Notes for JAIIB

Indian Economy
&
Indian Financial System
(IE & IFS)
Module A- Indian Economic Architecture
(Based on Syllabus 2023)

Compiled by Sekhar Pariti

Book No 57 from The Banking Tutor

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 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I want to share Notes
related to Indian Economy & Indian Financial System (IEFS), which is prepared
based on the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

A) Indian Economic Architecture

B) Economic Concepts Related to Banking

C) Indian Financial Architecture

D) Financial Products and Services

In this Notes, I am covering topics related to Module A - Indian Economic

Architecture. I am going to share separate books to other 3 modules soon. Also I
will share Objective Type Points covering all 4 Modules in one book.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

16-03-2023 Sekhar Pariti

+91 94406 41014

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 Syllabus 2023

Module A: Indian Economic Architecture

An Overview of Indian Economy, Sectors of the Indian Economy, Economic

Planning in India & NITI Aayog, Role of Priority Sector and MSME in the Indian
Economy, Infrastructure including Social Infrastructure, Globalisation- Impact on
India, Economic Reforms, Foreign Trade Policy, Foreign Investments and Economic
Development, International Economic Organizations (World Bank, IMF, etc.),
Climate change, Sustainable Development Goals (SDGs), Issues Facing Indian
Economy.

Module B: Economic Concepts Related to Banking

Fundamentals of Economics, Microeconomics, and Macroeconomics and Types of

Economies, Supply and Demand, Money Supply and Inflation, Theories of Interest,
Business Cycles, Monetary Policy and Fiscal Policy, System of National Accounts
and GDP Concepts, Union Budget.

Module C: Indian Financial Architecture

Indian Financial System-An Overview, Indian Banking Structure, Banking Laws –

Reserve Bank of India Act, 1934 & Banking Regulation Act, 1949, Development
Financial Institutions, Micro Finance Institutions, Non-Banking Financial
Companies (NBFCs),Insurance Companies, Indian Financial System- Regulators
and Their Roles, Reforms & Developments in the Banking Sector

Module D: Financial Products and Services

Financial Markets, Money Markets, Capital Markets and Stock Exchanges, Fixed
Income Markets – Debt and Bond Markets, Foreign Exchange Markets,
Interconnectedness of Markets and Market Dynamics, Merchant Banking Services,
Derivatives Market, Factoring, Forfaiting and Trade Receivables Discounting
System (TReDS), Venture Capital, Lease Finance and Hire Purchase, Credit Rating
and Credit Scoring, Mutual Funds, Insurance Products, Pension Products, Para
Banking and Financial Services Provided by Banks, Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (Inv!Ts)

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 Index – Module 01
Chapter No Topics covered

01 An Overview of Indian Economy

02 Sectors of the Indian Economy

03 Economic Planning in India & NITI Aayog

04 Role of Priority Sector and MSME

05 Infrastructure including Social Infrastructure

06 Globalisation- Impact on India

07 Economic Reforms

08 Foreign Trade Policy

09 Foreign Investments and Economic Development

10 International Economic Organizations

11 Climate change

12 Sustainable Development Goals (SDGs)

13 Issues Facing Indian Economy

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01. An Overview of Indian Economy
The Indian economy is the sixth-largest economy in the world. Globalisation,
integration into the global economy, investment rates, a young population, and a
low dependence ratio are all contributing factors.

History of the Indian Economy

In the past as well, the Indian economy was one of the most stabilised and was
the largest economy around the world. For almost 2 millennia (from the 1st
century to the 17th century) the Indian economy contributed 35%-40% of the
world’s economy.

By 1750, the Mughal Empire had a strong industrial manufacturing sector, with
India contributing around 25% of the world’s industrial output, making it the most
significant manufacturing hub in international commerce. Until the end of the
18th century, Mughal India accounted for almost 95% of the goods and textiles
exported to Europe from Asia, while the import was as low as negligible and was
still sufficient for the country.

During the British period, the Indian economy was hit majorly, and it came down
to 4.2% of the world economy in 1950 from 24.4% in 1700.

Nature of the Indian Economy

The Indian economy is a mixed economy, which means that a part of the
economy is owned by private businessmen, industrialists, and entrepreneurs. The
other part is managed by the government. The Indian economy is highly
dependent on the service sector because of its contribution to the GDP of India
which is equal to 60% of the total. It is followed by agriculture.

Sector Contributing to the Indian Economy

Since the Independence of India, the agriculture sector has been constantly
decreasing, while the service sector has increased gradually. Also, the industrial
sector had improved as well.

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Agriculture: The agriculture sector contributes 14% of the total GDP of India.
Crops, horticulture, milk and animal husbandry, fishing, aquaculture, apiculture,
sericulture, forestry, and other associated activities are all included.

Industry: The industrial sector contributes 27% of the total GDP of India. It
comprises a variety of manufacturing and other sub-sectors.

Service: The service sector contributes 59% of the total GDP of India. It
encompasses construction, retail, software, information technology,
communications, hospitality, infrastructure operations, education, healthcare,
banking, and insurance, as well as many other economic activities.

Salient Features of the Indian Economy

The Indian economy is still on the list of developing economies of the world,
owing to extremely high levels of illiteracy, unemployment, poverty, and so on.
The Indian economy has a low GDP, compounded by the following issues:

Poor Infrastructural Development

As per a recent report, India needs almost $100 million in infrastructure, to ensure
the entire population benefits from electricity, gets safe drinking water, and
proper sanitation services.

Imperfect Market

The Indian markets have a lot of easily exploitable loopholes. With an improper
supply chain, the prices in the market vary significantly at different locations.

Low per Capita Income

The revenue of a country is highly dependent on the purchasing power of the

population; the more they spend or purchase products, the more is the increment
in the revenues of the nation. However, to spend, the population must earn more
and must be able to fulfil their basic needs. Only then can they manage to
purchase other facilities and comfort. Therefore, per capita income is one of the
key factors.

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High rate of Population Growth

With a vast population comes the requirement of resources. India is the world’s
second-largest country in terms of population. This population needs education,
food, transportation, water resources, employment, and other basic necessities to
contribute to the development of the nation. As these resources are not available
in sufficient quantities in India, it is highly challenging for the nation to develop.
And if this continues, the nation will be in a perpetual developing stage.

Poverty

It has been said, “A nation will be poor if it’s poor”, and this is an endless loop.
Such loops of poverty always hinder the progress of a country and are a major
issue for a country to be reckoned as a developed nation.

Unadvanced Technology

Most of the work done in India is labour-intensive work. Thus, there is a huge gap
between the technology required in the industries and what is in use in the
country.

Income Disparity

The concentration of wealth in the country is highly focused and is possessed by

1% of the population of the nation. This 1% of the population owns 53% of the
wealth within the country. Therefore, poverty is one of the important points that
the government needs to highly focus on.

Agro-based Economy

The Indian economy is highly dependent on the agriculture sector. This sector
adds up to almost 14% of the total GDP of the country, and more than half of the
population of the country is dependent on this sector.

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Capital Formation

The average income of a person in India is very low and the GDP of the country is
dependent on this. Therefore, there is a significant need for improvement in the
rate of capital development.

Social issues

Indian society is referred to as a backward society. This is due to communalism, a

highly male-dominated social structure, a regressive caste system, and other such
malice.

Indian Economy 2022

As pandemic worries subsided, 2022 was ushered in with expectations of a

recovery in the world economy.

However, the euphoria was short-lived as the greatest land conflict in Europe
since World War II resulted from Russia’s invasion of Ukraine.

The conflict’s lingering effects continue to cast a shadow over 2023, as rising food
and fuel costs pose a danger to the war on inflation.

A worldwide recession appears to be coming as a result of China’s hazy post-

pandemic path and the potential for a central bank-engineered collapse.

Even if it was grouped with the economies that were performing well in 2022,
India might not be completely divorced from all of this.

The year saw the strongest US dollar in 20 years, the highest global inflation in 50
years, the most aggressive monetary tightening cycle in almost 40 years, and the
slowest Chinese GDP in more than 45 years.

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Indian Economy 2023

The Indian economy in 2023 is predicted to be hopeful yet challenging. The world
bank has predicted economic growth at 6.6% in FY24 as well. Hence India’s march
to become the third-largest economy by 2047 seems to be on track.

The World Bank projected the Indian economy to grow at 6.6 percent in 2023-24
(FY24), slowing down from an estimated 6.9 percent in 2022-23 (FY23).

The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The
sharp downturn in growth is expected to be widespread, with forecasts in 2023
revised down for 95% of advanced economies and nearly 70% of emerging
market and developing economies.

According to predictions made by the Indian government, the country will

develop by 7% in the fiscal year 2022–2023.

The country’s nominal GDP is also estimated to grow by 15.4 percent, according
to the Ministry of Statistics & Programme Implementation.

The government’s policy reforms like the Production-Linked Incentive Scheme

(PLI) and the PM Gati Shakti being the two most successful ones, have been
crucial in attaining favourable outcomes for the Indian economy.

Exports of manufactured goods can be significantly increased by using

production-linked incentives.

There is little doubt that India will benefit greatly from the transfer of
manufacturing from a concentrated area of the world to other locations.

In the next five years, India wants to cut its logistics expenses by 6 percentage
points, from 14% to 8%.

According to the National Logistics Policy, this will guarantee that logistics play
the role of a growth engine in the Indian economy. Due to attempts to relax
regulations for foreign direct investment, improved logistics will contribute to
India’s enhanced reputation as a destination for investments (FDI).

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Positive implications on economy of India

Several indications will support the growth of the Indian economy in 2023

The twin balance sheet issue, which involved banks with large amounts of bad
loans on their books and corporations with significant levels of debt, appears to
be improving.

The PLI program is boosting production, but the benefits are disproportionately
favourable to bigger businesses.

New investments are anticipated in battery technology, electric vehicles, and

renewable energy.

Due in part to a rise in investment zeal, bank credit has been expanding by double
digits.

The majority of international corporations are using China plus One strategy,
which may present an opportunity.

This is because India has the potential to occupy some of the space that Beijing is
vacating in low-skilled, unskilled labour-intensive manufacturing sectors including
textiles, shoes, leather, and ceramics.

According to the RBI, term lending to non-corporates is increasing after a two-

year lull. This is a good indicator that suggests smaller businesses may be looking
for funding beyond their immediate working capital needs.

The corporate sector has been recovering steadily, as seen by the Center’s strong
direct tax and GST revenues.

The states’ combined deficits and net market borrowings have also slightly
decreased.

The total GDP growth has been driven by the agricultural sector.

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Negative implications on Indian Economy 2023

Most of the global environment is the major source of negative affect on the
economic growth of developing countries.

As the conflict in Ukraine continues, the European Union, India’s largest export
market, is at risk of an energy-related slowdown.

Manufacturing in India is still unsteady as indicated by the Index of Industrial

Production (IIP), a gauge of factory output, which fell to a 26-month low in
October 2022.

Although there has been a slight increase, capacity utilization is still stuck around
the 75% level. Private investments are unlikely to noticeably increase unless this
rises steadily.

The Micro, Small, and Medium Enterprises (MSME) businesses are still in crisis.
This demonstrates the stark differences in the performance of larger and smaller
businesses during the industrial recovery.

Given that MSMEs employ a substantial portion of the labour force, their ongoing
financial stress is indicative of the labour market’s suffering and has a domino
effect on the recovery of demand.

The states’ capital spending has remained low. State investments often have a
greater multiplier effect.

Despite having increased its benchmark lending rate by 225 basis points since
May 2022, managing inflation expectations in 2023 may prove difficult in the
future.

At 4% of its GDP, India’s reliance on imported energy presents a problem for the
country’s balance of payments.

For FY23, a current account deficit of substantially over 3% is anticipated.

Rural communities’ substantially greater inflation is further reducing expenditure

there.

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The government, private parties, organized and unorganized sectors, and large
and small businesses have all worked together consistently to advance India. The
Indian economy has defied expectations following the covid outbreak.

The country’s young workforce’s potential can be unlocked by giving the system a
boost as the Skill India Mission is already in place. The economy could benefit
greatly from this action for a very long period.

China is already becoming a less desirable location for manufacturing due to

geopolitics. Global corporations aiming to relocate their centers outside of the
East Asian economic superpower could be advantageous for India.

India should look at creating special investment zones and approval windows for
companies to deploy infrastructure, talent, and research.

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02. Sectors of Indian Economy
India is the fastest growing large economy in the world, with an enormous
population, favourable demographics and high catch-up potential due to low
initial GDP per head.

Economic Sectors

Economic activities result in the production of goods and services while sectors
are the group of economic activities classified on the basis of some criteria.

The Indian economy can be classified into various sectors on the basis of
ownership, working conditions and the nature of the activities.

All economic activity was in the primary sector during early civilisation. After the
surplus production of food, people’s need for other products increased which led
to the development of the secondary sector.

The growth of secondary sector spread its influence during the industrial
revolution in the nineteenth century.

A support system was needed to facilitate the industrial activity. Certain sectors
like transport and finance played an important role in supporting the industrial
activity.

Primary Sector

In Primary sector of economy, activities are undertaken by directly using natural

resources. Agriculture, Mining, Fishing, Forestry, Dairy etc. are some examples of
this sector.

It is called so because it forms the base for all other products. Since most of the
natural products we get are from agriculture, dairy, forestry, fishing, it is also
called Agriculture and allied sector.

People engaged in primary activities are called red-collar workers due to the
outdoor nature of their work.

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Secondary Sector

It includes the industries where finished products are made from natural materials
produced in the primary sector. Industrial production, cotton fabric, sugar cane
production etc. activities comes under this sector.

Hence its the part of a country's economy that manufactures goods, rather than
producing raw materials

Since this sector is associated with different kinds of industries, it is also called
industrial sector.

People engaged in secondary activities are called blue collar workers.

Examples Of Manufacturing Sector:

Small workshops producing pots, artisan production.

Mills producing textiles,

Factories producing steel, chemicals, plastic, car.

Food production such as brewing plants, and food processing.

Oil refinery.

Core Industries

Eight Core Industries are Electricity, steel, refinery products, crude oil, coal,
cement, natural gas and fertilizers. The Index of Eight Core Industries is a monthly
production index, which is also considered as a lead indicator of the monthly
industrial performance. The Index of Eight Core Industries is compiled based on
the monthly production information received from the Source Agencies.

Tertiary Sector/Service Sector

This sector’s activities help in the development of the primary and secondary
sectors. By itself, economic activities in tertiary sector do not produce a goods but
they are an aid or a support for the production.

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Goods transported by trucks or trains, banking, insurance, finance etc. come
under the sector. It provides the value addition to a product same as secondary
sector. This sector jobs are called white collar jobs.

Pink Collar Worker

Pink-collar worker is one who is employed in a job that is traditionally considered

to be women's work. The term pink-collar worker was used to distinguish female-
orientated jobs from the blue-collar worker, a worker in manual labor, and the
white-collar worker, a professional or educated worker in office positions.

A pink collar worker need not require as much professional training as white-
collar professions. They do not get equal pay or prestige.

A pink collar worker is usually a woman. Men rarely work in pink collar jobs. Some
examples of pink collar occupations are baby sitter, florist, day care worker, nurses
etc.

Lately, the pink collar worker is educated or trained. Pink collar workers are
educated through training seminars or classes and they have to continue to strive
for advancement in their careers.

Today, women have more opportunities in traditionally male white-collar jobs and
men work in traditionally female pink-collar jobs.

Sunrise Industry

Sunrise industry is a term used for a sector that is just in its infancy but shows
promise of a rapid boom.

The industry is typically characterized by high growth rates, high degree of

innovation and generally has plenty of public awareness about the sector and
investors get attracted to its long-term growth prospects.

On the other hand Sunrise industry rapid emergence may threaten a competing
industry sector that is already in decline. Because of its dim long-term prospects,
such an industry is referred to as a sunset industry.

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Existing Indian sectors that can be termed as Sunrise sectors and likely to hold us
in good stead in the future in terms of employment generation and business
growth are:

Information Technology

Telecom Sector

Healthcare

Infrastructure Sector

Retail Sector

Food Processing Industries

Fisheries

Shift from Primary Sector to Services Sector

The natural economic movement of a country goes from agrarian economy to an

industrial economy to a service economy but India has leapfrogged from an
agrarian economy to a service economy.

One remarkable feature of India’s recent growth is diversification into services,

with the services sector dominating GDP.

India’s success in software and IT-enables serviced (ITeS) exports, has made it a
significant services exporter with its share in world services exports rising from 0.6
per cent in 1990 to 3.3 per cent in 2013.

Well educated and immense human resources, Fluency in English and availability
of cheap labour are other reasons for rapid growth of service sector in the
country.

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Low growth in Secondary sector can be attributed to:

The license Raj

Restrictions on foreign investment

Lack of measures to promote private industry

Power Deficit

Stringent Labour laws

Lack of skilled labour

Delays in Land Acquisition and environmental clearances

Import of cheap manufactured goods etc.

Though India ranks low in terms of per capita income, its share of services in GDP
is approaching the global average. Interestingly, however, the contribution of
services to employment was significantly lower than the world average.

The manufacturing sector tends to be labour intensive, hence renewed emphasis

on the manufacturing through programmes like ‘Make in India’ will serve to
correct this anomaly and raise employment in proportion with growth in GDP.

Quaternary Sector

The quaternary sector of the economy is based upon the economic activity that is
associated with either the intellectual or knowledge-based economy. This consists
of information technology; media; research and development; information-based
services such as information-generation and information-sharing; and knowledge-
based services such as consultation, education, financial planning, blogging, and
designing. Other definitions describe the quaternary sector as pure services. This
may consist of the entertainment industry, to describe media and culture, and
government. This may be classified into an additional quinary sector.

These are specialized tertiary activities in the ‘Knowledge Sector’ which demands a
separate classification.

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The quaternary sector is the intellectual aspect of the economy. It is the process
which enables entrepreneurs to innovate and improve the quality of services
offered in the economy.

Personnel working in office buildings, elementary schools and university

classrooms, hospitals and doctors’ offices, theatres, accounting and brokerage
firms all belong to this category of services.

Like other tertiary functions, quaternary activities can also be outsourced.

Quinary Sector

The quinary sector is also an extension of the tertiary sector and is responsible for
services provided by the highest levels of organization in a society, including
publicly supported services such as government, military, education, and
healthcare. Domestically-based services, which are services that were once done
by someone in-home, such as childcare and home cleaning services, are also
included in the quinary sector.

The quinary sector is the part of the economy where the top-level decisions are
made. This includes the government which passes legislation. It also comprises
the top decision-makers in industry, commerce and also the education sector.

These are services that focus on the creation, re-arrangement and interpretation
of new and existing ideas; data interpretation and the use and evaluation of new
technologies.

Profession under this category often referred as 'gold collar' professions, they
represent another subdivision of the tertiary sector representing special and
highly paid skills of senior business executives, government officials, research
scientists, financial and legal consultants, etc.

Organised Sector

In this sector, employment terms are fixed and regular, and the employees get
assured work and social security.

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It can also be defined as a sector, which is registered with the government and a
number of acts apply to the enterprises. Schools and hospitals are covered under
the organised sector.

Workers in the organised sector enjoy security of employment. They are expected
to work only a fixed number of hours. If they work more, they have to be paid
overtime by the employer.

Unorganised Sector

An unorganised worker is a home-based worker or a self-employed worker or a

wage worker in the unorganized sector and includes a worker in the organized
sector who is not covered by any of the Acts pertaining to welfare Schemes as
mentioned in Schedule-II of Unorganized Workers Social Security Act, 2008.

In this sector wage-paid labour is largely non-unionised due to casual and

seasonal nature of employment and scattered location of enterprises.

The sector is marked by low incomes, unstable and irregular employment, and
lack of protection either from legislation or trade unions.

The unorganised sector uses mainly labour intensive and indigenous technology.
The workers in unorganised sector, are so scattered that the implementation of
the Legislation is very inadequate and ineffective. There are hardly any unions in
this sector to act as watch-dogs.

But the contributions made by the unorganised sector to the national income, is
very substantial as compared to that of the organised sector. It adds more than
60% to the national income while the contribution of the organised sector is
almost half of that depending on the industry.

The Public Sector

In the sector, government owns most of the assets and it is the part of the
economy concerned with providing various governmental services.

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The purpose of the public sector is not just to earn profits. Governments raise
money through taxes and other ways to meet expenses on the services rendered
by it.

Classification of Central Public Sector Enterprises (CPSEs)

CPSEs are classified into 3 categories- Maharatna, Navratna and Miniratna.

Presently, there are 7 Maharatna, 16 Navratna and 71 Miniratna CPSEs.

Maharatna Scheme was introduced for Central Public Sector Enterprises (CPSEs),
with effect from 19th May, 2010, in order to empower mega CPSEs to expand
their operations and emerge as global giants.

Presently there are seven ‘Maharatna’ CPSEs, viz. (i) Bharat Heavy Electricals
Limited, (ii) Coal India Limited, (iii) GAIL (India) Limited, (iv) Indian Oil Corporation
Limited, (v) NTPC Limited, (vi) Oil & Natural Gas Corporation Limited and (vii)Steel
Authority of India Limited.

CPSEs fulfilling the following criteria are eligible to be considered for grant of
Maharatna status:

Having Navratna status.

Listed on Indian stock exchange with minimum prescribed public

shareholding under SEBI regulations.

Average annual turnover of more than Rs. 25,000 crore, during the last 3
years.

Average annual net worth of more than Rs. 15,000 crore, during the last 3
years.

Average annual net profit after tax of more than Rs. 5,000 crore, during the
last 3 years.

Should have significant global presence/international operations.

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Criteria for grant of Navratna status

The Miniratna Category – I and Schedule ‘A’ CPSEs, which have obtained
‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system
in three of the last five years, and have composite score of 60 or above in the six
selected performance parameters, namely,

net profit to net worth,

manpower cost to total cost of production/services,

profit before depreciation, interest and taxes to capital employed,

profit before interest and taxes to turnover,

earning per share and

inter-sectoral performance.

'Miniratna' Scheme: In October 1997, the Government had also decided to grant
enhanced autonomy and delegation of financial powers to some other profit
making companies subject to certain eligibility conditions and guidelines to make
them efficient and competitive. These companies called ‘Miniratnas’, are in two
Category-II. The eligibility conditions and criteria are:

Category –I CPSEs should have made profit in the last three years continuously,
the pre-tax profit should have been Rs. 30 crore or more in at least one of the
three years and should have a positive net worth.

Category-II CPSEs should have made profit for the last three years continuously
and should have a positive net worth.

These CPSEs shall be eligible for the enhanced delegated powers provided they
have not defaulted in the repayment of loans/interest payment on any loans due
to the Government.

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The Private Sector

In the private sector, ownership of assets and delivery of services is in the hands
of private individuals or companies.

It is sometimes referred as the citizen sector, which is run by private individuals or

groups, usually as a means of enterprise for profit, and is not controlled but
regulate by the State.

Activities in the private sector are guided by the motive to earn profits. To get
such services we have to pay money to these individuals and companies.

PPP (Public Private Partnership)

PPP is an arrangement between government and private sector for the provision
of public assets and/or public services.

In this type of partnership investments being undertaken by the private sector

entity, for a specified period of time.

As PPP involves full retention of responsibility by the government for providing

the services it doesn’t amount to privatization.

There is a well defined allocation of risk between the private sector and the public
entity.

Private entity is chosen on the basis of open competitive bidding and receives
performance linked payments.

PPP route can be alternative in developing countries where governments faced

various constraints on borrowing money for important projects.

It can also give required expertise in planning or executing large projects.

Sector-wise Contribution of GDP in India

Services sector is the largest sector of India. Gross Value Added (GVA) at current
prices for Services sector is estimated at 92.26 lakh crore INR in 2018-19. Services
sector accounts for 54.40% of total India's GVA of 169.61 lakh crore Indian rupees.

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With GVA of Rs. 50.43 lakh crore, Industry sector contributes 29.73%. While
Agriculture and allied sector shares 15.87%.

It is worth mentioning that agriculture sector has maximum share by working

force at near 53% while services and secondary sectors shares are near 29% and
18% respectively.

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03. Economic Planning in India & NITI Aayog
The Constitution came into force on 26 January 1950. Subsequently, Planning
Commis-sion was set up on 15 March 1950 and the plan era started from 1 April
1951 with the launch-ing of the First Five Year Plan (1951-56).

Economic Planning In India – Five Year Plans

The term economic planning is used to describe the long term plans of the
government of India to develop and coordinate the economy with efficient
utilization of resources. Economic planning in India started after independence in
the year 1950 when it was deemed necessary for economic growth and
development of the nation.

The idea of economic planning for five years was taken from the Soviet Union
under the socialist influence of first Prime Minister Pt. Jawahar Lal Nehru.

The first eight five year plans in India emphasised on growing the public sector
with huge investments in heavy and basic industries, but since the launch of Ninth
five year plan in 1997, attention has shifted towards making government a growth
facilitator.

Objectives of Economic Planning in India

The following were the original objectives of economic planning in India:

Economic Development: This is the main objective of planning in India. Economic

Development of India is measured by the increase in the Gross Domestic Product
(GDP) of India and Per Capita Income

Increased Levels of Employment: An important aim of economic planning in India

is to better utilise the available human resources of the country by increasing the
employment levels.

Self Sufficiency: India aims to be self-sufficient in major commodities and also

increase exports through economic planning. The Indian economy had reached
the take-off stage of development during the third five-year plan in 1961-66.

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Economic Stability: Economic planning in India also aims at stable market
conditions in addition to the economic growth of India. This means keeping
inflation low while also making sure that deflation in prices does not happen. If
the wholesale price index rises very high or very low, structural defects in the
economy are created and economic planning aims to avoid this.

Social Welfare and Provision of Efficient Social Services: The objectives of all the
five year plans as well as plans suggested by the NITI Aayog aim to increase
labour welfare, social welfare for all sections of the society. Development of social
services in India, such as education, healthcare and emergency services have been
part of planning in India.

Regional Development: Economic planning in India aims to reduce regional

disparities in development. For example, some states like Punjab, Haryana,
Gujarat, Maharashtra and Tamil Nadu are relatively well developed economically
while states like Uttar Pradesh, Bihar, Orissa, Assam and Nagaland are
economically backward. Others like Karnataka and Andhra Pradesh have uneven
development with world class economic centres in cities and a relatively less
developed hinterland. Planning in India aims to study these disparities and
suggest strategies to reduce them.

Comprehensive and Sustainable Development: Development of all economic

sectors such as agriculture, industry, and services is one of the major objectives of
economic planning.

Reduction in Economic Inequality: Measures to reduce inequality through

progressive taxation, employment generation and reservation of jobs has been a
central objective of Indian economic planning since independence.

Social Justice: This objective of planning is related to all the other objectives and
has been a central focus of planning in India. It aims to reduce the population of
people living below the poverty line and provide them access to employment and
social services.

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Increased Standard of Living: Increasing the standard of living by increasing the
per capita income and equal distribution of income is one of the main aims of
India’s economic planning.

History of Economic Planning in India

Economic planning in India dates back to pre-Independence period when leaders

of the freedom movement and prominent industrialists and academics got
together to discuss the future of India after Independence which was soon to
come. Noted civil engineer and administrator M. Visvesvaraya is regarded as a
pioneer of economic planning in India. His book “Planned Economy for India”
published in 1934 suggested a ten year plan based on economic conditions of the
time.

The Industrial Policy Statement published just after independence in 1948

recommended setting up of a Planning Commission and following a mixed
economic model.

Five Year Plans (FYP)

The first five year plan was introduced by Joseph Stalin in the USSR in 1928. He is
considered as the Father of Five Year Plans.

Father of Indian Economic Planning is Sir M. Vishweshwaraiah. Sir M Visvesvaraya,

popularly known as Sir MV, was an engineer, statesman, and a scholar. Sir MV
served as the Diwan of Mysore during the period of 1912-1918. In 1955, he was
honoured with Bharat Ratna.

The first five year plan was presented in the parliament by Prime Minister
Jawaharlal Nehru in December 1951. As such Nehru is known as Father of Indian
FYP.

From 1947 to 2017, the Indian economy was premised on the concept of
planning. This was carried through the Five-Year Plans, developed, executed, and
monitored by the Planning Commission (1951-2014) and the NITI Aayog (2015-
2017).

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The Government led by Narendra Modi, elected in 2014, announced the
dissolution of the Planning Commission, and its replacement by a think tank
called the NITI Aayog (an acronym for National Institution for Transforming India).

The First Five Year Plan (FYP) - The First Indian Prime Minister, Jawaharlal Nehru,
presented the First Five-Year Plan (1951-56) . The First Five-Year Plan was based
on the Harrod–Domar model with few modifications.

The Second Five Year Plan focused on the development of the public sector and
"rapid Industrialisation". The plan followed the Mahalanobis model, an economic
development model developed by the Indian statistician Prasanta Chandra
Mahalanobis in 1953. The plan assumed a closed economy in which the main
trading activity would be centred on importing capital goods. From the Second
Five-Year Plan, there was a determined thrust towards substitution of basic and
capital good industries.

Third FYP (1961–1966) - The Third Five-year Plan stressed agriculture and
improvement in the production of wheat, but the brief Sino-Indian War of 1962
exposed weaknesses in the economy and shifted the focus towards the defence
industry and the Indian Army.

For the first time India resorted to borrowing from IMF. Rupee value devalued for
the first time in 1966.

It was based on John Sandy and Sukhamoy Chakraborty's model.

Plan Holidays (1966–1969) - Due to miserable failure of the Third Plan the
government was forced to declare "plan holidays" (from 1966 to 1967, 1967–68,
and 1968–69). Three annual plans were drawn during this intervening period.
During 1966–67 there was again the problem of drought. Equal priority was given
to agriculture, its allied activities, and industrial sector. The government of India
declared "Devaluation of Rupee" to increase the exports of the country. The main
reasons for plan holidays were the war, lack of resources and increase in inflation.

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Fourth FYP (1969–1974) - The Fourth Five-Year Plan adopted the objective of
correcting the earlier trend of increased concentration of wealth and economic
power. It was based on the Gadgil formula focusing on growth with stability and
progress towards self reliance. At this time Indira Gandhi was the prime minister.

The Indira Gandhi government nationalised 14 major Indian banks and the Green
Revolution in India advanced agriculture.

The concept of a buffer stock was first introduced and a buffer stock of 5 million
tonnes of food grains was envisaged

The Drought Prone Area Program (DPAP) was launched.

The Fifth Five-Year Plan laid stress on employment, poverty alleviation (Garibi
Hatao), and justice. The plan also focused on self-reliance in agricultural
production and defence. In 1978 the newly elected Morarji Desai government
rejected the plan. The Electricity Supply Act was amended in 1975, which enabled
the central government to enter into power generation and transmission.

The Indian national highway system was introduced and many roads were
widened to accommodate the increasing traffic. Tourism also expanded. The
twenty-point programme was launched in 1975. It was followed from 1975 to
1979.

The Minimum Needs Programme (MNP) was introduced in the first year of the
Fifth Five-Year Plan (1974–78). The objective of the programme is to provide
certain basic minimum needs and thereby improve the living standards of the
people. It is prepared and launched by D. P. Dhar.

Rolling Plan

Rolling Plan was the sixth five year plan introduced by the Janata Government for
the time period 1978-83, after removing the fifth five year plan in 1977-78.

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Annual Plans (1990-92)

The Eight Five Year Plan was not introduced in 1990 and the following years 1990-
91 and 1991-92 were treated as Annual Plans. This was largely because of the
economic instability. India faced a crisis of foreign exchange reserves during this
time. Liberalisation, Privatisation, Globalisation (LPG) was introduced in India to
grapple with the problem of the economy under prime minister P.V Narasimha
Rao.

Twelfth FYP (2012–2017) is the last FYP and it completed its term in March 2017.
With the Planning Commission dissolved, no more formal plans are made for the
economy.

NITI (National Institution for Transforming India) Aayog

Setting up the NITI Aayog was a major step away from the command economy
structure adopted by India till 1991. The Planning Commission’s top down model
of development had become redundant due to changed economic conditions and
NITI Aayog approaches economic planning in a consultative manner with input
from various state governments and think tanks. The Niti Aayog has come out
with three documents — 3-year action agenda, 7-year medium-term strategy
paper and 15-year vision document.

Promote Cooperative Federalism

Governing Council of NITI Aayog has Lieutenant Governors of Union Territories

and State Chief Ministers.

NITI Aayog Constituted a Committee of State Chief Ministers to examine

important issues.

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Promote Competitive Federalism

NITI Aayog has Prepared online dashboards to rank the States on various
indicators of development Such as;

Sustainable Development Goals (SDG) India Index.

Health Index.

School Education Quality Index.

Digital Transformation Index.

Launched Aspirational District Programs for monitoring the Progress of

backward districts.

NITI Aayog has not been given the mandate or Powers to impose Policies on
States.

NITI Aayog is a think tank or an advisory body.

The Powers for allocation of funds have not been given to the NITI Aayog. The
Powers are with the Finance Ministry.

As a ‘think-tank’, Niti Aayog has helped the government In framing various

Policies on;

Clean energy

Methanol based economy

Infrastructure, human development etc.

NITI Aayog regularly organizes Seminars, Workshops, and Conferences.

NITI initiated Atal Innovation Mission (AIM) to help Startups. NITI is developing
the National Program on Artificial Intelligence.

NITI’s approach is modernised, forward-looking, and less bureaucratic; NITI Aayog

is playing an important role as a think tank for Economic growth, Human
development and Good governance in India.
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NITI Aayog ' s “Strategy for New India @75”

NITI Aayog recently released the document “Strategy for New India@75” to define
clear objectives for 2022-23 in a diverse range of 41 different areas. This
aspirational strategy aims to achieve a ‘New India’ by 2022 when the country
celebrates its 75th year of Independence.

The document has identified 41 different areas that require either a sharper focus
on implementing the flagship schemes already in place or a new design and
initiative to achieve India’s true potential.

Each chapter summarizes the current status of the sector, takes full cognizance of
the progress made thus far, then identifies the binding constraints and proposes
measures to address these constraints.

The approach is believed to provide an inventory of readily implementable

measures for the government departments and agencies both in the central and
state

The focus is to improve the policy environment so that the contribution of private
investors and other stakeholders can be maximized to achieve the goals set out
for New India.

In an effort to align the ‘Strategy for New India @ 75’ with India’s commitment to
the United Nations’ Sustainable Development Goals, each chapter is mapped to
the relevant goals. India is currently putting in place a ‘development state’ guided
by the philosophy of Sabka Saath, Sabka Vikas.

Failures of Indian Planning - The most important failure of Indian planning is the
growth of unemployment rate. It means the planning process did not able to
create gainful employment opportunities both in the organized and unorganized
sectors. Rise in Price level – Another major failure of Indian planning is the
inflation.

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Types of Economic Planning

There are two types of economic planning:

(1) collectivist planning, also known as economic planning by direction,

(2) suggestive planning, also known as economic planning by inducement.

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04. Role of Priority Sector and MSME
Priority sector lending include only those sectors, as part of the priority sector that
impact large sections of the population, the weaker sections and the sectors
which are employment-intensive such as agriculture, and Micro and Small
enterprises.

Priority Sector refers to those sectors which the Government of India and Reserve
Bank of India consider as important for the development of the basic needs of the
country. They are assigned priority over other sectors. The banks are mandated to
encourage the growth of such sectors with adequate and timely credit.

The Priority Sector Lending classifications and guidelines released by the RBI are
intended to align with emerging national priorities and bring a sharper focus on
inclusive development, building a consensus among all stakeholders.

It enables better credit penetration to credit deficient areas, increased lending to

small and marginal farmers and weaker sections, boost credit to renewable
energy, and health infrastructure and allied sectors that need credit boost, which
is otherwise difficult to avail.

Different Categories of the Priority Sector

Agriculture

Micro, Small and Medium Enterprises

Export Credit

Education

Housing

Social Infrastructure

Renewable Energy

Others

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The origins of Priority Sector Lending is traced back to 1966

The then government felt the need for increasing credit to agriculture and small
industries.

However, the definition for Priority Sector was only formalized based on a Reserve
Bank of India (RBI) report in the National Credit Council in 1972.

After bank nationalization, the Priority Sector formulation also allowed the
government to focus on different sectors by making credit available, through
direct lending.

Over the years the classification of the Priority Sector has evolved primarily from
agriculture and small industries (MSME) to various other domains till today.

Weaker Sections under the Priority Sector

Priority sector loans to the following borrowers are treated under the Weaker
Sections category

Small and Marginal Farmers.

Artisans, village and cottage industries where individual credit limits do not
exceed Rs 1 lakh.

Beneficiaries under Government Sponsored Schemes such as National Rural

Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and Self
Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)

Scheduled Castes and Scheduled Tribes.

Beneficiaries of the Differential Rate of Interest (DRI) scheme.

Self Help Groups.

Distressed farmers are indebted to non-institutional lenders.

Distressed persons other than farmers, with loan amounts not exceeding Rs 1 lakh
per borrower to prepay their debt to non-institutional lenders.

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Individual women beneficiaries up to Rs 1 lakh per borrower.

Persons with disabilities.

