Saturday, 16 June 2012

Banking and Financial Awareness

Banking and Financial Awareness (Soft Loan)

Soft Loan
A soft loan is a loan with a below-market rate of interest. This is also known as soft financing. Soft loans usually refer to loans made to developing countries and others in need of financing, but without the ability to borrow at the market rate. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays. Soft loans are usually provided by governments to projects they think are worthwhile.
Austerity measures
“Austere” means “strict or severe in discipline”.
“Austerity measures” are strict measures that are undertaken by a government to help bring expenditures more in line with revenues.

  • “Austerity measures” can be voluntarily implemented (for example, in order to bring deficits down) or involuntarily implemented (for example, if a country defaults on its debt and is given loans by the IMF).
  • “Austerity measures” usually include a combination of spending cuts and tax/fee increases.The most common example of “austerity measures” occurs when a sovereign government’s bond rating is downgraded. This makes borrowing more expensive, and usually forces the government to impose these new measures. Many European countries have either imposed “austerity measures” or are in the process of introducing them.
  • Recently Greece Govt. approves austerity measures recently to secure international bailout


Financial Term

Europe’s Financial Crisis
European debt crisis means that the market doesn’t trust that Greece, Italy, Spain, Ireland and Portugal can pay back their debts, and so they don’t want to lend them more money except at exorbitant rates.
Since the fall of 2009, the European Union has been struggling with a slow-moving but unshakable crisis over the enormous debts faced by its weakest economies, such asGreece and Portugal, or those most battered by the global recession, like Ireland.
A series of negotiations, bailouts and austerity packages have failed to stop the slide of investor confidence or to restore the growth needed to give struggling countries a way out of their debt traps. By August 2011 European leaders found themselvesscrambling once again to intervene in the markets, this time to protect Italy and Spain, two countries seen as too big to bail out.
The crisis has produced the deepest tensions within the union in memory, as Germany in particular has resisted aid to countries it sees as profligate, and has raised questions about whether the euro can survive as a multinational currency, since countries like Greece have been unable to boost their exports by devaluing their own currency.
A reluctant, indirect intervention by the European Central Bank in late 2011 led the crisis fever to cool considerably, as it lent vast sums to banks on easy terms to head off a liquidity crunch. But crisis has given way to a grinding reality for Europe of economic stagnation and even, for much of the Continent, the specter of another downturn less than three years after the last recession ended.
Globalization in India
Globalization in India has allowed companies to increase their base of operations, expand their workforce with minimal investments, and provide new services to a broad range of consumers.
The process of globalization has been an integral part of the recent economic progress made by India. Globalization has played a major role in export-led growth, leading to the enlargement of the job market in India.
One of the major forces of globalization in India has been in the growth of outsourced IT and business process outsourcing (BPO) services. The last few years have seen an increase in the number of skilled professionals in India employed by both local and foreign companies to service customers in the US and Europe in particular. Taking advantage of India’s lower cost but educated and English-speaking work force, and utilizing global communications technologies such as voice-over IP (VOIP), email and the internet, international enterprises have been able to lower their cost base by establishing outsourced knowledge-worker operations in India.

As a new Indian middle class has developed around the wealth that the IT and BPO industries have brought to the country, a new consumer base has developed. International companies are also expanding their operations in India to service this massive growth opportunity.
Notable examples of international companies that have done well in India in the recent years include Pepsi, Coca-Cola, McDonald’s, and Kentucky Fried Chicken, whose products have been well accepted by Indians at large.
Globalization in India has been advantageous for companies that have ventured in the Indian market. By simply increasing their base of operations, expanding their workforce with minimal investments, and providing services to a broad range of consumers, large companies entering the Indian market have opened up many profitable opportunities.
Indian companies are rapidly gaining confidence and are themselves now major players in globalization through international expansion. From steel to Bollywood, from cars to IT, Indian companies are setting themselves up as powerhouses of tomorrow’s global economy.

Banking terminology

Held for trading
Held –for- trading securities (or simply trading securities ) are considered short term assests , and their accounting is handled as such. Held for trading securities include debt and equity instruments that are held for short periods of time , purchased with the intention of profiting from short term price changes.
Rate-Improvement Mortgage
A type of fixed-rate mortgage, which contains a clause that entitles the borrower to reduce the fixed-interest-rate charge on the mortgage once, and early in the mortgage. The option will be exercised when interest rates fall lower then the borrowers initial mortgage rate.
There is typically a fee associated with exercising this option, and the initial mortgage might have a higher-than market-interest rate and/or high costs. However, the rate reduction option could save the borrower the costs of refinancing which might be more then the cost of using their rate improvement option.

