Economy Flashcards
Provisioning requirement
• Setting aside a portion of profits, in proportion of
risk weighed loans given, to compensate a
probable loss due to incomplete loan recovery is
called provisioning.
• Like Capital Conservation Buffer (CCB) & CAR requirements, provisioning is one of the contingency measures to contain risk.
• Different types of assets have different risk profiles
e.g. Government debt has 0% risk weight
• A high-risk weight discourages lending by increasing the capital requirement for lenders.
procyclical nature of lending
In business cycle theory & finance, any economic quantity that is positively correlated with the overall state of the economy is said to be procyclical. A ‘procyclical lending’ means that the banks keep the lending rates low & reduce buffers during an economic boom and therefore, promote increase in the credit uptake. Similarly, they lend less during a recession
countercyclical nature of lending
- Any economic quantity that is negatively correlated with the overall state of the economy is said to be countercyclical. Under ‘countercyclical lending’, banks tend to maintain higher buffers during the period of boom, limit lending and thus ‘cool down’ the economy and stimulate the economy when it is in a downturn.
- While there is an opportunity cost in following a countercyclical policy (in not lending more while there are reserve funds), it prepares the market well for the future declines.
BASEL norms
Basel Committee on Banking Supervision is an
international committee formed in 1974 to develop
standards for banking regulation.
• It consists of central bankers from 27 countries and
the European Union. It is headquartered in the
office of Bank for International Settlements (BIS)
in Basel, Switzerland.
• It developed a series of policy recommendations
known as Basel Accords, which suggested
minimum capital requirements to keep bank
solvent during the times of financial stress.
NBFCs
registered under Companies Act.
It can either be deposit taking (need an RBI registration) or non-deposit taking.
• NBFCs are different from banks as:
o They can only accept time deposits and not demand deposits
o NBFCs do not form part of the payment & settlement system & cannot issue cheques to its customers
o No deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation of India is available to depositors of NBFCs, unlike in case of banks
o In general, an NBFC is not required to maintain Reserve Ratios (CRR, SLR etc.).
However, deposit taking NBFCs are required to maintain at least 15% of its public deposits as liquid assets.
o NBFCs can deposit depositors’ money in share market unlike banks.
• NBFCs functions are regulated and supervised by RBI
Shadow Banking System
- Shadow banking system includes non-bank financial intermediaries that remain outside regular banking system. The term was coined by economist Paul McCulley in 2007.
- Working structure: They have a higher cost of funding. But the lack of regulatory oversight allows them to take on more risks than banks and earn higher returns.
- Significance: They provide a valuable alternative to bank funding, specially providing credit to inaccessible areas, niche sectors, small industries etc.
National Payment Corporation of India
NPCI
• It is an initiative of RBI & Indian Banks Association
(IBA) under provisions of the Payment &
Settlement Systems Act, 2007
• It is the umbrella organization for all retail
payments and settlement systems in the country.
• It also manages the UPI platform & links all the
ATMs in India.
• Other initiatives under NPCI are: BHIM, Unified
Payments Interface (UPI), RuPay, BharatQR,
Aadhaar Enabled Payment System (AePS), National
Automated Clearing House (NACH) for financial
institutions etc.
OMBUDSMAN SCHEME FOR DIGITAL TRANSACTIONS (OSDT)
- It is launched under Section 18 of Payment and Settlement Systems Act, 2007 which will provide a complaint redressal mechanism relating to digital transactions conducted through non-bank entities (like mobile wallets or tech enabled payment companies using UPI for settlements).
- The Ombudsman for Digital Transactions is a senior official appointed by the Reserve Bank of India (appointed for a period not exceeding 3 years at a time).
Transactions undertaken through the banking channels will still be managed by the Banking Ombudsman
Banking Ombudsman Scheme 2006
The Banking Ombudsman is a quasi-judicial authority appointed by the RBI
• It aims to provide a cost-effective grievance redressal mechanism to customers.
• All Scheduled Commercial Banks, Regional Rural Banks & Scheduled Primary Cooperative Banks are covered under the Scheme.
• The complaint has to be first filed in the respective banks before approaching Ombudsman. The power of Appellate Authority, which is vested with a Deputy
Governor of the RBI.
• RBI has extended the scheme to deposit taking Non-Banking Finance Companies (NBFC).
Digidhan Mission
• The government has extended the Digidhan
Mission till 2019-20 with the primary objective of
promoting digital payments as well as to increase
the acceptance of digital payment infrastructure.