Minority communities may be notified by the Government of India from time to

time

Overdraft availed by PMJDY account holders as per limits and conditions

prescribed by the Department of Financial Services, Ministry of Finance from time
to time may be classified under Weaker Sections.

In States, where one of the minority communities notified is found to be in

majority, the above covers only the other notified minorities.

These States, Union Territories are Punjab, Meghalaya, Mizoram, Nagaland,

Lakshadweep and Jammu & Kashmir.

Activities Covered under Priority Sector Lending

The activities covered under priority sector lending are as follows:

Agriculture

The lending to the agriculture sector includes Farm Credit (Agriculture and Allied
Activities), lending for Agriculture Infrastructure and Ancillary Activities.

Farm Credit to Individual farmers including Self Help Groups (SHGs) or Joint
Liability Groups (JLGs) includes groups of individual farmers and Proprietorship
firms of farmers, directly engaged in Agriculture and Allied Activities, such as
dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture.

Crop loans include loans for traditional/non-traditional plantations, horticulture

and allied activities.

Medium and long-term loans for agriculture and allied activities such as the
purchase of agricultural implements and machinery and developmental loans for
allied activities.

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Loans for pre and post-harvest activities viz. spraying, harvesting, grading and
transporting their own farm produce.

Loans to distressed farmers indebted to non-institutional lenders.

Loans under the Kisan Credit Card Scheme.

Loans to small and marginal farmers for purchase of land for agricultural
purposes.

Loans against pledge/hypothecation of agricultural produce (including warehouse

receipts) for a period not exceeding 12 months.

The limit is fixed up to Rs.75 lakh against Negotiable Warehouse Receipts and up
to Rs. 50 lakh against warehouse receipts not coming under the above category.

Loans to farmers for installation of stand-alone Solar Agriculture Pumps and

solarisation of grid-connected Agriculture Pumps.

Agricultural Infrastructure

Loans for construction of storage facilities (warehouses, market yards, godowns

and silos) including the storage units/ cold storage chains designed to store
agricultural produce/products, irrespective of their location.

Soil conservation and watershed development.

Plant tissue culture and agri-biotechnology, seed production, production of bio-

pesticides, bio-fertilizer, and vermicomposting.

For the above, the aggregate sanctioned limit of credit is Rs 100 crore per
borrower from the banking system.

Ancillary Activities

Loans up to Rs 5 crore to co-operative societies of farmers for disposing of the

produce of members.

Loans for setting up of Agriclinics and Agribusiness Centers.

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Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs
100 crore per borrower from the banking system.

Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service

Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-
lending to agriculture.

Other eligible funds are with NABARD if a priority sector shortfall is noticed.

Small and Marginal Farmers

Farmers with land holdings of up to 1 hectare come under the Marginal Farmer
category.

Farmers with a landholding of more than 1 hectare and up to 2 hectares are

considered Small Farmers.

Landless agricultural labourers, tenant farmers, oral lessees and share-croppers.

Loans to Self Help Groups, where groups of individual Small and Marginal farmers
are directly engaged in Agriculture and Allied Activities.

Banks have to maintain disaggregated data of such loans.

Loans to farmers’ producer companies of individual farmers, and co-operatives of

farmers directly engaged in Agriculture and Allied Activities.

In this case, the membership of Small and Marginal Farmers is not less than 75 per
cent and their land-holding share should not be less than 75 per cent of the total
land-holding.

Micro, Small and Medium Enterprises (MSMEs)

Micro enterprises are the ones where the investment in plant and machinery or
equipment does not exceed one crore rupees and turnover does not exceed five
crore rupees.

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Small enterprises are the ones where the investment in plant and machinery or
equipment does not exceed ten crore rupees and turnover does not exceed fifty
crore rupees.

Medium enterprise, where the investment in plant and machinery or equipment

does not exceed fifty crore rupees and turnover does not exceed two hundred
and fifty crore rupees

Khadi and Village Industries Sector

All loans to units in this sector are eligible for classification under the sub-target
of 7.5 per cent prescribed for Micro Enterprises under the priority sector.

Education

Loans to individuals for educational purposes, including vocational courses, not

exceeding Rs 20 lakh are considered eligible for priority sector classification.

Loans currently classified as a priority sector would continue till maturity.

Housing

Loans to individuals up to Rs 35 lakh in metropolitan centres.

Up to Rs 25 lakh in other areas apart from Urban centres for

purchase/construction of a dwelling unit per family.

The overall cost of the dwelling unit in the metropolitan centre and at other
centres should not exceed Rs 45 lakh and Rs 30 lakh respectively.

The housing loans to banks’ employees are excluded.

Loans up to Rs10 lakh in metropolitan centres and up to Rs 6 lakh in other

centres for repairs to damaged dwelling units conforming to the overall cost of
the dwelling unit.

Bank loans to any governmental agency for construction of dwelling units or slum
clearance and rehabilitation of slum dwellers subject to dwelling units with a
carpet area of not more than 60 sq.m.

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Social infrastructure

Loans up to a limit of Rs 5 crore per borrower for setting up schools, drinking

water facilities and sanitation facilities.

It includes the construction/ refurbishment of household toilets and water

improvements at the household level.

Loans up to a limit of Rs 10 crore per borrower for building health care facilities
including under Ayushman Bharat in Tier-2 to Tier-6 centres

In the case of UCBs, the above limits are applicable only in centres having a
population of less than one lakh.

Bank credit to Micro Finance Institutions (MFI) extended for on-lending to

individuals/ members of SHGs/ JLGs for water and sanitation facilities are also
eligible under these categories, subject to certain criteria.

Renewable Energy

Loans up to Rs 30 crore to borrowers for purposes such as solar-based power

generators, biomass-based power generators, windmills, micro-hydel plants.

Non-conventional renewable energy-based public utilities like street lighting

systems and remote village electrification.

For individual households, the loan limit is Rs 10 lakh

Others

Loans not exceeding Rs 1.00 lakh per borrower are provided directly by banks to
individuals and individual members of SHGs when they fulfill certain criteria of
annual income.

Loans not exceeding Rs 2.00 lakh provided directly by banks to SHG for activities
other than agriculture or MSME, such as meeting social needs, construction or
repair of houses, construction of toilets or any viable common activity started by
the SHGs.

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Loans to distressed persons not exceeding Rs 1,00,000/- per borrower to prepay
their debt to non-institutional lenders.

Loans sanctioned to State Sponsored Organizations for Scheduled Castes/

Scheduled Tribes for the specific purpose of purchase and supply of inputs and/or
the marketing of the outputs of the beneficiaries of these organizations.

Conclusion

Priority sector lending has enabled many to avail the facilities of institutional
credit, which are otherwise difficult provided the exploitative non-institutional
credit sources farmers, share crop growers usually resort to as a last option. It has
also given impetus to the growth of small and micro enterprises, creating more
enterprises, promoting entrepreneurship.

MSME (Micro, Small, and Medium Enterprise) term was introduced by the
Government of India in agreement with the Micro, Small & Medium Enterprises
Development (MSMED) Act, 2006. MSME is initiated and managed under the
Ministry of MSME (MoMSME) are entities engaged in the production,
manufacturing, processing, or preservation of goods and commodities.

Prior to 13th May, 2020, MSMEs were classified into 2 categories:- Manufacturing
and Services sector

Manufacturing units: (Based on investment in plant and machinery )

Micro enterprises – investment does not exceed 25 lakhs

Small enterprises -Investment more than twenty five lakh rupees but not
exceeding five crore rupees.

Medium enterprises- Investment more than five crore rupees but does exceeding
ten crore rupees

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Service sector: ( Based on investment in equipments)

Micro enterprises – Investment does not exceed ten lakh rupees

Small enterprises – Investment more than ten lakh rupees but not exceeding two
crore rupees

Medium enterprises -Investment more than two crore rupees but not exceeding
five core rupees .

Revised definition of MSME

Government of India announced various relief packages and relaxations for MSME
Sector on 13th May 2020. One of the major change introduced is the change in
the definition of MSME. The newly adopted definition comprises of an additional
criteria of turnover. The new limits based on Investment & Annual turnover for
both Manufacturing and Service sector are as follow:

A. Any enterprise with investment up to Rs 1 crore and turnover under Rs 5 crore

will be classified as “Micro“.

B. Any enterprise with investment up to Rs 10 crore and turnover up to Rs 50

crore will be classified as “Small“

C. Any enterprise with investment up to Rs 20 crore and turnover under Rs 100

crore will be classified as “Medium“. The Government of India on 01.06.2020
decided for further upward revision of the Medium Enterprises Definition. For
Medium Enterprises, now it is Rs. 50 Crore of investment and Rs. 250 Crore of
turnover.

Role of MSME

MSME sector is considered a pillar of India's economy due to its immense

contribution to employment and income generation.

The Micro, Small and Medium Enterprises(MSMEs) sector is an important pillar of

the Indian economy as it contributes greatly to growth of the Indian economy
with a vast network contributing about 45% to manufacturing output.

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MSMEs provide about 110 million jobs which is 22-23% of the total employment
in India. It is next highest to Agriculture. However, this sector still faces several
challenges. Barely 15% of MSME units have registered with the UDYAM Platform.
Heterogeneity, fragmentation and informalization highlight the need for reforms
in this sector.

Formulation of targeted policies in the areas of infrastructure development,

technology adoption, backward and forward linkage, can help MSMEs to achieve
their full potential and propel the Indian economy in a higher growth trajectory.

Significance of MSME Sector for India

Boon for Rural Development: Compared with large-scale companies, MSMEs

aided in the industrialisation of rural areas at minimal capital cost. The sector has
made significant contributions to the country's rural socio-economic growth and
complemented major industries as well.

Front Runner in Make in India Mission: As India aims that the products that are
'Make in India' are also ‘Made for the World,’ adhering to global standards of
quality. MSME is acquiring the centre stage in the mission. It is taken as a
backbone in making this dream a possibility.

Simple Management Structure for Enterprises: Considering India’s middle-class

economy, MSME offers a flexibility that it can start with limited resources within
the control of the owner. From this decision making gets easy and efficient.

On the contrary, a large corporation requires a specialist for every departmental

functioning as it has a complex organisational structure.

Economic Growth and Leverage Exports: It is the most significant driver in India
contributing to the tune of 8% to GDP.

Nowadays, Multi National Companies are buying semi-finished, and auxiliary

products from small enterprises. It offers immense potential in creating a linkage
between India’s MSME base and big companies.

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Current Challenges Related to MSME Sector in India

Financial Constraint: In the Indian economy, access to finance has always been
an issue for smaller firms and businesses. This is a major hindrance for businesses
as well as the MSME sector.

However, the most disturbing fact about it is that only 16% of SMEs get access to
timely finance, resulting in small and medium firms being forced to rely on their
own resources.

Lack of Innovation: Indian MSMEs lack innovation, and the majority of the
products that they produce are based on outdated technologies. There is a severe
lack of entrepreneurs in this sector, which has prevented it from adopting new
technologies and tools.

As a result, MSMEs have had to struggle with outdated technology as well as low
levels of productivity, especially when compared with larger firms.

Majority of Small Firms: Micro and small businesses account for more than 80%
of MSMEs. Therefore, due to communication gap and awareness, they cannot take
advantage of the government's emergency line of credit, stressed asset relief,
equity participation, and fund of funds operation.

Lack of Formalisation Amongst MSMEs: MSMEs lack formalisation and this

contributes to the credit gap.

Almost 86% of manufacturing MSMEs in the country are unregistered. Even today,
only about 1.1 crore MSMEs are registered with the Goods and Services Tax.

Recent Government Initiatives Related to MSMEs

Raising and Accelerating MSME Performance (RAMP) Scheme

Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)

Interest Subsidy Eligibility Certificate (ISEC)

A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE)

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Credit Linked Capital Subsidy for Technology Upgradation (CLCSS)

The growing importance of the data economy necessitates the government

creating an independent body to advise and offer consultancy to MSMEs and
establish regulatory measures to protect them from economic shocks.

Supply Chain Finance: It can help MSMEs meet urgent working capital
requirements and allow them to make early payments or have quicker access to
funds that they are owed and to inculcate Zero Defect & Zero Effect (ZED)
practices in manufacturing done by Indian MSMEs.

Technology-enabled platforms to automate transactions can be created making it

easier for MSMEs to track payments.

With such seamless and quick funding, MSMEs can easily invest in business
expansion, procure new raw materials, or update their inventories.

Linking Government Projects with Local MSME: The government can play a
crucial role in creating domestic manufacturing capabilities by the leverage of
proposed public procurements and projects.

For instance, public projects such as Sagarmala, Bharatmala, and industrial

corridors can be linked with the MSME sector.

Industry-Academia Channel: A greater connection between government

industry-academia is required to identify the evolving requirements in
manufacturing and prepare an employable workforce, contributing to Industrial
Revolution 4.0.

Dedicated MSME Portal: A portal can be created for MSME formalisation and
registration. It will not only bring transparency but also help in reducing frauds
and misappropriation of data.

And it can also be developed as a full-fledged marketplace for MSMEs through

which sellers can develop forward and backward linkages.

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Aadhaar or PAN can be used as a unique identifier for all compliance purposes
and annual registration process as a vendor must be simplified or can be done
with this identifier.

E-Courts for Dispute Resolution: To push for faster resolution of cases, there is a
need to strengthen the NCLT framework with introduction of alternate methods
of debt resolution, such as via e-courts.

Incentivising Digital Adoption Within the Sector: By incentivizing digital

adoption within this sector, particularly disruptive technologies such as artificial
intelligence and quantum technology, the industry can experience a technological
boom.

ECLGS extension

The Modi government in its budget announced an additional credit under

Emergency Credit Linked Guarantee Scheme (ECLGS) for 130 lakh MSMEs and
extended it until March 2023. In the next five years, a Rs 6,000 crore rating scheme
for MSMEs would be implemented. Also, guarantee cover under ECLGS has
expanded by Rs 50,000 crore to the total cover of Rs 5 lakh crore.

National MSME policy

While India does not have an MSME policy so far, PM Modi-led government in
February 2022 came out with a draft in which it proposed several measures to
enhance competitiveness, infrastructure and cluster development, technology
upgradation and MSME products procurement to boost the sector.

As a result of the Indian market’s resilience and agility, businesses across the
board have picked up again and subsequently witnessed growth. This growth and
expansion came with the need for capital. Additionally, technology and digital
capabilities have advanced and so have the comfort the average person has to
navigate these technologies. So digital lending no longer seemed like a foreign
concept but a readily accessible business decision that entrepreneurs and small
business owners could make.

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RAMP Scheme

In March, 2022, the Union Cabinet approved Rs 6,062.45 crore, World Bank-
assisted programme on “Raising and Accelerating MSME Performance” (RAMP).

PMEGP extension

In May, 2022 the Centre announced the extension of the Prime Minister’s
Employment Generation Programme (PMEGP), over the 15th Finance Commission
cycle for five years from 2021-22 to 2025-26 with an outlay of Rs 13554.42 crore.
It also increased the maximum project cost from the existing Rs 25 lakh to Rs 50
lakh for manufacturing units and from the existing Rs 10 lakh to Rs 20 lakh for
service units.

Non-tax benefits extension

In October, 2022 the Union Ministry of Micro, Small and Medium Enterprises
(MSME) said that registered MSMEs can leverage non-tax benefits for an
extended period of three years, as opposed to the previous year, if there is an
upward change in their category and resulting reclassification.

The ministry said that this decision has been taken after due deliberations with
MSME stakeholders and is in line with the Aatma Nirbhar Bharat Abhiyan. Non-tax
benefits include benefits of various schemes of the government, including public
procurement policy, delayed payments, etc.

National Logistics Policy and MSME

Launched by Prime Minister Narendra Modi, the National Logistics Policy (NLP) is
expected to enhance the efficiency of the country's logistics system and ensure
the smooth movement of goods across India. The main objective of the policy is
to reduce logistics costs from the current 13-14 per cent of India's GDP to the
global cost of 7 per cent.

Also, NLP is expected to help Indian MSMEs to become globally competitive and
will form a robust logistics infrastructure for fulfilling cross-border trade.

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Meanwhile, as the country moves towards becoming a USD five trillion economy,
experts noted that it is necessary to provide easy access to formal credit.

Notably, in the last financial year (FY22), NBFC loans grew by more than 10 per
cent which was almost double of bank loans signalling the rapid demand for
simplified access to credit.

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05. Infrastructure including Social Infrastructure
Infrastructure includes all essential systems and facilities that allow the smooth
flow of an economy’s day-to-day activities and enhance the people’s standard of
living. It includes basic facilities such as roads, water supply, electricity, and
telecommunications.

Infrastructure powers businesses and connects workers to their jobs and citizens
to opportunities for healthcare and education. It creates opportunities within
communities and an economy needs reliable infrastructure to connect supply
chains and move goods and services.

Public Infrastructure

Public infrastructure refers to infrastructure facilities, systems, and structures that

are developed, owned, and operated by the government. It includes all
infrastructure facilities that are open to the general public for use.

Examples of Public Infrastructure

Transportation Infrastructure – Bridges, roads, airports, rail transport, etc.

Water Infrastructure – Water supply, water resource management, flood

management, proper sewage and drainage systems, coastal restoration
infrastructure.

Power and Energy Infrastructure – Power grid, power stations, wind turbines,
gas pipelines, solar panels.

Telecommunications Infrastructure – Telephone network, broadband network,

WiFi services.

Political Infrastructure – Governmental institutions such as courts of law,

regulatory bodies, etc.; Public security services such as the police force, defense,
etc.

Educational Infrastructure – Public schools and universities, public training

institutes.
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Health Infrastructure – Public hospitals, subsidized health clinics, etc.

Recreational Infrastructure – Public parks and gardens, beaches, historical sites,

natural reserves.

Types of Infrastructure

1. Soft Infrastructure

Soft infrastructure refers to all the institutions that help maintain a healthy
economy. These usually require extensive human capital and are service-oriented
toward the population. Soft infrastructure includes all educational, health,
financial, law and order, governmental systems (such as social security), and other
institutions that are considered crucial to the well-being of an economy.

2. Hard Infrastructure

Hard infrastructure comprises all the physical systems that are crucial to running a
modern, industrialized economy. It includes transport systems such as roads and
highways and telecommunication services such as telephone lines and broadband
systems.

3. Critical Infrastructure

Critical infrastructure makes up all the assets that are defined by the government
as being crucial to the functioning of an economy. It includes assets used for
shelter and heating, telecommunication, public health, agricultural facilities, etc.
Examples of such assets: natural gas, drinking water, medicine.

4. Economic infrastructure

Economic infrastructure directly supports economic growth. It provides product

support services such as energy, transport, communication, etc. It improves the
productivity levels in productive sectors like agriculture and industry.

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Financing of Public Infrastructure

Public infrastructure is financed in a number of ways, including publicly (through

taxes), privately (through private investments), and through public-private
partnerships.

1. Taxation

Public Infrastructure may be financed through taxes, tolls, or metered user fees.
Since public infrastructure is open for use by the general public, the general
public pays for the infrastructure facilities through taxes.

2. Investments

Public infrastructure tends to require high-cost investment projects, the returns on

which are also extremely high. Sometimes, private companies choose to invest in
a country’s infrastructure projects as part of their expansion initiatives.

For example, a power and energy company opts to build railways and pipelines in
a country where it wants to refine petroleum. The investment benefits both the
company and the domestic economy.

3. Public-Private Partnerships (PPPs)

Public-private partnerships (PPPs) are best described as a partnership or an

arrangement between two or more private organizations and the public sector. A
public-private partnership is the most popular means of financing large public
sector projects. It helps to spread risks and makes the economy prosperous by
bringing in investment opportunities, opening up employment opportunities, and
increasing the standard of living.

Social Infrastructure
A well-developed social infrastructure can make a country a better place for
everyone. It promotes high productivity and inclusive growth within society. A
proper social infrastructure helps in eradicating deep-rooted inequalities
associated with wealth, health, and living standards.

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Social infrastructure can be broadly defined as the construction and maintenance
of facilities that support social services.

Social Infrastructure includes the following 5 major components

Health
Housing,
Education
Justice
Civic & Utilities

These are the basic facilities that any society needs for ensuring citizens enjoy a
better standard of living. It has often been found that better social infrastructure is
the major driver for the progress of developed countries such as the US, and
France.

Notably, the Central government has been investing an enormous amount of

money into the development of social infrastructure by launching various
landmark programmes.

Some key initiatives introduced by the government include the

a) Pradhan Mantri Poshan Shakti Nirman (PM POSHAN), a free mid-day

meal scheme;
b) Sarva Shiksha Abhiyan (SSA), the universalisation of free elementary
education;
c) Pradhan Mantri Awas Yojana (PMAY), housing for all by 2022
beneficiaries; and
d) Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY), the
national public health insurance for low-income earners.

Social Infrastructure does not extend to the provision of social services, such as
the provision of teachers at a school or custodial services at a prison.

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Social infrastructure is focused on enhancing the quality of life; it does not include
the following:

Telecommunication
Electricity
Transportation
Energy
Water supply
Industry
Service sector

All of these sectors do not play a direct role in upgrading the productivity of
citizens. Therefore, they are not recognised as social infrastructure.

Components of Infrastructure

In an organization or for a country, a basic infrastructure includes communication

and transportation, sewage, water, education system, health system, clean
drinking water, and monetary system. A country's economic and social
development is directly dependent on a country's infrastructure.

Infrastructure supports the primary areas of industrial and agricultural output, as

well as domestic and international trade and commerce.

Some of these facilities have a direct impact on products and service production,
while others provide indirect support through bolstering the economy's social
sector.

Infrastructure bottlenecks are a constant impediment to obtaining better

economic growth. To address infrastructure bottlenecks, India requires substantial
investment from both the public and private sectors.

Because the required investment is so significant, public and private sector

investments are complementary rather than alternatives.

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The ability to raise resources (capital) in the public sector, which in turn depends
on the ability to collect user fees from consumers, determines public investment
in the sector.

Infrastructure and long term physical assets created in the economy is very
important for economic development.

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06. Globalisation- Impact on India
Globalization is a term associated with the economic sector. It is defined as the
integration of global economies through the movement of goods and services,
cross-border trade, and so on. Globalization is when businesses start operating
internationally.

Globalization in India began with the LPG reforms of 1991 and its impact can be
felt in many ways today. The LPG reforms stated that the government’s control
over the economy through liberalization, privatization, and globalization. The
economy was open to foreign players.

Following globalisation, the Indian economy expanded by increasing foreign

currency, creating new jobs, decreasing the rate of unemployment, and so on.
However, it has a negative impact on our economy. The following examples
demonstrate the impact of globalisation on the Indian economy.

Globalization has resulted in an increase in the creation of new jobs in India.

Several international companies are now operating in India, creating a slew of new
job opportunities.

Because of globalisation, India’s IT sector has been booming in recent years.

Opportunities have also increased as Indian companies collaborate with

international firms to expand their businesses and revenues.

There has also been an increase in foreign investment. The increase in foreign
reserves has resulted in more companies investing in India.

Globalization has also had an impact on India’s culture and philosophy, as the
western way of life and ideas have become more prevalent.

India got foreign direct investment, transfer of technology, increasing choice for
Indian consumers, and new jobs which reduced unemployment in India. So, we
can say that the impact of globalization on the Indian economy is both positive
and negative.

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The impact of globalization on the Indian economy can be seen through an
increase in foreign investment and an increase in jobs and opportunities. Due to
this, the unemployment rate is decreasing and the economy in getting a boost.

Globalisation has improved Indian economy by improving foreign reserves and

investments. It has opened up doors for the expansion of companies as new
technologies are coming to the country.

Advantages of Globalisation

Helps in the development of underdeveloped or developing countries.

It may generate more employment opportunities at the national and global levels.

Access to various resources may result in the development of the manufacturing

sector.

Increased cooperation with other countries to improve the economy, defense,

healthcare, education, etc.

Disadvantages of Globalization

It may lead to the exploitation of resources from underdeveloped or developing

countries.

It may result in bad environmental impacts in underdeveloped or developing

countries.

Unbalanced growth of the countries if the effects of globalization are not

managed carefully.

Competition between countries can disadvantage organisations, individuals, etc.

Effects of Globalisation on Agriculture

Agriculture is still being impacted by globalisation. It can contribute to the

national economy with government support and policies that benefit agricultural
activities.

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Here are some of the agricultural effects of globalisation:

Any event in another part of the world can have an impact on the price of
agricultural commodities in India.

Possibility of Exploitation: Despite low labour costs and high productivity,

our products cannot compete with heavily subsidised agricultural products
from other countries.

The availability of modern agricultural technologies such as food processing

industries, farming equipment, etc.

Increased output and productivity

National Income Growth

New job opportunities

A rise in trade share Growth of agricultural exports

Extraction of natural resources

The process of contact and integration between individuals, organisations, and

governments on a global scale is known as globalisation. Since the 18th century,
globalisation has accelerated due to advancements in communications and
transportation technologies.

The impact of globalisation can be seen during colonisation. In the nineteenth

century, European traders came to India to trade Indian spices exported to various
countries. Farmers in south India were encouraged to grow these crops due to
high demand. Staple crops were profitable and had a good export potential in the
limited market.

When the Indian economy opened up to the global market in 1990, Indian
agricultural products struggled to compete, despite being a major producer of
rice, cotton, coffee, rubber, tea, jute, and spices. This was due to the fact that
agriculture is heavily subsidised in many developed countries. The need of the
hour is to help marginal farmers by providing subsidies and making agriculture
profitable.

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Role of MNCs in the Globalization

Multi National Companies (MNCs) play a crucial role in the globalization process.
In order to integrate the markets despite their distance, they also have direct
interactions with surrounding small and regional manufacturers. Their initiatives
foster investments and cross-border commerce of goods, which strengthens
international ties.

Liberalization, Privatization and Globalization

To make the economy more open, guarantee more economic and financial
independence, and integrate the economy on a global scale, India adopted a
Global model. To make the economy more efficient and less state-owned and
controlled, India opened to the privatization of state-owned ventures.

Popularly known as the LPG Reforms of 1991, it changed the Indian way of doing
business. The three terms mean:

Liberalization: A liberalized economy ensures greater freedom from any physical

or direct control extended by the country’s government.

Privatization: In an economic system in which the elements are privatized, there

would be private sector participation in the case of state-owned enterprise
ownership

Globalization: A globalized economy would be more open and would provide

more economic freedom. It will also have a promising scope of economic
integration on a global scale.

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07. Economic Reforms
Economic Reforms are defined as changes in policies that aim at improving the
economic efficiency of a Country. The need for Economic Reforms essentially
arises from distortions that are caused either due to international regulations or
by the Government. Economic Reforms occur when there is deregulation or a
reduction in the size of the Government. It is also done by eliminating or
decreasing the market distortion in specific sectors of the Economy.

The Economic Reforms encompass changes in Economy-wide policies such as tax

and competition policies. These Reforms are centered around bringing Economic
efficiency and not geared towards eradicating other issues like unemployment or
equity growth.

In the year 1991, India saw a shift in its economic policies, making it a landmark
year in the history of the Indian Economy. The humongous Economic crisis
suffered by India in 1991 was uncontrollable with the situation getting bleak
gradually. The result was that inflation reached its peak with daily use
commodities becoming extremely expensive, striking people.

Reasons and Effects of Economic Crisis of 1991

The primary reason for the crisis in 1991 can be attributed to a decline in exports
which started in the 1980s. India had to pay in dollars for importing any
commodity such as petroleum and the Country’s earnings in dollars from export
were not meeting this need.

The debilitating effects of the Economic crisis had a cascading effect on India’s
failing Economy.

The foreign currency reserves kept going down, which posed a significant crisis of
balance of payment in front of the Country.

Government income was not enough to resolve these issues as the revenue
generated through income tax was quite inadequate.

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India had to borrow a massive amount of 7 billion USD from IBRD (International
Bank for reconstruction and development). It is the lending arm of the World Bank
and the IMF (International monetary fund). India got this loan on the condition
that it would liberalize its Economic policy and make way for international trade in
India.

New Economic Reforms in India

India has seen many Economic Reforms since the late 1970s in the form of
liberalization. However, a whole battery of Economic Reforms came about in 1991,
which had a direct effect on the growth rate of the Country. The new Economic
Reforms refer to the neo-liberal policies that the Indian Government introduced in
1991.

The three main pillars of this Reform were:

Liberalization

Privatization

Globalisation

Liberalization

Right from the 1980s India has witnessed significant Reforms which fall under the
following two groups.

Stabilization Measures - These are short-term measures that are aimed at

reducing the crisis by maintaining foreign exchange reserves.

Structural Reform Policies - These are long-term measures that work at the root
of Economic policies. They are geared towards enhancing international
competitiveness and discarding hindrances like rigid rules and restraining
regulations.

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The license-raj was a bottleneck for the Economic growth of India. Breaking these
shackles was the major part of the liberalization of India's Economy. Many
changes were done in the following areas.

Import of technology.

Protection of domestic industries from foreign competition by imposing

quantitative restrictions on imports.

Import of capital goods along with an affordable rate of public investment.

The industrial licensing system was eradicated barring a few industries like
alcohol, drugs, cigarettes, harmful chemicals, industrial explosives,
aerospace, electronics, and pharmaceuticals.

India allowed investment by FII (foreign institutional investors) like mutual

funds, merchant Bankers, pension funds, etc. in the Indian financial arena.

The following are some of the beneficial effects of liberalization of the Economy in
India.

Rise in stock market values.

India is now one of the prominent exporters of IT products and services.

There was a reduced political risk for the investors.

Privatization

Privatization means giving private players a chance into segments that were
earlier monopolized by the Government. This included transforming Government
companies into private companies by the following three means.

The Government withdrew from the management and ownership of the company.

Public sector companies were sold to private sector companies.

Disinvestment, i.e., selling a portion of the Government companies’ equity to the

public.

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The Government also vested the autonomy of managerial decisions to some
private companies in the public sector industries to improve their efficiency. Some
of the highly regarded industries were given the status of:

Maharatnas - The Indian oil corporation Ltd. and Steel Authority of India
Ltd. are some of the industries given this status.

Navratnas - This includes Hindustan Aeronautics Ltd., National Aluminum

Company (NALCO), and Mahanagar Telephone Nigam Ltd.

Miniratnas - Some of the industries given this status are BSNL (Bharat
Sanchar Nigam Ltd.), IRCTC (Indian railway catering and tourism
corporation) Ltd., and the Airport Authority of India.

Globalization

Before 1991, there were no foreign players in the Indian Economy, and Indian
companies competed only with one another. After 1991 the Indian domestic
market opened up for foreign companies and was integrated with the global
market. It raised competition for Indian companies, but at the same time, it
brought a flow of foreign money to India in the form of investments. Globalization
worked two ways, i.e., now Indian companies could also get into foreign business
and invest in other countries. For example, ONGC Videsh has branches in 16
different countries, HCL in 31 countries, and Tata Steel in 26 countries.

Conclusion

India was a closed economy until 1991 which means it doesn't engage in trade
activity with other countries. The 1991 BOP crisis made India go for new Economic
Reforms on the recommendation of the International Monetary Fund (IMF)

Liberalization resulted in an inflow of foreign investments in the Country.

Privatization allowed competition and ended the Government’s monopoly.

Globalization resulted in the expansion of the global supply chain.

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08. Foreign Trade Policy
India’s Foreign Trade Policy is a set of guidelines for goods and services imported
and exported.

These are developed by the Directorate General of Foreign Trade (DGFT), the
Ministry of Commerce and Industry's regulating body for the promotion and
facilitation of exports and imports.

In line with the 'Make in India,' 'Digital India,' 'Skill India,' 'Startup India,' and 'Ease
of Doing Business' initiatives, the Foreign Trade Policy (2015-20) was launched on
April 1, 2015.

It provides a framework for increasing exports of goods and services, creating

jobs, and increasing value addition in the country.

The foreign trade policy statement outlines the market and product strategy as
well as the steps needed to promote trade, expand infrastructure, and improve
the entire trade ecosystem.

It aims to help India respond to external problems while staying on top of fast-
changing international trading infrastructure and to make trade a major
contributor to the country's economic growth and development.

Objectives of India's Foreign Trade Policy

India's Foreign Trade Policy boosts a country's revenue by promoting exports,

which in turn aids in improving the country's balance of payments.

It promotes national development and economic growth.

Make the most of global market prospects by accelerating economic activity.

Provide access to raw materials, components, intermediates (goods used as inputs

for the creation of other goods), consumables, and capital goods to support long-
term economic growth.

India's agriculture, industry, and services should be strengthened.

Encourage stakeholders to aim for worldwide quality standards in order to create

jobs.

Provide high-quality consumer goods at a fair price.

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In view of the Covid-19 situation, the government had already extended the
Foreign Trade Policy (FTP) 2015-20 through Mar 31, 2022.

In 2022, India will implement its foreign trade policy. For the next five years, the
policy will be the guiding philosophy for foreign trade.

The work of formulating policy will be significantly more difficult in the face of
global pressure, Covid-19, and the aim of a self-sufficient India.

Features of Foreign Trade Policy 2015-2020 :

MEIS (Merchandise Export from India Scheme) and SEIS (Service Exports from
India Scheme) have been launched.

Goods:

Previously, there were five separate schemes (Focus Product Scheme, Market
Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive
Scrip, and VKGUY) for rewarding goods exports with various types of duty scrips,
each with its own set of requirements.

Duty free scrips: These are paper authorizations that allow the holder to import
inputs that are used to manufacture items that are exported, or to manufacture
machinery that is used to produce such goods, without having to pay duty equal
to the scrip's printed value.

All of these programmes have been consolidated into a single plan, the
Merchandise Export from India Scheme ("MEIS"), under the Foreign Trade Policy,
and there are no conditions attached to scrips issued under the MEIS.

Services:

The Service Exports from India Scheme ("SEIS") has taken the place of the Served
From India Scheme. SEIS compensates all service providers of notified services
who deliver services from India, independent of the service provider's composition
or profile.

Special Economic Zones (SEZs): India's strategy provides expanded incentives for
SEZs under MEIS and SEIS.

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Export Houses: The terms "Export House," "Star Export House," "Trading House,"
"Star Trading House," and "Premier Trading House" have been condensed to "1, 2,
3, 4, and 5 Star Export House certificates."

Status Holders: It is proposed that business leaders who excel in international

commerce and have successfully contributed to India's foreign trade be
recognised as Status Holders and granted unique privileges to facilitate their
trade transactions, reducing transaction costs and time.

Resolving Complaints: A new chapter on Quality Complaints and Trade Disputes

was added to the Foreign Trade Policy to help settle quality complaints and trade
disputes between exporters and importers.

No conditionality for scrips: There are no conditions on any of the scrips issued
under these programmes.

The countries have been divided into three groups for the purpose of awarding
incentives under MEIS, with reward rates ranging from 2% to 5%.

The selected Services would be awarded at a rate of 3% and 5% under SEIS.

'Make in India,' 'Digital India,' and 'Skills India' objectives will be connected with
FTP.

State governments will be included in an export promotion mission.

Agriculture and village industry products will be supported at rates of 3% and 5%

globally under the MEIS.

The board of trade and the council for trade development (CTD) and promotion
are two institutional mechanisms being put in place for regular communication
with stakeholders.

While the board of trade will serve as an advisory body, the CTD will include state
and local government representatives.

The Centre for Research in International Trade is being developed not just to
boost India's research skills in the domain of international trade, but also to assist
developing countries to voice their opinions and concerns from a strong position
of knowledge.

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The Ministry of Commerce and Industry expanded the scope of MEIS and SEIS in
the mid-term review of FTP 2015–20, increased the MEIS incentive for ready-made
garments and made-ups by 2%, increased the SEIS incentive by 2%, and extended
the validity of Duty Credit Scrips from 18 to 24 months. The FTP 2015-20 has been
extended until March 31, 2022.

Regulation of Foreign Trade Policy in India

The Directorate General of Foreign Commerce (DGFT) and its regional offices,
which are part of the Ministry of Commerce and Industry, Department of
Commerce, Government of India, control export trade.

The DGFT announces policies and procedures that must be followed for exports
from India on a regular basis.

Benefits of Foreign Trade Policy 2015-2020

It combined a number of export incentives with various qualifying requirements

into two schemes: the Merchandise Exports from India Scheme (MEIS) and the
Services Exports from India Scheme (SEIS) (SEIS).

Under these two schemes, it provided export incentives in the form of duty credit
scrips, which exporters could use to pay import duties. The scrips are freely
transferable, meaning that if one exporter no longer requires them, they can be
passed on to another.

Under the Export Promotion Capital Goods Scheme (EPCG), it reduced the export
obligation for capital goods produced from local producers from 90% to 75%.

It permitted producers who are "status holders" (entrepreneurs who have helped
India become a significant export player as determined by the DGFT) to self-
certify their manufactured items as coming from India. This qualifies them for
special treatment under a number of bilateral and regional trade agreements.

It found 108 micro, small, and medium enterprise (MSME) clusters that could
benefit from targeted interventions in order to enhance exports.

It advocated the use of electronic technology to process various DGFT licences

and applications.

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Limitations of Foreign Trade Policy 2015-2020

Acting on Washington's protest, a WTO dispute settlement panel ruled in 2019

that India's export subsidy measures are in violation of WTO norms and must be
repealed.