RBI

 
RBI HISTORY: 
• INAGURATED IN 1935 WITH A SHARE CAPITAL OF RS. 5 CR.
• THE GOVERNMENT OF INDIA HELD SHARES OF NOMINAL VALUE OF RS. 2,22,000.
• RBI WAS NATIONALISED IN 1949.
CONSTITUTION OF RBI:
CENTRAL BOARD OF DIRECTORS OF 20 MEMBERS
• GOVERNOR & 4 DY. GOVERNORS.
• 1 GOVERNMENT OFFICIAL FROM MINISTRY OF FINANCE.
• 10 DIRECTORS BY GOVT. OF INDIA
• 4 DIRECTORS BY CENTRAL GOVT. (represent Local Board)
FUNCTIONS OF THE RESERVE BANK OF INDIA
 GENERAL FUNCTIONS:
 BANK OF ISSUE.
 BANKER TO GOVERNMENT.
 BANKER’S BANK.
 CONTROLLER OF CREDIT.
 CUSTODIAN OF FOREIGN EXCHANGE RESERVES.
 SUPERVISORY FUNCTIONS
 PROMOTIONAL FUNCTIONS
BANK OF ISSUE:
• SOLE RIGHT TO ISSUE BANK NOTES OF ALL DENOMINATIONS.
• SEPARATE ISSUE DEPARTMENT FOR ISSUE OF CURRENCY NOTES.
• ORIGINAL ASSETS:
 2/5TH OF GOLD COINS, GOLD BULLION OR STERLING SECURITIES FOR AMOUNT OF GOLD NOT LESS THAN RS. 40 CR.
 3/5TH HELD IN RUPEE COINS, GOI RUPEE SECURITIES, PROMISSIONARY NOTES PAYABLE IN INDIA.
• MODIFIED PROVISIONS SINCE 1957 (POST-WAR PERIOD)
 MAINTAIN GOLD & FOREIGN EXCHANGE RESERVES OF RS. 200 CR, OF WHICH RS. 115 CR. SHOULD BE IN GOLD.
• THIS SYSTEM IS CALLED AS “MINIMUM RESERVE SYSTEM”.
BANKER TO GOVERNMENT:
• ACT AS GOVERNMENT BANKER, AGENT AND ADVISER.
• OBLIGATION TO TRANSACT GOVT. BUSINESS i.e.
RECEIVE & MAKE PAYMENTS ON BEHALF OF GOVT.
• HELPS GOVT. TO FLOAT NEW LOANS & TO MANAGE PUBLIC DEBT.
• ACTS AS ADVISER TO THE GOVT. ON ALL MONETARY &
BANKING MATTERS.
BANKER’S BANK:
• EVERY SCHEDULED BANK WAS REQUIRED TO MAINTAIN A CASH BALANCE EQUIVALENT TO 5% OF ITS DEMAND LIABILITES & 2% OF ITS TIME LIABILITES WITH RBI.
• AT PRESENT BANKS KEEP CASH RESERVES EQUAL TO 3%OF THEIR AGGREGATE DEPOSIT LIABILITIES.
• SCHEDULED BANKS CAN BORROW OR GET FINANCIAL ACCOMODATION IN TIMES OF NEED.
• SINCE COMMERCIAL BANKS ALWAYS EXPECT RBI TO COME TO THEIR HELP IN TIME OF CRISIS, RBI ALSO BECOMES “LENDER OF THE LAST RESORT”
CONTROLLER OF CREDIT:
• RBI HOLDS THE CASH RESERVES OF ALL THE SCHEDULED BANKS.
• IT CONTROLS THE CREDIT OPERATIONS OF BANKS THRO’ QUANTITATIVE & QUALITATIVE CONTROLS.
• IT CONTROLS THE BANKING SYSTEM THRO’ THE SYSTEM OF LICENSING, INSPECTION AND CALLING FOR INFORMATION.
• IT ACTS AS THE LENDER OF THE LAST RESORT BY PROVIDING REDISCOUNT FACILITIES TO SCHEDULED BANKS.
CUSTODIAN OF FOREIGN EXCHANGE RESERVES:
 MAINTAINS THE OFFICIAL RATE OF EXCHANGE.
 ACC. TO RBI ACT OF 1934, BANK WAS REQUIRED TO BUY AND SELL AT FIXED RATES(AMOUNT NOT > 10,000)
 AFTER BECOMING A MEMBER OF THE I.M.F i.e. “INTERNATIONAL MONETARY FUND” IN 1946, RBI MAINTAINS FIX EXCHANGE RATE WITH ALL OTHER MEMBER COUNTRIES OF THE I.M.F.
 RBI ACTS AS THE CUSTODIAN OF INDIA’S RESERVE OF INTERNATIONAL CURRENCIES.
SUPERVISORY FUNCTIONS:
• RBI HAS CERAIN NON-MONETARY FUNCTIONS
 SUPERVISION OF BANKS
 PROMOTION OF SOUND BANKING IN INDIA
• RBI IS AUTHORISED TO CARRY OUT PERIODICAL
INSPECTION OF BANKS.
• NATIONALISATION OF 14 MAJOR INDIAN SCHEDULED
BANKS IN JULY 1969 IMPOSED NEW RESPONSIBILITIES
ON RBI FOR DIRECTING THE GROWTH OF BANKING
AND CREDIT POLICIES TOWARDS RAPID ECONOMIC
GROWTH.
PROMOTIONAL FUNCTIONS:
• PROMOTE BANKING HABIT.
• EXTEND BANKING FACILITIES TO RURAL & SEMI-
URBAN AREAS.
• ESTABLISH & PROMOTE NEW SPECIALISED
FINANCING AGENCIES.
• ACCORDINGLY RBI HAS SET UP :
 DEPOSIT INSURANCE CORPORATION (1962)
 UNIT TRUST OF INDIA (1964)
 INDUSTRIAL DEV. BANK OF INDIA (1964)
 AGRICULTURAL REFINANCE CORPORATION OF
INDIA (1963)
 INDUSTRIAL RECONSTRUCTION CORPORATION OF
INDIA (1972)
• THE BANK HAS DEVELOPED CO-OPERATIVE CREDIT
MOVEMENT TO:
 ENCOURAGE SAVING
 ELIMINATE MONEY-LENDERS FROM VILLAGE
• RBI WITH HELP OF ARDC PROVIDES LONG-TERM FINANCE TO FARMERS.


