4,814 crores has been proposed under the Deendayal
Upadhyaya Gram Jyoti Yojana in 2017-18.
Allocations for Deendayal Antyodaya Yojana- National Rural
Livelihood Mission increased to Rs. 4,500 crores in 2017-18.
For imparting new skills to the people in the rural areas, mason training
will be provided to 5 lakh persons by 2022, with an immediate target of
training at least 20,000 persons by 2017-18.
The total allocation for the rural, agriculture and allied sectors in 2017-
18 is Rs. 1,87,223 crores, which is 24% higher than the previous year.

Budget proposals for the Youth


An Innovation Fund for Secondary Education will be created to
encourage local innovation for ensuring universal access, gender parity
and quality improvement.

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Govt. to launch SWAYAM platform with at least 350 online courses.
This would enable students to virtually attend the courses taught by the
best faculty; access high quality reading resources; participate in
discussion forums; take tests and earn academic grades.
Govt. proposed to establish a National Testing Agency as an
autonomous and self-sustained premier testing organisation to conduct
all entrance examinations for higher education institutions.
Pradhan Mantri Kaushal Kendras (PMKK) will be extended to more
than 600 districts from 60 districts earlier.
100 India International Skills Centres will be established across the
country.
In 2017-18, the govt. proposed to launch Skill Acquisition and
Knowledge Awareness for Livelihood Promotion programme
(SANKALP) at a cost of Rs. 4,000 crores. It will provide market relevant
training to 3.5 crore youth.
The 2nd phase of Skill Strengthening for Industrial Value Enhancement
(STRIVE) will also be launched in 2017-18 at a cost of Rs. 2,200 crores. It
will focus on improving the quality and market relevance of vocational
training provided in ITIs.
Five Special Tourism Zones, anchored on SPVs, will be set up in
partnership with the States. Incredible India 2.0 Campaign will be
launched across the world.

Budget allocations for the Poor and the Underprivileged


Mahila Shakti Kendra will be set up at village level with an allocation of
Rs. 500 crores in 14 lakh ICDS Anganwadi Centres.
For the welfare of Women and Children under various schemes across
all Ministries, allocations hae been increased from Rs.1,56,528 crores in
2016-17 to Rs. 1,84,632 crores in 2017-18.
National Housing Bank will refinance individual housing loans of about
Rs. 20,000 crore in 2017-18.
Government has prepared an action plan to eliminate Kala-Azar and
Filariasis by 2017, Leprosy by 2018 and Measles by 2020. Elimination of
tuberculosis by 2025 is also targeted.

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Action plan has been prepared to reduce IMR from 39 in 2014 to 28 by
2019 and MMR from 167 in 2011-13 to 100 by 2018-2020.
1.5 lakh Health Sub Centres will be transformed into Health and
Wellness Centres.
Steps will be taken to create additional 5,000 Post Graduate seats per
annum in medical.
Two new All India Institutes of Medical Sciences will be set up in the
States of Jharkhand and Gujarat.
Allocation for the welfare of Scheduled Castes has been stepped up
from Rs. 38,833 crores to Rs. 52,393 crores in 2017-18.
The allocation for Scheduled Tribes has been increased to Rs. 31,920
crores and for Minority Affairs to Rs. 4,195 crores.
LIC will implement a scheme for senior citizens to provide assured
pension, with a guaranteed return of 8% per annum for 10 years.

Budget Allocation in Infrastructure.


For 2017-18, the total capital and development expenditure of Railways
is Rs.1,31,000 crores. This includes Rs. 55,000 crores provided by the
Government.
Railways will focus on four major areas which are:
Passenger safety; (ii) Capital and development works; (iii) Cleanliness;
and (iv) Finance and accounting reforms.
For passenger safety, a Rashtriya Rail Sanraksha Kosh will be created
with a corpus of Rs. 1 lakh crores over a period of 5 years.
Unmanned level crossings on Broad Gauge lines will be eliminated by
2020.
Railway lines of 3,500 kms will be commissioned in 2017-18, as against
2,800 kms in 2016-17.
500 stations will be made differently abled friendly by providing lifts
and escalators.
Govt. proposed to introduce ‗Coach Mitra‘ facility, a single window
interface, to register all coach related complaints and requirements.
By 2019, all coaches of Indian Railways will be fitted with bio toilets.