• Under the Mission, new policy measures and
interventions will be proposed to design tax
incentives to promote digital payments.
• Mechanisms will be devised to monitor the
regional penetration of digital payments by geotagging
the digital payment transactions.
• The Mission is implemented by Ministry of
Electronics and Information Technology.
Application Programming Interface Exchange
• Indian PM along with deputy PM of Singapore recently launched APIX.
• APIX is a banking technology platform designed to
reach two billion people worldwide who are still
without bank accounts.
• It will help people in 23 countries including the 10
ASEAN members as well as major markets such as
India, and small nations including Fiji.
Legal Entity Identifier (LEI)
Reserve Bank of India has made Legal Entity Identifier (LEI) code mandatory for all market participants, other than individuals.
It is a 20 character global reference number conceived by G20 that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction.
• Internationally LEI is implemented and maintained by Global Legal Entity Identifier Foundation. In India entities can obtain LEI from Legal Entity Identifier India Ltd (LEIL) (only LOU of India), subsidiary of The Clearing
Corporation of India Ltd, recognized by RBI under Payment and Settlement Systems Act, 2007.
• Now, banks will report debt details along with LEI to Central Repository of Information on Large Credit. It will help the banks monitor debt exposure of corporate borrowers and will also prevent multiple loans against the same collateral, thus helping reduce NPAs.
• Moreover, it will help regulators like RBI to track global financial transactions and check money laundering.
Global Legal Entity Identifier Foundation:
• It is a not-for-profit organization established by the
Financial Stability Board in June 2014.
• It is overseen by the LEI Regulatory Oversight
Committee, representing public authorities from
around the globe.
• It publishes Global LEI Index.
Exchange Traded Fund
• An ETF, or exchange-traded fund, is a marketable
security that tracks a stock index, a commodity,
bonds, or a basket of assets.
• Its trading value is based on the net asset value of
the underlying stocks that it represents.
• ETF shareholders are entitled to a proportion of
the profits, such as earned interest or dividends
paid, and they may get a residual value in case the
fund is liquidated.
• ETF is different from Mutual Fund (MF) in a way
that it is traded on public stock exchanges and its
ownership can bought, sold or transferred in the
same way as stocks. This is unlike MFs where
transaction is done only by the fund manager.
DESIGNATED OFFSHORE
SECURITIES MARKET
Bombay Stock Exchange has become the first
Indian exchange to be designated as a ‘Designated Offshore Securities Market’ (DOSM)
by the U.S. Securities and Exchange Commission
(SEC).
• DOSM status allows sale of securities to US
investors through the trading venue of BSE
without registration of such securities with
the US SEC, which eases the trades by US
investors in India and also enhances the
attractiveness of Indian Depository Receipts
(IDR).
• Only a few exchanges globally enjoy the
DOSM recognition, such as London Stock
Exchange, Bourse de Luxembourg, Tokyo
Stock Exchange and Toronto Stock Exchange.
Bombay Stock Exchange
It is Asia’s oldest stock exchange establishes in 1875.
• BSE’s overall performance is measured by
the Sensex, an index of 30 of the BSE’s largest stocks
covering 12 sectors.
• India INX, India’s 1st international exchange, located
at GIFT CITY IFSC in Ahmedabad is a fully owned
subsidiary of BSE.
Indian Depository Receipts (IDR)
• It is a financial instrument denominated in Indian
Rupees in the form of a depository receipt created by
a Domestic Depository (registered with the SEBI
India) against the underlying equity of issuing
company to enable foreign companies to raise funds
from the Indian securities Markets.
External Commercial Borrowings
It refers to commercial loans raised by eligible Indian resident entities from non-resident lenders with minimum average maturity of 3 years.
• It can be in the form of bank loans, buyers’ credit, suppliers’ credit or securitized instruments.
• ECBs are governed under the FEMA guidelines.
• They can be assessed under two routes i.e. automatic route and approval route. Generally, companies in businesses (such as hotel, hospitals and software) can access the automatic route.
• The negative list, for which the ECB proceeds cannot be utilized includes: real estate activities, investment in capital market, equity investment and repayment of Rupee loans except from foreign equity holder.
Reserve Bank recently came out with a new policy for external commercial borrowings. It allows all eligible entities to raise foreign funding under the automatic route and removes sectoral curbs.
• The list of eligible borrowers has been expanded to include all entities eligible to receive foreign direct investment (FDI).