Tax incentives under the popular MEIS and SEIS programmes were among them.
The panel found that because India's per capita gross national product exceeds
$1,000 per year, it may no longer grant subsidies based on export performance.
This debate reaffirms India's growing belief that it needs to move away from
subsidies and find new methods to assist its exporters.

In India, there is a strong view (supported by its trade policy) that free trade
agreements (FTAs) have failed to benefit the country.

One sign of this was India's decision not to join the Regional Comprehensive
Economic Partnership (RCEP), the world's largest free trade agreement, in
November 2020. Experts and economists say that this has cost India a good
opportunity to become a significant exporter.

Expectations from the new Foreign Trade Policy 2022-2027

International trade was severely harmed by Covid-19. In April 2020, India's exports
decreased by a record 60%, while imports fell by 59%. Despite the fact that the
situation has improved, the path to recovery remains lengthy and difficult. As a
result, the new trade policy must deliver on its promises. Some main expectations,
based on input from traders, trade associations, members of Parliament, and a
government-appointed high-level advisory body, are:

WTO-compliant tax incentives: With incentives under MEIS and SEIS in the
cloud, WTO-compliant tax benefits are a must.

The government has announced the RoDTEP (Remission of Duties or Taxes on

Export Products) scheme, which will take effect on January 1, 2021.

It takes the place of MEIS. The new scheme's rates and terms have yet to be
revealed.

Access to credit: Credit availability has long been a need of exporters, particularly
MSMEs.

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Because MSMEs lack appropriate collateral, formal financial institutions such as
banks are hesitant to lend to them. Alternative lending outlets, such as finance
technological start-ups, may be made available as a result of the policy.

The advisory council recommends increasing the Export-Import Bank of India's

borrowing limitations.

Infrastructure Upgrade: China's network of ports, motorways, and high-speed

trains, which are among the greatest in the world, is one of the reasons it is a
manufacturing and export powerhouse.

By updating existing ports, warehouses, quality testing and certification centres,

and developing new ones, India can learn from its neighbour and strengthen its
deteriorating infrastructure.

The Trade Infrastructure for Export Sector was started in 2017 for a three-year
period with the goal of constructing infrastructure to promote exports. Many in
the business are hoping for an extension.

Digitisation and e-commerce

India requires innovative trading procedures as a result of Covid-19 breaking old

supply channels. There are two approaches to this: digitization and e-commerce.

Making typical import-export processes paperless is a good place to start with

digitization. NASSCOM, for example, suggests an online system for Importer
Exporter Code (IEC) holders to update their information (mobile numbers, e-mail
IDs, etc).

It also makes a case for promoting e-commerce exports by incorporating e-

commerce export platforms into Niryat Bandhu (a scheme for mentoring
international trade entrepreneurs),

establishing e-commerce export promotion cells within export promotion

councils, and establishing e-Commerce Export Zones to promote MSMEs.

Export Awareness: Indian exporters are sometimes thwarted not by a lack of trade
prospects, but by a lack of awareness of those opportunities. Government
workshops and awareness programmes can be included in the trade policy to
educate and inform traders about international rules and standards, global
markets, intellectual property rights, patents, and geographical indications (GI).

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Thus the current Foreign Trade Policy aims to increase India's market share in
existing markets and products while also pursuing new products and markets. In
addition, India's Foreign Trade Policy envisions assisting exporters in maximizing
the benefits of GST, closely monitoring export performance, boosting cross-
border trading ease, raising revenue from agriculture-based exports, and
promoting exports from MSMEs and labour-intensive industries.

Tail Notes

NASSCOM - The National Association of Software and Service Companies is an

Indian non-governmental trade association and advocacy group, focused mainly
on the technology industry of India.

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09 Foreign Investments and Economic Development
Foreign direct investment (FDI) is an investment made by a company or an
individual in one country into business interests located in another country. FDI is
an important driver of economic growth.

Foreign Investment contributes to the overall growth of a country's economy.

Foreign investment brings capital and helps the domestic workforce get access to
new technologies and skills. It will help in improving their productivity while also
developing the quality of goods and services produced.

Any investment that is made in India with the source of funding that is from
outside of India is a foreign investment. By this definition, the investments that are
made by Foreign Corporates, Foreign Nationals, as well as Non-Resident Indians
would fall into the category of Foreign Investment.

Methods of Foreign Investment

There are two methods or strategies for this investment - Greenfield Investment
and Brownfield Investment.

Greenfield Investment - In this strategy, the company starts its business

operation in another country from scratch. For example, Domino’s and
McDonald’s are US-based companies that started their business in India from
zero. Currently, they are leading in their segments.

Brownfield Investment - In this strategy, the company does not create its
business from scratch. Instead, they choose mergers or acquisitions. Recently,
another US-based company, Walmart Inc acquired Flipkart, an Indian company,
thus acquiring all its assets and liabilities.

Types of Foreign Investments

Funds from foreign country could be invested in shares, properties, ownership /

management or collaboration. Based on this, Foreign Investments are classified as
below.

Foreign Direct Investment (FDI)

Foreign Portfolio Investment (FPI)

Foreign Institutional Investment (FII)

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Foreign Direct Investment (FDI) is an investment made by a company or
individual who us an entity in one country, in the form of controlling ownership in
business interests in another country. FDI could be in the form of either
establishing business operations or by entering into joint ventures by mergers and
acquisitions, building new facilities etc.

Foreign Portfolio Investment (FPI) is an investment by foreign entities and

non-residents in Indian securities including shares, government bonds, corporate
bonds, convertible securities, infrastructure securities etc. The intention is to
ensure a controlling interest in India at an investment that is lower than FDI, with
flexibility for entry and exit.

Foreign Institutional Investment (FII) is an investment by foreign entities in

securities, real property and other investment assets. Investors include mutual
fund companies, hedge fund companies etc. The intention is not to take
controlling interest, but to diversify portfolio ensuring hedging and to gain high
returns with quick entry and exit.

The differences in FPI and FII are mostly in the type of investors and hence the
terms FPI and FII are used interchangeably.

Foreign Direct Investment (FDI)

Any investment from an individual or firm that is located in a foreign country into
a country is called Foreign Direct Investment. However, two other types of FDI
have emerged—Conglomerate and Platform FDI.

Horizontal: Under this type of FDI, a business expands its inland operation to
another country. The business undertake the same activities but in foreign
country.

Vertical: In this case, a business expands into another country by moving to a

different level of supply chain. Thus business undertakes different activities
overseas but these activities are related to main business.

Conglomerate: Under this type of FDI, a business undertakes unrelated business

activities in a foreign country. this type is uncommon as it involves the difficulty of
penetrating a new country and an entirely new market.

Platform: Here, a business expands into another country but the output from the
business is then exported to a third country.

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Generally, FDI is when a foreign entity acquires ownership or controlling stake in
the shares of a company in one country, or establishes businesses there.

It is different from foreign portfolio investment where the foreign entity merely
buys equity shares of a company.

In FDI, the foreign entity has a say in the day-to-day operations of the company.

FDI is not just the inflow of money, but also the inflow of technology, knowledge,
skills and expertise/know-how.

It is a major source of non-debt financial resources for the economic development

of a country.

FDI generally takes place in an economy which has the prospect of growth and
also a skilled workforce.

FDI has developed radically as a major form of international capital transfer since
the last many years.

The advantages of FDI are not evenly distributed. It depends on the host country’s
systems and infrastructure.

The determinants of FDI in host countries are:

Policy framework

Rules with respect to entry and operations/functioning

(mergers/acquisitions and competition)

Political, economic and social stability

Treatment standards of foreign affiliates

International agreements

Trade policy (tariff and non-tariff barriers)

Privatisation policy

Foreign Direct Investment (FDI) in India

The investment climate in India has improved tremendously since 1991 when the
government opened up the economy and initiated the LPG strategies. The
improvement in this regard is commonly attributed to the easing of FDI norms.
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Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country. Currently, India ranks in the list of the top
100 countries in ease of doing business.

FDI Routes in India - There are two routes through which FDI flows into India -
Automatic Route and Government Route

Automatic Route FDI

In the automatic route, the foreign entity does not require the prior approval of
the government or the RBI. Examples: Medical devices: up to 100% ; Thermal
power: up to 100% ; Services under Civil Aviation Services such as Maintenance &
Repair Organizations ; Insurance: up to 49% ; Infrastructure company in the
securities market: up to 49% ; Ports and shipping ; Railway infrastructure ; Pension:
up to 49% ; Power exchanges: up to 49% ; Petroleum Refining (By PSUs): up to
49%.

Government Route FDI

Under the government route, the foreign entity should compulsorily take the
approval of the government. It should file an application through the Foreign
Investment Facilitation Portal, which facilitates single-window clearance. This
application is then forwarded to the respective ministry or department, which
then approves or rejects the application after consultation with the DPIIT.

Sectors where FDI is prohibited

There are some sectors where any FDI is completely prohibited. They are -
Agricultural or Plantation Activities (although there are many exceptions like
horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.) ;
Atomic Energy Generation ; Nidhi Company; Lotteries (online, private,
government, etc.); Investment in Chit Funds; Trading in TDR’s; Any Gambling or
Betting businesses; Cigars, Cigarettes, or any related tobacco industry; Housing
and Real Estate (except townships, commercial projects, etc.)

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New FDI Policy

According to the new FDI policy, an entity of a country, which shares a land
border with India or where the beneficial owner of investment into India is
situated in or is a citizen of any such country, can invest only under the
Government route.

A transfer of ownership in an FDI deal that benefits any country that shares a
border with India will also need government approval.

Investors from countries not covered by the new policy only have to inform the
RBI after a transaction rather than asking for prior permission from the relevant
government department.

The earlier FDI policy was limited to allowing only Bangladesh and Pakistan via the
government route in all sectors. The revised rule has now brought companies
from China under the government route filter.

Benefits of FDI

FDI brings in many advantages to the country. Some of them are discussed below.

Brings in financial resources for economic development.

Brings in new technologies, skills, knowledge, etc.

Generates more employment opportunities for the people.

Brings in a more competitive business environment in the country.

Improves the quality of products and services in sectors.

Disadvantages of FDI

However, there are also some disadvantages associated with foreign direct
investment. Some of them are:

It can affect domestic investment, and domestic companies adversely.

Small companies in a country may not be able to withstand the onslaught of

MNCs in their sector. There is the risk of many domestic firms shutting shop as a
result of increased FDI.

FDI may also adversely affect the exchange rates of a country.

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Government Measures to increase FDI in India

Government schemes like production-linked incentive (PLI) scheme in 2020 for

electronics manufacturing, have been notified to attract foreign investments.

In 2019, the amendment of FDI Policy 2017 by the government, to permit 100%
FDI under automatic route in coal mining activities enhanced FDI inflow.

FDI in manufacturing was already under the 100% automatic route, however, in
2019, the government clarified that investments in Indian entities engaged in
contract manufacturing is also permitted under the 100% automatic route
provided it is undertaken through a legitimate contract.

Further, the government permitted 26% FDI in digital sectors. The sector has
particularly high return capabilities in India as favourable demographics,
substantial mobile and internet penetration, massive consumption along
technology uptake provides great market opportunity for a foreign investor.

Foreign Investment Facilitation Portal (FIFP) is the online single point interface of
the Government of India with investors to facilitate FDI. It is administered by the
Department for Promotion of Industry and Internal Trade, Ministry of Commerce
and Industry.

FDI inflow is further expected to increase as foreign investors have shown interest
in the government’s moves to allow private train operations and bid out airports.

Valuable sectors such as defence manufacturing where the government enhanced

the FDI limit under the automatic route from 49% to 74% in May 2020, is also
expected to attract large investments going forward.

FDI is a major driver of economic growth and an important source of non-debt

finance for the economic development of India. A robust and easily accessible FDI
regime, thus, should be ensured.

Economic growth in the post-pandemic period and India’s large market shall
continue to attract market-seeking investments to the country.

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Differences between FDI and FII are:

FDI involves a direct investment in a company with the intention of acquiring

management control or influence, while FII involves investment in securities or
assets of a foreign company.

FDI results in a long-term interest in the investee company, whereas FII

investment is usually short-term and focused on the secondary market.

FDI is subject to stricter regulations compared to FII, which allows for a relatively
easy entry and exit from investment.

FDI brings in not just finance, but also technical knowledge and direct
involvement in the day-to-day operations of the foreign company, while FII
investment primarily provides financial benefits.

The maximum permissible investment by an FII in an Indian company is 24% of

the paid-up capital, with a 2% lower cut-off, while there is no such limit for FDI.

FDI is considered a more stable form of foreign investment as compared to FII,

which is known as “hot money” due to its quick entry and exit from investments.

Difference between FPI and FII in India

Foreign Portfolio Investors (FPIs) are those foreign investors making an

investment in Indian financial assets, including shares, bonds, debentures etc.

FPIs includes investment groups of Foreign Institutional Investors (FIIs), Qualified

Foreign Investors (QFIs) and subaccounts etc. FPI includes all investment
categories which makes portfolio investment including FII, small investors
included under QFI and miscellaneous investment entities.

FPI = FIIs + QFIs and other small investors.

Foreign Institutional Investors (FIIs) - An important type of Foreign Portfolio

Investors is the Foreign Institutional Investors or FIIs. The FIIs comprises
institutions like Pension Funds, Mutual Funds, Insurance Companies etc. They are
a part of the broad FPI category. Significance of the FIIs is that they are big
investors as they are institutions like mutual funds, insurance companies etc.

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Tail Notes

QFI stands for qualified foreign investor. A QFI is an individual, firm, fund that
is located outside of the country in which the investment is being made. These
firms can directly make investments in the foreign markets without the
requirement of opening a sub-accounts with other FIIs.

QFIs offer an easier route for foreign investors to invest in international stock
markets without having to open sub-accounts and complying with the strict high
net worth requirements. However, in order to invest, a QFI must open a demat
account and trade account with depository participant firm.

The demat account is the account that is used to transfer purchased shares (in a
paperless manner).

A trade account is the account that allows the investor trade shares online.

In order to become a QFI, the investor must be from a country that adheres to
anti-money laundering as well as anti-terrorist financing such as being a member
of the Financial Action Task Force (FATF).

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10. International Economic Organizations
International organizations are legal entities formed by formal political
agreements between members that have the status of international treaties; their
existence is recognized by law in their member countries, and they are not treated
as resident institutional units of the countries in which they are located. They
serve as catalysts for the creation of coalitions among its member countries. They
also make it easier for member countries to cooperate and coordinate.

The International Telecommunication Union was the earliest and oldest

international organization, having been established under a treaty and creating a
permanent secretariat with a global membership (founded in 1865).

The League of Nations was the first general international organization, addressing
a wide range of issues.

Organizations, such as the United Nations, the World Health Organisation, and
NATO, may be constituted by treaty or as an instrument governed by
international law and with its legal personality.

International organizations are formed of primarily member states, but may also
include other entities, such as other international organizations.

Observer status can also be granted to entities (including nations).

The Bretton Woods Conference, 1944

The Bretton Woods Conference, officially known as the United Nations

Monetary and Financial Conference, was a gathering of delegates from 44
nations that met from July 1 to 22, 1944 in Bretton Woods, New Hampshire, to
agree upon a series of new rules for the post-WWII international monetary
system. The two major accomplishments of the conference were the creation of
the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD).

Bretton Woods System

The Bretton Woods System was the first system to control the exchange rate of
currencies between countries. It meant that each country had to maintain a
monetary policy that kept its currency's exchange rate within a predetermined
range in terms of gold—plus or minus one percent.

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The IMF and the World Bank were designated as Bretton Woods Institutions
under the Bretton Woods Agreement.

Both organizations were initially founded in December 1945 and have served as
significant pillars for international capital financing and trade activities ever since.

The Bretton Woods Twins (The Bretton Woods Sisters) refers to the two
multilateral organizations created at the Bretton Woods Conference in 1944. Both
twin organizations functioned to enact and maintain the Bretton Woods system of
proscribed international currency exchange rates. They are the International Bank
for Reconstruction and Development and the International Monetary Fund.

Bretton Woods Trio

IMF (International Monetary Fund), the IBRD (International Bank for

Reconstruction and Development) later called the World Bank, and the ITO
(International Trade Organization) later replaced by GATT and WTO are known as
Bretton Woods Trio.

World Bank Group

The World Bank Group is one of the world’s largest sources of funding and
knowledge for developing countries. Its five institutions share a commitment to
reducing poverty, increasing shared prosperity, and promoting sustainable
development. The World Bank Group is a global partnership of 189 countries and
five constituent organizations committed to alleviating poverty and promoting
prosperity.

World Bank Group consists the following 5 Institutions :

1. IBRD - The International Bank for Reconstruction and Development

2. IDA - The International Development Association

3. IFC - The International Finance Corporation

4. MIGA - The Multilateral Investment Guarantee Agency

5. ICSID - The International Centre for Settlement of Investment Disputes

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World Bank - The International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA), are known as the World
Bank.

The World Bank is an international financial institution that lends and gives money
to the governments in low- and middle-income nations to fund capital projects. It
is headquartered in Washington D.C, United States.

Developmental Institutions of the World Bank

A) International Monetary Fund

The International Monetary Fund (IMF) is an organization of 190-countries,

dedicated to global monetary cooperation, financial stability, international trade
facilitation, high employment and long-term economic growth, and poverty
reduction.

The IMF was established on December 27, 1945, with 29 member countries
agreeing to be bound by the treaty. On March 1, 1947, it launched its financial
operations.

B) Asian Development Bank

The Asian Development Bank (ADB), headquartered in Manila (Philippines), was

established in 1966. It is made up of 67 Asian and Pacific members.

Japan owns 15.677% of ADB, followed by the United States (15.567%), China
(6.473%), and India (6.473%).

The Asian Development Bank invests in infrastructure, health, and government

administration to help countries combat climate change and manage natural
resources.

C) New Development Bank

The New Development Bank (NDB), formerly known as the BRICS Development
Bank, is established by the BRICS countries (Brazil, Russia, India, China, and South
Africa).

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It is a multilateral development bank founded by the BRICS countries in Fortaleza,
Brazil, at the 6th BRICS Summit in 2014. It was created to promote infrastructure
and sustainable development efforts in the BRICS and other developing emerging
economies, with a focus on innovation and cutting-edge technology, to boost
growth. Shanghai, China is where the headquarters is located.

D) Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank

whose mission is to improve Asia's social and economic conditions.

The AIIB Articles of Agreement, a global treaty that took effect on December 25,
2015, regulates it.

The parties to the agreement make up the Bank's membership (57 founding
members). It was established in January 2016 and is based in Beijing, China.

E) Organisation for Economic Co-operation and Development (OECD)

The Organisation for Economic Co-operation and Development (OECD) is a group

of 38 countries that work together to promote economic development.

The Organisation for Economic Cooperation and Development (OECD) was

established in 1961 to promote global trade and economic advancement.

It gives its member countries a place to share policy experiences, look for
solutions to common challenges, discover and share best practices, and
coordinate domestic and international policies.

The Organisation for Economic Cooperation and Development (OECD) is a think-

tank or monitoring group that is an official Permanent Observer to the United
Nations. The OECD's headquarters are located in Paris, France.

F) G20

It is an informal organization comprising 19 countries and the European Union

(EU), as well as officials from the World Bank and the International Monetary Fund.

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It does not have a fixed headquarters or secretariat.

The membership consists of a mix of the world's greatest advanced and emerging
economies, representing over two-thirds of the global population, 85% of global
GDP, 80% of the worldwide investment, and over 75% of global commerce.

The member countries include Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia,
Saudi Arabia, South Africa, Turkey, the UK, the US, and EU.

G) G7

The G7 or Group of Seven is a group of the world's seven most advanced

economies (IMF). Canada, the United States, the United Kingdom, France,
Germany, Japan, and Italy are the seven countries.

The Group of Seven is an informal group of advanced/developed countries that

meets once a year to discuss issues such as global economic policy, international
security, and energy policy.

The G7 lacks a written constitution and a permanent headquarters. Leaders'

choices at annual summits are not legally binding.

Critics argue that the yearly summits' choices and talks are unfollowed and that
they exclude major growing nations.

H) World Trade Organisation

The World Trade Institution (WTO) is the sole international organization that deals
with international trade rules.

Its key responsibilities include ensuring seamless global trade and resolving
concerns or disputes that may have an impact on global trade.

The World Trade Organisation (WTO) has 164 members (including the European
Union) and 23 observer countries (like Iran, Iraq, Bhutan, Libya, etc).

The WTO's global system, which functions under the principle of non-
discrimination, decreases trade obstacles through negotiation.

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The consequence is lower production costs (due to lower import costs), lower
prices for finished goods and services, more choice, and, eventually, a lower cost
of living.

An international organization can provide them with security, trade opportunities,

stronger relationship prospects, and, ultimately, a stronger voice in the
international arena.

Smaller states can benefit from international organizations by gaining economic

clout.

They have aided in the establishment of order and the mitigation of destructive
inter-state conflicts.

International organizations perform a variety of responsibilities in the evolution of

international law, including offering negotiation venues, such as resolving
disputes.

INGO and IGO

To differentiate themselves from international non-governmental organizations

(INGOs), which are non-governmental organizations (NGOs) that operate globally,
international organizations are often referred to as intergovernmental
organizations (IGOs). International charitable organizations such as the World
Organisation of the Scout Movement, the International Committee of the Red
Cross, as well as lobbying groups representing global corporations, fall into this
category.

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11. Climate Change
The UNFCCC secretariat (UN Climate Change) is the United Nations entity tasked
with supporting the global response to the threat of climate change. UNFCCC
stands for United Nations Framework Convention on Climate Change.

The secretariat of the United Nations Framework Convention on Climate Change

is located on the UN Campus in Bonn, Germany.

The UNFCCC, signed in 1992 at the United Nations Conference on Environment

and Development also known as the Earth Summit, the Rio Summit or the Rio
Conference. The UNFCCC entered into force on March 21, 1994.

Principles of UNFCCC

Promoting transparency, accuracy, completeness, consistency and comparability;

Avoiding duplication of work and undue burden on Parties and the secretariat;
Ensuring that Parties maintain at least the frequency and quality of reporting in
accordance with their respective obligations under the Convention.

UNFCCC and Kyoto Protocol (also known as The Paris Climate Agreement)

In short, the Kyoto Protocol operationalizes the United Nations Framework

Convention on Climate Change by committing industrialized countries and
economies in transition to limit and reduce greenhouse gases (GHG) emissions in
accordance with agreed individual targets.

The Paris Climate Agreement of 2015, which replaced the Kyoto Protocol,
includes commitments from all major GHG-emitting countries to reduce their
climate-altering pollution.

The Conference of the Parties (COP) - Article 7.2 defines the COP as the
“supreme body” of the Convention, as it is its highest decision-making authority.
The climate change process revolves around the annual sessions of the COP.

Subsidiary Bodies (SBs)

The Convention establishes two permanent subsidiary bodies (SBs), namely the
Subsidiary Body for Scientific and Technological Advice (SBSTA), by Article 9, and
the Subsidiary Body for Implementation (SBI), by Article 10. These bodies advise
the COP.

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The SBSTA’s task is to provide the COP “with timely advice on scientific and
technological matters relating to the Convention”.

The SBI’s task is to assist the COP “in the assessment and review of the effective
implementation of the Convention”

COP27 (The 27th Conference of the Parties)

The 2022 United Nations Climate Change Conference or Conference of the Parties
of the UNFCCC, more commonly referred to as COP27, was the 27th United
Nations Climate Change conference, held from November 6 until November 20,
2022 in Sharm El Sheikh, Egypt. COP27 brought together countries from around
the world to increase ambition and implement existing goals and strengthen
commitments.

Climate Finance

Climate Finance refers to local, national, or transnational financing—drawn from

public, private and alternative sources of financing—that seeks to support
mitigation and adaptation actions that will address climate change.

The UNFCCC, Kyoto Protocol, and the Paris Agreement call for financial assistance
from Parties with more financial resources (Developed Countries) to those that are
less endowed and more vulnerable (Developing Countries).

This is in accordance with the principle of “Common but Differentiated

Responsibility and Respective Capabilities” (CBDR).

In COP26, new financial pledges to support developing countries in achieving the

global goal for adapting to the effects of climate change were made.

New rules for the international carbon trading mechanisms agreed at COP26 will
support adaptation funding.

Significance:

Climate finance is needed for mitigation because large-scale investments are

required to significantly reduce emissions.

Climate finance is equally important for adaptation, as significant financial

resources are needed to adapt to the adverse effects and reduce the impacts of a
changing climate.

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Climate Financing recognizes that the contribution of countries to climate change
and their capacity to prevent it and cope with its consequences vary enormously.

Hence, developed countries should also continue to take the lead in mobilizing
climate finance through a variety of actions, including supporting country-driven
strategies and taking into account the needs and priorities of developing country
Parties.

Climate finance is critical to tackle the issues posed by climate change and achieve
the goal of limiting the rise in the earth’s average temperature to below 2 degrees
Celsius over pre-industrial levels, something the 2018 IPCC report has predicted.

In 2009, at the UNFCCC COP15 (held in Copenhagen), The developed country

parties, to achieve meaningful mitigation actions and transparency on
implementation, jointly set a target of USD 100 billion a year by 2020 to address
the needs of developing countries. The climate finance goal was then formally
recognized by the UNFCCC Conference of the Parties at COP16 in Cancun. At
COP21 in Paris, Parties extended the $100 billion goals through 2025.

After COP26 there was a consensus that developed nations will double their
collective provision of adaptation finance from 2019 levels by 2025, in order to
achieve this balance between adaptation and mitigation.

Green Financing

To assist the provision of climate financing, UNFCCC established a financial

framework to give financial resources to developing nation Parties. The finance
structure also supports the Kyoto Protocol and the Paris Agreement.

It specifies that the financial mechanism's operation can be entrusted to one or

more existing international entities, since the Convention's entrance into force in
1994, the Global Environment Facility (GEF) has acted as the financial mechanism's
operating institution.

Parties established the Green Climate Fund (GCF) at COP 16 in 2010 and
designated it as an operating entity of the financial mechanism in 2011.

The financial mechanism reports to the COP, which determines its policies,
programme priorities, and financing eligibility criteria.

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In addition to providing guidance to the GEF and the GCF, Parties have
established two special funds - Special Climate Change Fund (SCCF) and Least
Developed Countries Fund (LDCF). Both are managed by the GEF and the
Adaptation Fund (AF) established under the Kyoto Protocol in 2001. At the Paris
Climate Change Conference in 2015, the Parties agreed that the operating entities
of the financial mechanisms – GCD, GEF, SCCF and the LDCF, shall serve the Paris
Agreement.

India’s Initiatives regarding Climate Finance - The following are India’s

Intended Nationally Determined Contributions (INDCs) under the UNFCCC:

Reduce the carbon intensity of its GDP by 33 to 35 per cent from 2005 levels
by 2030.

By 2030, non-fossil fuel-based energy resources will account for around 40%
of installed electric power capacity.

To do this, India has been steadily expanding its climate finance channels.

National Adaptation Fund for Climate Change (NAFCC) - It was established in

2015 to meet the cost of adaptation to climate change for the State and Union
Territories of India that are particularly vulnerable to the adverse effects of climate
change. The fund was established with the aim of bridging the gap between the
need and the available funds. The fund is operated under the Ministry of
Environment, Forests, and Climate Change (MoEF&CC).

National Clean Energy Fund - The Fund was created to promote clean energy,
and funded through an initial carbon tax on the use of coal by industries. It is
governed by an Inter-Ministerial Group with the Finance Secretary as the
Chairman. Its mandate is to fund research and development of innovative clean
energy technology in the fossil and non-fossil fuel-based sectors.

Developed countries must assist and work with developing nations to help them
make clean energy transitions and get financing for climate resilient infrastructure,
thus, ensuring that the former delivered on the $100-billion goal.

Further, there is a need to sustain a political commitment to raising new finance,

besides ensuring that finance is better targeted at reducing emissions and
vulnerability.

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12. Sustainable Development Goals (SDGs)
“Sustainable Development is the Development which meets the needs of the
present without compromising the ability of future generations to meet their own
needs’. This most widely accepted definition of Sustainable Development was
given by the Brundtland Commission in its report Our Common Future (1987).

Sustainable development (SD) calls for concerted efforts towards building an

inclusive, sustainable and resilient future for people and planet.

Core Elements of Sustainable Development

Three core elements of sustainable development are economic growth, social

inclusion and environmental protection. It is crucial to harmonize them.

Sustainable economic growth, achieving sustainable livelihood, living in harmony

with nature and appropriate technology are important for sustainable
development.

Environmental Sustainability:

It prevents nature from being used as an inexhaustible source of resources and

ensures its protection and rational use.

Aspects such as environmental conservation, investment in renewable energy,

saving water, supporting sustainable mobility, and innovation in sustainable
construction and architecture, contribute to achieving environmental sustainability
on several fronts.

Social Sustainability:

It can foster gender equality, development of people, communities and cultures to

help achieve a reasonable and fairly-distributed quality of life, healthcare and
education across the Globe.

Economic Sustainability:

Focuses on equal economic growth that generates wealth for all, without harming
the environment.

Investment and equal distribution of economic resources.

Eradicating poverty in all its forms and dimensions.

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Integration of Scientific and Traditional knowledge

If the people are able to contribute their local resources and practices into the
process of change, the development becomes not only sustainable but also gets
accelerated.

Combined traditional and scientific knowledge is called Community Knowledge.

Moving towards SD in many areas will require community knowledge.

Indigenous Knowledge is also a potential source for the conservation of

biodiversity.

Significance of traditional knowledge has been recognised in India through

initiatives such as National Ayush Mission (NAM) and the Traditional Knowledge
Digital Library (TKDL).

The Sustainable Development Goals (SDGs)

United Nations Development Programme (UNDP) works in about 170 countries

and territories, helping to eradicate poverty, reduce inequalities and exclusion,
and build resilience so countries can sustain progress. As the UN’s development
agency, UNDP plays a critical role in helping countries achieve the Sustainable
Development Goals.

The Sustainable Development Goals (SDGs), also known as the Global Goals, were
adopted by the United Nations in 2015 as a universal call to action to end poverty,
protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.

The 17 SDGs are integrated—they recognize that action in one area will affect
outcomes in others, and that development must balance social, economic and
environmental sustainability.

Countries have committed to prioritize progress for those who're furthest behind.
The SDGs are designed to end poverty, hunger, AIDS, and discrimination against
women and girls.

The creativity, knowhow, technology and financial resources from all of society is
necessary to achieve the SDGs in every context.

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Sustainable Development Goals in India

NITI Aayog has released the second edition of the Sustainable Development Goals
(SDGs) India Index (SDG Index 2.0).

The index documents the progress made by India’s States and UTs towards
achieving the 2030 SDG targets.

2020 will be the 5th anniversary of the adoption of SDGs by the United Nations
(UN).

According to the latest SDG India Index from NITI Aayog, India has made steady
progress toward achieving the United Nations' Sustainable Development Goals
(SDGs) in the areas of health, energy, and infrastructure.

India's track record in terms of achieving the Sustainable Development

Goals:

The Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is

being implemented to offer jobs and enhance the living standards of unskilled
laborers.

The National Food Security Act is in place to ensure that subsidized food grains
are available.

The government of India aims to make India open defecation free under its
flagship program Swachh Bharat Abhiyan.

Renewable energy generation targets have been set at 175 GW by 2022 in order
to maximize the use of solar energy, wind energy, and other renewable energy
sources while reducing reliance on fossil fuels.

To improve infrastructure, the Atal Mission for Rejuvenation and Urban

Transformation (AMRUT) and Heritage City Development and Augmentation
Yojana (HRIDAY) projects have been implemented.

By ratifying the Paris Agreement, India has demonstrated its commitment to

combating climate change.

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United Nations Millennium Development Goals (MDGs)

At United Nations Millennium Summit (Sep 2000), world leaders agreed to eight
specific and measurable development goals—later came to be known as the
Millennium Development Goals (MDGs). There were 8 MDGs, 18 targets and 48
indicators to measure the results. The target year was 2015.

The MDGs are drawn from the actions and targets contained in the Millennium
Declaration that was adopted by 189 nations-and signed by 147 heads of state
and governments during the UN Millennium Summit in September 2000.

Important Features of MDGs

a) It synthesizes, in a single package, many of the most important commitments

made separately at the international conferences and summits of the 1990s ;

b) recognize explicitly the interdependence between growth, poverty reduction

and sustainable development;

c) acknowledge that development rests on the foundations of democratic

governance, the rule of law, respect for human rights and peace and security;

d) It is based on time-bound and measurable targets accompanied by indicators

for monitoring progress; and

e) It brings together, in the eighth Goal, the responsibilities of developing

countries with those of developed countries, founded on a global partnership
endorsed at the International Conference on Financing for Development in
Monterrey, Mexico in 2002, and again at the Johannesburg World Summit on
Sustainable Development in August 2003.

HIV/AIDS

To prevent the spread of HIV/AIDS and reduce its impact, developing countries
need to mobilize all levels of government and civil society.

UNDP advocates for placing HIV/AIDS at the centre of national planning and
budgets; help build national capacity to manage initiatives that include people
and institutions not usually involved with public health, and promotes
decentralized responses that support community-level action.

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United Nations Capital Development Fund (UNCDF)

The Fund was established in 1966 and became fully operational in 1974. It invests
in poor communities in least-developed countries by providing economic and
social infrastructure, credit for both agricultural and small-scale entrepreneurial
activities, and local development funds which encourage people’s participation as
well as that of local governments in the planning and implementation of projects.
UNCDF aims to promote the interests of women in community projects and to
enhance their earning capacities.

Impact of SDG & MDG

The Millennium Development Goals served as a springboard for UN members to

strive for a more developed and prosperous future for their countries and people.

The Millennium Development Goals (MDGs) were approved in 2000, and the final
report presented in 2015 clearly states that the rate of infant mortality has
decreased, that poverty has decreased, that safe drinking water and sanitation
have been provided, and that people's mental health has improved dramatically.

The Sustainable Development Goals are meant to make the world a better place
to live by 2030, following in its footsteps.

The plan was approved in 2015, and reports produced by the UNDP show that
numerous activities have been made for the welfare of the nation and that
people's livelihoods have improved around the world.

The Sustainable Development Goals have helped to lower maternal mortality

rates, reduce poverty, enhance people's health, and raise awareness of infectious
and non-communicable diseases, as well as the immunizations that are essential
for children.

Mental illness is being treated as a big concern, and efforts are being made to
provide better medication to the world.

Overall, the Sustainable Development Goals aim to make the world a better place
to live by achieving their targets within the 15-year time frame set by the United
Nations and eradicating poverty, improving health, providing employment,
empowering women, reducing inequalities, and adhering to all of the UN's
seventeen targets.

Page 91 of 99
Conclusion

The concept of sustainable development states that human civilizations must

survive and meet their needs without jeopardizing future generations' ability to
meet their own needs. The goal of sustainable development is to meet today's
requirements while without jeopardizing tomorrow. This means we can't keep
utilizing present amounts of resources since future generations won't have
enough.

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Page 92 of 99
13. Issues Facing Indian Economy
The Indian economy is one of the fastest-growing economies in the world.
However, it faces a number of challenges that need to be addressed in order for it
to continue to grow.

The Indian economy is the world’s tenth-largest economy by minor GDP and
third-largest by PPP (purchasing power parity).

India is a member of the G20, the International Monetary Fund (IMF) and the
World Bank.

The Indian economy is projected to be the world’s second-largest by 2050.

There are different challenges that the Indian economy faces. They are :

Population Density - One of the biggest challenges is population density. India

has one of the highest population densities in the world, which puts a lot of
pressure on resources like land and water.

Poverty - Another challenge faced by the Indian economy is poverty. Nearly 22%
of the population lives below the poverty line. This means that a large portion of
the population is not able to participate in the economy and this leads to a vicious
cycle of poverty.

Unemployment - Unemployment is another big challenge that the Indian

economy faces. The unemployment rate in India is at a 45-year high. This means
that there are a lot of people who are not able to find jobs. This leads to a lot of
social problems as well.

Payment Deterioration - One of the most recent challenges faced by the Indian
economy is payment deterioration. This is caused by the delay in payments from
the government to contractors and suppliers. This has led to a lot of financial
problems for the contractors and suppliers.

Poor Education - The literacy rate in India is only around 74%. This means that a
lot of people are not able to get good jobs and participate in the economy. This
leads to a lot of social problems as well.

Page 93 of 99
Private Debt - The private debt to GDP ratio in India is one of the highest in the
world. This means that a lot of people have taken out loans and are not able to
repay them. This leads to a lot of financial problems for the economy.

Fixed Labour Laws - Existing Labour Laws make it very difficult for companies to
lay off workers. This leads to a lot of inefficiency in the economy and leads to a lot
of financial problems for the companies.

Inadequate Infrastructure - The infrastructure in India is not able to keep up

with the population growth. This leads to a lot of problems such as traffic jams,
power cuts, and water shortages. The country’s infrastructure is not up to par with
other developed countries, which hurts economic growth.

Corruption - Corruption leads to a lot of inefficiency and waste in the economy. It

also leads to a lot of social problems as well.

Low per capita income - Usually, developing economies have a low per-capita
income.