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Pilot plants for environment friendly disposal of solid waste and
conversion of biodegradable waste to energy are being set up at New
Delhi and Jaipur railway stations.
Service charge on e-tickets booked through IRCTC has been withdrawn.
Cashless reservations have gone up from 58% to 68%.
In the road sector, Budget allocation for highways increased to Rs.
64,900 crores in 2017-18.
For transportation sector as a whole, including rail, roads, shipping, FM
provided Rs. 2,41,387 crores in 2017-18.
Under the BharatNet Project, OFC has been laid in 1,55,000 kms.
Allocation for BharatNet Project increased to Rs. 10,000 crores in 2017-
18.
A DigiGaon initiative will be launched to provide tele-medicine,
education and skills through digital technology.
For strengthening our Energy sector, Government has decided to set up
Strategic Crude Oil Reserves. It is proposed to set up caverns at 2 more
locations, namely, Chandikhole in Odisha and Bikaner in Rajasthan.
Allocation for incentive schemes like M-SIPS and EDF increased to Rs.
745 crores in 2017-18.
A new and restructured Central scheme, namely, Trade Infrastructure
for Export Scheme (TIES) will be launched in 2017-18.
The total allocation for infrastructure development in 2017-18 stands at
Rs. 3,96,135 crores.

Budget proposals related to Financial Sector


Govt. decided to abolish the FIPB in 2017-18.
The govt. will amend the Multi State Cooperative Societies Act, 2002 as
part of ‗Clean India‘ agenda.
A Computer Emergency Response Team for our Financial Sector
(CERT-Fin) will be established.
The shares of Railway PSEs like IRCTC, IRFC and IRCON will be listed
in stock exchanges.
Accordingly, a new ETF with diversified CPSE stocks and other
Government holdings will be launched in 2017-18.

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In line with the ‗Indradhanush‘ roadmap, govt. has provided Rs. 10,000
crores for recapitalisation of Banks in 2017-18.
The lending target under Pradhan Mantri Mudra Yojana has been set at
Rs. 2.44 lakh crores for 2017-18. Priority will be given to Dalits, Tribals,
Backward Classes, Minorities and Women.

Budget proposals for the digital economy


Government will launch two new schemes to promote the usage of
BHIM; these are, Referral Bonus Scheme for individuals and a Cashback
Scheme for merchants.
Aadhar Pay, a merchant version of Aadhar Enabled Payment System,
will be launched shortly.
A Mission will be set up with a target of 2,500 crore digital transactions
for 2017-18 through UPI, USSD, Aadhar Pay, IMPS and debit cards.
Banks have targeted to introduce additional 10 lakhs new PoS terminals
by March 2017. They will be encouraged to introduce 20 lakh Aadhar
based PoS by September 2017.
Government will encourage SIDBI to refinance credit institutions which
provide unsecured loans, at reasonable interest rates, to borrowers
based on their transaction history.
Govt. proposed to create a Payments Regulatory Board in the Reserve
Bank of India by replacing the existing Board for Regulation and
Supervision of Payment and Settlement Systems.

Budget proposals to Public Service


Govt. have decided to utilise the Head Post Offices as front offices for
rendering passport services.
A comprehensive web based interactive Pension Disbursement System
for Defence Pensioners will be established.
Govt. proposed to rationalise the number of tribunals and merge
tribunals wherever appropriate.
A High Level Committee under the Chairmanship PM is proposed to be
set up to improve the standards of public service and transparent
governance.

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Govt. will commemorate the centenary year of Champaran Satyagrah
this year.
GOI will support Govt. of Gujarat to commemorate 100 years of
Sabarmati Ashram in 2017.
This year the govt. will also commemorate Buxi Jagabandhu who led a
valiant uprising of soldiers in Khordha of Odisha in 1817.

Budget proposals related to Fiscal Management


Total expenditure in Budget for 2017-18 has been placed at Rs. 21.47
lakh crores. With the abolition of Plan-Non Plan classification of
expenditure, the focus is now on Revenue and Capital expenditure.
Capital expenditure increased by 25.4% over the previous year.
The total resources being transferred to the States and the Union
Territories with Legislatures is Rs. 4.11 lakh crores, against Rs. 3.60 lakh
crores in BE 2016-17.
Provision of Rs. 3,000 crores under the Department of Economic Affairs
to implement various Budget announcements and other new schemes in
2017-18.
For Defence expenditure excluding pensions, a sum of Rs. 2,74,114
crores including Rs. 86,488 crores for Defence capital have been
provided.
Allocation for Scientific Ministries increased to Rs. 37,435 crore in 2017-
18.
For the first time, a consolidated Outcome Budget, covering all
Ministries and Departments, is being laid along with the other Budget
documents.
The FRBM review Committee has favoured Debt to GDP of 60% for the
General Government by 2023, consisting of 40% for Central Government
and 20% for State Governments.
FM have pegged the fiscal deficit for 2017-18 at 3.2% of GDP and remain
committed to achieve 3% in the following year.
The net market borrowing of Government limit is kept at Rs. 3.48 lakh
crores after buyback.