Manufacturing firms can get ECBs up to $50 mn with minimum maturity of 1 year as compared to earlier three.
Limited Liability Partnerships
It is a corporate structure whereby partners of the company are not personally liable for company’s debts & liability and can’t be held liable for another’s misconduct or negligence.
• It provides the benefits of limited liability of a company (unlike corporate shareholders, partners have the right to manage the business directly), and allows its members the flexibility of organizing their internal management, as is the case in a partnership firm.
• Foreign Direct Investment in an LLP is also allowed.
• Since laws are less stringent for LLPs, they have lower registration cost & doesn’t require compulsory audit, it is a preferred option for businesses.
• LLPs are also tax efficient as they are exempt from dividend distribution tax & minimum alternative tax.
• However, like shell companies, inactive LLPs can be used for tax evasion and money laundering. Hence, the government is now taking steps to deregister inactive LLPs.
Masala Bonds
• Rupee denominated bonds issued to foreign
buyers.
• Currency risk lies with investor
• Indian companies, NBFCs, infrastructure
investment trusts and real investment trusts can
issue the bonds, with ceilings imposed on
maximum worth of issuance and pricing cap for
various tenures
• Will make rupee more lucrative in international
market and is a step towards full convertibility of
rupee
Withholding Tax
• Tax levied on income (interests / dividends) from
securities owned by a non-resident entity
• Intends to check volatile trading in equity and
bond market
ICAI (Institute of Chartered Accountants of India)
• Statutory body established by Chartered
Accountants Act, 1949.
• Under administrative control of Ministry of
Corporate Affairs.
• Conducts CA exams, registers qualified CAs, issues
certificates of practice etc.
• Investigates auditors of small listed companies
(other than entities notified under NFRA rule
2018)
International Forum of Independent Audit Regulators
IFIAR
Independent audit regulator from 52 jurisdictions
• Aims to enhance investor protection by improving
audit quality globally
• Shares knowledge of evolving audit environment & practical experience of independent audit
regulatory activity.
International
Financial Services Centres (IFSC) Authority Bill,
2019.
SEZ act provides for the establishment of an IFSC in India within an SEZ in India and enables the Central Government to regulate IFSC activities.
• Gujarat International Finance Tech-City Co. Ltd (GIFT) is being developed as the country’s first IFSC.
• IFSC has been designated for all practical purposes as a ‘deemed foreign territory’ which would have the same ecosystem as other offshore locations, but which is physically on Indian soil
Government Saving Promotion Act
Government proposed creation of a new Government Saving Promotion Act during the budget (2018).
• It will merge Government Savings Certificates Act, 1959 and Public Provident Fund (PPF) Act, 1968 with the Government Savings Banks Act, 1873. The move intends to remove existing ambiguities due to multiple Acts and rules in small saving schemes (SSSs) and add
flexibility.
• The amendments provide for:
o provision of premature closure of Small Savings Schemes to deal with medical emergencies, higher education needs
o guardian to invest in SSSs on behalf of minor(s) to promote culture of savings among the children
o provisions of accounts for differently abled persons, which was not clear in aforesaid acts
Small Saving Schemes (SSSs)
They are important source of household savings for providing social benefit.
• These can be classified under three heads
o Postal deposits: Savings account, recurring deposits, time deposits of varying maturities and monthly income scheme(MIS)
o Savings certificates: National Small Savings Certificate & Kisan Vikas Patra (KVP).
o Social security schemes: Public Provident Fund (PPF), Senior Citizens Savings Scheme (SCSS) & Sukanya Samridhi Account Scheme.
Features of Small Saving Scheme
• They generally offer higher interest rates compared to bank deposits
• Some of the small savings schemes offer income tax benefits, assured return and government’s guarantee.
• All the money pooled form different SSSs goes to National Small Savings Fund (NSSF) which was established in 1999 within the Public Account of India.
Aaykar Setu:
It is an app to help users, to understand the various nuances of direct taxes, file income tax, apply for PAN, check TDS statement etc.
Project Insight
It will monitor high-value transactions with use big data analytics to find out any discrepancy between a taxpayer’s income and expenses.
Operation Clean Money
launched by IT Department to bring out illegal wealth. It
involved e-verification of large cash deposits using data analytics during demonetization
Unicorn club
A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures.
Directorate General of Trade Remedies
DGTR
unified Directorate General of Trade Remedies (DGTR) has been formed for providing comprehensive and swift trade defence mechanism in India.