Unequal Distribution of Income – India also has a problem of unequal

distribution of income. This makes the problem of poverty a critical one and a big
obstacle in the economic progress of the country.

Huge dependence of population on agriculture - The Indian agriculture sector

has managed to live up to the demands of the fast-increasing population of the
country.

Deficiency of Capital - The deficiency of capital has led to the inadequate growth
of the secondary and tertiary occupations. This has further contributed to chronic
unemployment and under-employment in India.

Inequality in wealth distribution - Inequal distribution of wealth is certainly one

of the major economic issues in India.

Low level of technology - New technologies are being developed every day.
However, they are expensive and require people with a considerable amount of
skill to apply them in production. Any new technology requires capital and trained
and skilled personnel. Therefore, the deficiency of human capital and the absence
of skilled labour are major hurdles in spreading technology in the economy.

Page 94 of 99
Lack of access to basic amenities - This leads to the low efficiency of Indian
workers. Also, dedicated and skilled healthcare personnel are required for the
efficient and effective delivery of health services. However, ensuring that such
professionals are available in a country like India is a huge challenge.

Under-utilisation of natural resources - India is rich in natural resources like

land, water, minerals, and power resources. However, due to problems like
inaccessible regions, primitive technologies, and a shortage of capital, these
resources are largely under-utilized. This contributes to the economic issues in
India.

Others (which need no detailed explanation)

Poor Quality of Human Capital

Increase in Non-Performing Assets (NPA)

The above factors present both opportunities and challenges for the
country’s economic growth in the years ahead.

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Page 95 of 99
 List of Books compiled by The Banking Tutor

So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book No Title

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

Page 96 of 99
20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

Page 97 of 99
43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basics Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

Page 98 of 99
 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1293 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 529 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 26 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

16-03-2023 Sekhar Pariti

Page 99 of 99
 Notes for JAIIB
Indian Economy
&
Indian Financial System
(IE & IFS)
Module B- Economic Concepts Related to Banking
(Based on Syllabus 2023)

Compiled by Sekhar Pariti

Book No 58 from The Banking Tutor

Page 1 of 96
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I want to share Notes
related to Indian Economy & Indian Financial System (IEFS), which is prepared
based on the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

A) Indian Economic Architecture

B) Economic Concepts Related to Banking

C) Indian Financial Architecture

D) Financial Products and Services

In this Notes, I am covering topics related to Module B - Economic Concepts

Related to Banking. I am going to share separate books to other 3 modules
soon. Also I will share Objective Type Points covering all 4 Modules in one book.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

18-03-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 96
 Syllabus 2023

Module A: Indian Economic Architecture

An Overview of Indian Economy, Sectors of the Indian Economy, Economic

Planning in India & NITI Aayog, Role of Priority Sector and MSME in the Indian
Economy, Infrastructure including Social Infrastructure, Globalisation- Impact on
India, Economic Reforms, Foreign Trade Policy, Foreign Investments and Economic
Development, International Economic Organizations (World Bank, IMF, etc.),
Climate change, Sustainable Development Goals (SDGs), Issues Facing Indian
Economy.

Module B: Economic Concepts Related to Banking

Fundamentals of Economics, Microeconomics, and Macroeconomics and Types of

Economies, Supply and Demand, Money Supply and Inflation, Theories of Interest,
Business Cycles, Monetary Policy and Fiscal Policy, System of National Accounts
and GDP Concepts, Union Budget.

Module C: Indian Financial Architecture

Indian Financial System-An Overview, Indian Banking Structure, Banking Laws –

Reserve Bank of India Act, 1934 & Banking Regulation Act, 1949, Development
Financial Institutions, Micro Finance Institutions, Non-Banking Financial
Companies (NBFCs),Insurance Companies, Indian Financial System- Regulators
and Their Roles, Reforms & Developments in the Banking Sector

Module D: Financial Products and Services

Financial Markets, Money Markets, Capital Markets and Stock Exchanges, Fixed
Income Markets – Debt and Bond Markets, Foreign Exchange Markets,
Interconnectedness of Markets and Market Dynamics, Merchant Banking Services,
Derivatives Market, Factoring, Forfaiting and Trade Receivables Discounting
System (TReDS), Venture Capital, Lease Finance and Hire Purchase, Credit Rating
and Credit Scoring, Mutual Funds, Insurance Products, Pension Products, Para
Banking and Financial Services Provided by Banks, Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (Inv!Ts)

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Page 3 of 96
 Index – Module B
Economic Concepts Related to Banking
Chapter No Topics covered

01 Fundamentals of Economics – Scarcity and Shortage; Problem of

Choice, Opportunity Cost; Factors of Production; Nature of
Economics; Definitions of Economics; Microeconomics &
Macroeconomics.

02 Types of Economies – Different Forms of Markets – Types of

Economic Activities

03 Supply and Demand – Classification of Wants – Classification of

Goods

04 Money - Supply and Demand

05 Inflation and Deflation

06 Theories of Interest

07 Business Cycles

08 Monetary Policy and Fiscal Policy

09 System of National Accounts and GDP Concepts

10 Union Budget

11 Miscellaneous Concepts

Page 4 of 96
01 Fundamentals of Economics - Microeconomics &
and Macroeconomics
Human wants are Unlimited and Resources are Limited. Moreover, Wants are
recurring and Resources have alternative Uses. Since limited resources can not
satisfy all the Wants, the problem of Choice arise.

This problem of Choice is known as Economic Problem.

As such, Economics is the study of scarcity and choice.

Shortage and Scarcity

Both scarcity and shortage are underlying economic concepts. Scarcity occurs
when limited resources are not enough to fulfill unlimited demands. On the other
hand, shortage explains the nature of goods and services not meeting the
demand imposed on them entirely. A shortage occurs when the quantity
demanded in the market is more than the quantity available at that particular
market. In the world, every resource exhibits some level of scarcity. Something
abundant in nature requires no decision on how to allot such a resource. On the
other hand, something that is scarce will require trade-offs and heavy decision-
making when allocating these resources. For instance, it is normal to have limited
time and money, but no one has unlimited time and money at the same time.

The bottom line is that scarcity is a naturally occurring limitation on the resources,
and such resources cannot be replenished. On the other hand, a shortage is an
artificial limitation brought about by the market situation. It can be witnessed in
particular goods or services, resulting in a given price. However, the goods or
services can be replenished with time, and the shortage condition will be fixed.

The easiest way to distinguish between the two is that scarcity is a naturally
occurring limitation on the resource that cannot be replenished. A shortage is a
market condition of a particular good at a particular price. Over time, the good
will be replenished and the shortage condition resolved.

So studying economics helps use to better make decisions regarding how to deal
with the condition of scarcity.

Page 5 of 96
Goods are tangible items, or products, such as Pop Tarts, automobiles and I
Phones.

Services are intangible items such as a haircut, mowing a lawn, and a dentist visit.

Opportunity Cost

Opportunity Cost is your second choice-what you give up when you make a
decision. For example, if you choose to go to college, you give up the salary you
could have earned if you go directly into the work force. The salary you would
give-up is the opportunity cost of going to college.

As the Economics is the study of scarcity and choice, the concept of opportunity
cost is an important element in economic choices.

Opportunity costs can be viewed as a trade off. Trade offs happen in decision
making when one option is chosen over another option. Opportunity costs sums
up the total cost for that trade off.

Factors of Production

In factors of production, the word “production” refers to a process of transforming

inputs into outputs, which are finished products that can be sold as a good or
service. In order to do so, the input will go through a production process and
various stages to reach the hands of consumers.

Factors of production are the inputs needed for creating a good or service, and
the factors of production include land, labour, entrepreneurship, and capital.

Those who control the factors of production often enjoy the greatest wealth in a
society.

In capitalism, the factors of production are most often controlled by business

owners and investors.

In socialist systems, the government (or community) often exerts greater control
over the factors of production.

Land

Land is a broad term that includes all the natural resources that can be found on
land, such as oil, gold, wood, water, and vegetation. Natural resources can be
divided into renewable and non-renewable resources.

Page 6 of 96
Renewable resources are resources that can be replenished, such as water,
vegetation, wind energy, and solar energy.

Non-renewable resources consist of resources that can be depleted in supply,

such as oil, coal, and natural gas.

All resources, whether it is renewable or non-renewable, can be used as inputs in

production in order to produce a good or service. The income that comes from
using land and its natural resources is referred to as rent.

Besides using its natural resources, land can also be utilized for various purposes,
such as agriculture, residential housing, or commercial buildings. However, land
differs from the other factors of production because some natural resources are
limited in quantity, so its supply cannot be increased with demand.

Labour

Labour as a factor of production refers to the effort that individuals exert when
they produce a good or service. For example, an artist producing a painting or an
author writing a book. Labour itself includes all types of labour performed for an
economic reward, such as mental and physical exertion. The value of labour also
depends on human capital, which is determined by the individual’s skills, training,
education, and productivity.

Productivity is measured by the amount of output someone can produce in each

hour of work. The income that comes from labour is referred to as wages. Note
that work performed by an individual purely for his/her personal interest is not
considered to be labour in an economic context.

The following are characteristics of labour in terms of being a factor of

production:

1) labour is considered to be heterogeneous, which refers to the idea of how the

efficiency and quality of work are different for each person. It differs because it
depends on an individual’s unique skills, knowledge, motivation, work
environment, and work satisfaction.

2) labour is perishable in nature, which means that labour cannot be stored or

saved up. If an employee does not work a shift today, the time that is lost today
cannot be recovered by working another day.

Page 7 of 96
3) labour is strongly associated with human efforts. It means that there are factors
that play an important role in labour, such as the flexibility of work schedules, fair
treatment of employees, and safe working conditions.

Capital

Capital, or capital goods, as a factor of production, refers to the money that is

used to purchase items that are used to produce goods and services. For example,
a company that purchases a factory to produce goods or a truck that is purchased
to do construction are considered to be capital goods.

Other examples of capital goods include computers, machines, properties,

equipment, and commercial buildings. They are all considered to be capital goods
because they are used in a production process and contribute to the productivity
of work. The income that comes from capital is referred to as interest.

Characteristics of capital as a factor of production:

1) Capital is different from the first two factors because it is created by humans.
For example, capital goods like machines and equipment are created by
individuals, unlike land and natural resources.

2) Capital can last a long time, but it depreciates in value over time. For example, a
building is a capital good that can endure for a long period of time, but its value
will diminish as the building gets older.

3) Capital is considered to be mobile because it can be transported to different

places, such as computers and other equipment.

Entrepreneurship (also called Organization)

Entrepreneurship as a factor of production is a combination of the other three

factors. Entrepreneurs use land, labour, and capital in order to produce a good or
service for consumers.

Entrepreneurship is involved with establishing innovative ideas and putting that

into action by planning and organizing production. Entrepreneurs are important
because they are the ones taking the risk of the business and identifying potential
opportunities. The income that entrepreneurs earn is called profit.

Page 8 of 96
Important Definitions of Economics

The subject ‘Economics’ is defined by many in many ways. However, there are 4
important definitions – Wealth Definition ; Welfare Definition, Scarcity Definition
and Growth Definition.

Wealth Definition

“Economics is the science of wealth” - Adam Smith.

This definition was given by Adam Smith.

He is also known as the ‘father of economics.

According to this definition, economics is a science of the study of wealth

only.

It deals with production, distribution, and consumption.

This wealth-centred definition deals with the causes behind the creation of
wealth.

Welfare Definition

“Economics is the study of man in the ordinary business of life” - Alfred Marshall

This definition was put forward by Alfred Marshall.

According to Alfred Marshall, economics is the study of man in the ordinary

business of life.

It examines how a person gets his income and how he invests it.

Thus, on one side, it is a study of wealth.

On the other most important side, it is a study of well-being (welfare)

Page 9 of 96
Scarcity Definition

“Economics is the aspect of scarcity in all economic behaviour” - Lionel Robbins

This definition was put forward by Lionel Robbins.

According to him, economics is a science that studies human behaviour as

a relationship between end and scarce means that have alternative uses.

Features:

The wants of a human are unlimited.

It has an alternative use of scarce resources.

It is an efficient use of resources.

It is needed for optimisation, i.e., best allocation of resources.

Growth Definition

Economics is concerned with determining the pattern of employment of scarce

resources to produce commodities ‘over time’ - Paul. A. Samuelson

This definition was introduced by Paul A. Samuelson.

According to him, “economics is the study of how people and society choose, with
or without the use of money, to employ scarce productive resources which could
have alternative uses, to produce various commodities over time and distribute
them for consumption now and in the future among various persons and groups
of society”.

It analyses the costs and benefits of improving patterns of resource allocation.

This definition is the combination of welfare and scarcity definition.

Nature of Economics

Economics is a part of social science which is associated with the study of

production, households, distribution, firms, consumption of goods and services,
industries, government, decision making, and more. It helps to understand how
limited resources can be utilised to satisfy consumers’ desire to obtain maximum
satisfaction.
Page 10 of 96
Economics as a science: Science is defined as a branch of knowledge that is
associated with the cause and effect relationship and analyses economic factors.
Additionally, economics contributes in combining various sections of science like
statistics, mathematics, etc., to understand the relationship between price, supply,
demand, and various economic determinants.

Economics as an Art: Art is a system that controls and represents the way things
should be approached and completed.

Economics has multiple sections such as creation, delivery, consumption, finance,

and implementation of standard rules and regulations that are competent in
solving complex issues and queries of the society. Therefore, economics is
recognised as both science and art: science for its methodology and arts for its
applications in both professional and practical aspects of the economic problems
we confront every day.

Positive economics: Positive science examines the connection between two

variables, but it does not furnish any value judgement, which means that it only
states ‘what is’ and deals with just the facts related to the economy.

Normative economics: According to normative science, economics transfers

value judgement, which indicates ‘what ought to be.’ This form of science is
involved in policies required to achieve these economic goals.

Microeconomics and Macroeconomics

Economics is classified into two significant parts – Microeconomics and

Macroeconomics

Macroeconomics deals with the behaviour of the aggregate economy and

Microeconomics focuses on individual consumers and businesses.

Microeconomics

Microeconomics is the study of decisions made by people and businesses

regarding the allocation of resources and prices of goods and services. The
government decides the regulation for taxes. Microeconomics focuses on the
supply that determines the price level of the economy.

Page 11 of 96
It uses the bottom-up strategy to analyse the economy. In other words,
microeconomics tries to understand human’s choices and allocation of resources.
It does not decide what are the changes taking place in the market, instead, it
explains why there are changes happening in the market.

The key role of microeconomics is to examine how a company could maximise its
production and capacity, so that it could lower the prices and compete in its
industry. A lot of microeconomics information can be obtained from the financial
statements.

Concepts covered under Microeconomics

Demand, supply, and equilibrium

Production theory
Costs of production
Labour economics

Examples: Individual demand, and price of a product.

Macroeconomics

Macroeconomics scrutinises itself with the economy at a massive scale. and

several issues of an economy are considered. The issues confronted by an
economy and the headway that it makes are measured and apprehended as a
part and parcel of macroeconomics. Macroeconomics studies the association
between various countries.

In macroeconomics, we normally survey the nation’s total manufacture and the

degree of employment with certain features like cost prices, wage rates, rates of
interest, profits, etc., by concentrating on a single imaginary good and what
happens to it.

Concepts covered under macroeconomics are as follows:

Capitalist nation
Investment expenditure
Revenue
Examples: Aggregate demand, and national income.

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Page 12 of 96
02. Types of Economic Systems & Different Forms of
Markets
With the limited factors of production and to meet the Unlimited needs, we have
to address the following 3 Basic Economic Questions:

What goods and services should be produced?

How should goods and services be produced?

For whom to produce the goods?

Economic systems are the methods societies and governments use to organize,
allocate and distribute goods, services and resources across locations.

An economic system serves as a regulatory system for controlling different

aspects of production and distribution, including capital, labour, land and other
physical resources.

In an economic system, there are many essential entities, agencies and decision-
making authorities. Additionally, economic systems follow patterns of use and
consumption that make up the structure of society and communities.

There are five distinct types of economic systems

1. Traditional Economic System

2. Command Economic System

3. Centrally Planned Economic System

4. Market Economic System

5. Mixed Economic System

1. Traditional Economic System (Simple Economy)

In a traditional economic system, each member of a community or society has a

specific role that contributes to the whole progress of the community. Traditional
economic systems represent the oldest model, where societies are more physically
connected and socially satisfied through labour, farming and other simple
processes.

Page 13 of 96
Advantages of Traditional Economic System :

Rarely any surplus in goods or resources

Community members are generally more satisfied in social roles

Absence of total economic hierarchy results in a lack of economic competition

Drawbacks of Traditional Economic System :

Antiquated methods of distribution

Lack of growth and technology development

Reliance on localized resources and services inhibits globalization

Less focus on industrialized production and more focus on agricultural processes

2. Command Economic System

In command economic systems, governments and centralized powers control

much of the economic processes, including allocating and distributing resources,
goods and services. In a command economy, the government plays a key role in
directing and intervening in business processes that provide essential goods and
services to the community. Many command economies consist of governments
that have total control over the distribution and use of valuable resources, like oil
and gas.

Additionally, these types of systems may operate under governing entities that
have ownership of essential industries like transportation, utilities and energy, and
technology.

Advantages of Command Economic System :

Creates potential for mass mobilization of necessary resources due to government

control

Creates additional jobs for community members and citizens due to increased
mobility of resources

Focuses on benefits to society over individual interests

Encourages more efficient use of valuable resources

Page 14 of 96
Disadvantages of Command Economic System:

Creates scarcity due to an inability to plan for individual needs

Forces government rationing due to inability to calculate demand on set prices

Eliminates market competition, resulting in a lack of innovation and advancement

Inhibits employees' freedom to pursue creative jobs and careers

3. Centrally Planned Economic System

In a centrally planned economy, the society creates and dictates economic plans
to drive the production, investments and allocation of goods, services and
resources.

The government only intervenes in production processes to regulate fair trade

agreements and ensure compliance with international policy. Additionally,
governments in a centrally planned economy take part in coordination efforts to
provide public services. This type of economic system is an offshoot of the
command economy, where governments still maintain a level of control over the
allocation and distribution of resources.

Advantages of Centrally Planned Economic System:

Better able to meet national and social objectives by addressing issues like
environmentalism and anti-corruption.

Gives governing powers the ability to make decisions regarding the production
and distribution of goods and resources when private industries cannot raise
enough investment capital.

Allows input from community members on government plans for setting product
prices, determining production quantity and opening up job sectors.

Disadvantages of Centrally Planned Economic System:

Can create a lack of government resources to respond to shortages and surpluses

Potential for corrupt actions within governing bodies and established powers

Creates a loss of freedom for citizens wanting to start their own enterprises

Institutes governing powers may develop into repressive political systems.

Page 15 of 96
4. Market Economic System

In a market economic system, or a “free-market system,” communities, firms and

proprietors act in self-interest to decide how to allocate and distribute resources,
what to produce and who to sell to. Governments in market systems typically have
little intervention in how businesses operate and generate income, however, can
regulate factors like fair trade, policy development and honest business
operations.

Advantages of Market Economic System:

Provides incentive for innovative entrepreneurship

Gives consumers a choice in goods, services and purchase prices

Creates market competition for resources, resulting in quality offerings and

efficient use of resources to produce goods

Inspires research, development and advances in goods and production of goods

Disadvantages of Market Economic System :

Highly competitive markets can cause a scarcity in resources for disadvantaged

individuals

Potential for monopolizing of industries and niches, such as technology, health

care and pharmaceuticals

Can increase income disparity by placing focus on economic needs over societal,
community and human needs

5. Mixed Economic System

A mixed economy consists of a market and command economy combined to form

an economic system where the market is generally free from government or
national ownership. However, the government can still have control over essential
industries and sectors like transportation and defence. Additionally, the governing
entities in mixed economic systems usually have a predominant oversight over the
regulation of private corporations and businesses.

Page 16 of 96
Advantages of Mixed Economic System

Allows for private companies to operate more efficiently and reduce operational
costs because of less government oversight

Creates an outlet for market failures through allowing certain government

intervention

Enables governments to create net programs like social security, health care and
food and nutrition programs

Gives governments power to redistribute income through tax policies, reducing

income disparities

Disadvantages of Mixed Economic System

Government intervention can be too frequent or not frequent enough, creating an

imbalance

Creates potential for government subsidiaries within state-run industries

Can cause subsidized government industries to go into debt with a lack of

competition in state-run industries.

Economic Systems – Economic Philosophy

Each type of economy is associated with a separate economic philosophy. An

economic philosophy is a method by which resources are organised. At opposite
ends of the spectrum are capitalism and communism.

Capitalism

A capitalist economic system revolves around wage labour and the private
ownership of property, businesses, industry, and resources. Capitalists believe
that, compared to private enterprises, governments do not use economic
resources efficiently, so society would be better off with a privately-managed
economy. Capitalism is associated with market economies and usually serves as
the basis for mixed economies.

Page 17 of 96
Communism

Communism, on the other hand, advocates for the public ownership of property
and businesses. Communism extends beyond an economic system into an
ideological system, in which the end goal is perfect equality and the dissolution of
institutions- even a government. In order to transition to this end goal,
communist governments centralise the means of production and completely
eliminate (or heavily regulate) private businesses.

Socialism

A related economic system, socialism, advocates for the social ownership of

property and businesses. Socialists believe in the redistribution of wealth among
all people in order to create equality, with the government serving as the arbiter
of redistribution. Like a communist government, a socialist government will also
take control of the means of production. Because they depend on centralisation,
communism and socialism are both associated with command economies.

Socialism and Communism

Socialism is easily confused with communism. Socialism differs from communism

in that it does not share the same end goal of a stateless, classless society. The
socialist power structures that redistribute wealth- to create equality- are meant
to remain in place indefinitely. Communists frame socialism as an intermediary
stage between capitalism and socialism, and in fact, virtually all communist
governments are currently practising socialism.

The majority of developed nations today are capitalist with some socialist
elements.

Economic Sectors

Economic sectors reflects the different economic processes that have affected a
place over time. The four economic sectors are primary, secondary, tertiary and
quaternary. The relative importance of these economic sectors changes based on
each place's level of development and role in their respective local and global
economy.

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The Primary Economic Sector is based on the extraction of raw, natural
resources. This includes mining and farming. Places such as Plympton, Dartmoor,
and southwest England are characterised by the sector.

The Secondary Economic Sectors are based on the manufacturing and

processing of raw resources. This includes iron and steel processing or car
manufacturing. The secondary sector has shaped places such as Scunthorpe,
Sunderland, and northeast England.

The Tertiary Economic Sector is the service sector and includes industries such
as tourism and banking. The tertiary sector supports places such as Aylesbury and
southeast England.

The Quaternary Economic Sector deals with research and development (R&D),
education, business, and consulting services. Examples are Cambridge and east
England.

Clark Fisher Model

The Clark Fisher model was created by Colin Clark and Alan Fisher and showed
their three-sector theory of economic activity in the 1930s. The theory envisaged a
positive model of change where the countries move from a focus in the primary
to the secondary to the tertiary sector alongside development.

The Clark Fisher model shows how countries move through three phases: pre-
industrial, industrial and post-industrial.

During the pre-industrial phase, most of the population works in the primary
sector, with only a few people working in the secondary sector.

During the industrial stage, fewer workers are in the primary sector as land is
being taken over by manufacturing and imports are becoming more common.
There is internal rural-to-urban migration, with workers looking for secondary
sector employment for a better quality of life.

During the post-industrial stage, when the country has industrialised, there is a
decrease in primary and secondary sector workers but a large increase in tertiary
sector workers. There is a demand for entertainment, holidays, and technologies
as disposable income grows. The UK is an example of a post-industrial society.

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Forms of Market
The market structure comprises different types of markets, and the structures are
portrayed by the nature and the level of competition that exists for the goods and
services in the market.

The forms of the market, both for the products market and the factor market or
the service market, is to be decided by the idea of rivalry that is winning in a
specific kind of market.

The Market structure is an expression that is resultant for the quality or the
adequacy of the market competition that is winning in the market.

There are seven primary market structures:

Monopoly

Oligopoly

Perfect competition

Monopolistic competition

Monopsony

Oligopsony

Natural monopoly

Duoploy

Bilateral Monopoly

Meaning of a Market:

A market can be characterised as where a couple of parties can meet, which will
expedite the trading of products and services. The parties involved in the market
activities are the sellers and the buyers. A market is an actual structure like a retail
outlet, where the dealers and purchasers can meet eye to eye, or in a virtual
structure like an internet-based market, where there is the truancy of direct, actual
contact between the purchasers and vendors.

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Monopoly:

A monopolistic market is a market formation with the qualities of a pure market. A

pure monopoly can only exist when one provider gives a specific service or a
product to numerous customers. In a monopolistic market, the imposing business
organisation, or the controlling organisation, has the overall control of the entire
market, so it sets the supply and price of its goods and services. For example, the
Indian Railway, Google, Microsoft, and Facebook.

Oligopoly:

An oligopoly is a market form with a few firms, none of which can hold the others
back from having a critical impact. The fixation or concentration proportion
estimates the piece of the market share of the biggest firms. For example,
commercial air travel, auto industries, cable television, etc.

Perfect Competition:

Perfect competition is an absolute sort of market form wherein all end consumers
and producers have complete and balanced data and no exchange costs. There is
an enormous number of makers and customers rivalling each other in this sort of
environment. For example, agricultural products like carrots, potatoes, and various
grain products, the securities market, foreign exchange markets, and even online
shopping websites, etc.

Monopolistic Competition:

Monopolistic competition portrays an industry where many firms offer their

services and products that are comparative (however somewhat flawed)
substitutes. Obstructions or barriers to exit and entry in monopolistic competitive
industries are low, and the choices made of any firm don’t explicitly influence
those of its rivals. The monopolistic competition is firmly identified with the
business technique of brand separation and differentiation. For example,
hairdressers, restaurant businesses, hotels, and pubs.

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Monopsony:

A monopsony is a market situation wherein there is just a single purchaser, the

monopsonist. Just like a monopoly, a monopsony additionally has an imperfect
market condition. The contrast between a monopsony and a monopoly is basically
in the distinction between the controlling business elements. A solitary purchaser
overwhelms a monopsonist market while a singular dealer controls a monopolised
market.

Monopsonists are normal to regions where they supply most of the locale’s
positions in the regional jobs. For example, a company that collects the entire
labour of a town. Like a sugar factory that recruits labourers from the entire town
to extract sugar from sugarcane.

Oligopsony:

An oligopsony is a business opportunity for services and products that is

influenced by a couple of huge purchasers. The centralisation of market demand
is in only a couple of parties that gives each a generous control of its vendors and
can adequately hold costs down. For example, the supermarket industry is arising
as an oligopsony with a worldwide reach.

Natural Monopoly:

A natural monopoly is a kind of a monopoly that can exist normally because of

the great start-up costs or incredible economies of scale of directing a business in
a particular industry which can bring about huge barriers to exit and entry for
possible contenders. An organisation with a natural monopoly may be the main
supplier of a service or a product in an industry or geographic area.

Normally, natural monopolies can emerge in businesses that require the latest
technology, raw materials, or similar factors to work. For example, the utility
service industry is a natural monopoly. It consists of supplying water, electricity,
sewer services, and distribution of energy to towns and cities across the country.

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Duopoly

A duopoly is a form of oligopoly, where only two companies dominate the

market. The companies in a duopoly tend to compete against one another,
reducing the chance of monopolistic market power. Visa and Mastercard are
examples of a duopoly that dominates the payments industry in Europe and the
United States.

Bilateral Monopoly

Bilateral Monopoly is a market situation in which a single seller faces a single

buyer, i.e., the seller is a monopolist and the buyer is a monopsonist.

Economic activity - Types

Economic activity is any form through which a good or service is produced,
intermediated, and sold to satisfy a need or desire of the consumers, regardless of
whether it is producing, brokering, or selling any good or service.

An example of economic activity would be renting a flat we own to a tenant. The

persons or entities participating in the economic activity are called economic
agents.

Features of Economic activity

1. These are related to the production and consumption of goods in return for
money

2. Main motive is to earn money

3. It is added to the national income.

Types of Economic Activities

Production, Consumption, Capital Formation and Distribution are the primary

economic activities of an economy.

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Production

Economic activity must be productive in nature, it must involve some aspect of

the production of goods and/or services.

For examples, a worker in a factory is producing goods, a software engineer is

providing services, a teacher also produces services. Similarly, farming is an
economic activity as again it helps in production.

Even if the production is for self-consumption it is still a productive activity and so

it is an economic activity. Because it will still add to the overall supply of the
market. Also, all other activities like warehousing, transporting, etc which help
bring the products to the market are also productive economic activities.

Consumption

Consumption is also an Economic Activity. Consumption is the demand side of

the market. It is what generates the production and the supply of goods and
services. The consumption of goods promotes competition and introduction of
better products in the market. So consumption encourages production activities,
so it is in itself an economic activity.

Distribution

Distribution refers to the economic activity which studies how income generated
from the production process is distributed among the factors of production.
Income generated by Land is called Rent, by Labour – wages; by Capital – interest
and by Organization – profit.

Capital Formation (Savings, Investment, Wealth)

Savings is the income that is not spent. Such savings are invested in a variety of
instruments such as savings account, term deposits, the stock market, mutual
funds, real estate, gold, etc. So such investment turns to wealth. Then the private
and public companies borrow such monies to invest in their business and further
economic activities in the country.

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Quaternary Economic Activities

In this sector, activities that are very productive in generating knowledge and new
technologies stand out, such as consultancies, financial planning, design in
general, information technologies, research and development (R&D), and
information generation.

Quinary Economic Activities

Like the quaternary, the quinary sector is another subdivision of the tertiary sector
and forms a branch of the economy focused on creating, rearranging, and
interpreting ideas and projects. It includes the work of government officials,
directors of large companies, scientific leaders, legislators, etc.

Non-Economic Activities

Activities are which are done out of one’s own will and not to earn money.

The motive can be social or psychological. Out of love, satisfaction, happiness.

It is not added to the national income.

Example: Anyone who works at an NGO out of one’s own will without getting
paid.

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03. Supply and Demand ; Types of Goods & Wants
Demand, in economics, is the willingness and ability of consumers to purchase a
given amount of a good or service at a given price.

Supply is the willingness of sellers to offer a given quantity of a good or service

for a given price.

Supply and Demand Determine the Price of Goods and Quantities Produced and
Consumed.

Consumers may exhaust the available supply of a good by purchasing a given

good or service at a high volume. This leads to an increase in demand. As demand
increases, the available supply also decreases.

The Law of Supply and Demand

The law of supply and demand is the theory that prices are determined by the
relationship between supply and demand. If the supply of a good or service
outstrips the demand for it, prices will fall. If demand exceeds supply, prices will
rise.

There is an inverse relationship between the supply and prices of goods and
services when demand is unchanged.

If there is an increase in supply for goods and services while demand remains the
same, prices tend to fall.

If there is a decrease in supply of goods and services while demand remains the
same, prices tend to rise.

When demand increases and supply remains the same, the higher demand leads
to a higher price.

When demand decreases and supply remains the same, the lower demand leads
to a lower price.

The Law of Supply

The Law of Supply states that, all other factors being equal, as the price of a good
or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa.

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The Law of Demand

The Law of Demand states that , all other factors being equal, at a higher price
consumers will demand a lower quantity of a good, and vice-versa.

Change in Demand vs. Change in Quantity Demanded

A change in quantity demanded refers to shift in demand which is caused by a

change in price.

A change in demand refers to a shift in the which is caused by one of the shifters:
income, preferences, changes in the price of related goods and so on, other than
the Price.

Change in Supply vs. Change in Quantity Supplied

A change in supply refers to a shift in the entire supply which is caused by shifters
such as taxes, production costs, and technology, other than the price.

A change in quantity supplied refers to shift in supply which is caused by a change

in price.

An Elastic Demand is one in which the change in quantity demanded due to a

change in price is large.

Elastic goods include luxury items and certain food and beverages as changes in
their prices affect demand.

An Inelastic Demand is one in which the change in quantity demanded due to a

change in price is small.

Inelastic goods may include items such as tobacco and prescription drugs as
demand often remains constant despite price changes.

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Nature and Classification of Human Wants

Human wants are endless even when provided with every need.

In terms of Economics, wants to refers to something that individual desires, which

is not something that the individual cannot live without.

With changes in innovation and technology, wants are ever-increasing.

Classification of Human Wants

Human wants can be classified into various categories depending on various

bases as under.

Economic and Non-Economic wants

Want for things that can be bought by paying a price in money or currency are
economic wants, such as they want for a diamond necklace.

Want for non-material qualities of human life such as peace, equality, acceptance,
etc., are called non-economic wants.

Individual and Collective Wants

Individual wants refer to the wants of one specific person who may not be wanted
by anyone else. Such wants vary from one person to another.

Collective want refers to those wants which are required by a commodity such as
a hospital or a school.

Necessities, Comforts, and Luxuries

Necessities refer to the want of products or services essential for survival.

Examples of such wants are food, clothing, and housing. Out of these are the
wants that improve the efficiency of humans and improve the quality of life such
as food, better house, etc.

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Comfort refers to those products or services that help in making life satisfactory.
A human can live without these comforts but they help make life easier for them
such as AC, cars, etc.

Luxuries are those products that provide humans with a sense of entitlement.
They make humans feel better about themselves. These are products and goods
that humans don't need but are mostly meant for showing off. Some examples
are jewellery, expensive cars, electronic goods, etc.

Characteristics of Human Wants

The nature of human wants varies depending on several parameters. These further
describe the characteristics of human wants. Some of the characteristics are as
follows.

Iterative Wants:

Some commodities in life are required on a daily basis which may not be essential
for many other individuals. For example, insulin is only required by diabetic
patients.

Changing Want with Age:

Humans want different things at different stages in life. A kid would want to play
with a toy while a teenager would want to play with a PlayStation.

Gender-Specific Wants:

Gender plays a vital role in wanting different products. For example, want for a
fancy dressing item will vary for men and women.

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Geographic Variation of Wants:

People living in hotter regions will want coolers and ACs but people living in hill
stations would want temperature regulators. This type of want is quite self-
explanatory.

Health Specific Want:

People in need of medicines and medical facilities would want better access to
facilities of services such as high-end health care facilities. Personal preferences or
biases might also play a role here.

Endless Human Wants:

Wants are ever-increasing at par with innovation and technology. Humans never
get satisfied. The more you provide, the more they will consume and want.

Conclusion:

At the end of it all, the economy is completely related and revolves around human
wants. It helps the government in understanding the demand-supply and chain.

The prime reasons for the skyrocketing human wants are

Expectation and need for a better living.

Increase in population with each passing day.

These factors highly contribute to the ever-rising human wants.

Wants never end, the more you give, the more people want.

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Goods in Economics : Meaning and Classification

Meaning of Good

Good is any item that adds some kind of value to the lives of people in any form.
Good can be any tangible item that satisfies the want of the consumers. In factor
of production, a good is the output of an economic system.

Features of Goods

Tangibility : Goods are tangible in nature i.e. they have shape and are visible
unlike any services which are intangible.

Perishability : Another feature is the perishable nature of goods. Perishability

means goods have some life or durability. Goods have some shelf life after the
production.

Separability : The production and consumption of goods are two separate

events. Goods produced can be stored for later consumption, unlike service where
production and consumption are simultaneous.

Standardization : Goods have different grades and qualities. Qualities and grades
of the goods can be controlled and can have standardized production. In service,
service quality varies every time they are served.

Classification of Goods

Normal Goods

Normal goods are those goods whose demand changes along with the change in
income of the consumers. When income increases demand for the goods also
increases and vice versa. On the other hand, normal goods response to negative
price effects i.e. rise in price leads to fall in demand and vice versa. Example:
Television, general good items.

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Giffen Goods

Giffen goods are special types of goods whose demand increases with the rise of
price and decreases with the fall of the price. There is a positive relationship
between price and quantity of demand. A giffen good shows an upward-sloping
demand curve and it generally violates the fundamental law of demand. Example:
Rice, Salt etc. are giffen goods.

Inferior Goods

Inferior goods are those goods whose demands decrease with the increase in
income of the consumer and demand increases with the decrease in income of
the consumer. There is an inverse relationship between income of the customer
and demand for inferior goods. Example: Street Foods, canned items, grocery
items etc.

Substitute Goods

Substitute goods are those goods whose alternatives are available. Such goods
satisfy the need similar to that of its close substitution. Such goods can be used
for same purpose by the same consumer. They have the inverse relation with price
of one product and demand for its substitute. For instance, X and Y are substitute
goods. When price increases, demand for X decreases and consumers will shift to
product Y for similar utility and demand for Y increases. Example: Pepsi and Coca
Cola, Tea and Coffee

Complementary Goods

Complementary goods are those goods which jointly offer to satisfy a particular
want of the consumer. Such goods are purchased and used together. There is an
inverse relationship between rise in the price of one product and demand for
another product. For instance: X and Y are complementary goods. When the price
of X increases, demand for X decreases leading to decrease in demand for Y as
well. Example: Pen and Paper, Milk and Cereals, DVD and DVD player etc.