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Revenue Deficit is pegged at 1.9% , against 2% mandated by the FRBM
Act.

Budget Proposals related to Taxes


The net tax revenue grew by 17% in 2015-16. In 2016-17, it will be up by
17%.
The rate of growth of advance tax in personal income tax in the first
three quarters of the current financial is 34.8%.
The thrust tax proposals is stimulating growth, relief to middle class,
affordable housing, curbing black money, promoting digital economy,
transparency of political funding and simplification of tax
administration.

Measures for Promoting Affordable Housing and Real Estate Sector


Changes made in the profit-linked income tax exemption for promoters
of affordable housing scheme. Instead of built up area of 30 and 60
sq.mtr., the carpet area of 30 and 60 sq.mtr. will be counted. The scheme
which was to be completed in 3 years have been extended to 5 years.
The holding period for considering gain from immovable property to be
long term is 3 years now. This is proposed to be reduced to 2 years.
Also, the base year for indexation is proposed to be shifted from
1.4.1981 to 1.4.2001 for all classes of assets including immovable
property. Govt. exempted the capital gain tax of persons holding land
on 2.6.2014, the date on which the State of Andhra Pradesh was
reorganised, and whose land is being pooled for creation of capital city
under the Government scheme.

Measures for Stimulating Growth


A concessional with-holding rate of 5% is being charged on interest
earned by foreign entities in external commercial borrowings or in
bonds and Government securities have been extended to 30.6.2020.
The profit linked deduction available to the start-ups for 3 years out of 5
years is being changed to 3 years out of 7 years.

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Govt. proposed to allow carry forward of MAT upto a period of 15
years instead of 10 years at present.
Govt. proposed to reduce the income tax for smaller companies with
annual turnover upto Rs. 50 crore to 25%.
Govt. proposed to increase allowable provision for Non-Performing
Asset from 7.5% to 8.5%.
Govt. proposed to reduce the basic customs duty on LNG from 5% to
2.5%.

Measures for Promoting Digital Economy


To reduce the presumptive income tax for small and medium tax payers
whose turnover is upto Rs. 2 crores to 6%in respect of turnover which is
received by non-cash means.
Govt. proposed to limit the cash expenditure allowable as deduction,
both for revenue as well as capital expenditure, to Rs. 10,000. Limit of
cash donation which can be received by a charitable trust is being
reduced from Rs. 10,000/- to Rs. 2000/-.
Govt. accepted the proposal of SIT that no transaction above Rs. 3 lakh
should be permitted in cash.
To promote cashless transactions, govt. proposed to exempt BCD,
Excise/CV duty and SAD on miniaturised POS card reader for m-POS,
micro ATM standards version 1.5.1, Finger Print Readers/Scanners and
Iris Scanners.

Scheme to cleanse the system of funding of political parties:


a) Maximum amount of cash donation that a political party can receive
will be Rs. 2000/- from one person.
b) Political parties will be entitled to receive donations by cheque or digital
mode from their donors.
c) Amendment is being proposed to the Reserve Bank of India Act to
enable the issuance of electoral bondsunder which the donor could
purchase bonds from authorised banks against cheque and digital
payments only. They shall be redeemable only in the designated
account of a registered political party.

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d) Every political party would have to file its return within the time
prescribed in accordance with the provision of the Income-tax Act.

Ease of Doing Business


Govt. proposed to increase the threshold limit for audit of business
entities who opt for presumptive income scheme from Rs. 1 crores to Rs.
2 crores.
The threshold for maintenance of books for individuals and HUF is
being increased from turnover of Rs. 10 lakhs to Rs. 25 lakhs or income
from Rs. 1.2 lakhs to Rs. 2.5 lakhs.
Govt. proposed to exempt Foreign Portfolio Investor (FPI) Category I &
II from indirect transfer provision.
Proposed to exempt from TDS subject to filing a self-declaration that
their income is below taxable limit.
The time period for revising a tax return is being reduced to 12 months
from completion of financial year, at par with the time period for filing
of return.