Important Budget Terminologies


Revenue Budget: It consists of the revenue receipts of the government (which is tax revenues plus other revenues) and the expenditure met from these revenues. It has two components: Revenue Receipt and Revenue Expenditure.
Capital Budget: It consists of capital receipts and payments. It also incorporates transactions in the Public Account. It has two components: Capital Receipt and Capital Expenditure.
Capital Expenditure: It consists of payments for acquisition of assets like land, buildings, machinery, equipment, as also investments in shares etc, and Loans and advances granted by the Central government to state and union territory governments, government companies, corporations and other parties.
Capital Receipt: The main items of capital receipts are loans raised by the government from public which are called market loans, borrowings by the government from the Reserve Bank of India and other parties through sale of Treasury Bills, loans received from foreign governments and bodies and recoveries of loans granted by the Central government to state and union territory governments and other parties. It also includes proceeds from disinvestment of government equity in public enterprises.
Expenditure Budget: It contains expenditure estimates made for a scheme or programme under both revenue and capital heads. These estimates are brought together and shown on a net basis at one place by major heads.
Finance Bill: This contains the government’s proposals for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament. It is submitted to Parliament along with the Budget for its approval.
Fiscal Deficit: It is the difference between the revenue receipts plus certain non-debt capital receipts and the total expenditure including loans (net of repayments). This indicates the total borrowing requirements of the government from all sources.
Monetised Deficit: It indicates the level of support extended by the Reserve Bank of India to the government’s borrowing programme.
Non-Plan Expenditure: It includes both revenue and capital expenditure on interest payments, the entire defence expenditure (both revenue and capital expenditure), subsidies, postal deficit, police, pensions, economic services, loans to public enterprises and loans as well as grants to state governments, union territory governments and foreign governments.