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Private Goods

Private goods are goods with private ownership which means such goods are
exclusive (Excludable) to its owner. Such goods require permission from the owner
for consumption by other individuals. The law of demand and supply prevails for
such goods. Example: Land, Building, vehicles, mobile phone, clothes, cosmetics
etc.

Public Goods

Public goods are common goods to all the people and belong to all the members
of the community or society. Such goods are non-exclusive (non-excludability) as
anyone can consume such public goods without permission and without reducing
the availability to the other. Example: Roads, Hospitals, Parks, bridges etc.

Economic Goods

Economic goods are scarce goods and we have to make payment for the use and
consumption. All the man-made goods where supply is scarce and limited and
have some market value are economic goods. Example : TV, computer, tooth
paste, rice etc.

Free Goods

Free goods are those goods which are readily available in abundant quantities
and supply of goods is more than demand. Such goods do not require any
payment and are freely available. Example : Air, Atmosphere, sunlight etc.

Veblen Goods

A Veblen Good is a good for which demand increases as the price increases.
Veblen goods are typically high-quality goods that are well made, exclusive, and a
status symbol. Veblen goods are generally sought after by affluent consumers
who place a premium on the utility of the good.

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Veblen Goods vs. Giffen Goods

A Veblen good is a good for which demand increases as the price increases.
Veblen goods are typically high-quality goods that are well made, exclusive, and a
status symbol. Veblen goods are generally sought after by affluent consumers
who place a premium on the utility of the good.

Veblen goods are luxury items that connote status in society, such as cars, yachts,
fine wines, celebrity-endorsed perfumes, and designer jewelry.

Giffen goods are essential goods, such as rice, potatoes and wheat. Demand stays
high when prices increase because there is no ready substitute for them.

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04 Money – Demand and Supply
Money is an asset and thus the demand for money exists because the public
wants to own it. Of course, the reason for holding money and the time period for
which it is held differs from person to person. The total amount of money
demanded in an economy is thus the total amount of money demanded by all
individuals/households in that economy.

The supply of money in an economy at any point in time refers to the amount of
money held by households and businesses for transactions and debt settlement.
We exclude money held by the government and money held by the commercial
banking sector from commonly accepted measures of money supply.

Demand for Money

In economics, demand for money is commonly associated with cash or bank

demand deposits. In general, the nominal demand for money increases with the
level of nominal output and decreases with the nominal interest rate.

The demand for money is influenced by a variety of factors, including income

level, interest rates, inflation, and future uncertainty.

The impact of these factors on money demand is typically explained in terms of

the three motives for demanding money:

Transaction motive – It refers to the demand for money to meet the current
needs of individuals and businesses.

Precautionary motive – It refers to people's desire to save money for various

contingencies that may arise in the future.

Speculative motive – It refers to the motivation of individuals to hold cash in

order to profit from market movements regarding future changes in theinterest
rate.

Monetary policy can help to stabilise an economy when the demand for money is
stable. When the demand for money is not stable, real and nominal interest rates
change, and economic fluctuations occur.

The demand for money explains people's desire for a specific amount of money.

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Money is required to manage transactions, and the value of the transactions
determines how much money people wish to keep.

The greater the number of transactions, the greater the amount of money
demanded.

Since the quantity of transactions is determined by earnings, it should be obvious

that an increase in earnings leads to an increase in the demand for money.

When people save their money rather than putting it in a bank where it earns
interest, the money they save is also subject to the rate of interest.

People become less focused on stockpiling money when interest rates rise,
because holding money leads to holding less interest-earning deposits. As a
result, at high interest rates, the amount of money demanded decreases.

Supply of Money

Money supply is a stock variable, just like money demand. Money supply refers to
the total stock of money in circulation among the general public at any given
time.

The money supply is the total value of money available in an economy at a point
of time.

In India, Reserve Bank of India (RBI), measures the money supply and publishes it
on a weekly or fortnight basis.

Monetary aggregates are the measures of the money supply in a country.

The money supply is the total amount of money used by the general public at a
given point in time. It should be emphasized that total money supply and total
money stock are two different things. Only that part of the overall stock of money
with the public at any given time is considered the money supply. Currency,
printed notes, money in bank accounts, and other liquid assets make up
circulating money.

The RBI has started publishing a set of new monetary aggregates following the
recommendations of the Working Group on Money Supply: Analytics and
Methodology of Compilation (Chairman: Dr. Y.V. Reddy) which submitted its
report in June 1998.

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The Working Group recommended compilation of four monetary aggregates on
the basis of the balance sheet of the banking sector in conformity with the norms
of progressive liquidity: M0 (monetary base), M1 (narrow money), M2 and M3
(broad money)

The following Table may be help to understand various Monetary Aggregates

S No Particulars

1 Currency in Circulation

2 Cash with Banks

3 Currency with Public

4 Other Deposits with RBI

5 Bankers’ Deposits with RBI

6 Demand Deposits

7 Time Deposits

8 Reserve Money (M0) = 1 + 4 + 5

9 Narrow Money (M1) = 3 + 4 + 6

10 Broad Money (M3) = 7 + 9

M2 = M1 + Post Office Savings Deposits. Since the post office bank is not a part
of the banking sector, postal deposits are no longer treated as part of money
supply. As such M2 is not being published by RBI as it has no relevance.

The liquidity of these grades is decreasing. M1 is the most liquid and makes
transactions the easiest, while M3 is the least liquid. The most commonly used
indicator of the money supply is M3.

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In addition to the monetary aggregates, the Working Group had recommended
compilation of three liquidity aggregates namely, L1, L2 and L3, which include
select items of financial liabilities of non-depository financial corporations such as
development financial institutions and non-banking financial companies
accepting deposits from the public, apart from post office savings banks.

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05. Inflation and Deflation
In a market economy, prices for goods and services can always change. Some
prices rise; some prices fall.

Inflation occurs when there is a broad increase in the prices of goods and services,
not just of individual items.

Inflation is a sustained increase in the general level of prices for goods and
services. In other words, inflation reduces the value of the currency over time.

Inflation is a rise in prices, which can be translated as the decline of purchasing

power over time.

In economics, inflation is an increase in the general price level of goods and

services in an economy. When the general price level rises, each unit of currency
buys fewer goods and services; consequently, inflation corresponds to a reduction
in the purchasing power of money.

The opposite of inflation is deflation, a decrease in the general price level of

goods and services.

The common measure of inflation is the inflation rate, the annualized percentage
change in a general price index. As prices faced by households do not all increase
at the same rate, the consumer price index (CPI) is often used for this purpose.

Inflation and deflation refer to the direction of prices, disinflation refers to the
rate of change in the rate of inflation.

In this lesson, various concepts related to Inflation, Deflation are explained in

brief.

Demand-pull inflation

Demand pull inflation is caused by increased demand in the economy, without

adequate increase in supply of output. It is mainly an outcome of excess money
income with the people. This high money income would be due to increased
money supply. The situation of “too much money chasing too few goods” is an
instance of demand pull inflation.

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Cost -Push inflation

Cost push inflation represent inflation due to price rise of inputs in the form of
increased raw material cost, electricity charges or wage rate (including a rise in
profit margin made by the producer). Such a price rise results in increased cost
and price of the product leading to cost push inflation. Price rise of key inputs like
crude oil products may trigger price spiralling effect on other goods and services.
In India, cost push inflation is the major supply side factor producing inflation.

Built-in inflation

Expectation of future inflations results in Built-in Inflation. A rise in prices results in

higher wages to afford the increased cost of living. Therefore, high wages result in
increased cost of production, which in turn has an impact on product pricing. The
circle hence continues.

Open Inflation

This is the simplest form of inflation where the price level rises continuously and is
visible to people. You can see the annual rate of increase in the price level.

Repressed Inflation

Let’s say that there is excess demand in an economy. Typically, this leads to an
increase in price.

However, the Government can take some repressive measures like price control,
rationing, etc. to prevent the excess demand from increasing the prices.

True Inflation

This takes place after the full employment of all the factor inputs of an economy.
When there is full employment, the national output becomes perfectly inelastic.
Therefore, more money simply implies higher prices and not more output.

Semi-Inflation

Even before full employment, an economy might face inflationary pressure due to
bottlenecks from certain sectors of the economy.

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Moderate Inflation

Moderate inflation occurs when the price level persistently rises over a period of
time at a mild rate. When the rate of inflation is less than 10 per cent annually, or
it is a single digit inflation rate, it is considered to be a moderate inflation.

Skewflation

Skewflation means the skewness of inflation among different sectors of the

economy — some sectors are facing huge inflation, some none and some
deflation.

Structural inflation

Structural inflation is the one prevailing in most developing countries. The

situation is due to the operation of the structural weakness (supply bottleneck,
lack of infrastructure, etc.) existing in a developing economy. Lack of adequate
supply responses or production to increase in demand is the cause of structural
inflation.

Price spiralling effect of inflation

Inflation has a tendency to pass on from one sector to the other depending upon
the prevailing conditions. In developing countries like India, inflation often begins
in primary commodities like food and fuel. Price rise may be appearing in one
sector or in the case of a few commodities. But it always has the tendency to
spread all over the economy-into different goods and services. Price rise in basic
goods spreading to other commodities is called price spiralling effect.

Imported inflation

Increase in the prices of imported goods like crude, coal etc., can produce
domestic inflation. this is called imported inflation.

Protein Inflation

Protein inflation is the increased prices of protein rich items like mil, meat, fish,
egg etc.

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Agflation is an increase in the price of agricultural food products caused by
increased demand, especially as a result of the use of these products in alternative
energy sources.

Food Inflation

Food inflation is the inflation visible in food items. There are two food inflation
measurements out the CPI -the Consumer Food Price Index and the WPI – Food
Price Index that measures food inflation in India.

Headline inflation

This is the inflation figure that we can observe from consumer price index of
wholesale price index. If the CPI inflation shows 4% during the last month, this 4%
is the headline inflation.

Seasonal inflation or non-core inflation

Seasonal inflation is the temporary price rise that usually occurs in primary
products like food and fuel items.

Core inflation or Underlying inflation

Core inflation which is also called underlying inflation, excludes seasonal

inflationary factors such as food and energy costs. The transitory or seasonal
inflation is removed from headline inflation to get core inflation.

Core and non-core are the two parts of total inflation or what we call the headline
inflation.

So, Headline inflation = Core inflation + Non-core inflation

Or

Core inflation = headline inflation – non-core or seasonal inflation

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Based on speed, there are 5 different types of inflation – Hyperinflation,
Galloping, Running, Walking, and Creeping.

Hyperinflation (Runaway Inflation)

It is a stage of very high rate of inflation. While economies seem to survive under
galloping inflation, a third and deadly strain takes hold when the cancer of
hyperinflation strikes. Hyperinflation occurs when the prices go out of control and
the monetary authorities are unable to impose any check on it. It is also known as
Runaway inflation.

Galloping Inflation

If mild inflation is not checked and if it is uncontrollable, it may assume the

character of galloping inflation. Galloping inflation (also jumping inflation) is one
that develops at a rapid pace (dual or triple-digit annual rates), perhaps only for a
brief period of time. Such form of inflation is dangerous for the economy as it
mostly affects the middle and low-income classes of population. Importantly, the
galloping inflation can precipitate an economic depression. Nevertheless, the
galloping inflation can still be accompanied by the real economic growth.

Running inflation

When prices rise rapidly at the rate of 10 to 20 per cent per annum, it is called
running inflation. This type of inflation has tremendous adverse effects on the
poor and middle class. Its control requires strong monetary and fiscal measures.

Walking inflation

Walking inflation occurs when prices rise moderately and annual inflation rate is a
single digit. This occurs when the rate of rise in prices is in the intermediate range
of 3 to less than 10 per cent.

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Creeping Inflation

Creeping inflation also known as mild inflation is as the name suggests a very
slow rise in prices of goods and services. If the prices increase by 3% or less
annually, then such inflation is creeping inflation. Such inflation is not harmful to
the economy. This is also known as mild inflation.

Reflation and Re-inflation

Reflation is stimulating the economy by producing inflation. It is done by

increasing money supply or by reducing taxes. The reflationary exercise is often
made by the government and the central bank is done to bring back the economy
from recession. In effect, reflation is the opposite of disinflation.

Reflation is the act of stimulating the economy by increasing the money supply or
by reducing taxes, seeking to bring the economy (specifically price level) back up
to the long-term trend. It is the opposite of disinflation, which seeks to return the
economy back down to the long-term trend.

Reflation, which can be considered a form of inflation (increase in the price level),
is different from inflation (narrowly speaking) in that “ inflation” is inflation above
the long-term trend line, while reflation is a recovery of the price level when it has
fallen below the trend line.

Re-inflation

Reflation is the term used in the context of Finance, whereas the term Re-inflation
is used in other Sectors such as Medicine. In Finance the term Reflation is only
used and not Re-inflation.

Disinflation

Disinflation is the slowing rate of inflation. Disinflation condition indicates that the
inflation rate is coming down marginally over a short term. Disinflation is different
from deflation. Deflation is decline in prices, whereas disinflation is decline in
inflation rate.

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Deflation

Deflation is the opposite condition of inflation. It is general decline in prices, often

caused by a reduction in the supply of money or credit. Deflation can be caused
also by a decrease in expenditure by government, consumers or business people.
Deflation produces many side effects. The major one is that it is a disincentive for
the producers. Because of the declined demand and lower investment,
unemployment occurs in the economy. Gradually, deflation can worsen into a
recession and depression. It is often said that among the two undesirables-
inflation and deflation; deflation is more dangerous. Hence, Central banks try to
avoid severe deflation. Deflation is also known as Negative Inflation

Stagnation

Stagnation is a prolonged period of little or no growth in an economy. Real

economic growth of less than 2% annually is considered stagnation, and it is
highlighted by periods of high unemployment and involuntary part-time
employment. Stagnation can occur on a macroeconomic scale or a smaller scale in
specific industries or companies. Stagnation can occur as a temporary condition,
such as a growth recession or temporary economic shock, or as part of a long-
term structural condition of the economy.

Stagflation

Stagflation is a hybrid of inflation and stagnation. Stagnation is very low economic

growth. Usually inflation is accompanied growth of the economy. In this sense,
stagflation is a paradoxical situation. Since both inflation and stagnation are
undesirable economic conditions, stagflation is double pain for the economy.

Shrinkflation

Shrinkflation is the practice of reducing the size of a product while maintaining its
sticker price.

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Philip’s curve

Philip’s curve shows a trade-off between inflation and unemployment.

Unemployment can be reduced by affording to inflation. The concept has been
developed out of a study made by British Economist William Philips on the British
economy. The Phillips curve brings an inverse relationship between the rate of
unemployment and the rate of inflation in an economy. It can serve as a menu
between two evils -inflation and unemployment; for the policy makers. Stated
simply, the lower the unemployment in an economy, the higher will be the rate of
inflation.

Ratchet effect

Ratchet effect is a price/age situation where prices or wages goes upwards only
and can’t be reversed or reduced.

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06. Theories of Interest
Interest is the Reward for Capital. The following are some Theories of Interest.

1. The Marginal Productivity Theory

2. The Demand-Supply Theory

3. The Abstinence or Waiting Theory

4. The ‘Agio’ or the ‘Time Preference’ Theory

5. The Loanable Funds Theory

6. The Liquidity-Preference Theory.

The Marginal Productivity Theory:

The marginal productivity theory of interest states that the marginal productivity
of capital determines the rate of interest. Interest is paid because capital is
productive and is equal to the marginal product of capital. The application of
capital increases considerably the volume of production.

In today’s complex production system, the role of capital is highly important as a

producer can produce a much larger volume than what can without capital.
Accordingly, the higher productivity of capital makes the interest rate higher and
the lower productivity keeps it at a low level. So, a producer would employ capital
up to that amount at which the rate of interest becomes equal to the value of the
marginal product of capital.

Capital is demanded because it is productive; it makes possible a much greater

future output. Firms invest (i.e., create capital) because they expect to earn profits.
They anticipate that the newly created capital will yield a series of returns during
its lifetime which will exceed the costs incurred in its purchase and maintenance.

The firm undertaking investment will esti-mate the net additional profits to be
derived from the increased output and these expected net annual receipts can
then be expressed in the form of a percentage annual return on the initial outlay.
This percentage yield is the productivity of capital.

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If we assume that the stock of capital is being increased relative to the stocks of
the other factors of production, the returns to capital will be diminishing. Capital,
like the other factors of production, is subject to the Law of Diminishing Marginal
Productivity.

More formally we say that profitability is maximised when,

The MP of Capital = The Rate of Interest

The marginal productivity of capital, like that of labour, has two com-ponents:

(i) The physical productivity of the capital, and

(ii) The price of the goods produced with that capital. Changes in either of these
components will shift the MP curve which is, of course, the demand curve for
capital.

But, it is pointed out that the marginal productivity of capital cannot determine
the rate of interest, as the former is itself, as pointed out by J. M. Keynes,
governed by the latter.

Again, it is also pointed out that like the marginal product of the other factors, the
marginal product of capital cannot be separately determined as every product is
jointly produced by all the factors.

Furthermore, the theory is one-sided as it emphasises only the demand side of

capital for the determination of interest.

Finally, the use of capital does not always increase production as postulated in the
theory.

The Demand-Supply Theory ( Classical Theory of Interest)

The theory is also called Saving Investment Theory of Interest. The theory was
propounded and developed by classical economists, namely, Marshall, Pigou.

According to this theory, the demand for and the supply of capital jointly
determine the rate of interest.

While the demand for capital is governed by its marginal productivity its supply
depends on saving.

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The rate of interest reaches equilibrium at the point where the demand for capital
becomes equal to its supply.

But the theory is criticised as it assumes the existence of full employment as it fails
to take into account the effect of changes in investment upon the level of income
and savings.

The Abstinence or Waiting Theory:

The abstinence theory holds that interest is the reward for the abstaining from the
present consumption. People save to create capital goods, but saving implies the
abstinence from, or the sacrifice of, current consumption.

The abstinence is, however, unpleasant. So, interest must be paid to induce the
people for making the sacrifice of present consumption. Mar-shall substituted
‘waiting’ for ‘abstinence’ because the idea of pain or suffering is associated with
abstinent. But the abstinence theory is criticised on the ground that abstinence
does not always involve sufferings. More-over, interest cannot be regarded as the
price paid for waiting because many people accept ‘waiting’ without any interest.

The ‘Agio’ or the ‘Time Preference’ Theory:

According to the Austrian economist Bohm Bawerk, interest is the agio or

premium which the present consumption has over future consumption of the
same amount.

Eugen von Bohm Bawerk advanced three reasons for the emergence of interest
rate as:

(a) Present wants are felt more keenly than future wants. If now everyone expects
a continuously rising income stream, then the law of diminishing marginal utility
implies positive time preference which is indicated by the positive rate of interest.

(b) persistent underestimation of future which Bohm Bawerk attributed to:

(i) Deficiency of imagination, (ii) Limited willpower, and (iii) The shortness and
uncertainty of life.

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(c) The third reason for the emergence of interest is technical superiority of
present over future goods. Because of the greater productivity of capital people
prefer to have present goods which can be used as capital, so that they have more
goods in future. They are, therefore, prepared to pay a premium on present
goods, as against future goods. These are the essence of the time preference
theory of interest.

Later on, Fisher developed the time preference theory on the basis of the agio
theory. According to him, interest functions as a price in exchange between
present and future goods. As people have a preference for present over future
consumption, interest has to be paid to win over the individual’s impatience i.e.,
his desire to spend his income for present consumption in preference to future
enjoyment. But this theory is one-sided as it has explains only the supply side of
capital.

The Loanable Funds Theory:

The neo-classical writers hold the view that the rate of interest is the price for use
of loan capital and is determined by the demand for and the supply of loanable
funds.

The Liquidity-Preference Theory:

According to J. M. Keynes, the rate of interest is determined by the demand for

and the supply of money Interest is the reward for parting with liquidity for a
specified period of time.

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07. Business Cycles
A business cycle, also known as a "trade cycle" or "economic cycle," is a series of
stages in the economy's expansion and contraction. It is constantly repeated and
is primarily measured by the rise and fall of a country's gross domestic product
(GDP).

A business cycle goes through four distinct stages, known as phases, over the
course of its life: boom, recession, depression, and recovery.

Due to increased globalization, business cycles occur at similar times across

countries more frequently than they did previously.

Income growth in any economy occurs by increasing the level of production in the
economy, i.e., real gross national product (GNP). It means that development
necessitates greater growth, i.e., higher levels of economic activity. The
government of an economy strives to maintain a higher level of economic activity
by enacting appropriate economic policies. However, the economy frequently fails
to achieve this goal. As a result, economies fluctuate between the best and worst
levels of economic activity, referred to in economics as a boom and a depression,
respectively. They can be categorized as different stages of an economy's
economic activities.

Between boom and bust, there may be many other economic activity situations,
such as stagnation, slowdown, recession, and recovery.

Economists refer to fluctuations in the level of economic activity between

depressions and booms as the business cycle or trade cycle, with recession and
recovery serving as the main intermediate stages. Stagnation and slowdown are
also intermediate stages of the business cycle.

Stages of the Business Cycle

1. Expansion

The first stage in the business cycle is expansion. In this stage, there is an increase
in positive economic indicators such as employment, income, output, wages,
profits, demand, and supply of goods and services. Debtors are generally paying
their debts on time, the velocity of the money supply is high, and investment is
high. This process continues as long as economic conditions are favourable for
expansion.
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2. Peak

The economy then reaches a saturation point, or peak, which is the second stage
of the business cycle. The maximum limit of growth is attained. The economic
indicators do not grow further and are at their highest. Prices are at their peak.
This stage marks the reversal point in the trend of economic growth. Consumers
tend to restructure their budgets at this point.

3. Recession

The recession is the stage that follows the peak phase. The demand for goods and
services starts declining rapidly and steadily in this phase. Producers do not notice
the decrease in demand instantly and go on producing, which creates a situation
of excess supply in the market. Prices tend to fall. All positive economic indicators
such as income, output, wages, etc., consequently start to fall.

4. Depression

There is a commensurate rise in unemployment. The growth in the economy

continues to decline, and as this falls below the steady growth line, the stage is
called a depression.

5. Trough

In the depression stage, the economy’s growth rate becomes negative. There is
further decline until the prices of factors, as well as the demand and supply of
goods and services, contract to reach their lowest point. The economy eventually
reaches the trough. It is the negative saturation point for an economy. There is
extensive depletion of national income and expenditure.

6. Recovery

After the trough, the economy moves to the stage of recovery. In this phase, there
is a turnaround in the economy, and it begins to recover from the negative
growth rate. Demand starts to pick up due to low prices and, consequently, supply
begins to increase. The population develops a positive attitude towards
investment and employment and production starts increasing.

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Employment begins to rise and, due to accumulated cash balances with the
bankers, lending also shows positive signals. In this phase, depreciated capital is
replaced, leading to new investments in the production process. Recovery
continues until the economy returns to steady growth levels.

This completes one full business cycle of boom and contraction. The extreme
points are the peak and the trough.

Explanations by Economists

John Keynes explains the occurrence of business cycles is a result of fluctuations

in aggregate demand, which bring the economy to short-term equilibriums that
are different from a full-employment equilibrium.

Keynesian models do not necessarily indicate periodic business cycles but imply
cyclical responses to shocks via multipliers. The extent of these fluctuations
depends on the levels of investment, for that determines the level of aggregate
output.

In contrast, economists like Finn E. Kydland and Edward C. Prescott, who are
associated with the Chicago School of Economics, challenge the Keynesian
theories. They consider the fluctuations in the growth of an economy not to be a
result of monetary shocks, but a result of technology shocks, such as innovation.

Depression, Recession & Slowdown

A Recession is a widespread economic decline that lasts for several months. A

Recession is a period of decline in total output, income, employment and trade,
usually lasting six months to a year. In a recession, Gross Domestic Product
contracts for at least two quarters. In a recession, GDP growth will slow for several
quarters before it turns negative.

A Depression a more severe downturn that lasts for years. Depression is a

prolonged period of economic recession marked by a significant decline in
income and employment. A common rule of thumb for depression is a negative
GDP of 10% of more, for more than 3 years.

A slowdown, on the other hand, simply means that the pace of the GDP growth
has decreased. During slowdown, the GDP growth is still positive but the rate of
growth has decreased.

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There hasn’t been a decline large enough to call it a ‘depression’ since the Great
Depression (of 1930’s). However, the recession that began in 2007 has been called
‘The Great Recession’ .It was because of high unemployment for a long time, and
the recession lasted for 18 months.

Conclusion

A business cycle includes various events that result in economic fluctuations in a

nations growth. Increased economic instability and uncertainty have the potential
to discourage investments thereby reducing growth. Further lack of innovations
may put an economy on the path of a slump and other unforeseen disasters.

Some economists suggest that there is another more casual way to explain the
difference between a recession and a depression (of course, in a lighter vein )

“When your neighbor loses their job, it’s a recession.

When you lose your job, that’s a depression!”

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08. Monetary Policy and Fiscal Policy
Monetary Policy

Monetary policy is adopted by the monetary authority of a country that controls

either the interest rate payable on very short-term borrowing or the money
supply. The policy often targets inflation or interest rate to ensure price stability
and generate trust in the currency.

Monetary policy refers to the policy of the central bank – i.e. Reserve Bank of India
– in matters of interest rates, money supply and availability of credit.

It is through the monetary policy, RBI controls inflation in the country. Control of
money supply helps to manage inflation or deflation.

In short, Monetary policy refers to the use of monetary instruments under the
control of the central bank to regulate magnitudes such as interest rates, money
supply and availability of credit with a view to achieving the ultimate objective of
economic policy.

The Reserve Bank of India (RBI) is vested with the responsibility of conducting
monetary policy. This responsibility is explicitly mandated under the Reserve Bank
of India Act, 1934.

The monetary policy in India is carried out under the authority of the Reserve
Bank of India. RBI uses various monetary instruments like REPO rate, Reverse
RERO rate, SLR, CRR etc to achieve its purpose.

Expansionary and Contractionary Monetary Policy

The monetary policy can be expansionary or contractionary.

An expansionary monetary policy is focused on expanding (increasing) the money

supply in an economy. An expansionary monetary policy is implemented by
lowering key interest rates thus increasing market liquidity.

A contractionary monetary policy is focused on contracting (decreasing) the

money supply in an economy. A contractionary monetary policy is implemented
by increasing key interest rates thus reducing market liquidity.

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Main Objectives of Monetary Policy

Simply put the main objective of monetary policy is to maintain price stability
while keeping in mind the objective of growth as price stability is a necessary
precondition for sustainable economic growth.

In India, the RBI plays an important role in controlling inflation through the
consultation process regarding inflation targeting. The current inflation-targeting
framework in India is flexible.

The primary objective of monetary policy is to maintain price stability while

keeping in mind the objective of growth. Price stability is a necessary precondition
for sustainable growth.

The Monetary Policy Framework (MPF)

While the Government of India sets the Flexible Inflation Targeting Framework in
India, it is the Reserve Bank of India (RBI) which operates the Monetary Policy
Framework of the country.

The RBI Act explicitly provides the legislative mandate to the Reserve Bank to
operate the monetary policy framework of the country.

The framework aims at setting the policy (repo) rate based on an assessment of
the current and evolving macroeconomic situation, and modulation of liquidity
conditions to anchor money market rates at or around the repo rate.

Repo rate changes transmit through the money market to the entire financial
system, which, in turn, influences aggregate demand – a key determinant of
inflation and growth.

Once the repo rate is announced, the operating framework designed by the
Reserve Bank envisages liquidity management on a day-to-day basis through
appropriate actions, which aim at anchoring the operating target – the weighted
average call rate (WACR) – around the repo rate.

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The Monetary Policy Process (MPP)

The Monetary Policy Committee (MPC) determines the policy interest rate
required to achieve the inflation target.

The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in
formulating the monetary policy. Views of key stakeholders in the economy and
analytical work of the Reserve Bank contribute to the process of arriving at the
decision on the policy repo rate.

The Financial Markets Operations Department (FMOD) operationalises the

monetary policy, mainly through day-to-day liquidity management operations.

The Financial Market Committee (FMC) meets daily to review the liquidity
conditions so as to ensure that the operating target of monetary policy (weighted
average lending rate) is kept close to the policy repo rate. This parameter is also
known as the weighted average call money rate (WACR).

Role of the Monetary Policy Committee (MPC)

The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act,
2016, to provide for a statutory and institutionalized framework for a Monetary
Policy Committee, for maintaining price stability, while keeping in mind the
objective of growth.

The Monetary Policy Committee is entrusted with the task of fixing the benchmark
policy rate (repo rate) required to contain inflation within the specified target
level.

Now in India, the policy interest rate required to achieve the inflation target is
decided by the Monetary Policy Committee (MPC).

MPC is a six-member committee constituted by the Central Government.

The MPC is required to meet at least four times a year. The quorum for the
meeting of the MPC is four members. Each member of the MPC has one vote, and
in the event of an equality of votes, the Governor has a second or casting vote.

The resolution adopted by the MPC is published after the conclusion of every
meeting of the MPC.

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Once in every six months, the Reserve Bank is required to publish a document
called the Monetary Policy Report to explain:

(1) the sources of inflation and

(2) the forecast of inflation for 6-18 months ahead.

Instruments of Monetary Policy

Some of the following instruments are used by RBI as a part of their monetary
policies.

Open Market Operations: An open market operation is an instrument which

involves buying/selling of securities like government bond from or to the public
and banks. The RBI sells government securities to control the flow of credit and
buys government securities to increase credit flow.

Open Market Operations (OMOs) include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity,
respectively.

Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified amount of bank
deposits which banks are required to keep with the RBI in the form of reserves or
balances. The higher the CRR with the RBI, the lower will be the liquidity in the
system and vice versa.

CRR is the average daily balance that a bank is required to maintain with the
Reserve Bank as a share of such percentage of its Net demand and time liabilities
(NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.

Statutory Liquidity Ratio (SLR): All financial institutions have to maintain a

certain quantity of liquid assets with themselves at any point in time of their total
time and demand liabilities. This is known as the Statutory Liquidity Ratio. The
assets are kept in non-cash forms such as precious metals, bonds, etc.

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Statutory Liquidity Ratio (SLR) is the share of NDTL that a bank is required to
maintain in safe and liquid assets, such as unencumbered government securities,
cash and gold.

Changes in SLR often influence the availability of resources in the banking system
for lending to the private sector.

Bank Rate Policy: Also known as the discount rate, bank rates are interest
charged by the RBI for providing funds and loans to the banking system. An
increase in bank rate increases the cost of borrowing by commercial banks which
results in the reduction in credit volume to the banks and hence the supply of
money declines. An increase in the bank rate is the symbol of the tightening of
the RBI monetary policy.

Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills
of exchange or other commercial papers.

Bank Rate is the rate of interest which a Central Bank (RBI) charges on the loans
and advances to a commercial bank, without selling or buying any security.

The Bank Rate is published under Section 49 of the Reserve Bank of India Act,
1934.

This rate has been aligned to the MSF rate and, therefore, changes automatically
as and when the MSF rate changes alongside policy repo rate changes.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight
liquidity to banks against the collateral of government and other approved
securities under the liquidity adjustment facility (LAF).

Repo rate is the discount rate at which a central bank (RBI) repurchases
government securities from the commercial banks, depending on the level of
money supply it decides to maintain in the country's monetary system. ... Repo is
short for Repossession.

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Bank Rate & Repo Rate – Both are similar in respect of nature of transaction
involved. Both are related to Funds lent / invested by RBI to Commercial Banks.
However, Bank Rate related to Long Term Transactions and no collateral is
involved. Repo Rate is related to Short Term transactions and it is backed by
Collaterals with Repurchase Agreement.

Normally Bank Rate is higher than Repo Rate.

Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs
liquidity, on an overnight basis, from banks against the collateral of eligible
government securities under the LAF.

Reverse Repo Rate is the rate at which RBI borrows money from the commercial
banks.

Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as

term repo auctions. Progressively, the Reserve Bank has increased the proportion
of liquidity injected under fine-tuning variable rate repo auctions of a range of
tenors. The aim of term repo is to help develop the inter-bank term money
market, which in turn can set market-based benchmarks for pricing of loans and
deposits, and hence improve the transmission of monetary policy. The Reserve
Bank also conducts variable interest rate reverse repo auctions, as necessitated
under the market conditions.

LAF is a monetary policy tool, primarily used by the RBI, to manage liquidity and
provide economic stability. LAF include both Repo and Reverse Repo Agreements.
LAF can manage inflation by increasing and reducing money supply

Marginal Standing Facility (MSF): A facility under which scheduled commercial

banks can borrow an additional amount of overnight money from the Reserve
Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at
a penal rate of interest. This provides a safety valve against unanticipated liquidity
shocks to the banking system.

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MSF (Marginal Standing Facility) is a window for banks to borrow from Reserve
Bank of India in emergency situation when interbank liquidity dries up completely.
Banks borrow from the Central Bank by pledging government securities at a rate
higher than the Repo Rate.

Under MSF, banks can borrow funds up to one percentage of their Net Demand
and Time Liabilities (NDTL).

Corridor: The MSF rate and reverse repo rate determine the corridor for the daily
movement in the weighted average call money rate.

Market Stabilisation Scheme (MSS): This instrument for monetary management

was introduced in 2004. Surplus liquidity of a more enduring nature arising from
large capital inflows is absorbed through the sale of short-dated government
securities and treasury bills. The cash so mobilised is held in a separate
government account with the Reserve Bank.

Credit Ceiling: With this instrument, RBI issues prior information or direction that
loans to the commercial bank will be given up to a certain limit. In this case, a
commercial bank will be tight in advancing loans to the public. They will allocate
loans to limited sectors. A few examples of credit ceiling are agriculture sector
advances and priority sector lending.

Monetary Policy of India - Miscellaneous

Flexible Inflation Targeting Framework: Now there is a flexible inflation

targeting framework in India (after the 2016 amendment to the Reserve Bank of
India (RBI) Act, 1934). The amended RBI Act provides for the inflation target to be
set by the Government of India, in consultation with the Reserve Bank, once every
five years.

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Long Term Repo Operation (LTRO)

Long Term Repo Operation (LTRO) is fundamentally a means to infiltrate liquidity

into the banking system and financial institutions to ensure the streamlined
transmission of credit flow and monetary policy actions into the Indian economy.

Furthermore, after the RBI (Reserve Bank of India) announced the repo rate cuts,
there was a question about the efficient transmission of those repo rate cuts to
the clients. Therefore, by going for LTRO (Long Term Repo Operation), the RBI
assured the efficient communication of the monetary policy decisions.

In simpler terms, under LTRO (Long Term Repo Operation), the Reserve Bank of
India presents longer-term loans, varying from one month to three years, to banks
and financial institutions at the prevailing market rate.

The primary aim of LTRO is to reduce the cost of accounts, as banks obtain long-
term funds at lower interest rates.

The LTRO is a mechanism under which the RBI renders loans to banks and
financial institutions at the current repo rate, acknowledging government
securities with equivalent or higher terms as the collateral.

While the Reserve Bank of India’s existing windows of MSF (Marginal Standing
Facility) and LAF (Liquidity Adjustment Facility) offer banks and financial
institutions funds for their immediate requirements ranging from 1-28 days, the
LTRO (Long Term Repo Operation) provides them with liquidity for 1- to 3-year
funds requirements.

LTRO functions remain intended to control short-term interest rates in the

industry from sailing a long way away from the prevailing policy rate, which is the
repo rate.

Banks and financial institutions must place their requests for the loan amount
sought under a long-term repo operation during the window timing at the
existing policy repo rate, and bids above or below the policy rate will get rejected.

LTRO transactions occur on E-KUBER, a core banking solution platform introduced

in 2012. These Core Banking Solutions (CBS) refers to the solution that allows
banks to present a multitude of client-centric assistance round the clock from a
single place, supporting corporate and retail banking activities.

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The minimum bid sum for banks and financial institutions would be INR 1 crore
and multiples. In addition, there will be no limitation on the maximum bidding
sum by individual bidders.

Advantages of LTRO (Long Term Repo Operation)

Reduce the cost of funds for banks and financial institutes: LTRO aims to
reduce the cost of funds borrowed for banks and financial institutions without
slashing deposit rates. This will make the reverse repo rate the prevailing policy
rate over a fixed point in time.

Help boost investment: It is expected to reduce short-term rates and encourage

investment in corporate bonds.

Guarantee banks and financial institutions have durable liquidity: These

actions get carried forward to guarantee banks the availability of stable liquidity at
an affordable cost relative to existing market conditions.

Ensure credit flow to banking sectors: This should motivate banks to embark on
maturity transformation seamlessly and smoothly to increase credit flows.

In a nutshell, the LTRO (Long Term Repo Operations) will assist the Reserve Bank
of India to guarantee that the banks and financial institutions lower their lending
rates without diminishing the policy rates.

Targeted Long Term Repo Operations (TLTRO) (also known as ‘On Tap
TLTRO’ scheme)

TLTRO scheme allows banks to borrow funds from the RBI at the prevailing repo
rate for a period of one to three years, with government securities that have an
equivalent or higher tenure serving as collateral.

These funds need to be invested in corporate bonds, commercial papers, and

non-convertible debentures distributed in 31 specific sectors.