Proposals related to Personal Income-Tax


Govt. proposed to reduce the existing rate of taxation for individual
assesses between income of Rs. 2.5 lakhs to Rs. 5 lakhs to 5% from 10%.
The existing benefit of rebate available to the same group of
beneficiaries is being reduced to Rs. 2500 available only to assessees
upto income of Rs. 3.5 lakhs.
All the other categories of tax payers in the subsequent slabs will also
get a uniform benefit of Rs. 12,500/- per person.
Govt. proposed to levy a surcharge of 10% of tax payable on categories
of individuals whose annual taxable income is between Rs. 50 lakhs and
Rs. 1 crore. Existing surcharge of 15% of Tax on people earning more
than Rs. 1 crore will continue.
The direct tax proposals for exemptions, etc. would result in revenue
loss of Rs. 22,700 crores but after revenue gain Rs. 2,700 crore, the net
revenue loss in direct tax would come to Rs. 20,000 crore.

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Topic 2: Direct and Indirect taxes

Direct taxes are all those taxes that cannot be transferred or shifted to
another person, for instance the income tax an individual pays directly to
the government. In this case, the burden of the tax falls flatly on the
individual who earns a taxable income and cannot shift the tax to others.

Indirect taxes, on the other hand, are taxes which can be shifted to another
person. An example would be the Value Added Tax (VAT) that is included
in the bill of goods and services that you procure from others.

TAX STRUCTURE IN INDIA


Taxes are the amount of money government imposes on an individual or
corporates directly or indirectly so as to generate revenue or to keep in
check any black money activities in India.

The tax on incomes, customs duties, central excise and service tax are levied
by the Central Government. The state Government levies agricultural
income tax (income from plantations only), Value Added Tax (VAT)/ Sales
Tax, Stamp Duty, State Excise, Land Revenue, Luxury Tax and Tax On
Professions. The local bodies have the authority to levy tax on properties,
octroi/entry tax and tax for utilities like water supply, drainage etc.

DIRECT TAXES-
These taxes are levied directly on the persons.These contributes major
chunk of the total taxes collected in India.

INCOME TAX-
This is a type of tax levied on the individuals whose income falls under the
taxable category (2.5 lakhs per annum).
The Indian Income Tax Department is governed by CBDT and is part of the
Department of Revenue under the Ministry of Finance, Govt. of India.

Corporate Income Tax –

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This is the tax levied on the profits a corporate house earned in a year. In
India, the Corporate Income tax rate is a tax collected from companies.

Securities Transaction Tax-


Introduced in 2004, STT is levied on the sale and purchase of equities (ie
Shares, Debentures or any other security). The income an individual
generate through the securities market be it through reselling of shares or
through debentures is taxed by the government of India and the same tax is
called as Securities Transaction Tax.

Banking Cash Transaction Tax-


A bank transaction tax is a tax levied on debit (and/or credit) entries on
bank accounts. It can be automatically collected by a central counterparty in
the clearing or settlement process.

Capital Gains Tax:


Capital Gain tax as name suggests it is tax on gain in capital. If you sale
property, shares, bonds & precious material etc. and earn profit on it then
you are supposed to pay capital gain tax.
 PROPERTY TAX
 GIFT TAX
 HOUSE TAX
 PROFESSIONAL TAX
 DTC

INDIRECT TAXES-
You go to a super market to buy goods or to a restaurant to have a mouthful
there at the time of billing you often see yourself robbed by some more
amount than what you enjoyed of, these extra amounts are indirect taxes,
which are collected by the intermediaries and when govt tax the income of
the intermediaries this extra amount goes in to government‘s kitty, hence as
the name suggests these are levied indirectly on common people.

Indirect Taxes :
 Sales Tax
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 Vat(Value Added Tax)
 Custom Duty
 Octroi
 Excise Duty
 Anti Dumping Duty
 Entertainment Tax
 Toll Tax
 Service Tax
 Gst-Goods & Service Tax

Value Added Tax-


When we pay an extra amount of price for the goods and services we
consume or buy, that extra amount of money is called as VAT. This taxes is
about to be replaced by Goods and Services Tax.

Customs Duty –
Customs Duty is a type of indirect tax levied on goods imported into India
as well as on goods exported from India. In India, the basic law for levy and
collection of customs duty is Customs Act, 1962. It provides for levy and
collection of duty on imports and exports.

Service Tax-
Service Tax is a tax imposed by Government of India on services provided
in India. The service provider collects the tax and pays the same to the
government. It is charged on all services except the services in the negative
list of services.

Sales Tax :
Sales tax charged on the sales of movable goods.