- It would subsume the Directorate General of Anti-dumping and Allied duties, Directorate General of Safeguards and some functions of the Directorate General of Foreign Trade.
- It will be the apex national authority for all trade remedial measures including antidumping, countervailing duties and safeguard measures, and would recommend Department of Revenue on the same.
- The Office of DGTR will function as an attached office of Department of Commerce.
Concessional Finance Scheme (CFS)
- Under it, EXIM bank supports Indian entities bidding for strategically important infrastructure projects abroad since 2015-16.
- EXIM Bank extends credit at a rate not exceeding LIBOR (avg. of six months) + 100 bps. The repayment of the loan is guaranteed by the foreign govt.
- Under the scheme Ministry of External Affairs selects the project, keeping in view strategic interest of India.
GRID (Grass Roots Initiative and Development)
Initiative
• EXIM Bank provides financial support to promote
grassroots initiatives/ technologies, particularly the
ones with export potential and help the artisans/
producer groups/ clusters/ small enterprises/ NGOs
realize remunerative return on their produce and
facilitate exports from these units.
Recapitalization Bonds
A government bond is an instrument to raise money from the market with a promise to repay the face value at the maturity date and a periodic interest. A bond issued for the purpose of recapitalisation is called recapitalisation bonds.
How will recapitalization bonds work?
• The government will issue recapitalization bonds, which banks will subscribe and enter it as an investment in their books. The banks will lend money to the government for subscribing the bonds.
- This money raised by the government through these bonds will go back to banks as capital. This will immediately strengthen the balance-sheet of the banks and show capital-adequacy.
- Since the government is always solvent, the money lent to the government for subscribing recap bonds is free from becoming a bad loan.
EXPORT CREDIT GUARANTEE
CORPORATION (ECGC
• The ECGC Limited is a company wholly owned
by the Government of India. It provides
export credit insurance support to Indian
exporters and is controlled by the Ministry of
Commerce.
WORLD CUSTOMS
ORGANIZATION
Recently, 80th Session of the Policy Commission
Meeting of the World Customs Organization
(WCO) was held in India.
• WCO was established in 1952 as the Customs
Co-operation Council (CCC), it’s an
independent intergovernmental body whose
mission is to enhance the effectiveness and
efficiency of Customs administrations.
• It’s the only global organization which
defines global standards and procedures for
customs clearances at the border and their
implementation.
• Membership: India is a member since 1971.
• In July, 2018, India became the Vice-Chair
(Regional Head) of the Asia Pacific Region of
WCO for a period of two years.
NATIONAL APPRENTICESHIP
PROMOTION SCHEME
Government has decided to execute the National
Apprenticeship Promotion Scheme (NAPS) in the
public-private partnership mode.
• Its objective is to promote apprenticeship
training and incentivize employers who wish
to engage apprentices.
• It reimburses 25% of prescribed stipend
subject to a maximum of Rs. 1500/- per month
per apprentice and targets 15 lakh apprentices
in 2018-2019 & 20 lakh apprentices in 2019-20.
• It covers all apprentices except the Graduate,
Technician and Technician (Vocational)
apprentices which are covered by the scheme
administered by MHRD.
• It also promotes dual-learning mode of
training in which theoretical instructions are
given in the ITI’s while practical training is
given in the industry, thus improves the
connect between industry and ITI’s.
• State Apprenticeship Advisers (SAAs) and
Regional Directorates of Apprenticeship
(RDATs) will act implementing agencies in
their respective State/Regions.
National
Council for Vocational Education and Training
(NCVET)
The Cabinet approved the merger of National
Council of Vocational Training (NCVT) & National
Skill Development Agency (NSDA) into National
Council for Vocational Education and Training
(NCVET) for improving the outcome of the Skill
India mission.
• Jan Shikshan Sansthans:
Vocational skill training
programmes (in cutting, tailoring, food processing,
welding, plumbing etc) at the door step of the
beneficiaries with a minimum cost and
infrastructure.
National Level Entrepreneurship Awareness
Campaign ‘Udyam Abhilasha’:
Launched by SIDBI,
it aims to create a cadre of 800 trainers to provide
entrepreneurship training to the aspiring youth.
SIDBI has partnered with Common service centres,
e-Governance Services India Limited, a Special
Purpose Vehicle, set up by the Ministry of
Electronics and IT for implementing the campaign