LTRO Vs TLTRO

TLTRO is same as LTRO with a difference that the money borrowed by the banks
under TLTRO Scheme has to be deployed in investment-grade corporate bonds,
commercial paper, and non-convertible debentures.

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Carrying Costs of Sterilisation - The RBI conducts Market Stabilisation Scheme
to withdraw excess liquidity from the financial system. As a part of this exercise,
the RBI issues government bonds or Market Stabilisation Bonds in the market. The
proceeds (money) from MSS cannot be used as it should be kept idle to check
inflation. At the same time, an interest payment is to be made to the bond
holders. The interest payment burden is the undesirable element of the MSS
exercise. Here, the government accommodates the interest payment expenditure
under the budget account and spends money out of the budget. This dead
expenditure is called referred as carrying cost of sterilisation

Fiscal Policy
Fiscal Policy deals with the revenue and expenditure policy of the Govt. The word
fiscal has been derived from the word ‘fisk’ which means public treasury or Govt
funds.

Objectives of Fiscal Policy

Higher Economic Growth

Price Stability

Reduction in Inequality

The above objectives are met in the following ways:

Consumption Control – This way, the ratio of savings to income is raised.

Raising the rate of investment.

Taxation, infrastructure development.

Imposition of progressive taxes.

Exemption from the taxes provided to the vulnerable classes.

Heavy taxation on luxury goods.

Discouraging unearned income.

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Components of Fiscal Policy

There are three components of the Fiscal Policy of India:

Government Receipts

Government Expenditure

Public Debt

Government Receipts

The categorisation of the government receipts is given below:

Revenue Receipt ;

Tax Revenue (Direct Tax ; Indirect Tax)

Non Tax Revenue (Fees; License and Permits; Fines and Penalties, etc)

Capital Receipt

Loans Recovery

Disinvestments

Borrowing and other liabilities

Disinvestment

When the government sells or liquidates its assets of Central Public Sector
Enterprises, State Public Sector Enterprises or other assets; it is referring to
disinvestment. This approach caters to the objective of fiscal burden reduction.

Government Expenditure

There are two classifications of public expenditure:

Revenue Expenditure – It is a recurring expenditure: (Interest Payments; Defence

Expenses; Salaries to Central Government employees, etc are examples of
revenue expenditure)

Capital Expenditure – It is a non-recurring expenditure (Loans repayments; Loans

to public enterprises, etc.

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Plan and Non-Plan expenditure have been scrapped with the abolishing of
the Planning Commission of India.

Fiscal Consolidation

The measures that are taken to improve the fiscal deficit comes under the process
of fiscal consolidation. Fiscal Consolidation is a process where government’s fiscal
health is getting improved and is often indicated by declining fiscal deficit.
Improved tax revenue realization and better aligned expenditure are the
components of fiscal consolidation that brings fiscal deficit to a manageable level.
Improved tax revenue realization and controlled expenditure are the crucial
components of fiscal consolidation.

Through fiscal consolidation, the government tries for:

Improvement in revenue receipts

Better alignment in the public expenditure

The government introduced the FRBM Act aiming for fiscal consolidation.

Fiscal Responsibility and Budget Management Act (FRBMA), 2003

The objective of this FRBM Act is to impose fiscal discipline on the government.

It means fiscal policy should be conducted in a disciplined manner or a

responsible manner i.e. government deficits or borrowings should be kept within
reasonable limits and the government should plan its expenditure in accordance
with its revenues so that the borrowing should be within limits.

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

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Fiscal Federalism

It refers to the distribution of resource between centre and states.

The distribution of taxes between centre and states is mentioned in the 7th
schedule of the Indian constitution. There are 3 lists where the taxes are
distributed

Union List
State List
Concurrent List

Compensatory Fiscal Policy - During recession, decline in aggregate demand will

reduce consumption, investment, employment etc. leading to down turn and
recession in the economy. In this juncture, effort by the government through
additional expenditure (and reduced taxes) will fill the gap in demand,
consumption and investment. This is known as Compensatory Fiscal Policy.

Era of Financial Repression - In the history of Indian banking, the pre-reform

period or pre-1991 is known as the era of financial repression. Here, the
government exerted big control over the banking system with commercially
hurting policies on the banking sector including high CRR, SLR, administrative
interest rate etc. These policies were started from 1969 onwards and most of them
were phased out with the launch of financial sector reforms of the 1990s.

Escape Clause (FRBM) refers to the situation under which the central
government can flexibly follow fiscal deficit target during special circumstances.
This terminology was innovated by the NK Singh Committee on FRBM.

Golden Rule in Fiscal Policy means that the government should borrow to
finance investment so that it can benefit future generations.

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Inflation Targeting is a central banking policy that revolves around adjusting
monetary policy to achieve a specified annual rate of inflation.

Market Stabilisation Scheme (MSS) – Under MSS, the RBI issues Market
Stabilisation Bonds (MSBs)to withdraw the excess liquidity in the economy. These
bonds are government bonds provided by the central government to the RBI for
the dedicated purpose of withdrawing excess liquidity under the MSS. The value
of bonds in rupees will be treated as net RBI debt to the government. This is
because the proceeds from MSS will not go to the government, though it is the
government who provided the bonds.

Monetised Fiscal Deficit (MFD) is that part of the fiscal deficit financed out of
borrowing from the RBI. It indicates borrowings form the RBI to run the budget.
This practice was phased out in 1997. Hence, the MFD is not relevant now. MFD is
highly inflationary.

Outcome Budget is a progress card on what various departments have done with
the amount assigned in the previous annual Budget. It measures the outcomes of
all government programmes and whether the money has been spent for the
purpose it was sanctioned.

Recession Proof is a term used to describe an asset, company, industry or other

entity that is believed to be economically resistant to the effects of a recession.

Sterilisation in the context of monetary policy refers to the activity of the RBI of
taking away the excess money supply created due to its foreign exchange market
intervention. Here, excess money supply has been occurred when the RBI bought
dollars (foreign exchange/currency) from the foreign exchange market while
giving rupee.

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NK Singh Committee (FRBM Review Committee)

The FRBM review committee, also known as NK Singh Committee was formed in
2016 under the Chairmanship of NK Singh, former revenue and expenditure
secretary. Its mandate was to review the Fiscal Responsibility and Budget
Management Act (FRBM). The other members were Urjit Patel, former finance
secretary Arvind Subramanian, etc.

The NK Singh Committee report was submitted in 2017. It prepared a draft Debt
Management and Fiscal Responsibility Bill 2017 to replace the physical
responsibility and budget management Act 2003.

Fiscal Council

The NK Singh Committee proposed to create an autonomous fiscal Council with a

chairperson and two members to be appointed by the centre. To maintain its
independence it proposed a non-renewable 4-year tenure for the chairperson and
the members. Further, these people should not be Central or State Government
employees at the time of their appointment.

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09 System of National Accounts and GDP Concepts
National Income Accounting

National income accounting refers to the set of methods and principles that are
used by the government for measuring production and income, or in other words
economic activity of a country in a given time period.

The various measures of determining national income are GDP (Gross Domestic
Product), GNP (Gross National Product), and NNP (Net National Product) along
with other measures such as personal income and disposable income.

The importance of national income accounting is that it is helpful in facilitating

techniques and procedures for measurement of output and income at the
aggregate level. It is a process of preparing national income accounts that is
based on the principles of double entry system of business accounting.

National income accounting helps in summarising the economic performance of a

country by measuring the national income aggregates for the year.

The government policies are framed on the basis of the data obtained from
national income accounting.

National Income Accounting Equation

National income accounting equation is an equation that shows the relationship

between income and expense of an economy and other categories. It is
represented by the following equation:

Y = C + I + G + (X – M)

Where

Y = National income ; C = Personal consumption expenditure ; I = Private

investment ; G = Government spending ; X = Net exports ; M = Imports

The most important metrics that are determined by national income accounting
are GDP, GNP, NNP, disposable income, and personal income. Let us know more
about these concepts briefly in the following lines.

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Gross Domestic Product (GDP)

The most important metric that is determined by national income accounting is

GDP or the gross domestic product. GDP is defined as the total monetary or the
market value of all the final goods and services that are produced within the
geographical boundaries of a country.

GDP works as a scorecard that reflects the economic health of a country. It is

calculated on an annual basis. GDP helps in estimating the growth rate of a
country. GDP can be calculated using the three methods, which are expenditures
method, production method, and income method.

The other indicators of national income are derived from GDP.

GDP can be calculated by the following two methods:

Expenditure approach

Income approach

Calculation of GDP by expenditure approach is,

GDP = C + I + G + (X – M)

Where - GDP = Gross domestic product ; C = Personal consumption expenditure;

I = Private investment ; G = Government spending ; X = Net exports ;

M = Imports

Income approach calculation

GDP = Private consumption + Gross investment + Government investment +

Government spending + (Exports – Imports)

Gross National Product (GNP)

Gross national product or GNP is a measure of the total value of all the finished
goods and services that is produced by the citizens of a country irrespective of
their geographic location. It calculates only the final or finished goods.

It signifies how much the citizens of a country are contributing to the economy. It
does not include income earned by foreign nationals within the country.
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GNP is calculated using the following formulae:

GNP = C + I + G + X + Z

Where - C = Consumption ; I = Investment; G = Government ; X = Net exports ;

Z = Net factor income from abroad ; Net National Product (NNP)

Net National Product or NNP is the total value of all goods and services that are
produced in a country during a given period of time minus the depreciation. It is
represented as follows:

NNP = GNP – Depreciation

Methods of National Income Accounting

There are three methods of measuring national income. They are as follows:

Product method: In this method, a country’s national income can be calculated

by adding the output of all the firms in the economy to determine the nation’s
output.

Income method: This method is used to calculate incomes generated by

production. It includes income from employment, rent obtained for buildings,
patents, and copyrights, return on capital from the private sector and public
sector, depreciation, etc.

Expenditure method: In this method, the national income is calculated by adding

all the expenditures that are done for purchasing the national output.

Functions of National Income Accounting

The basic functions of national income accounting are as follows:

To determine the economic status of a country.

To provide a basis of evaluation and reviewing of policies that are under

implementation.

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Uses of National Income Accounting

It reflects the economic performance of an economy and shows its strengths

and weaknesses.

It helps to determine the structural changes that are appearing in the

economy.

It helps in comparing nations based on national income.

It shows the contribution of each sector towards the growth of the economy.

Father Of National Income Accounting

Sir Richard Stone is regarded as the father of national income accounting. He

studied law at the University of Cambridge, but later under the influence of John
Maynard Keynes decided to study Economics.

National Accounts or National Account Systems (NAS) are defined as a measure

of macroeconomic categories of production and purchase in a nation. These
systems are essentially methods of accounting used to measure the economic
activity of a country based on an agreed upon framework and set of accounting
rules. National accounts are specifically intended to present specific economic
data in such a way as to facilitate analysis and even policy-making.

National accounting provides economists and statisticians with detailed

information that can be used to track the health of an economy and to forecast
future growth and development.

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10 Union Budget
The Union Budget of India, also referred to as the Annual Financial Statement in
Article 112 of the Constitution of India, is the annual budget of the Republic of
India.

The Government presents it on the first day of February so that it could be

materialised before the beginning of new financial year in April.

According to Article 112 of the Indian Constitution, the Union Budget of a year,
also referred to as the annual financial statement, is a statement of the estimated
receipts and expenditure of the government for that particular year.

Union Budget keeps the account of the government's finances for the fiscal year
that runs from 1st April to 31st March. Union Budget is classified into Revenue
Budget and Capital Budget.

Revenue Budget includes the government's revenue receipts and expenditure.

There are two kinds of revenue receipts - tax and non-tax revenue. Revenue
expenditure is the expenditure incurred on day to day functioning of the
government and on various services offered to citizens. If revenue expenditure
exceeds revenue receipts, the government incurs a revenue deficit.

Capital Budget includes capital receipts and payments of the government. Loans
from public, foreign governments and RBI form a major part of the government's
capital receipts. Capital expenditure is the expenditure on development of
machinery, equipment, building, health facilities, education etc. Fiscal deficit is
incurred when the government's total expenditure exceeds its total revenue.

The state budget is a financial document including income and expenditure for
the year. An income- and expense-based spending plan is referred to as a budget.

The three types of budgets are a surplus budget, a balanced budget, and a deficit
budget. The state budget is a financial document including income and
expenditure for the year. An income and expense based spending plan is referred
to as a budget. In other words, it’s an estimation of the amount of money you’ll
earn and spend over a specific time frame, like a month or a year. Financial
stability is facilitated by a budget.

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Balanced Budget

In this budget, estimated income and projected expenses are equal. Many
economists believe that government spending should not exceed its revenue.

A balanced budget cannot translate into financial stability automatically in terms

of economic depression or deflation due to the absence of any scope for
additional spending.

The government can come to the aid of the people. It can borrow money and
spend it on public works to increase employment and the overall demand for
goods and services and encourage investment.

Surplus Budget

In this budget, estimated government revenues are higher than estimated

government expenditures. It serves to reduce the state’s public debt or increase
its savings.

The extra funds can be used to pay fees, which decreases the interest payable and
is suitable for the economy in the long run.

Most useful in times of inflation to reduce aggregate demand.

Deficit Budget

The estimated government revenue in this budget is below estimated government

spending. Either the government’s liabilities or reserves are affected. It is most
helpful during periods of deflation.

It contributes to rising the employment rate.

It encourages economic expansion by generating more demand.

Depression and unemployment are reduced by it.

The main drawback is that it may result in overspending by the government or

debt accumulation.

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Miscellaneous Points related to Budget

Department of Economic affairs prepares Union Budget of India

The Four Main Types of Budgets and Budgeting Methods.

The first budget of India was submitted on 18 February 1860 by James Wilson.

P C Mahalanobis is known as the father of Indian budget.

Presentation of Budget - Process

The union government has to present the budget of India in February to ensure
that the new budget will come into effect from April, the first month of India’s
financial year.

Though the finance minister is entrusted with the process of preparing and
presenting the budget, the budget is made through consultations involving the
ministry of finance along with various ministries and the NITI Aayog.

After the beginning of a new financial year, the ministry of finance issues
guidelines for spending. In consonance with the guidelines, different ministries,
Union Territories, departments and defence forces prepare their spending
estimates.

Comprehensive meetings are then held between the ministries/departments and

the department of expenditure—a key body of the ministry of finance. The budget
division in the finance ministry finally produces the budget. Along with these, pre-
budget meetings are also conducted with stakeholders like economists, farmers,
Federation of Indian Industries and others.

After deciding the tax proposals, the finance minister holds a meeting with the
Prime Minister. The finance minister, after briefing the cabinet, then presents the
union budget of India.

The finance minister’s budget speech in the Lok Sabha includes finance bill,
appropriation bill, receipts budgets, expenditure budget, annual financial
statement, macro-economic framework, medium term fiscal policy and others.

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The first budget in independent India was passed by India’s first finance minister R
K Shanmukham Chetty on November 26, 1947.

The importance of union budget stems from the following factors:

Forming efficient fiscal policies: The union budget of India allows the government
to implement the economic policies, which are in consonance with the country’s
overall economic development.

Allocation of economic resources: The union budget of India allows for equitable
distribution of economic resources. It allows the policymakers to reduce income
disparities through taxation and the provision of subsidies.

Reducing unemployment: The goal of the budget of India is to create ample

employment opportunities so that every citizen has access to basic facilities. An
increase in employment opportunities not only tackles the issue of poverty, but
also results in a productive workforce—a must for economic development.

Curbing inflation: The budget of India also strives to curb the sharp price rise
during inflation. Surplus budget policies are implemented to maintain price
stability.

Revising tax structure: A revision in tax structure, including changes in direct and
indirect taxes, is essential for equitable distribution of income. Thus, a union
budget provides for a viable income tax structure by revision of tax rates and tax
brackets.

Propelling the economy towards sustainable growth: Through optimal distribution

of resources, reduction in unemployment and poverty, curbing inflationary trends,
and implementation of viable tax mechanism, the economy is propelled towards
sustainable growth.

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Union Budget of India: Miscellaneous Concepts & Terminology

Interim Budget

An interim budget is; a budget presented by the government in the parliament

going through a transition period, while a vote on account is passed through the
interim budget to meet small expenditures. An interim budget comes into play
when the existing government cannot present an entire union budget. Thus, the
ruling government presents the interim budget. Some key features of the interim
budget are listed below.

An interim budget meaning is that it is a complete set of accounts that include;

both receipts and expenditures.

Until the government passes the interim budget, the government passes a Vote
on Account to allow them to meet its expenses.

Vote on Account

A Vote on Account is a grant provided to the ruling government to meet essential

expenditures before the activation of the new budget. This amount is from the
consolidated fund of India. Some key features of the vote on account are listed
below.

The vote on account is a formality passed without discussion.

A vote on account is a grant in advance for the government to function properly

during a transition period or the final leg before elections.

It allows the government to meet its required expenses

Interim Budget Vs Vote on Account

The difference between Vote on Account and Interim Budget is that vote on the
account can not impact the tax regime, whereas the Interim budget can impact or
change it.

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Fiscal Deficit

This is the gap between the Government's total spending and the sum of its
revenue receipts and non-debt capital receipts.

It represents the total amount of borrowed funds required by the Government to

completely meet its expenditure. The gap is bridged through additional
borrowing from the Reserve Bank of India, issuing Government securities etc. The
fiscal deficit is one of the major contributors to inflation.

Primary Deficit

The primary deficit is the fiscal deficit minus interest payments. It tells how much'
of the Government's borrowings are going towards meeting expenses other than
interest payments. In other words, it is the difference between the current year's
fiscal deficit and the interest that had to be paid in the previous year's budget.

Primary Deficit is calculated by:

Primary Deficit = Fiscal Deficit - Interest Payments

Direct and Indirect Taxes

Direct taxes are levied on the incomes of individuals and corporations. For
example, income tax, corporate tax, etc. Indirect taxes are paid by consumers
when they buy goods and services. These include excise duty, customs duty etc.

Central Plan Outlay:

Central Plan Outlay refers to the allocation of monetary resources among the
different sectors in the economy and the ministries of the Government. The
different sectors include energy, transport, social services, general economics
services, communications, science and tech, rural development, agriculture, and so
on.

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Public Account

The Government acts as a banker for transactions relating to provident funds,

small savings collection etc.

The Public Account Funds are not the government's property and have to paid
back to the people or the organization(s) who have deposited them.

The funds that the Government thus receives from its bank-like operations are
kept in the public account, from which the related disbursements are made.

Balance of Payments:

Balance of payments is the difference between the demand for, and supply of, a
country's currency on the foreign exchange market. In layman words, Balance of
Payment (BoP) is the difference between the total amount of money entering a
country over a specific time period and the total amount of money leaving the
country to the rest of the world.

Budget Estimate

Budget Estimate is an estimate of fiscal and revenue deficits for the year. The term
is associated with the estimates of the Centre's spending during the financial year
and the income received through taxes. In layman's words, Budget Estimates are
the funds allotted for various occupations, activities, and ministries.

Capital Receipt

Loans raised by the Centre from the market. Government borrowings from the
Reserve Bank and other parties, the sale of Treasury Bills, and loans received from
foreign governments form a part of capital receipt.

Other items that also fall under this category include the recovery of loans
granted by the Centre to State Governments and proceeds from the
disinvestment of Government stakes in public sector undertakings.

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Consolidated Fund:

Under Consolidated Fund, the Government pools all its funds together.

It includes all Government revenues, loans raised, and recoveries of loans granted.

All expenditure of the Government is incurred from the consolidated fund and no
amount can be withdrawn from the fund without the authorization of the
Parliament.

Contingency Fund

Contingency Fund is a fund used for meeting emergencies where the Government
cannot wait for authorization of the Parliament. The Government subsequently
obtains Parliamentary approval for the expenditure. The amount spent from the
contingency fund is returned to the fund later.

Concepts related to Union Budget 2023

Finance Bill

The Finance Bill forms a part of the Union Budget, with details about all the legal
amendments required for the changes in taxation proposed by the Finance
Minister of the country.

Money Bill

Money bills are concerned with financial matters like taxation, public expenditure,
etc.

Difference between Money Bill and Finance Bill

The major difference between Finance Bill and Money Bill is that the Finance Bill
forms a portion of the Union Budget, while Money Bills are concerned with
financial matters.

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Amrit Kal

Amrit Kaal refers to the next 25 years (up to 2047) leading to the centenary of
India's independence. This period has been pitched by the Narendra Modi
government as the time when India can strive to turn into a developed country.

Sapatrishis in Union Budget 2023

Sapatrishis refer to seven priorities that will guide India's vision during Amrit Kaal.
They are –

Inclusive Development:

Sabka Sath Sabka Vikas,

Reaching the Last Mile,

Infrastructure & Investment,

Unleashing the Potential,

Green Growth, Youth Power,

Boost to the Financial Sector.

ANB in the context of Indian Economy

ANB stands foe Atmanirbhar Bharat Abhiyaan or Self-reliant India. This is the
vision of new India. The aim is to make the country and its citizens independent
and self-reliant in all senses. Five pillars of Atma Nirbhar Bharat – Economy,
Infrastructure, System, Vibrant Demography and Demand have been outlined.

It aims towards cutting down import dependence by focussing on substitution

while improving safety compliance and quality goods to gain global market share.

The Self-Reliance signifies neither any exclusionary or isolationist strategies but

involves creation of a helping hand to the whole world.

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AKAM ( Azadi Ka Amrit Mahotsav )

Azadi Ka Amrit Mahotsav is an initiative of the Government of India to celebrate

and commemorate 75 years of independence and the glorious history of it's
people, culture and achievements.

PVTG

PVTG stands for Primitive Vulnerable Tribal Groups. Scheduled Tribe (ST) is an
artificial division created by the Government of India to provide some special
arrangements for their upliftment. However, ST is not a homogenous group and it
contains some sub-groups which have chosen to remain secluded and are
deprived of any social benefits of government schemes. These groups are called
Primitive Vulnerable Tribal Groups (PVTGs).

SHRI (Science and Heritage Research Initiative)

Science and Heritage Research Initiative SHRI, a new programme on Heritage

Research, plans to engage experts from diverse fields for data capture and
analysis, to form new collaborations, and provide viable technology to address
cultural heritage related issues.

LGD that is referred in Union Budget 2023

LGD (Lab-Grown Diamonds) is a technology-and innovation-driven emerging

sector with high employment potential. These environment-friendly diamonds
which have the same properties as natural diamonds. The 2023 Budget promises
to reduce the basic customs duty on seeds used in the manufacture of lab-grown
diamonds (LGD) in a bid to popularise their production in India— the duty on
seeds for rough LGDs will be reduced from 5% to nil.

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MISHTI in the context of Budget 2023

MISTI in the context of Budget 2023-24 stands for ‘Mangrove Initiative for
Shoreline Habitats and Tangible Incomes’. Mishti means sweetmeats in Bengali.
The MISHTI scheme is aimed at preserving mangroves.

PM PRANAM

PM PRANAM, stands for PM Promotion of Alternate Nutrients for Agriculture

Management Yojana, which will incentivise states to reduce the use of chemical
fertilisers.

FAME in the context of Budget 2023

FAME stands for The Faster Adoption and Manufacturing of Electric Vehicles
scheme was launched in April 2015 under the National Electric Mobility Mission
Plan, to encourage electric and hybrid vehicle purchase by providing financial
support. Its first phase ran for four years until 2019. Fame India Scheme 2023 is
the second phase of NEMMP.

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11. Miscellaneous Concepts

Marginal Utility

Marginal utility is the added satisfaction that a consumer gets from having one
more unit of a good or service. The concept of marginal utility is used by
economists to determine how much of an item consumers are willing to purchase.

Positive marginal utility occurs when the consumption of an additional item

increases the total utility. On the other hand, negative marginal utility occurs
when the consumption of one more unit decreases the overall utility.

Law of Diminishing Marginal Utility

The law of diminishing marginal utility is a law of economics that states that as
your consumption increases, the satisfaction you derive from each individual unit
decreases. This is why consumers are willing to pay the most for the first unit of
something they buy, but after a point they often will not buy additional units
without a decrease in price.

Disposable Income is what is left over after taxes, and is what households used
for consumption of needs and wants. Things like rent, bills, food shopping,
gasoline, and so on come out of disposable income.

Discretionary Income - what is left over for savings or wants (vs. needs) is known
as discretionary income.

Personal Income is the sum total of all the incomes that are actually received by
households from all the sources.

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Private Income is referred to as the total of all the factors incomes and transfer
earnings received by the private sector from all sources. Private income includes
incomes generated from any type of occupational activities or any income that is
received apart from salary or any type of commission.

Inflation Hedge is an investment that is considered to protect the decreased

purchasing power of a currency that results from the loss of its value due to rising
prices either macro-economically or due to inflation.

Baby Steps - to make progress very slowly; to take small steps to achieve a goal.
When RBI increases or decrease Policy Rates (Bank Rate, Repo Rate etc.) by small
basic points (say 25 bps), it is known as “taking baby steps”. RBI typically take
baby steps – 25 basis points (bps) increase/decrease in policy rate at a time or
even less, which is known as interest rate smoothing by central banks.

Freelance Economy , also known as the Gig Economy, is a labour market

consisting of a growing number of short-term contracts. Companies hire self-
employed workers to undertake specific jobs in return for an agreed-upon
payment, rather than offering them permanent positions. The people who do
these temporary jobs are called freelancers . They may find jobs through classified
ads, temporary staffing agencies, or other means.

Operation Twist is a monetary policy intervention by the central bank, conducted

through Open Market Operations (OMOs), where the central bank is buying long
term bonds of the government and at the same time selling short term securities
of the government.

Buying long term securities and selling short term securities will reduce the yield
of long term securities compared to that of the short term ones. This yield impact
is the objective of Operation Twist.

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Helicopter Money is the term used for a large sum of new money that is printed
and distributed among the public, to stimulate the economy during a recession or
when interest rates fall to zero. It is also referred to as a helicopter drop, in
reference to a helicopter scattering supplies from the sky.

Quantitative Easing (QE) is a form of unconventional Monetary Policy in which a

Central Bank purchases longer-term Securities from the open market in order to
increase the money supply and encourage lending and investment. Buying these
securities adds new money to the economy, and also serves to lower interest rates
by bidding up fixed-income securities. It also greatly expands the central bank's
balance sheet. Such measures, normally, adopted in abnormal situations like
economic slowdown and recession.

Ceteris paribus is an economic term of Latin origin that means “all other things
being equal (constant)” or “all else equal.” In other words, it‟s an assumption that
everything outside of a discussion is held constant and nothing interferes with the
subject at hand. This concept is important in both economics and finance, as it is
nearly impossible to isolate a range of different variables in the real world.

Crowding Out Effect : Any displacement of private economic activities by the

public sector which reduces funds available to private borrowers, increases
interest rates and causes a decrease in the private sector economic activities is
known as Crowding Out Effect.

Economies of Scale refers to the cost savings a company can earn by increasing
the size of their operation or number of units produced. In other words, the
production process becomes more efficient as more goods are produced.

Diseconomies of Scale happen when a company or business grows so large that

the costs per unit increase. It takes place when economies of scale no longer
function for a firm.

Page 87 of 96
Linkages in Economics

A Forward Linkage is created when investment in a particular project encourages

investment in subsequent stages of production.

A Backward Linkage is created when a project encourages investment in facilities

that enable the project to succeed. Normally, projects create both forward and
backward linkages.

Bubble is an economic cycle that is characterized by the rapid escalation of

market value, particularly in the price of assets. This fast inflation is followed by a
quick decrease in value, or a contraction, that is sometimes referred to as a
"Crash" or a "Bubble Burst."

Catch up effect, alternatively called the theory of convergence, states that poor
or developing economies grow faster compared to economies with a higher per
capita income and gradually reach similar high levels of per capita income. Thus,
all economies, over time, may converge in terms of income per head. The poorer
economies will literally "catch-up" to the more robust economies.

Conspicuous consumption is the practice of purchasing goods or services to

publicly display wealth rather than to cover basic needs.

Consumer surplus is the difference between the consumers' willingness to pay

for a commodity and the actual price paid by them.

Demonstration Effect refers to the consumption habit of the people to imitate

the consumption trends adopted by other people.

Dove is an economic policy advisor who promotes monetary policies that usually
involve low interest rates.

Page 88 of 96
Economies of Scope refers to the decreasing of costs of overall operation and
performance by virtue of using the same existing resources for various
complementary operations.

Demand Shock is a sudden unexpected event that dramatically increases or

decreases demand for a product or service, usually temporarily. A positive
demand shock is a sudden increase in demand, while a negative demand shock is
a decrease in demand. Either shock will have an effect on the prices of the
product or service.

Divestment is the process of selling subsidiary assets, investments, or divisions of

a company in order to maximize the value of the parent company. Also known as
divestiture, divestment is effectively the opposite of an investment and is usually
done when that subsidiary asset or division is not performing up to expectations.

In some cases, however, a company may be forced to sell assets as the result of
legal or regulatory action. Companies can also look to a divestment strategy to
satisfy other strategic business, financial, social, or political goals.

"Monetize" refers to the process of turning a non-revenue-generating item into

cash. In many cases, monetization looks to novel methods of creating income
from new sources, such as embedding ad revenues inside of social media video
clips to pay content creators. Sometimes, monetization is due to privatization
(called commodification), whereby a previously free or public asset is turned into a
profit center—such as a public road being converted into a private tollway.
Monetize converts otherwise non-revenue-generating items or activities into cash
flows.

Engel's Law is an economic theory introduced in 1857 by Ernst Engel, a German

statistician, stating that the percentage of income allocated for food purchases
decreases as income rises. As a household's income increases, the percentage of
income spent on food decreases while the proportion spent on other goods (such
as luxury goods) increases.

Page 89 of 96
Fractional Reserve Banking means that banks keep less than 100% their
deposits in cash, placing the rest in income-earning investments. Such a policy is
built on laws of probability, which protect the bank from having all its depositors
come in at the same time and demand cash. In India RBI controls the percent¬age
of total deposits which must be kept as reserves by member banks. (These are
called SLR and CRR) In the end the government now stands behind the fractional
cash reserve policy, ready even to print up new money in the case of a run on the
banks, in order to avoid a wave of bankruptcies, a collapse of the banking system,
and massive deflation of the money supply.

Negative CRR takes place when the return on the CRR balance is zero. Negative
carry arises when the actual return is less than the cost of the funds. This will
impact the mandatory SLR balance, reserve every commercial bank must maintain.
Negative carry on CRR and SLR balances arises because the return on CRR
balances is nil, while the return on SLR balances is lower than the cost of deposits.

Overheated Economy is one that has experienced a prolonged period of good

economic growth and activity that has led to high levels of inflation, triggered by
increased consumer wealth.

Sterilised Intervention and Non-Sterilised Intervention

If the intervention has no impact on the short- term interest rate, it is sterilised. If
the short-term interest rate is affected, the intervention is non-sterilised.

Weightless Economy - At the start of the 21st century, the total output of the
American economy weighed roughly the same as it did 100 years earlier. Yet the
value of that output, in Real terms, was 20 times greater. Output is increasingly
weightless, produced from Intellectual Capital rather than physical materials.
Production has shifted from steel, heavy copper wire and vacuum tubes to
microprocessors, fine fibre-optic cables and transistors. Services have increased
their share of GDP. This weightless or dematerialised economy, most economists
agree, is not just lighter but also more efficient.

Page 90 of 96
Consumer staples refers to a set of essential products used by consumers. This
category includes things like foods and beverages, household goods, and hygiene
products as well as alcohol and tobacco. These goods are those products that
people are unable—or unwilling— to cut out of their budgets regardless of their
financial situation. Consumer staples are considered to be non-cyclical, meaning
that they are always in demand, year-round, no matter how well the economy is—
or is not—performing. As such, consumer staples are impervious to business
cycles. Also, people tend to demand consumer staples at a relatively constant
level, regardless of their price.

Corridor in Monetary Policy of the RBI refers to the area between the reverse
repo rate and the MSF rate. Reverse repo rate will be the lowest of the policy rates
whereas Marginal Standing Facility is something like an upper ceiling with a
higher rate than the repo rate.

Demand Destruction refers to a permanent or sustained decline in the demand

for a certain good in response to persistently high prices or limited supply.
Because of prolonged high prices, consumers may decide it is not worth
purchasing as much of that good, or they may seek out alternatives as substitutes.
Demand destruction is most often associated with the demand for oil or other
energy commodities.

Hard Landing is often seen as a result of tightening economic policies that bring
high-flying economies that run into a sudden, sharp check on their growth, such
as a monetary policy intervention meant to curb inflation. Economies that
experience a hard landing often slip into a stagnant period or even recession.

Soft landing is a cyclical downturn that avoids recession. It typically describes

attempts by central banks to raise interest rates just enough to stop an economy
from overheating and experiencing high inflation, without causing a significant
increase in unemployment, or a hard landing. It may also refer to a sector of the
economy that is expected to slow down without crashing.

Page 91 of 96
Supply shock is an unexpected event that suddenly changes the supply of a
product or commodity, resulting in an unforeseen change in price. Supply shocks
can be negative, resulting in a decreased supply, or positive, yielding an increased
supply; however, they're often negative. Assuming aggregate demand is
unchanged, a negative (or adverse) supply shock causes a product's price to spike
upward, while a positive supply shock decreases the price.

Saving and Savings

Saving refers to an activity occurring over time, a flow variable, whereas savings
refers to something that exists at any one time, a stock variable.

Saving is the act of spending less than you earn in income, and placing the
remainder into a reserve account for later use.

Savings is the actual quantity of funds in that reserve account, or another name
for that reserve account.

Savings and Investment

Saving involves income that is not consumed.

Investment is as an addition to the capital stock.

Propensity to Consume, in economics, is the proportion of total income or of an

increase in income that consumers tend to spend on goods and services rather
than to save.

Propensity to Save, in economics, is the proportion of total income or of an

increase in income that consumers save rather than spend on goods and services.

@@@

Page 92 of 96
 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book No Title

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

Page 93 of 96
19 Inland Bank Guarantees

20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

Page 94 of 96
42 Less Known Forex Terminology

43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basics Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

Page 95 of 96
 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1279 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 525 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 25 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

18-03-2023 Sekhar Pariti

Page 96 of 96
 Notes for JAIIB
Indian Economy
&
Indian Financial System
(IE & IFS)
Module C- Indian Financial Architecture
(Based on Syllabus 2023)

Compiled by Sekhar Pariti

Book No 59 from The Banking Tutor

Page 1 of 75
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I want to share Notes
related to Indian Economy & Indian Financial System (IEFS), which is prepared
based on the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

A) Indian Economic Architecture

B) Economic Concepts Related to Banking

C) Indian Financial Architecture

D) Financial Products and Services

In this Notes, I am covering topics related to Module C - Indian Financial

Architecture. I am going to share book related to 4th module soon. Also I will
share Objective Type Points covering all 4 Modules in one book.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

20-03-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 75
 Syllabus 2023

Module A: Indian Economic Architecture

An Overview of Indian Economy, Sectors of the Indian Economy, Economic

Planning in India & NITI Aayog, Role of Priority Sector and MSME in the Indian
Economy, Infrastructure including Social Infrastructure, Globalisation- Impact on
India, Economic Reforms, Foreign Trade Policy, Foreign Investments and Economic
Development, International Economic Organizations (World Bank, IMF, etc.),
Climate change, Sustainable Development Goals (SDGs), Issues Facing Indian
Economy.

Module B: Economic Concepts Related to Banking

Fundamentals of Economics, Microeconomics, and Macroeconomics and Types of

Economies, Supply and Demand, Money Supply and Inflation, Theories of Interest,
Business Cycles, Monetary Policy and Fiscal Policy, System of National Accounts
and GDP Concepts, Union Budget.

Module C: Indian Financial Architecture

Indian Financial System-An Overview, Indian Banking Structure, Banking Laws –

Reserve Bank of India Act, 1934 & Banking Regulation Act, 1949, Development
Financial Institutions, Micro Finance Institutions, Non-Banking Financial
Companies (NBFCs),Insurance Companies, Indian Financial System- Regulators
and Their Roles, Reforms & Developments in the Banking Sector

Module D: Financial Products and Services

Financial Markets, Money Markets, Capital Markets and Stock Exchanges, Fixed
Income Markets – Debt and Bond Markets, Foreign Exchange Markets,
Interconnectedness of Markets and Market Dynamics, Merchant Banking Services,
Derivatives Market, Factoring, Forfaiting and Trade Receivables Discounting
System (TReDS), Venture Capital, Lease Finance and Hire Purchase, Credit Rating
and Credit Scoring, Mutual Funds, Insurance Products, Pension Products, Para
Banking and Financial Services Provided by Banks, Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (Inv!Ts)

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Page 3 of 75
 Index – Module C
Indian Financial Architecture
Chapter No Topics covered

01 Indian Financial System-An Overview

02 Indian Banking Structure

03 Banking Laws – Reserve Bank of India Act, 1934 & Banking

Regulation Act, 1949

04 Development Financial Institutions

05 Micro Finance Institutions

06 Non-Banking Financial Companies (NBFCs)

07 Insurance Companies

08 Indian Financial System- Regulators and Their Roles

09 Reforms & Developments in the Banking Sector

10 Miscellaneous Concepts

Page 4 of 75
01. Indian Financial System-An Overview
The Financial System is a set of institutions, markets or instruments that promotes
savings by channelising them to the most efficient use.