Custom duty & Octroi (On Goods):


Custom Duty is a type of indirect tax charged on goods imported into
India. One has to pay this duty, on goods that are imported from a foreign
country into India

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Octroi is tax applicable on goods entering from one state to another for
consumption or sale. In simple terms one can call it as Entry Tax.

Excise Duty:
An excise duty is a type of tax charged on goods produced within the
country. Another name of this tax is CENVAT (Central Value Added Tax).

Non-tax sources of Revenue


The revenue of the government consists of tax revenue, revenue from
administrative activities like fines, fees, gifts & grants which is mainly
known as the non-tax revenue.

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Topic 3: Sources of Non-Tax Revenue

The revenue obtained by the government from sources other then tax is
called Non-Tax Revenue. The sources of non-tax revenue are :

1. Fees
Fees are another important source of revenue for the government. A fee is
charged by public authorities for rendering a service to the citizens. For
example, fees are charged for issuing of passports, driving licenses, etc.

2. Fines or Penalties
Fines or penalties are imposed as a form of punishment for breach of law or
non-fulfillment or certain conditions or for failure to observe some
regulations. Fines are imposed as a form of punishment or to prevent
people from breaking the law. They are not expected to be a major source of
revenue to the government.

3. Surplus from Public Enterprises


The Government also gets revenue by way of surplus from public
enterprises.

4. Special assessment of betterment levy


It is a kind of special charge levied on certain members of the community
who are beneficiaries of certain government activities or public projects. For
example, due to a public park in a locality or due to the construction of a
road, people in that locality may experience an appreciation in the value of
their property or land. Thus, due to public expenditure, some people may
experience 'unearned increments' in their asset holding.

5. Grants and Gifts


Gifts are Voluntary contributions by individuals or institutions to the
government. Gifts are significant source of revenue during war and
emergency.

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6. Deficit Financing
Deficit means an excess of public expenditure over public revenue. This
excess may be met by borrowings from the market, borrowings from
abroad, by the central bank creating currency. In case of borrowing from
abroad, there cannot be compulsion for the lenders, but in case of internal
borrowings there may be compulsion.

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Topic 4: GST

Goods and Service Tax (GST) has been in News since early 2017. The GST Bill
is already passed in so many states including Madhya Pradesh, Uttarakhand,
Arunachal Pradesh etc. The GST Council has also recently finalised the tax rates
on Goods and Services.

A Brief on GST
GST is one indirect tax for the whole nation, which will make India one unified
common market. GST is a single tax on the supply of goods and services, right
from the manufacturer to the consumer. Credits of input taxes paid at each stage
will be available in the subsequent stage of value addition, which makes GST
essentially a tax only on value addition at each stage. The final consumer will
thus bear only the GST charged by the last dealer in the supply chain, with set-
off benefits at all the previous stages.

It will be a national sales tax that will be levied on either consumption of goods
or use of services. It will replace 16 current levies -seven central taxes like excise
duty and service tax and nine state taxes like VAT and entertainment tax, this
will lead to one market with one tax rate. France was the first country to
implement the GST in 1954.

GST Council finalises the tax rates on Goods & Services under the 4-slab
structure
GST Council finalised tax rates on goods and services under the four-slab
structure with essential items of daily use being kept in the lowest bracket of 5
percent. The Council was headed by Finance Minister Arun Jaitley and
comprising representatives of all states in the meeting that was held in J&K. GST
will be applicable from 1st July 2017.

Tax Rates finalised under GST

According to GST slabs, seven per cent of the items fall under the exempt list
while 14 per cent have been put in the lowest tax bracket of 5 per
cent. Another 17 per cent items are in 12 per cent tax bracket, 43 per cent in 18
per cent tax slab and only 19 per cent of goods fall in the top tax bracket of 28 per
cent.
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No GST Slab
Foodgrains, milk and other articles of daily use have been exempted from
taxation under the GST regime.The items are: foodgrains, gur, milk, eggs, curd,
lassi, unpacked paneer, natural honey, fresh vegetables, fruits, atta, besan, maida,
vegetable oil, Prasad, common salt, contraceptive, bread, bindi, vermillion,
stamp, judicial documents, printed books, bangles and handloom products.

5 PER CENT GST SLAB


The items that are used daily but are not considered articles of basic necessity are
taxed at 5 per cent under the GST regime. The items are: sugar, tea, coffee, edible
oil, coal, skimmed milk powder, milk food for babies, condensed milk, packed
paneer, newsprint, umbrella, PDS kerosene, LPG, broom, fish fillet, cream, frozen
vegetables, spices, pizza bread, juice, sabudana, coal, medicines, stent and
lifeboat.