Plan Expenditure:
It includes both revenue and capital expenditure of the government on the Central Plan, Central assistance to state and union territory plans. It forms a sizeable proportion of the total expenditure of the Central government.
Primary Deficit: It is the difference between fiscal deficit and interest payments.
Public Account: It is an account in which money received through transactions not relating to the Consolidated Fund is kept. Besides the normal receipts and expenditure of the government relating to the Consolidated Fund, certain other transactions enter government accounts in respect of which the government acts more as a banker, for example, transactions relating to provident funds, small savings collections, other deposits etc. Such money is kept in the Public Account and the connected disbursements are also made from it. Public Account funds do not belong to the government and have to be paid back some time or the other to the persons and authorities who deposited them. Parliamentary authorisation for payments from the Public Account is not required.
Revenue Deficit: It refers to the excess of revenue expenditure over revenue receipts. Revenue Expenditure: It is meant for the normal running of government departments and various services, interest charges on debt incurred by the government and subsidies. Broadly speaking, expenditure which does not result in creation of assets is treated as revenue expenditure. All grants given to state governments and other parties are also treated as revenue expenditure even though some of the grants may be for creation of assets.
Revenue Receipt: It includes proceeds of taxes and other duties levied by the Centre, interest and dividend on investments made by the government, fees and other receipts for services rendered by the government.
Appropriation Bill: It is presented to Parliament for its approval, so that the government can withdraw from the Consolidated Fund the amounts required for meeting the expenditure charged on the Consolidated Fund. No amount can be withdrawn from the Consolidated Fund till the Appropriation Bill is voted is enacted.
Balance of Payment
The statement that shows the transaction of the country’s trade and finance in terms of net outstanding receivable or payable from any other country with a certain period of time.
Bill
A legislative proposal draft is discussed and passed by both the houses of Parliament and then has to get an approval from the President and then finally it is a declared Act.
Contingency Fund
If and when in emergencies the Government at such times helps with funds which is not authorized by the Parliament because of urgent needs that may arise.
Consumer price index
It is a price index that features the rates of consumer goods
Capital budget
When a list of capital expenditure is planned and prepared annually it is termed Capital budget.
Custom Duty
It is the tax that is put on imports and tariffs.

Nationalization

Nationalization in context of banks means, when a bank becomes a public sector bank. These are the banks which were not public sect bank right from the start. Notes below will help you further in understanding the Nationalisation of banks in India
Phase I
With the nationalization of RBI in 1949,RBI was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.
Phase II
Before the steps of nationalization of Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955 (In 1955, this act nationalised Imperial Bank of India to SBI). Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. SBI was to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.
On 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. In 1980 with seven more banks were nationalized (hence Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks). Below is the list of those 14 banks:
• Central Bank of India
• Bank of Maharashtra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• United Bank of India
• UCO Bank
• Bank of India
Important point: Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19.
Phase III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Time is given more importance than money.

Purchasing Power Parity

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The idea originated with the School of Salamanca in the 16th century and was developed in its modern form by Gustav Cassel in 1918. The concept is founded on the law of one price; the idea that in absence of transaction costs, identical goods will have the same price in different markets.
In its “absolute” version, the purchasing power of different currencies is equalized for a given basket of goods. In the “relative” version, the difference in the rate of change in prices at home and abroad—the difference in the inflation rates—is equal to the percentage depreciation or appreciation of the exchange rate.
Deviations from the theory imply differences in purchasing power of a “basket of goods” across countries, which means that for the purposes of many international comparisons, countries’ GDPs or other national income statistics need to be “PPP adjusted” and converted into common units. The best-known and most-used purchasing power adjustment is the Geary-Khamis dollar (the “international dollar”).
Real exchange rate fluctuations are mostly due to different rates of inflation between the two economies. Aside from this volatility, consistent deviations of the market and purchasing power adjusted exchange rates can be observed, for example (market exchange rate) prices of non-traded goods and services are usually lower in countries with lower incomes (a U.S. dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States).
There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates. For example, the World Bank’s World Development Indicators 2005 estimated that in 2003, one Geary-Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity—considerably different from the nominal exchange rate. (from wikipedia)
In simple words
An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency’s purchasing power.
The relative version of PPP is calculated as:
Purchasing Power Parity (PPP)
Where:
“S” represents exchange rate of currency 1 to currency 2
“P1” represents the cost of good “x” in currency 1
“P2” represents the cost of good “x” in currency 2
In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency.
For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)


GDP

Q) What is GDP?
Ans ) Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP is the basic measure of the country’s economic performance over a given period.
GDP is measured by three basic approaches viz.
1)Expenditure approach
2)Income approach
3)Value based approach
Types of GDP
1. Real GDP
2. Nominal GDP
Real GDP is the production of goods and services valued at constant prices whereas nominal GDP is the production of goods and services valued at current prices.
But why we need to measure both real and nominal GDP?. The answer is here.
Now when the total spending increases in a given period it points towards two happenings, either the goods or services are sold at higher prices (i.e inflation has increased) or the total output of goods and services have increased. While studying economy, economist tries to separate these two effects. Hence they measure the real GDP which allows them to find whether production of goods and services has increased or decreased over the periods.
Components of GDPGDP is a variable which depends upon four other variables. These variables form components of GDP
GDP = C+I+G+NX
C= total consumption
I = gross investment
G= Government spending
NX= exports less imports
Consumption is spending by households on goods and services. Here we do not include purchase of new housing. Investment is spending on inventories. Equipments and purchase of new housing
Government spending includes spending on goods and services by state and central government
Net exports spending on the domestic products by foreigners less spending on foreign products by locals.

 


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