The Financial System of an economy provides a way to exchange funds between

the lenders and the borrowers. The efficient allocation of economic resources is
achieved by a financial system.

Capital accumulation, Production and Growth are what a financial system helps in.
Thus, functions of the financial system are encouraging saving, mobilising savings
and allocation of the funds to alternative uses.

Facilitating payments, a link between the lender and borrower, help in capital
formation, ensuring the safety of investment and economy growth are a few
objectives of a financial system.

The Indian Financial System manages the flow of funds between the people
(household savings) of the country and the ones who may invest it wisely
(investors/businessmen) for the betterment of both the parties.

The services that are provided to a person by the various Financial Institutions
including banks, insurance companies, pensions, funds, etc. constitute the
financial system.

The financial system of a country mainly aims at managing and governing the
mechanism of production, distribution, exchange and holding of financial assets
or instruments of all kinds.

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

Financial Institutions
Financial Assets
Financial Services
Financial Markets

Page 5 of 75
Financial Institutions

The Financial Institutions act as a mediator between the investor and the
borrower. The investor’s savings are mobilised either directly or indirectly via the
Financial Markets.

Functions of the Financial Institutions are as follows:

A short term liability can be converted into a long term investment

It helps in conversion of a risky investment into a risk-free investment

Also acts as a medium of convenience denomination, which means, it can match a

small deposit with large loans and a large deposit with small loans

The best example of a Financial Institution is a Bank. People with surplus amounts
of money make savings in their accounts, and people in dire need of money take
loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

Banking Institutions or Depository Institutions – This includes banks and other

credit unions which collect money from the public against interest provided on
the deposits made and lend that money to the ones in need

Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual

funds and brokerage companies fall under this category. They cannot ask for
monetary deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.

Intermediates – Commercial banks which provide loans and other financial

assistance such as SBI, BOB, PNB, etc.

Non Intermediates – Institutions that provide financial aid to corporate

customers. It includes NABARD, SIBDI, etc.

Page 6 of 75
Financial Assets

The products which are traded in the Financial Markets are called Financial Assets.
Based on the different requirements and needs of the credit seeker, the securities
in the market also differ from each other.

Call Money – When a loan is granted for one day and is repaid on the second
day, it is called call money. No collateral securities are required for this kind of
transaction.

Notice Money – When a loan is granted for more than a day and for less than 14
days, it is called notice money. No collateral securities are required for this kind of
transaction.

Term Money – When the maturity period of a deposit is beyond 14 days, it is

called term money.

Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending money
to the Government.

Certificate of Deposits – It is a dematerialised form (Electronically generated) for

funds deposited in the bank for a specific period of time.

Commercial Paper – It is an unsecured short-term debt instrument issued by

corporations.

(The above will be explained in detail in later chapters)

Financial Services

Services provided by Asset Management and Liability Management Companies.

They help to get the required funds and also make sure that they are efficiently
invested. The financial services in India include:

Banking Services – Any small or big service provided by banks like granting a
loan, depositing money, issuing debit/credit cards, opening accounts, etc.

Insurance Services – Services like issuing of insurance, selling policies, insurance

undertaking and brokerages, etc. are all a part of the Insurance services

Investment Services – It mostly includes asset management

Page 7 of 75
Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a
part of the Foreign exchange services

The main aim of the financial services is to assist a person with selling, borrowing
or purchasing securities, allowing payments and settlements and lending and
investing.

Financial Markets

The marketplace where buyers and sellers interact with each other and participate
in the trading of money, bonds, shares and other assets is called a financial
market.

The financial market can be further divided into four types:

Capital Market – Designed to finance the long term investment, the Capital
market deals with transactions which are taking place in the market for over a
year. The capital market can further be divided into three types:

(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorised for small-term investments only. It is
a wholesale debt market which works on low-risk and highly liquid instruments.
The money market can further be divided into two types:

(a) Organised Money Market

(b) Unorganised Money Market

Foreign exchange Market – One of the most developed markets across the
world, the Foreign exchange market, deals with the requirements related to multi-
currency. The transfer of funds in this market takes place based on the foreign
currency rate.

Page 8 of 75
Credit Market – A market where short-term and long-term loans are granted to
individuals or Organisations by various banks and Financial and Non-Financial
Institutions is called Credit Market

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Page 9 of 75
02. Indian Banking Structure
The Banking system of a country is an important pillar holding up the financial
system of the country’s economy.

The major role of banks in a financial system is the mobilization of deposits and
disbursement of credit to various sectors of the economy.

The existing, elaborate banking structure of India has evolved over several
decades.

Banks are financial institutions that perform deposit and lending functions. There
are various types of banks in India and each is responsible to perform different
functions.

The bank takes deposit at a much lower rate from the public called the deposit
rate and lends money at a much higher rate called the lending rate.

Reserve Bank of India is the central bank of the country and regulates the banking
system of India.

The structure of the banking system of India can be broadly divided into
scheduled banks, non-scheduled banks and development banks.

Banks that are included in the second schedule of the Reserve Bank of India Act,
1934 are considered to be scheduled banks.

All scheduled banks enjoy the following facilities:

Such a bank becomes eligible for debts/loans on bank rate from the RBI

Such a bank automatically acquires the membership of a clearing house.

All banks which are not included in the second section of the Reserve Bank of
India Act, 1934 are Non-scheduled Banks. They are not eligible to borrow from
the RBI for normal banking purposes except for emergencies.

Scheduled banks are further divided into commercial and cooperative banks.

Scheduled, Non-Scheduled Banks and Development Banks

Page 10 of 75
Banks can be classified into various types as under.

Central Bank

Cooperative Banks

Commercial Banks

Regional Rural Banks (RRB)

Local Area Banks (LAB)

Specialized Banks

Small Finance Banks

Payments Banks

Functions of Banks

The major functions of banks are almost the same but the set of people each
sector or type deals with may differ. Given below the functions of the banks in
India:

Acceptance of deposits from the public

Provide demand withdrawal facility

Lending facility

Transfer of funds

Issue of drafts

Provide customers with locker facilities

Dealing with foreign exchange

Apart from the above, various utility functions also performed by the banks.

Page 11 of 75
Central Bank

The Reserve Bank of India is the central bank of our country. Each country has a
central bank that regulates all the other banks in that particular country.

The main function of the central bank is to act as the Government’s Bank and
guide and regulate the other banking institutions in the country. Given below are
the functions of the central bank of a country:

Guiding other banks

Issuing currency

Implementing the monetary policies

Supervisor of the financial system

In other words, the central bank of the country may also be known as the banker’s
bank as it provides assistance to the other banks of the country and manages the
financial system of the country, under the supervision of the Government.

Cooperative Banks

These banks are organised under the state government’s act. They give short term
loans to the agriculture sector and other allied activities.

The main goal of Cooperative Banks is to promote social welfare by providing

concessional loans

They are organised in the 3 tier structure

Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD).

Funded by RBI, government, NABARD. Money is then distributed to the public.

Concessional CRR, SLR applies to these banks.

Owned by the state government and top management is elected by members

Tier 2 (District Level) – Central/District Cooperative Banks

Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

Page 12 of 75
Commercial Banks

Organised under the Banking Companies Act, 1956

They operate on a commercial basis and its main objective is profit.

They have a unified structure and are owned by the government, state, or any
private entity.

They tend to all sectors ranging from rural to urban

These banks do not charge concessional interest rates unless instructed by the RBI

Public deposits are the main source of funds for these banks

Public sector Banks – A bank where the majority stakes are owned by the
Government or the central bank of the country.

Nationalised Banks

The nationalized banks are those banks that were ones owned by the private
players but due to the financial or socio-economic exigencies, the ownership was
acquired by the government.

In more technical terms Nationalised Banks have such an ownership structure

where the government is the majority shareholder i.e. >50%.

Bank Nationalization is a policy decision, which is undertaken keeping certain

goals in mind. From time to time Central Government can carry out the
nationalization of banks. Nariman committee on banking reforms 1991 and
1998 has called for more private banks in India.

RBI or the Reserve Bank of India was the first nationalized bank in India.

Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people

Foreign Banks – The banks with their headquarters in foreign countries and
branches in our country, fall under this type of bank

Regional Rural Banks (RRB)

These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.

Page 13 of 75
RRBs were established in 1975 and are registered under a Regional Rural Bank
Act, 1976.

RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).

One RRB cannot open its branches in more than 3 geographically connected
districts.

Local Area Banks (LAB)

Introduced in India in the year 1996. These are organized by the private sector.
Earning profit is the main objective of Local Area Banks. Local Area Banks are
registered under Companies Act, 1956.

At present, there are only 4 Local Area Banks all which are located in South India

Specialized Banks

Certain banks are introduced for specific purposes only. Such banks are called
specialized banks. These include:

Small Industries Development Bank of India (SIDBI) – Loan for a small scale
industry or business can be taken from SIDBI. Financing small industries with
modern technology and equipments is done with the help of this bank

EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can
be done through this type of bank

National Bank for Agricultural & Rural Development (NABARD) – To get any
kind of financial assistance for rural, handicraft, village, and agricultural
development, people can turn to NABARD.

There are various other specialized banks and each possesses a different role in
helping develop the country financially.

Page 14 of 75
Small Finance Banks

As the name suggests, this type of bank looks after the micro industries, small
farmers, and the unorganized sector of the society by providing them loans and
financial assistance. These banks are governed by the central bank of the country.

Payments Banks

A newly introduced form of banking, the payments bank have been

conceptualized by the Reserve Bank of India. People with an account in the
payments bank can only deposit an amount of up to Rs.1,00,000/- and cannot
apply for loans or credit cards under this account.

Options for online banking, mobile banking, the issue of ATM, and debit card can
be done through payments banks.

Public Sector Bank Vs. Nationalised Bank

The primary distinction between a nationalised bank and a public sector bank is
that a Public Sector Bank has always been under the control of the central or state
government, whereas the Nationalised Bank began as a private sector bank and
was chosen to take over by the administration for the betterment of the public.

Miscellaneous

There are 12 Public Sector Banks in India in 2022.

After the massive merger, the total number of Public Sector Banks (PSBs) in India
has come down from 27 banks in 2017 to 12 in 2021.

Currently in India there are 12 banks in number that are nationalised, and their
names are Punjab National Bank, Bank of Baroda, Bank of India, Central Bank of
India, Canara Bank, Union Bank of India, Indian Overseas Bank, Punjab, and Sind
Bank, Indian Bank, UCO Bank, and Bank of Maharashtra, State Bank Of India.

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Page 15 of 75
03. Banking Laws – RBI Act, 1934 & BR Act, 1949
The Indian Banking Sector is regulated by the Reserve Bank of India Act 1934 (RBI
Act) and the Banking Regulation Act 1949 (BR Act).

The Reserve Bank of India (RBI), India's central bank, issues various Guidelines,
Notifications and Policies from time to time to regulate the banking sector.

The Reserve Bank of India Act 1934

In 1921, the Imperial Bank of India was established to perform as central bank of
India by the British Government.

Hilton Young Commission recommended formation of a Central Bank (RBI).

Vide Reserve Bank of India Act, 1934 The Parliament of India has constituted RBI
for the purposes of taking over the management of the currency from the Central
Government and of carrying on the business of banking in accordance with the
provisions of this Act.

Though considered a body with considerable institutional independence, the RBI

is not a constitutional body. It was established under the Reserve Bank of India
Act, 1934. Crucially, Section 7 has never been invoked before.

First Governor of RBI - Osborne Smith (April 1, 1935, to June 30, 1937), a Banker.

Preamble of Reserve Bank of India Act, 1934 specifies the objective of RBI is to:

a) Regulate the issue of Bank notes

b) Keeping of reserves with a view to securing monetary stability in India

c) Operate the currency and credit system of the country to its advantage

The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance
with the Reserve Bank of India Act, 1934.

The Reserve Bank is permanently situated in Mumbai since 1937.

In January, 1949, RBI was nationalized.

This act along with the Companies Act , which was amended in 1936, were meant
to provide a framework for the supervision of banking firms in India.

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The First Schedule of the RBI Act 1934 defines the 4 areas under which the Indian
states should come. The 4 areas are Western Area, Eastern Area, Northern Area,
Southern Area.

Second Schedule of The RBI Act contains the definition of the scheduled banks.
These are banks which were to have paid up capital and reserves above 5 lakh.

There are total 61 Sections in the RBI Act 1934.

Section 7 of RBI Act 1934 states that central government can legislate the
functioning of the RBI through the RBI board, and the RBI is not an autonomous
body.

On 01-11-2018 , Central Government has used Section 7 Act 1934, for the first
time in 83 years have used and issued amendment to direct the central bank on
the necessary issues for the development of public.

Section 17 of the of RBI Act 1934 t defines the manner in which the RBI can
conduct business.

Section 18 of RBI Act 1934 deals with emergency loans to banks.

The section 19 of the Reserve Bank of India Act, 1934 states that the Reserve Bank
of India has been prohibited from

(a) making loans or advances;

(b) drawing or accepting bills payable otherwise than on demand ;

(c) allowing interest on deposits or current accounts.

Section 20 of RBI Act 1934 narrates obligation of the RBI to transact Government
business.

Section 21 of RBI Act 1934 states that the RBI must conduct banking affairs for the
central government and manage public debt .

Section 22 of RBI Act 1934 states that only the RBI has the exclusive rights to issue
currency notes in India.

Section 24 of RBI Act 1934 states that the maximum denomination a note can be
is ₹10,000.

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Section 26 of RBI Act 1934 describes the legal tender character of Indian bank
notes.

Section 26 (2) deals with withdrawal of legal tender of notes.

Section 27 of RBI Act 1934 states that the RBI shall not re-issue bank notes which
are torn, defaced or excessively soiled.

Section 28 of RBI Act 1934 allows the RBI to form rules regarding the exchange of
damaged and imperfect notes.

Section 31 of RBI Act 1934 states that in India, only the RBI or the central
government can issue and accept promissory notes that are payable on demand.
However, cheques , that are payable on demand, can be issued by anyone.

Section 42 of RBI Act 1934 states that Cash Reserves of Scheduled Banks to be
kept with the Bank (RBI).

Section 42(1) of RBI Act 1934 says that every scheduled bank must have an
average daily balance with the RBI. The amount of the deposit shall be a certain
percentage of its net time and demand liabilities in India.

Section 45 U of RBI Act 1934 defines Repo, Reverse Repo, Derivative, Money
Market Instruments and Securities.

In the RBI Act the most controversial and confusing section is Section 7. Although
this section has been used only once by the central govt, it puts a restriction on
the autonomy of the RBI. Section 7 states that central government can legislate
the functioning of the RBI through the RBI board, and the RBI is not an
autonomous body.

The Banking Regulation Act 1949

The Banking Regulation Act is the fundamental law governing banking activity
and Banks in India.

Passed as the Banking Companies Act 1949, it came into force from 16 March
1949 and changed to Banking Regulation Act 1949 from 1 March 1966.

The Banking Regulation Act 1949 has 56 Sections in total. There were initially 55
Sections, but in 1965 the Banking Regulation Act 1949 was amended to include
Cooperative banks in the 56th section.

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Objectives of the Banking Regulation Act are:

a) to safeguard the interest of depositors;

b) to develop banking institutions on sound lines; and

c) to attune the monetary and credit system to the larger interests and
priorities of the nation.

We see contents of some sections hereunder

Section 5 of BR Act interprets the terms Bank and Banking Company.

Section 6 of BR Act deals with the forms of business a bank can undertake.

Section 7 of BR Act deals with usage of word bank, banker , banking or banking
company. No company other than a banking company shall use as part of its
name in connection with its business] any of the words "bank", "banker" or
"banking" and no company shall carry on the business of banking in India unless
it uses as part of its name at least one of such words.

Section 8 of BR Act prohibits a Bank from engaging directly or indirectly in any

trading.

Section 9 of BR Act deals with disposal of non banking assets.

As per Section 10 B of BR Act a Banking company to be managed by whole time

chairman.

Section 10BB of BR Act deals with Power of Reserve Bank to appoint Chairman of
the Board of directors appointed on a whole-time basis or a managing director] of
a banking company.

As per Section 14 of BR Act, no banking company shall create any charge upon
any unpaid capital of the company, and any such charge shall be invalid.

As per Section 15 of BR Act, no banking company shall pay any dividend on its
shares until all its capitalised expenses have been completely written off.

In terms of Section 16 of BR Act (prohibition of common directors) – no banking

company incorporated in India shall have as a director in its Board of directors any
person who is a director of any other banking company.

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As per Section 17 of BR Act, every banking company shall create a reserve fund
and out of the balance of profit of each year as disclosed in the profit and loss
account and before any dividend is declared, transfer to the reserve fund a sum
equivalent to not less than 20% of such profit.

Section 18 of BR Act deals with Cash reserves to be maintained by Banks.

Section 20 of BR Act deals with the Restrictions on loans and advances

Section 20 A of BR Act stipulates Section 20A - Restrictions on power to remit

debts by Banks.

As per Section 20 of BR Act banking company shall not

(a) grant any loans or advances on the security of its own shares, or-

(b) enter into any commitment for granting any loan or advance to or on behalf of

(i) any of its directors,

(ii) any firm in which any of its directors is interested as partner, manager,
employee or guarantor.

RBI exercise control advances by banking companies as per Section 21 of BR Act.

As per Section 21A of BR Act, Rates of interest charged by banking companies not
to be subject to scrutiny by Courts.

Section 22 of BR Act deals with Licensing of banking companies.

As per Section 26 of BR Act, Banks have to submit a Return of unclaimed deposits

(accounts which have not been operated upon for ten years, within thirty days
after the close of each calendar year.

Section 26A of BR Act deals with establishment of Depositor Education and

Awareness Fund (DEAF).

Section 35 of BR Act empowers RBI to inspect any banking company and its
books and accounts.

Section 35A of BR Act empowers Reserve Bank to give directions to Banking

Companies.

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Section 44A of BR Act deals with the Procedure for amalgamation of banking
companies.

Section 44B of BR Act imposes Restriction on compromise or arrangement

between banking company and creditors.

Section 45 of BR Act deals with the Power of Reserve Bank to apply to Central
Government for suspension of business by a banking company and to prepare
scheme of reconstitution or amalgamation.

Section 45Z of BR Act deals with the Return of paid instruments to customers.

Section 45ZA of BR Act deals with Nomination in Deposit Accounts.

Section 45ZC of BR Act deals with the Nomination for Safe Custody Articles.

Section 49A of BR Act imposes restriction on acceptance of deposits withdrawable

by cheque. No person other than a banking company, the Reserve Bank, the State
Bank of India or any other banking institution shall accept from the public
deposits of money withdraw able by cheque.

The Act makes provisions for nomination facility in case of accounts.

Important Sections in Banking Regulation Act 1949 related to RBI‘s PCA (Prompt
Corrective Action) :

1) RBI to remove managerial persons under Section 36AA of the BR Act

1949 as applicable.

2) RBI to supersede the Board under Section 36ACA of the BR Act 1949 and
recommend supersession of the Board as applicable.

The Banking Regulation Act is of vital importance governing banks.

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04. Development Financial Institutions (DFIs)
The Development Banks are the financial institutions that provide long-term credit
in order to support capital-intensive investments spread over a long period and
yielding low rates of return with considerable social benefits.

The development finance institutions or development finance companies are

organizations owned by the government or charitable institution to provide funds
for low-capital projects or where their borrowers are unable to get it from
commercial lenders.

Development finance institutions (DFIs) occupy an intermediary space between

public aid and private investment, facilitating international capital flows.

Types of Finance provided are –

Medium (1 – 5 years) and

Long term ( >5 years).

Objectives of Development Finance Institutions

The prime objective of DFI is the economic development of the country. These
banks provide financial as well as the technical support to various sectors.

DFIs do not accept deposits from people

They raise funds by borrowing funds from governments and by selling their bonds
to the general public.

It also provides a guarantee to banks on behalf of companies and subscriptions to

shares, debentures, etc.

Underwriting enables firms to raise funds from the public. Underwriting a financial
institution guarantees to purchase a certain percentage of shares of a company
that is issuing IPO if it is not subscribed by the Public.

They also provide technical assistance like Project Report, Viability study, and
consultancy services.

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The major Development Banks in India are;

Industrial Finance Corporation of India (IFCI Ltd)

Industrial Development Bank of India' (IDBI)

Small Industries Development Bank of India (SIDBI)

Export-Import Banks of India (EXIM)

National Bank for Agriculture and Rural Development (NABARD)

Sector Specific

Industry Specific DFIs

IFCI Ltd. (Industrial Corporation of India.

IFCI’s full form is Industrial Finance Corporation of India, founded as a Statutory

Corporation in 1948 to offer medium- and lengthy finance to industries. It is First
DFI of India. IFCI became a Public Limited Company under the Companies Act of
1956 when the IFC Act was repealed in the year of1993. IFCI is currently a
government-owned corporation, with the Indian government owning 61.02 % of
the company’s paid-up capital.

IFCI is also a recognised Public Financial Institution under Section 2(72) of the
Companies Act in 2013 and is registered as a Systemically Important Non-Deposit
Taking Non-Banking Finance Company with the Reserve Bank of India (RBI).

Indian capital markets were somewhat underdeveloped at the time of

independence in 1947. The need for capital was fast increasing, yet capital sources
were scarce. The commercial banks that existed at the time were not well-
positioned to meet long-term capital demands in any substantial way.

The Indian Capital Markets and Financial System saw considerable changes after
the Indian economy was liberalised in 1991. The constitution of IFCI was
converted from a statutory corporation to a company under the Indian
Companies Act, 1956, to facilitate raising funds directly through capital markets.
The company’s name was subsequently changed to ‘IFCI Limited’ in October 1999.

The main goal of forming IFCI was to provide long-term financing to the country’s
manufacturing and industrial sectors. The IFCI’s primary stakeholders are the IDBI,
scheduled banks, the insurance industry, and cooperative banks.

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Industrial Development Bank of India (IDBI) –was set up in 1964 under RBI and
was granted autonomy in 1976.

It is responsible for ensuring adequate flow of credit to various sectors.

It was converted into a Universal Bank in 2003. With the Industrial Development
Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a
limited company viz., IDBI Ltd.

Industrial Development Bank of India (IDBI Bank Limited or IDBI Bank or IDBI) was
established in 1964 by an act to provide credit and other financial facilities for the
development of the Indian industry.

Many national institutes find their roots in IDBI like SIDBI, India Exim Bank,
National Stock Exchange of India and National Securities Depository Limited.

Initially, it operated as a subsidiary of the Reserve Bank of India and later RBI
transferred it to the Government of India. On 29 June 2018, Life Insurance
Corporation of India (LIC) got a technical go-ahead from the Insurance Regulatory
and Development Authority of India (IRDAI) to increase stake in IDBI Bank up to
51%.

LIC completed the acquisition of 51% controlling stake on 21 January 2019

making it the majority shareholder of the IDBI Bank.

IDBI provided financial assistance, both in rupee and foreign currencies, for green-
field projects and also for expansion, modernization, and diversification purposes.

In the wake of financial sector reforms unveiled by the government since 1992,
IDBI also provided indirect financial assistance by way of refinancing of loans
extended by State level financial institutions and banks and by way of
rediscounting of bills of exchange arising out of the sale of indigenous machinery
on deferred payment terms.

After the public issue of IDBI in July 1995, the government shareholding in the
bank came down from 100% to 75%.

IDBI played a pioneering role, particularly in the pre-reform era (1964–91), in

catalyzing broad-based industrial development in India in keeping with its
Government-ordained 'development banking' charter.

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As a Development Bank prior to 1991, IDBI was extending Refinance to
Commercial Banks with a view to ease funds position of the Bank to encourage
long term industrial finance by Banks. However, after conversion into a
Commercial Bank, Refinance activity come to a halt.

Small Industries Development Bank of India (SIDBI ) was established in 1989.

Was established as a subsidiary of IDBI. It was granted autonomy in 1998. Small

Industries Development Bank of India (SIDBI) is the apex institution for financing,
promotion and development of micro, small and medium enterprises in India.

It is under the jurisdiction of Ministry of Finance , Government of India

headquartered at Lucknow and having its offices all over the country.

Its purpose is to provide refinance facilities to banks and financial institutions and
engage in term lending and working capital finance to industries, and serves as
the principal financial institution in the Micro, Small and Medium Enterprises
(MSME) sector.

SIDBI also coordinates the functions of institutions engaged in similar activities

like Commercial Banks.

It was established on 2 April 1990, through an Act of Parliament. It is

headquartered in Lucknow. SIDBI operates under the Ministry of Finance ,
Government of India.

SIDBI is active in the development of Micro Finance Institutions through SIDBI

Foundation for Micro Credit, and assists in extending microfinance through the
Micro Finance Institution (MFI) route. Its promotion & development program
focuses on rural enterprises promotion and entrepreneurship development.

In order to increase and support funds flow to the MSE sector, it operates a
refinance program known as Institutional Finance program. Under this program,
SIDBI extends Term Loan assistance to Banks, Small Finance Banks and Non-
Banking Financial Companies. Besides the refinance operations, SIDBI also lends
directly to MSMEs.

Page 25 of 75
Foreign Trade

EXIM Bank (The Export-Import Bank of India)

The Export-Import Bank of India Act was passed in September 1981 and the Bank
commenced its operations in March 1982. The Export-Import Bank of India,
popularly known as EXIM Bank also known as India Exim Bank.

Exim Bank is offering a comprehensive range of products and services to

empower businesses at all stages of business cycle.

Objective of EXIM Bank :

The Main Objective of the Export-Import Bank of India is to provide financial

assistance to exporters and importers, and for functioning as the principal
financial institution for co-ordinating the working of institutions engaged in
financing export and import of goods and services with a view to promoting the
country’s international trade and for matters connected therewith or incidental
thereto.

EXIM Bank offers a range of financing programmes to enhance the export

competitiveness of Indian companies. The following Products are offered by EXIM
Bank to Indian Corporates engaged in Foreign Trade.

a) Research & Development Finance for Export Oriented Units

b) Pre-Shipment/Post-Shipment Credit Programme

c) Lending Programme for Export Oriented Units

d) Import Finance Programme

e) Production Equipment Finance Programme

EXIM Bank’s Ubharte Sitare (Raising Star) Programme

The Ubharte Sitare Programme (USP) identifies Indian companies that are future
champions with good export potential. An identified company should have
potential advantages by way of technology, product or process. It can be
supported even if it is currently underperforming or may be unable to tap its
latent potential to grow. The Programme diagnoses such challenges and provides
support through a mix of structured support covering equity, debt and technical
assistance.

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Objectives of the USP :

a) To enhance India’s competitiveness in select sectors through finance and

extensive handholding support;

b) To identify and nurture companies having differentiated technology, products

or processes, and enhance their export business;

c) To assist units with export potential, which are unable to scale up their
operations for want of finance;

d) To identify and mitigate challenges faced by successful companies which

hinder their exports;

e) To assist existing exporters in widening their basket of products and target new
markets through a strategic and structured export market development initiative.

Nature of assistance under the USP

The Bank can support eligible companies by both financial and advisory services
through:

a) Support by way of equity / equity-like instruments.

b) Debt (funded / non-funded): Term loans for modernisation, technology /

capacity upgradation, R&D and balancing of production facilities by investment in
activities such as: Machinery and equipment; Tools, jigs and fixtures; Testing /
quality control equipment; Land and building.

c) Technical Assistance (TA) for product adaptation and improvement, cost of

certifications, training expenses, market development activities including overseas
travel for product/market development, studies relating to sectors, markets,
regulations, Techno Economic Viability (TEV) study, etc.

EXIM Bank offers the following Other Services :

a) Marketing Advisory Services

b) Research & Analysis

c) Export Advisory Services

d) Provides technical assistance and loan to exporters.

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Agriculture Sector

National Bank for agriculture and rural development (NABARD) – was

established in July 1982. It was established on the recommendation of the
Shivraman Committee. It is the apex institution in the area of agriculture and rural
sectors. It functions as a refinancing institution

Considering the importance of institutional credit in boosting rural economy the

Reserve Bank of India (RBI) at the insistence of the Government of India,
constituted a Committee to Review the Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD) to look into these very critical
aspects. The Committee was formed on 30 March 1979, under the Chairmanship
of Shri B. Sivaraman, former member of Planning Commission, Government of
India.

Based on interim report of the Committee, National Bank for Agriculture and
Rural Development (NABARD) was approved by the Parliament through Act 61 of
1981.

NABARD came into existence on 12 July 1982 by transferring the agricultural

credit functions of RBI and refinance functions of the then Agricultural Refinance
and Development Corporation (ARDC). NABARD is fully owned by Government of
India.

Vision of NABARD is “Development Bank of the Nation for Fostering Rural

Prosperity”.

Mission of NABARD is to promote sustainable and equitable agriculture and

rural development through participative financial and non-financial interventions,
innovations, technology and institutional development for securing prosperity.

The Government of India encourages farmers in taking up projects in select areas

by subsidizing a portion of the total project cost. All these projects aim at
enhancing capital investment, sustained income flow and employment areas of
national importance.

NABARD is the channel partner of the Government in some of such schemes

shown in this Issue. Subsidy as and when received from the concerned Ministry is
passed onto the financing banks.

We may see them under two sectors – Farm Sector and Off Farm Sector.

Page 28 of 75
Under Farm Sector the following 7 Schemes are there.

a. Dairy Entrepreneur-ship Development Scheme (DEDS) - since

discontinued.

b. Commercial production units of organic inputs

c. Agri-clinic and Agribusiness Centres Scheme
d. National Livestock Mission
e. Interest subvention Scheme
f. New Agricultural Marketing Infrastructure
g. Special Long Term Refinance Schemes

Under Off Farm Sector the following 3 Schemes are available

a. The Credit Linked Capital Subsidy Scheme (CLCSS)

b. National Rural Livelihood Mission (NRLM) and National Urban Livlihood

Mission (NULM)

c. Weavers Package

Housing

NHB- National Housing Bank was established in 1988. It is the apex institution
in Housing Finance.

The National Housing Policy, 1988 envisaged the setting up of NHB as the Apex
level institution for housing. In pursuance of the above, NHB was set up on July 9,
1988 under the National Housing Bank Act, 1987. Reserve Bank of India
contributed the entire paid up capital. The general superintendence, direction and
management of the affairs and business of NHB vest, under the Act, in a Board of
Directors. The Head Office of NHB is at New Delhi.

The following are activities of NHB :

a) Project Finance (Financing Directly to Housing Projects)

b) Refinancing
c) Extending Equity Support
d) Securitisation
e) Guarantees

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Project Finance

NHB provides direct finance to public housing agencies such as, State Level
Housing Boards and Area Development Authorities for large scale integrated
housing projects and slum redevelopment projects.

Refinance

Refinance is extended to primary lending institutions (PLIs) in respect of eligible

housing loans extended by them to individual borrowers. Refinance is provided
under its various schemes which cater to all segments of the population in both
rural and urban areas.

The PLIs include HFCs, scheduled commercial banks, scheduled state cooperative
banks, scheduled urban cooperative banks, Small Finance Banks, Regional Rural
Banks, Apex Cooperative Housing Finance Societies (ACHFs) and Agriculture and
Rural Development Banks (ARDBs).Refinance is also provided to HFCs for project
loans extended by them to various implementing agencies.

Equity Support

NHB participates in the equity share capital of HFCs and other related companies.

Securitisation

NHB has in the past acted as a Special Purpose Vehicle (SPV) for securing the
housing loan receivables i.e. Securitization.

Guarantee

NHB has also had a scheme (CRGFTLIH) to guarantee, the repayments of principal
and payment of interest on bonds issued by HFCs (guarantee). CRGFTLIH stands
for Credit Risk Guarantee Fund Trust for Low Income Housing.

Industrial Reconstruction Bank of India (IRBI)!

To provide financial assistance as well as to revive and revitalise sick industrial

units in public/private sectors, an institution called the Industrial Reconstruction
Corporation of India (IRCI) was set up in 1971. In March 1985, it was converted
into a statutory corporation called the Industrial Reconstruction Bank of India
(IRBI).

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The following functions were laid down for the IRBI:

a) To provide financial assistance to sick industrial units.

b) To provide managerial and technical assistance to sick industrial units,

c) To secure the assistance of other financial institutions and government agencies

for the revival and revitalisation of sick industrial units,

d) To provide merchant banking services for amalgamation, merger,

reconstruction, etc.,

e) To provide consultancy services to the banks in the matter of sick units, and

f) To undertake leasing business

The IRBI is to function as the principal credit and reconstruction agency for
industrial revival and co-ordinate the activities of other institutions engaged in the
revival of industries and also to assist and promote industrial development and
rehabilitation of industrial concerns.

The IRBI is empowered to take over the management of assisted sick industrial
units, lease them out or sell them as running concerns or to prepare schemes for
reconstruction-by scaling down the liabilities with the approval of the
Government of India.

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05. Micro Finance Institutions
Like a bank, a microfinance institution is a provider of credit. However, the size of
the loans are smaller than those granted by traditional banks. These small loans
are known as microcredit. The clients of an MFI are often microentrepreneurs in
need of economic support to launch their business.

Microfinance is a basis of financial services for entrepreneurs and small businesses

deficient in contact with banking and associated services.

The two key systems for the release of financial services to such customers include
‘relationship-based banking’ for individual entrepreneurs and small businesses
along with ‘group-based models’ where several entrepreneurs come together to
apply for loans and other services as a group.

Similar to banking operation traditions, microfinance entities are supposed to

charge their lender’s interests on loans. In most cases the so-called interest rates
are lower than those charged by normal banks, certain rivals of this concept
accuse microfinance entities of creating gain by manipulating the poor people’s
money.

History of Microfinance

During the 1800s, the benefits of small credits to entrepreneurs and farmers was
written by Lysander Spooner, the theorist, as a way to get people out of poverty.
Later, the first cooperative lending bank was founded independently by Friedrich
Wilhelm Raiffeisen to support the farmers in rural Germany.

The term “microfinancing” was first used in the 1970s during the development of
Grameen Bank of Bangladesh, which was founded by the microfinance pioneer,
Muhammad Yunus.

In 1976, Yunus institutionalized the approaches of microfinance, along with the

foundation of Grameen Bank in Bangladesh.

Microfinance in India

Lack of security and high operating costs are some of the major limitations faced
by the banks while providing loans to poor people. These limitations led to the
development of microfinance in India as an alternative to provide loans to the
poor with an aim to create financial inclusion and equality.

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SEWA Cooperative Bank was initiated in 1974 in Ahmedabad, Gujarat, by Ela Bhatt
which is now one of the first modern-day microfinance institutions of the country.

The National Bank for Agriculture and Rural Development (NABARD) offered
financial services to the unbanked people, especially women and later decided to
experiment with a very different model, which is now popularly known as Self-
help Groups (SHGs).

The origin of SHGs in India can be traced back to the establishment of the Self-
Employed Women’s Association (SEWA) in 1972.

The central government had introduced the Micro Units Development Refinance
Agency (MUDRA) where the scheme aims to refinance collateral-free loans of up
to Rs 10 lakh granted by lending entities to non-corporate small borrowers, for
revenue growth actions in the non-farm sector.

Currently, loans granted under this system have falls under three categories
namely, Shishu loans for up to Rs 50,000, Kishor loans in a range between Rs
50,001 to Rs 5 lakhs and Tarun loans ranging from Rs 5 lakhs to 10 lakhs;

MFI is an organization that offers financial services to low income populations.

These services include microloans, micro-savings and microinsurance.

MFIs are financial companies that provide small loans to people who do not have
any access to banking facilities.

The definition of “small loans” varies between countries. In India, all loans that are
below Rs.1 lakh can be considered as microloans.

In most cases the so-called interest rates are lower than those charged by normal
banks, certain rivals of this concept accuse microfinance entities of creating gain
by manipulating the poor people’s money.

Different types of financial services providers for poor people have emerged -
non-government organizations (NGOs); cooperatives; community-based
development institutions like self-help groups and credit unions; commercial and
state banks; insurance and credit card companies; telecommunications and wire
services; post offices; and other points of sale - offering new possibilities.

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Major Business Models:

Joint Liability Group:

This is usually an informal group that consists of 4-10 individuals who seek loans
against mutual guarantee.

The loans are usually taken for agricultural purposes or associated activities.

Self Help Group:

It is a group of individuals with similar socio-economic backgrounds.

These small entrepreneurs come together for a short duration and create a
common fund for their business needs. These groups are classified as non-profit
organisations.

The National Bank for Agriculture and Rural Development (NABARD) SHG linkage
programme is noteworthy in this regard, as several Self Help Groups are able to
borrow money from banks if they are able to present a track record of diligent
repayments.

Grameen Model Bank:

It was the brainchild of Nobel Laureate Prof. Muhammad Yunus in Bangladesh in

the 1970s.

It has inspired the creation of Regional Rural Banks (RRBs) in India. The primary
motive of this system is the end-to-end development of the rural economy.

Rural Cooperatives:

They were established in India at the time of Indian independence.

However, this system had complex monitoring structures and was beneficial only
to the creditworthy borrowers in rural India. Hence, this system did not find the
success that it sought initially.