12 PER CENT SLAB


The items that are not essential but used by a large number of households and
people will attract 12 per cent GST. The items are butter, ghee, mobile phones,
cashew, almonds, sausages, fruit juices, packed coconut water, agarbatti, frozen
meat products, animal fat, mixtures, ayurvedic medicines, tooth powder, colour
books and sewing machine.

18 PER CENT SLAB


The articles are considered to be used by middle-class people will attract 18 per
cent GST from July 1. The items are: hair oil, soap, toothpaste, capital goods,
industrial intermediaries, pasta, corn flakes, jams, soups, ice-cream, toilet paper,
facial tissues, iron and steel, fountain pen, mineral water, camera, speaker,
icecream, envelops and instant food items.

28 PER CENT SLAB


Such items, which are considered as luxury goods or health hazards will attract
28 per cent GST. The articles are consumer durables, cars, cement, chewing gum,
custard powder, pan masala, perfume, shampoo, make-up items, fireworks,
motorcycles, paint, deodorant, shaving cream, hair dye, washing machine,
vending machines, vacuum cleaner, hair clippers and dishwasher.

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Topic 5: 14th Finance Commission Recommendations

1) The 14th Finance Commission is of the view that tax devolution should
be the primary route for transfer of resources to the States.
2) In understanding the States‘ needs, it has ignored the Plan and non-Plan
distinctions
3) According to the Commission, the increased devolution of the divisible
pool of taxes is a ``compositional shift in transfers‘‘ – from grants to tax
devolution
4) In recommending an horizontal distribution, it has used broad
parameters – population (1971), changes in population since then,
income distance, forest cover and area, among others.
5) It has recommended distribution of grants to States for local bodies
using 2011 population data with weight of 90 per cent and area with
weight of 10 per cent
6) Grants to States are divided into two
7) One, grant to duly constituted gram panchayats
8) Two, grant to duly constituted municipal bodies
9) And, it has divided grants into two parts
10) A basic grant, and a performance one for gram panchayats and
municipal bodies
11) The ration of basic to performance grant is 90:10 for panchayats; and
80:20 for municipalities
12) The total grant recommended is Rs. 2,87,436 crore for a five-year period.
Out of which, the grant to panchayats is Rs.2,00,292 crore. And, the
reminder goes to municipalities
13) The Commission has significantly departed from previous commission
vis-à-vis recommendation of the principles governing grants-in-aid to
the States by the Centre
14) It has chosen to take the entire revenue expenditure for this purpose.
Hence, it has decided to take into account a state‘s entire revenue
expenditure needs without making a distinction between plan and non-
plan expenditure

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15) The Commission is of the view that sharing pattern in respect to various
Centrally-sponsored schemes need to change. It wants the States to
share a greater fiscal responsibility for the implementation of such
schemes.

Points related to the 15th FC

The Narendra Modi government has kickstarted the process of constituting


the 15th Finance Commission by allocating Rs10 crore in the 2017-18
budget.
The Finance Commission is set up every five years to suggest principles
governing the distribution of tax proceeds among the Centre, states and
local bodies.
The recommendations of the previous 14th Finance Commission (FFC),
chaired by former Reserve Bank of India (RBI) governor
Y.V. Reddy, are valid from 2015 to 2020. The recommendations of the
15th Finance Commission will be implemented for the period starting 1
April 2020 to 31 March 2025.

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Topic 6: Fiscal Responsibility and Budget Management Act (FRBM)

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an


Act of the Parliament of India to institutionalize financial discipline, reduce
India‘s fiscal deficit, improve macroeconomic management and the overall
management of the public funds by moving towards a balanced budget and
strengthen fiscal prudence.

FRBM Act, 2003


Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act
of the Parliament of India to institutionalize financial discipline, reduce
India's fiscal deficit, improve macroeconomic management and the overall
management of the public funds by moving towards a balanced budget and
strengthen fiscal prudence.

The main purpose was to eliminate revenue deficit of the country (building
revenue surplus thereafter) and bring down the fiscal deficit to a
manageable 3% of the GDP by March 2008.

However, due to the 2007 international financial crisis, the deadlines for the
implementation of the targets in the act was initially postponed and
subsequently suspended in 2009.

In 2011, given the process of ongoing recovery, Economic Advisory Council


publicly advised the Government of India to reconsider reinstating the
provisions of the FRBMA. N. K. Singh is currently the Chairman of the
review committee for Fiscal Responsibility and Budget Management Act,
2003, under the Ministry of Finance (India), Government of India.

The Fiscal Responsibility and Budget Management (FRBM) Committee


headed by Shri N.K. Singh presents its Report to the Union Finance Minister
Shri Arun Jaitley. The Committee had wide ranging Terms of Reference
(ToR) to comprehensively review the existing FRBM Act in the light of
contemporary changes, past outcomes, global economic developments, best

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international practices and to recommend the future fiscal framework and
roadmap for the country. Subsequently, the Terms of Reference were
enlarged to seek the Committee‘s views on certain recommendations of the
Fourteenth Finance Commission and the Expenditure Management
Commission. These primarily related to strengthening the institutional
framework on fiscal matters as well as certain issues connected with new
capital expenditures in the budget.

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Chapter 7: Inflation: Definition, trends, estimates, consequences, and
remedies (control): WPI, CPI - components and trends.

Inflation is a sustained increase in the general price level. It effectively


measures the change in the prices of a basket of goods and services in an
year.

How Inflation Measured in India?


In India, infation is measured based on two price indices which are
Wholesale Price Index (WPI) and Consumer Price Index (CPI).

What is Wholesale Price Index?


It measures the average change in the prices of commodities for bulk sale at
the level of early stage of transactions. The index basket of the WPI covers
commodities falling under the three Major Groups namely Primary Articles,
Fuel and Power and Manufactured products. This means that WPI is an
index covering prices of products/commodities only pertaining to four
sectors comprising agriculture, mining, manufacturing and electricity. The
other sectors of GDP, in particular, services sector are not covered under
WPI.

Recent changes in WPI


In the revised WPI basket, the number of items has been increased from 676
to 697. Efforts have been made to enhance the number of quotations from
5482 to 8331.The revised weights in the new WPI basket reflect the structure
of the economy in the base year i.e. 2011-12 from earlier 2004-05.

CPI
CPI measures price change from the perspective of the retail buyer. It is the
real index for the common people. It reflects the actual inflation that is
borne by the individual. CPI is designed to measure changes over time in
the level of retail prices of selected goods and services on which consumers
of a defined group spend their incomes.

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Depending upon the socio-economic differentiations among consumers,
India has four differing sets of CPI with some differentials in the basket of
commodities allotted to them.

CPI-IW: Consumer Price Index for the industrial workers


CPI-UNME: Consumer Price Index for the Urban Non-Manual
Employees
CPI-AL: Consumer Price Index for Agricultural Labourers
CPI-RL: Consumer Price Index for the Rural Labourers

Revision in CPI
It was in 2011 that the government announced a new Consumer Price Index
(CP) – CPI (Rural); CPI (Urban) and by combining them a ‗national‘ CPI-C
(where ‗C‘ stands for ‗Combined‘).

The major changes introduced in the revised series are as given below:
1. The Base Year has been changed from 2010 = 100 to 2012 = 100.
2. The basket of items and their weighing diagrams have been prepared
using the Modified Mixed Reference Period (MMRP) data of Consumer
Expenditure Survey (CES), 2011-12, of the 68th Round of National
Sample Survey (NSS).
3. The number of Groups, which was five in the old series, has now been
increased to six. ‗Pan, tobacco and intoxicants‘, which was a Sub-group
under the Group ‗Food, beverages and Tobacco‘, has now been made as
a separate Group.
The other groups are
(i) Food and beverages
(ii) Clothing and Footwear
(iii) Housing
(iv) Fuel and Light
(v) Miscellaneous

A Brief on CPI

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The Consumer Price Index (CPI) was chosen as the benchmark inflation
index by the RBI for inflation targeting. It was proposed by the Urjit Patel
Committee. CPI is calculated using a basket of 299 commodities. The
Ministry of Statistics and Programme Implementation (MoSPI) calculates
CPI, both nationwide and for individual states. The Labour Bureau,
calculates three versions of the CPI, one each for the Industrial Worker
(CPI-IW), the Rural Labourer (CPI-RL), and the Agricultural Labourer (CPI-
AL). The commodity basket is divided into six broad categories for the
purpose of building index. They are Food, Tobacco and Intoxicants, Fuel
and Light, Housing, Clothing and Footwear, and Miscellaneous. The base
year fixed by MoSPI is 2012 while the the Labour Bureau has fixed it at
2001.

Divergence Between WPI & CPI


WPI reflects the change in average prices for bulk sale of commodities at
the first stage of transaction while CPI reflects the average change in
prices at retail level paid by the consumer. Major difference is the
underlying data used for the derivation of weights of the items retained
in the two index baskets.
The weights of the WPI are based on production values whereas the
weights of the CPI basket are based on the average household
expenditure taken from the Consumer expenditure survey conducted in
the base year.
The prices used for compilation of WPI are collected at ex-factory level
for manufactured products, at ex-mine level for mineral products and
mandi level for agricultural products. In contrast, retail prices
applicable to consumers and collected from various markets are used to
compile CPI.

What is Producer Price Index (PPI)?


Producer Price Index (PPI) measures the average change in the price of
goods and services either as they leave the place of production, called
output PPI or as they enter the production process, called input PPI.

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Types of Inflation based on the Causes
Cost-push inflation occurs mainly because of general increases in the
costs of the factors of production which are capital, land, labor and
entrepreneurship, which are the necessary inputs required to produce
goods and services.
Demand-pull inflation occurs from an excess of aggregate demand
relative to aggregate supply.

Types of Inflation
Creeping inflation or low inflation- It exists where the inflation is less
than 3%.
Walking Inflation: It is the inflation between 3-10% a year. It is harmful
because it heats up economic growth too fast.
Running or galloping inflation -When the inflation is running in the
range of double digits i.e greater than 10%, then it can be termed as
galloping.

Hyperinflation- It occurs when the prices rises by more than 50%. It


happens for a very short span of time.
Skewflation- In this inflation there will be a raise in the prices of one or
small group of commodities over a period of time
Headline Inflation: It is a measure of total inflation within an economy
including the commodities such as food and energy prices.
Stagflation: It is a situation where the economy growth is stagnant but
there is price inflation.
Disinflation: It is basically decrease in the prices inflation rate
compared to the previous months rates and the inflation is still existing.
Deflation: Deflation is the opposite of inflation, it occurs when prices
fall.

A BRIEF ON Structural Inflation


India has been facing the typical problem of bottleneck inflation (i.e.,
structural inflation) which arises out of shortfalls in the supply of goods, a

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general crisis of a developing economy, rising demand but lack of investible
capital to produce the required level of goods.

A BRIEF ON DEPRESSION
Major traits of depression could be as given below:
(i) An extremely low aggregate demand in the economy causes activities to
decelerate;
(ii) The inflation being comparatively lower;
(iii) The employment avenues start shrinking forcing unemployment rate to
grow fast;
(iv) To keep the business going, production houses go for forced labour-
cuts or retrenchment (to cut down production cost and be competitive
in the market,) etc.

A BRIEF ON BOOM
The Major economic traits of boom may be listed as given below:
(i) An accelerated and prolonged increase in the demand;
(ii) Demand peaks up to such a high level that it exceeds sustainable
output/production levels;
(iii) The economy heats up and a demand-supply lag is visible;
(iv) The market forces mismatch (i.e., demand and supply disequilibirium)
and tend to create a situation where inflation start going upward;
(v) The economy might face structural problems like shortage of investible
capital, lower savings, falling standard of living, creation of a sellers‘
market.

A BRIEF ON RECESSION
Major traits of recession, may be summed up as follows:
(i) There is a general fall in demand as economic activities takes a
downturn;
(ii) Inflation remains lower or/and shows further signs of falling down;
(iii) Employment rate falls/unemployment rate grows;
(iv) Industries resort to ‗price cuts‘ to sustain their business.

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How Inflation can be controlled?

Monetary Measures:
Monetary measures aim at reducing the supply of money in the Market.
This can be done through Credit Control which can be done by RBI by
using the tools of Monetary Policy.

Fiscal Measures:
Fiscal measures are highly effective for controlling government
expenditure, personal consumption expenditure, and private and public
investment.
The principal fiscal measures are the following:
(a) Reduction in Unnecessary Expenditure:
(b) Increase in Taxes:
(c) Increase in Savings:
(d) Surplus Budgets: This means that government should give up deficit
financing and instead have surplus budgets. It means collecting more in
revenues and spending less.
(e) Check on Public Debt

Other Measures:
The other types of measures are those which aim at increasing aggregate
supply and reducing aggregate demand directly.
(a) To Increase Production
(b) Price control and rationing is another measure of direct control to check
inflation.
(c) Rationing:
Rationing aims at distributing consumption of scarce goods so as to make
them available to a large number of consumers.

Important Points related to Small Finance Banks in India

AU Small Finance Bank (AU Financiers Ltd)


MD & CEO: Mr. Sanjay Agarwal
Tagline: Chalo Aage Badhe
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