Benefits:

Microfinance is a source of capital for the people.

It also empowers women in particular, which may lead to more stability and
prosperity for families.

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They provide easy credit and offer small loans to customers, without any
collateral.

It makes more money available to the poor sections of the economy, leading to
increased income and employment of poor households.

Serving the under-financed section such as women, unemployed people and

those with disabilities.

It helps the poor and marginalised section of the society by making them aware
of the financial instruments available for their help and also helps in developing a
culture of saving.

Families benefiting from microloans are more likely to provide better and
continued education for their children.

Challenges:

Fragmented Data:

While overall loan accounts have been increasing, the actual impact of these loans
on the poverty-level of clients is not clear as data on the relative poverty-level
improvement of MFI clients is fragmented.

Impact of Covid-19:

It has impacted the MFI sector, with collections having taken an initial hit and
disbursals yet to observe any meaningful thrust.

Social Objective Overlooked:

In their quest for growth and profitability, the social objective of MFIs—to bring in
improvement in the lives of the marginalized sections of the society—seems to
have been gradually eroding.

Loans for Non-income Generating Purposes:

The proportion of loans utilized for non-income generating purposes could be

much higher than what is stipulated by the RBI which is 30% of the total loans of
the MFI.

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These loans are short-tenured and given the economic profile of the customers, it
is likely that they soon find themselves in the vicious debt trap of having to take
another loan to pay off the first.

MFIs should ensure that the ‘stated purpose of the loan’ that is often asked from
customers at the loan-application stage is verified at the end of the tenure of the
loan.

Leading Microfinance Companies in India 2022

India has been progressing economically over the last few years and microfinance
companies have played a huge role in alleviating poverty, especially among
women, the rural youth, and the poor, uplifting them and bringing them formal
channels of credit.

Microfinance has become a hugely successful concept in India, with hundreds of

microfinance companies changing the landscape of the financial lending industry
for the low-income population.

Microfinance helps rural communities, women, and people who are involved in
agricultural and small business activities.

Leading Microfinance Companies in India

BSS Microfinance Limited

Annapurna Finance Private Limited
Credit Access Grameen Limited
Arohan Financial Services Limited
Asmitha Microfin Ltd.
Muthoot Microfin Limited
Spandana Sphoorty Financial Ltd.
Cashpor Micro Credit

MFIs today are making a great impact, providing services to millions of Indians
and enabling them to get loans at affordable interest rates.

Thus, microcredit institutions are lucrative in India though they are heavily
dependent on funding.

Banks are currently among the largest providers of microfinance with MFI-turned-
banks continuing to be the primary source.

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Micro Finance and Micro Credit

The terms Micro Credit and Micro Finance are often used inter-changeably, but it
is important to note the difference between them.

Micro Finance is the provision of financial services to low-income poor and very
poor self-employed people”. These financial services generally include savings and
credit and also include other financial services such as insurance and payment
services.

Further Microfinance is an the attempt to improve access to small deposits and

small loans for poor households neglected by banks.

Micro Credit is the small credit facility provided to the needy people whose
earning capacity is very less. The loan is provided to the borrowers who are
unemployed, lacking collateral and whose credit history is not sound.

The loan is mainly granted to help people earn their livelihood, especially, women
who can start their business and become independent.

Microcredit not only increases the income level of the poor people but also raise
their standard of living and provides the financial assistance to the poor class of
people in rural areas to help them become self-employed rather than depending
on loan sharks for raising finance who charge inflated interest rates. The best
thing about microcredit is that the loan does not require any asset as collateral.
The loan is granted for a short period only.

Thus, Micro Credit is a component of Micro Finance in that it involves providing

credit to the poor, but Micro Finance also involves additional non-credit financial
services such as savings, insurance, pensions and payment services.

Vide Regulatory Framework for Microfinance Loans Directions, 2022, (updated

25th July, 2022) RBI has advised the following revised Definitions.

Definition of Microfinance Loan

A microfinance loan is defined as a collateral-free loan given to a household

having annual household income up to ₹3,00,000. For this purpose, the household
shall mean an individual family unit, i.e., husband, wife and their unmarried
children.

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All collateral-free loans, irrespective of end use and mode of application/
processing/ disbursal (either through physical or digital channels), provided to
low-income households, i.e., households having annual income up to ₹3,00,000,
shall be considered as microfinance loans.

Limit on Loan Repayment Obligations of a Household

Repayment of monthly loan obligations of a household shall be subject to a limit

of maximum 50 per cent of the monthly household income.

The computation of loan repayment obligations shall take into account all
outstanding loans (collateral-free microfinance loans as well as any other type of
collateralized loans) of the household. The outflows capped at 50 per cent of the
monthly household income.

Interest rates and other charges/ fees on microfinance loans should not be
usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank.

Each RE shall disclose pricing related information to a prospective borrower in a

standardised simplified factsheet.

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06. Non-Banking Financial Companies (NBFCs)
NBFC stands for Non-Banking Financial Corporations. As per Section 451(c) of the
RBI Act, a Non-Banking Company that carries the business of a financial institution
is called a Non-Banking Financial Corporation or NBFC.

NBFC (Non-Banking Financial Institution) offers financial services and products,

but it is not officially recognized as a bank with a banking license.

A Non-Banking Financial Corporation is a company that is registered under the

Companies Act, 1956 of the Companies Act, 2013 and is involved in the lending
business, hire-purchase, leasing, insurance business, receiving deposits in some
cases, chit funds, stocks, and shares acquisition, etc.

The functions of the NBFCs are managed by both the Ministry of Corporate Affairs
and the Reserve Bank of India.

The activities of Non-Banking Financial Institutions (NBFI) include lending and

other financial services like providing loans & advances, credit facilities, trading in
the money market, savings and investment products, managing stock portfolios,
money transfers, etc. Additionally, their activities also include leasing, hiring,
venture capital finance, infrastructure finance, and so on.

Before beginning the Non-Banking Financial Institutions activities, NBFC

registration is required.

Financial Organisations which do not need a NBFC license

Certain entities are involved in the business of financial activities but do not
require obtaining a registration with the Reserve Bank of India (RBI). As these
entities are regulated by other financial sector regulators, they do not need either
the NBFC registration or the NBFC regulations of RBI. These entities are as follows:

Insurance Companies which are regulated by Insurance Regulatory and

Development Authority of India (IRDA)

Housing Finance Companies which are regulated by the National Housing Bank

Stock Broking Companies which are regulated by Securities and Exchange Board
of India.

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Merchant Banking Companies which are regulated by Securities and Exchange
Board of India

Mutual Funds which are regulated by Securities and Exchange Board of India

Venture Capital Companies which are regulated by Securities and Exchange Board
of India

Companies that run Collective Investment Schemes which are regulated by

Securities and Exchange Board of India

Chit Fund Companies which are regulated by the respective State Governments

Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

Some of the popular examples of Non-Banking Financial Institutions include- ICICI

Ventures, SBI Factors, Kotak Mahindra Finance, and Sundaram Finance.

Such entities are registered under the Companies Act, 1956 and, as specified
under Section 45-IA of the RBI Act, 1934, do operation as a non-banking financial
institution.

An NBFC is primarily involved in the business of loans, stocks, equity acquisition,

insurance business, government-issued bonds, chit fund business, and much
more.

The key difference among NBFC & the Bank in which we can withdraw or deposit
cash in a bank when we required it, but NBFC does not allow withdrawals or
deposit cash when it is necessary.

NBFC deposits are not considered as investments, like the amount we invest for
our health insurance or LIC policy and so on. It is just long-term premiums or
deposits.

Types of NBFCs

There are three broad heads under which the NBFC in India can be categorized:

a) On the basis of deposits

b) On the Nature of their activity

c) On the basis of the size of their assets

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On the basis of deposits

Deposit-taking non-banking finance companies

Non-Deposit taking Non-Banking Financial Institutions

On the Nature of their activity

Asset Finance Company (AFC)

Non-Banking Financial Company-Factors (NBFC-Factors)
Investment Company (IC)
Systematically Important Core Investment Company (CIC-ND-SI)
Non-Banking Financial Company: Micro Finance Institutions (NBFC-
MFI)(IDF-NBFC)
NBFC-Non-Operative Financial Holding Company (NOFHC)
Loan Company (LC)
Infrastructure Debt Fund: Non-Banking Financial Institutions
Infrastructure Finance Company (IFC)
Mortgage Guarantee Company (MGC)

On the basis of the size of their assets

Non-systematically Important NBFCs

Systematically Important Non-Banking Financial Institutions

Requirements to be fulfilled in order to obtain NBFC license:

The fundamental requirements which are to be fulfilled in order to apply for NBFC
license are as follows:

The company has to be registered under the Companies Act. That is the company
should either be a Limited Company or a Private Limited Company (PLC).

The minimum Net Owned Fund of the company must be Rs.2 crore.

The Net Owned Fund of a company can be defined as the funds owned by a
company after deducting the intangible assets and reserves from its Total Owned
Fund.

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Guidelines prescribed by the RBI to be followed by NBFC :

a) NBFCs cannot accept demand deposits from public depositors or investors

b) The minimum time period for which the public deposits can be taken by the
company is 12 months, while the maximum tenure can be 60 months.

c) The Reserve Bank of India will not guarantee the repayment of any amount
which is taken by the NBFCs.

d) The Company cannot charge an interest rate which is more than the rate
prescribed by the Reserve Bank of India.

e) NBFCs can issue cheques to their customers in order to make payments or

settlements.

f) The company has to furnish a record of the statutory return on the deposits
taken by the company in the form NBS- 1 every year.

g) The company has to furnish a quarterly return on the liquid assets of the
company.

h) The audited balance sheet of the company has to be submitted every year.

i) The company has to ascertain its credit ratings every 6 months and submit the
same to the RBI.

j) The companies which have a Public Deposit of Rs.20 Crore or more or have
assets worth Rs.100 Crore or more will have to submit a half-yearly ALM return.

k) The depositors of the NBFCs cannot avail the securing facility of the Deposit
Insurance and Credit Guarantee Corporation (DICGC).

l) Only the NBFCs that have been duly rated and matches the recommended
Minimum Investment Grade Credit (MIGC) rating, are eligible to accept
conditional deposits from public depositors.

m) The RBI has restricted the NBFCs from providing additional benefits, extra
incentives, or gifts to the customers or depositors, than those which are offered
by the banks.

n) The company has to maintain a minimum of 15% of the Public Deposits in its
Liquid Assets.

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Action in case a NBFC defaults

In case the NBFC defaults and fails to make the payment of the amount taken, the
depositor can file a suit against the company to the Consumer Forum or the
National Company Law Tribunal.

Mutual Funds

Mediators between people and stock exchange

Money collected from people by selling their units is called the corpus

Oldest Mutual Fund company in India is UTI ( Unit Trust of India)

Insurance Companies

There are two types of Insurance – Life Insurance and General Insurance.

IRDA Act, 1999

As per the Insurance Regulatory and Development Authority Act, Insurance

companies were opened up for private companies. The objective was to promote
competition FDI was allowed up to 26% (Recently increased to 49%) IRDA was
established as the regulator of the insurance sector

LIC – Life Insurance Corporation

Set up in 1956 by the government by nationalising all the existing private sector
life insurance companies.

GIC – General Insurance Corporation

It was established in 1973

Subsidiaries of GIC are:-

NICL – National Insurance Company of India Limited

United India Insurance Company Limited

Oriental Insurance Company of India Limited

New India Insurance Company of India Limited

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Hedge Funds

These are mutual funds for rich investors

Funds are raised through the sale of their unit to High net worth Individuals and
Institutional Investors

Units of these are usually sold in chunks/groups

There is a lock-in period for Hedge funds before which funds cannot be
withdrawn

Corpus is an investment in risky instruments with a long term perspective.

Venture Capital Firms/ Companies

They provide finance and technical assistance to firms which undertake a business
project based on innovative ventures.

They provide finance for the commercial application of new technology

Merchant banks ( Investment Banks)

Merchant banks provide financial consultancy services. They advise firms on

fundraising, manage IPO of firms, underwrite new issues and facilitate demat
trading.

Finance Companies (Loan Companies)

Financial Institutions raise funds from the public for lending purpose. Examples -
Muthoot Finance, Chola Mandalam

Micro Finance Institutions (MFI)

Raise funds from the public for lending to weaker sections. In India, they mainly
raise funds from banks. Examples- Basix, Bandhan, SKS Micro Finance.
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Vulture Funds

These funds buy stocks of companies which are nearing bankruptcy at a very low
price. After purchasing such stocks they initiate the recovery process to increase
the price of shares and sell it at a later point of time.

Islamic Banks

These banks provide loans on the basis of Islamic laws called Sharia.

In the law of Sharia Interest cannot be charged on the loans

Leasing Companies

They purchase equipment and machinery and provide the same to companies on
a lease. These companies charge rent on these machineries which is similar to EMI

Scale-Based Regulations (SBR)

The RBI’s Scale-Based Regulations (SBR) for lending by non-banking finance

companies are aimed at reducing risks for the financial sector.

All Non-Banking Financial Companies will be regulated through a framework

called Scale Based Regulation (SBR) framework

Based on their size, activity, and perceived riskiness NBFC are Classified in to four
layers:-

NBFC Base Layer (NBFC-BL).

NBFC – Middle Layer (NBFC-ML)
NBFC – Upper Layer (NBFC-UL)
Top Layer (NBFC-TL)

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Base Layer consists of Non-deposit taking NBFCs below the asset size of ₹1000
crore . The NBFCs in this Layer can undertake the following activities-

NBFC-Peer to Peer Lending Platform (NBFC-P2P) – is a type of NBFC which

carries on the business of providing services of Loan facilitation to willing lenders
and borrowers through online platform. This type of Non-Banking Financial
Company is not allowed to accept deposits or lend on its own. Few examples are –
LenDen Club, Finzy, Faircent, Lendingkart, Rupee Circle and Paisa Dukaan etc. This
type of Non-Banking Financia

NBFC-Account Aggregator (NBFC-AA)- are entities that enable sharing of data

across multiple financial sector organizations and act as “consent brokers”, i.e., the
intermediate data transfer among the financial organizations with the consent of
the user. Few Examples are Axis, ICICI, HDFC, and IndusInd Banks

Non-Operative Financial Holding Company (NOFHC)- Non-Operative Financial

Holding Company (NOFHC) means a non-deposit taking NBFC which holds the
shares of a banking company and the shares of all other financial services
companies in its group, whether regulated by Reserve Bank or by any other
financial regulator, to the extent permissible under the applicable. Example is -
Bandhan Financial Holdings Limited.

This type of Non-Banking Financial Company is not allowed to accept deposits or

lend on its own.

The Middle Layer shall consist of:

(a) All deposit taking NBFCs (NBFC-Ds), irrespective of asset size,

(b) Non-deposit taking NBFCs with asset size of ₹1000 crore and above and

(c) NBFCs undertaking the following activities

Standalone Primary Dealers (SPDs) – means a NBFC that holds a valid letter of
authorization as a PD issued by the Reserve Bank, in terms of the “Guidelines for
Primary Dealer in Government Securities Market”.

Infrastructure Debt Fund – IDFs are investment vehicles which can be sponsored
by commercial banks and NBFCs in India in which domestic/offshore institutional
investors, specially insurance and pension funds can invest through units and
bonds issued by the IDFs.

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Core Investment Company (CIC) is a NBFC which carries on the business of
acquisition of shares and securities and holds not less than 90% of its net assets in
the form of investment in equity shares, preference shares, bonds, debentures,
debt or loans in group companies.

Housing Finance Companies (HFCs) – shall mean a company incorporated

under the Companies Act, 2013, whose financial assets, in the business of
providing finance for housing, constitute at least 60% of its total assets (netted off
by intangible assets)

Infrastructure Finance Companies (NBFC-IFCs) – is defined as a NBFC if a

minimum of 75 percent of its total assets shall deploy in infrastructure loan.

Upper Layer:

The Upper Layer shall comprise of those NBFCs which are specifically identified by
the Reserve Bank as warranting enhanced regulatory requirement based on a set
of parameters and scoring methodology.

The top ten eligible NBFCs in terms of their asset size shall always reside in the
upper layer, irrespective of any other factor.

The Top Layer:

Normally this layer remain empty.

This layer can get populated if the Reserve Bank is of the opinion that there is a
substantial increase in the potential systemic risk from specific NBFCs in the Upper
Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.

Conclusion:

a) NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer
interface will always remain in the Base Layer of the regulatory structure.

b) NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer
(and not in the Base layer), as the case may be.

c) SPD and IDF-NBFC will always remain in the Middle Layer.

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d) The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro
Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee
Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure
depending on the parameters of the scale based regulatory framework.

e) Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as
the case may be.

Difference Between Banking and Non-Banking Financial Institutions in India

A few activities of NBFC are akin to that of banks; for example, Non-Banking
Financial Institutions lend and make investments. However, there are a few
differences between banks and NBFCs.

a) Non-Banking Financial Institutions are types of financial institutions in India

that offer banking services without a banking license but on the other hand, Bank
is a government-authorized financial intermediary which aims to provide banking
services.

b) NBFC can’t accept demand deposits

c) They don’t form part of the payment and settlement system. Also, they can’t
issue cheques drawn on themselves.

d) Credit Guarantee Corporation and the deposit insurance facility of Deposit

Insurance are not available to the depositors of Non-Banking Financial
Institutions.

Significance of NBFC

In a country like India, where access to bank finance remains a challenge for a
large population, NBFC plays a crucial role.

Non-Banking Financial Institutions are the types of financial institutions that offer
services to the market segments that the commercial banks don’t due to high risk
and low returns.

NBFCs are an essential part of the economy’s financial sector because of their
inherent characteristics.

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NBFC - Challenges

The criticism faced by Non-Banking Financial Institutions in India are as follows:

NBFCs are not heavily regulated, just like banks. Due to this, a huge risk was
highlighted during the 2008 Global Financial Crisis, where the lending practices of
the companies were unchecked. In the end, it resulted in a disastrous outcome.

The IL&FS default and turbulence in the Indian Credit Market in 2018 pointed out
some fundamental and critical questions about the role of NBFCs and their
business model

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07. Insurance Companies
Insurance is a legal contract (insurance policy) made between two parties, i.e. the
insurance company (known as insurer) and the individual or group (known as
insured). Both these parties enter into a contract under which the insured pays a
predetermined sum of money to the insurer (known as a premium) with the
promise that the company will compensate the insured in the event of a financial
loss (risk) due to the causes that the insurer has agreed to provide a cover for.

The basic principle behind any insurance contract is that the insured would prefer
to spend small amounts of money on a periodic basis against the possibility of
incurring a huge unexpected loss.

This concept works because all the policyholders pool in their risks together, and
in case there are any losses arising due to the occurrence of the insured event, the
person suffering the loss will be compensated up to the extent agreed in the
contract.

The Indian Insurance Sector is basically divided into two categories –

Life Insurance

Non-life Insurance.

The Non-life Insurance sector is also termed as General Insurance.

Insurance Regulatory and Development Authority of India or the IRDAI

IRDAI is the apex body responsible for regulating and developing the insurance
industry in India. It is an autonomous body. It was established by an act of
Parliament known as the Insurance Regulatory and Development Authority Act,
1999. Hence, it is a statutory body. The IRDAI is headquartered in Hyderabad.

The functions of the IRDA are listed below:

Its primary purpose is to protect the rights of the policyholders in India.

It gives the registration certificate to insurance companies in the country.

It also engages in the renewal, modification, cancellation, etc. of this registration.

It also creates regulations to protect policyholders’ interests in India.

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IRDA Mission

To protect the interests of the policyholders, to regulate, promote and ensure

orderly growth of the insurance industry and for matters connected therewith or
incidental thereto.

Both the Life Insurance and the Non-life Insurance is governed by the IRDAI
(Insurance Regulatory and Development Authority of India).

The role of IRDA is to thoroughly monitor the entire insurance sector in India and
also act like a custodian of all the insurance consumer rights.

Coverage

Life insurance companies offer coverage to the life of the individuals, whereas
the non-life insurance companies offer coverage with our day-to-day living like
travel, health insurance, our car and bikes, and home insurance.

Non-life insurance companies provide coverage for our industrial equipment’s

as well.

Crop insurance for our farmers, gadget insurance for mobiles, pet insurance etc.
are some more insurance products being made available by the general insurance
companies in India.

The insurance industry comprises a total of 57 insurance companies in India.

For Life Insurance Business there are 24 companies recognised by IRDA, similarly
for non-life insurance 34 companies got the approval from IRDA.

Life Insurance Corporation of India is the only public sector company among the
life insurers.

There are 6 public sector insurers non-life insurance companies. They are

Agriculture Insurance Company of India

Export Credit Guarantee Corporation of India
National Insurance Company
New India Assurance
The Oriental Insurance Company
United India Insurance Company

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General Insurance Corporation of India is the only reinsurer in India recognised
by the Insurance Regulatory and Development Authority.

Insurance Amendment Act 2021

The above Act increases the limit on foreign investment in an Indian insurance
company from 49% to 74%, and removes restrictions on ownership and control.

While control will go to foreign companies, the majority of directors and key
management persons will be resident Indians who will be covered by law of the
land.

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08. Indian Financial System- Role of Regulators
Financial markets play a crucial role in contributing to the growth of the economy;
hence it is essential to monitor the functioning of the money market.

The financial system of India is regulated by several governing bodies.

The objective of these financial regulators in India is to maintain fairness, parity,

and functioning of financial marketing. Therefore, regulators of financial market
not only set ethical standards but also maintain the stability of the financial
system.

The financial Regulator Bodies in India may be classified as

Regulators of Banks and Financial Institutions

Quasi-Regulatory Institutions

Regulators of Banks and Financial Institutions

Reserve Bank of India (RBI)

Securities and Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDAI)

Pension Fund Regulatory and Development Authority (PFRDA)

Forward Market Commission India (FMC)

Quasi-Regulatory Institutions

National Bank for Agriculture and Rural Development (NABARD)

National Housing Bank (NHB)

Small Industries Development Bank of India (SIDBI)

Export-Import Bank of India (EXIM Bank)

Ministry of Corporate Affairs

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Reserve Bank of India (RBI)

RBI is an autonomous body that ensures price stability in the country, it stabilizes
the value of the currency and ensures that financial market is stable and robust.

RBI is a regulator of money market performing the following functions:

1. RBI maintains and ensures effective functioning of the infrastructures of the

financial market, such as the Securities Settlement System (SSS), Real Time Gross
Settlement System (RTGS), Clearing Corporation of India (CCIL), etc.

2. RBI regulates Banking System.

3. Adapting an electronic payment system is not an option but a necessity. RBI

helps in the growth of payment systems and complying with international trends.

4. The RBI has access to information about the operation of payments and is
authorized to conduct audits and inspections.

Securities and Exchange Board of India (SEBI)

As an autonomous body, SEBI plays an essential role in regulating the Indian

financial market. It protects the interests of the participants and enforces a set of
rules to ensure that the market functions effectively. In addition, SEBI promotes
safe and fair practices in the market in the following ways:

1. It prevents insider trading and unfair trade practices.

2. Regulate the takeover of companies, conduct audits, and set the guidelines and
code of conduct to be followed for the proper functioning of financial markets.

3. Monitor the activities of financial intermediaries like brokers, sub-brokers, etc.,

and prevent malpractices, providing a healthy environment for investors.

4. SEBI regulates Stock Broking Companies

5. SEBI regulates Merchant Banking Companies

6. SEBI regulates Mutual Funds

7. SEBI regulates Venture Capital Companies

8. SEBI regulates Companies that run Collective Investment Schemes

9. SEBI regulates regulation of commodity futures market.

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Insurance Regulatory and Development Authority of India (IRDAI)

The Insurance Regulatory and Development Authority of India is another financial

regulator of money market in India. It mainly secures the insurance sector in India.
Insurance policies help people to protect their health, assets, and loved ones. If
different insurance companies set different policy rules and rates, it would put the
credibility of general as well as life insurance plans at stake. This is where IRDAI
comes into play. IRDAI is a statutory body that promotes orderly growth and
proper functioning of the insurance industry in India. It helps protect the
policyholder’s interest and ensures fairness in the insurance sector.

IRDA regulates Insurance Companies, both Life and General.

The Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA is a statutory regulatory body established under the Pension Fund

Regulatory and Development Authority Act, 2013. It was established to oversee
the National Pension System (NPS), and regulate India’s pensions sector

Forward Market Commission India (FMC) (since merged with SEBI)

FMC was chief regulatory authority for commodity futures market in India. The
objectives of regulation were to exclude from forward dealings operators with
insufficient financial resources and inadequate experience, and to prevent all
forms of price manipulation. Forward Markets Commission (FMC) has been
merged with SEBI with effect from September 28, 2015 to make the regulation of
commodity futures market strong.

National Bank for Agriculture and Rural Development (NABARD)

NABARD is an apex body for overseeing the agricultural finance and rural
development in India. It provides financial assistance to the farm sector by way of
refinance to commercial banks, State Co-operative Banks, ‘ Regional Rural Banks
and, State Land Development Banks for various agriculture and allied activities,
like minor irrigation, plantation and horticulture, land development, farm
mechanisation, and animal husbandry.

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National Housing Bank (NHB)

NHB regulates Housing Finance Companies

Small Industries Development Bank of India (SIDBI)

Small Industries Development Bank of India (SIDBI) was established after taking
over IDBI’s financing activities relating to small-scale industries. It is the principal
institution in the country for promotion, financing and development of industries
in the tiny and small-scale sectors. It undertakes both financing activities as well
as promotional activities and provides support services.

Export-Import Bank of India (EXIM Bank)

Export-Import Bank of India (EXIM Bank) was set up for the purpose of financing,
facilitating and promoting the foreign trade of India. It is responsible for co-
coordinating the working of institutions engaged in financing exports and
imports. It also renders various advisory services to exporters and other entities
connected with foreign trade.

Ministry of Corporate Affairs (MCA)

The Ministry of Corporate Affairs is one of the financial regulators in India that
regulates the functioning industrial and services sectors. It plays a significant role
in the preparation and analysis of corporate business information. In addition, it
administers the Competition Act of 2002, preventing malpractices in the market
and safeguarding the interests of participants.

Nidhi Companies which are regulated by the Ministry of Corporate Affairs (MCA)

State Governments

State Governments regulates Chit Fund Companies

The financial market provides liquidity, funds mobilization, and capital formation.
Therefore, it provides a vital role in the economy of any country, providing the
participants with an opportunity to trade and grow financially. Hence, it is the
government’s responsibility to provide a healthy environment and protect the
interests of the participants.

Financial regulators in India not only protect the rights of investors but also
prevent market failures.

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Different regulatory bodies have different structures and frameworks with their
codes of conduct to ensure the integrity and smooth functioning of the financial
system in India.

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09. Reforms & Developments in the Banking Sector
The Indian banking sector has been evolving on a continuous basis, from being
exclusivist to becoming a carrier of social reform and financial inclusion. However,
in recent times, the banking industry has experienced many issues.

For instance, a decline in asset quality, financial soundness, and efficiency has
marred the functioning of the Indian banking industry.

Given the current challenges of a burgeoning population, the ongoing Covid-19

pandemic, and the West’s intention to shift its manufacturing base to India and
elsewhere, it is essential to say ‘yes’ to fifth generation banking reforms.

Evolution of Indian Banking Industry

First Generation Banking: During the pre-Independence period (till 1947), the
Swadeshi Movement saw the birth of many small and local banks.

Most of them failed mainly due to internal frauds, interconnected lending, and the
combining of trading and banking books.

Second Generation Banking (1947-1967): Indian banks facilitated concentration

of resources (mobilised through retail deposits) in a few business families or
groups, and thus neglected credit flow to agriculture.

Third Generation Baking (1967-1991): The government was successful in

breaking the nexus between industry and banks through the nationalisation of 20
major private banks in two phases (1969 and 1980) and introduction of priority
sector lending (1972).

These initiatives resulted in the shift from ‘class banking’ to ‘mass banking’.

Further, it had a positive impact on the expansion of branch networks across

(rural) India, massive mobilisation of public deposits and incremental credit flow
to agriculture and allied sectors.

Fourth Generation Banking (1991-2014): This period saw landmark reforms such
as issue of fresh licences to private and foreign banks to infuse competition,
enhanced productivity as well as efficiency.

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This was done by leveraging technology; introduction of prudential norms;
providing operational flexibility coupled with functional autonomy; focus on
implementation of best corporate governance practices; and strengthening of
capital base as per the Basel norms.

Current Model: Since 2014, the banking sector has witnessed the adoption of the
JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and issuance of licences to Payments
Banks and Small Finance Banks (SFBs) to achieve last-mile connectivity in the
financial inclusion drive.

Fifth Generation Banking

Big Banks: The Narasimham Committee Report (1991), emphasised that India
should have three or four large commercial banks, with domestic and
international presence, along with foreign banks.

The second tier may comprise several mid-size lenders, including niche banks,
with economy-wide presence.

In accordance with these recommendations, the government has already merged

a few PSBs, initiated steps towards setting up of DFI, Bad Bank, etc.

Need for Differentiated Banks: Though the universal banking model has been
widely preferred, there is a need for niche banking to cater to the specific and
varied requirements of different customers and borrowers.

Essentially, these specialised banks would ease the access to finance in areas such
as RAM (retail, agriculture, MSMEs).

Further, the proposed DFI/niche banks may be established as specialised banks to

have access to low-cost public deposits and for better asset-liability management.

Blockchain Banking: Risk management can be more specific and the neo-banks
can leverage the technology to further (digital) financial inclusion and finance
higher growth of aspirational/new India.

In this context, technologies like Blockchain can be implemented in Indian

Banking.

Blockchain technology will allow prudential supervision and control over the
banks may be easier.

Page 59 of 75
Mitigating Moral Hazard: Till date, failure of public sector banks has been a rare
phenomenon and the hidden sovereign guarantee is the main reason for superior
public confidence in the banks.

However, with the privatization drive of PSBs, this may not be always true.

Therefore, fifth generation banking reforms should focus on the need for higher
individual deposit insurance and effective orderly resolution regimes to mitigate
moral hazard and systemic risks with least cost to the public exchequer.

ESG Framework: Differentiated Banks also may be encouraged to get listed on a

recognised stock exchange and adhere to ESG (Environment, Social Responsibility,
and Governance) framework to create value for their stakeholders in the long run.

Empowering Banks: The government should tighten the loose ends by allowing
them to build diversified loan portfolios, establishing sector-wise regulators,
bestowing more powers to deal effectively with wilful defaulters.

There is also a need to pave the way for the corporate bond market (shift from
bank-led economy) to create a responsive banking system in a dynamic real
economy.

Conclusion

Present scenario calls for a paradigm shift in the banking sector to improve its
resilience and maintain financial stability. In this context, the government has
recently announced new banking reforms, involving the establishment of a
Development Finance Institution (DFI) for infrastructure, creation of a Bad Bank,
and privatisation of public sector banks (PSBs) to ease its burden in terms of
mobilising additional capital.

However, governance reforms will always form the underlying layer of every
generation of making reforms.

Present scenario, triggered by Covid-19 pandemic, calls for a paradigm shift in the
banking sector to improve its resilience and maintain financial stability.

The performance of the Indian banking sector is intimately correlated with the
overall health of the economy, perhaps more so than any other sector.

Page 60 of 75
The sector is tasked with supporting other economic sectors like agriculture,
small-scale businesses, exports, and banking activities in developed commercial
areas and remote rural areas. The improvement of asset quality, application of
rational risk management procedures, and capital adequacy are some of the main
functions of the Indian banking system.

Banking sector reforms are implemented to improve the condition of the banking
system. Multiple banking sector reforms have been introduced in India in the
context of economic liberalisation and the growing trend toward globalisation.
The main objective is to improve operational efficiency and promote banks' health
and financial reliability, so that Indian banks can meet internationally recognised
standards of performance.

The overall banking sector in India has evolved significantly over the last decade,
from being major lenders to the industry, to being the majority providers of
personal loans, vehicle loans, credit cards, and housing loans. Private banks are
gradually taking over from public sector banks as the main lenders in the country.

Another recent change in the banking sector is the emergence of e-banking,

which is crucial in offering better services to clients. Internet banking, e-wallets,
and mobile banking are some of the new methods that have replaced the
traditional methods of conducting transactions.

Banking Reforms

The reforms in the Indian banking sector have been introduced to increase the
efficiency, stability, and effectiveness of banks. Some of these recent reforms are:

National Asset Reconstruction Company Limited (NARCL): Setting up of the

NARCL was announced in the Union Budget 2021-22. The objective was to
construct a 'bad bank' which would house bad loans of Rs. 500 crore (US$ 62.63
million) and above.

There are already 28 existing asset reconstruction companies (ARCs) on the

market. However, due to the sizeable and fragmented nature of the bad loan
book held by different lenders, significant amounts of NPAs continue to appear
on bank balance sheets. Thus, more choices and alternatives like the NARCL are
required.

Page 61 of 75
NARCL will have a dual structure – it will consist of an asset management
company (AMC) and an asset reconstruction company (ARC) to recover and
manage stressed assets. It is a collaboration between private and public sector
banks (PSBs), but PSBs will maintain 51% ownership in NARCL.

NARCL will be capitalised through equity from banks and non-banking financial
companies (NBFCs). If necessary, it will also issue new debt. The guarantee
provided by the Government of India will lower the need for up-front capital. The
NARCL will be assisted by the India Debt Resolution Company Ltd (IDRCL).

In August 2022, the NARCL offered to buy the distressed loan accounts of five
companies, including Future Retail.

India Debt Resolution Company Ltd. (IDRCL): The IDRCL is a service

company/operational entity whose purpose is to manage the assets of the NARCL
with the help of turnaround experts and market professionals. The NARCL will buy
assets by presenting an offer to the lead bank; IDRCL will be included for
management and value addition after NARCL's offer is accepted. Public FIs and
PSBs will hold a 49% stake in IDRCL, and the rest will be with private banks.

Digital Rupee: The central bank's digital currency (CBDC), the RBI's digital rupee,
was announced in the Union Budget 2022-23, and is expected to be launched by
the end of this financial year. India's digital economy is predicted to benefit
greatly from the introduction of the digital rupee.

A CBDC is a digital representation or token of a nation's legal currency.

A CBDC can benefit customers with better liquidity, scalability, acceptance,

convenience of transactions with anonymity, and quicker settlement.

Similar to how UPI made digital cash more user-friendly, this development will
increase people's access to digital currencies.

Adopting the digital rupee is expected to help cross-border remittances and

reduce the transaction cost for businesses and the government.

The digital rupee would reduce the settlement risk in the financial system.

Page 62 of 75
National Bank for Financing Infrastructure and Development (NaBFID): The
NaBFID has been set up as a Development Financial Institution (DFI) to aid India in
developing long-term infrastructure financing.

The NaBFID has both developmental and financial objectives.

Unlike banks, DFIs do not take deposits from the general public. Instead, they
raise funds from the government, the market and multilateral institutions, and are
often backed by the government's guarantee. The government initially holds
100% of the shares in the bank, which may subsequently be reduced to 26%.

The NaBFID was set up as a corporate body with an authorised share capital of Rs.
1 lakh crore (US$ 12.53 billion).

The NaBFID plans to finance multiple projects that are a part of India's Rs. 6
trillion (US$ 75.18 billion) National Monetisation Pipeline.

India's financial regulators have helped craft one of the strongest banking and
financial systems in the world. In order to provide better and more accessible
banking experiences, the Indian government has implemented several reforms
and policies, which help the country deal with any change in economic conditions
and demographics.

Information technology and electronic money transfer systems have become the
two cornerstones of modern banking development in the area of technology-
based banking. Banks now offer a variety of products that go far beyond
traditional banking, and these services are now available 24/7.

Consumers today are more demanding of virtual banking experiences due to the
advancement of digital technologies. The pandemic has only increased the
demand for stress-free access to financial products and services, and the necessity
for quick and easy access to banking products, services, and information. After
internet and mobile banking, payments banks will provide a third alternative
channel, increasing efficiency and lowering expenses associated with serving
customers in rural and semi-urban areas. Upcoming technical advancements, such
as the digital rupee, will significantly impact India's banking sector as we move
forward.

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Page 63 of 75
10. Miscellaneous Concepts
In this Chapter, I wish to cover some terminology and concepts which are used
elsewhere in this Book and which needs some explanation.

Mutual Fund

A mutual fund is a collective investment vehicle that collects & pools money from
a number of investors and invests the same in equities, bonds, government
securities, money market instruments.

The money collected in mutual fund scheme is invested by professional fund

managers in stocks and bonds etc. in line with a scheme’s investment objective.
The income / gains generated from this collective investment scheme are
distributed proportionately amongst the investors, after deducting applicable
expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. In
return, mutual fund charges a small fee.

In short, mutual fund is a collective pool of money contributed by several

investors and managed by a professional Fund Manager.

Mutual Funds in India are established in the form of a Trust under Indian Trust
Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.

The fees and expenses charged by the mutual funds to manage a scheme are
regulated and are subject to the limits specified by SEBI.

Depository Institutions and Non-Depository Institutions

Those that accept deposits from customers—depository institutions—include

commercial banks, savings banks, and credit unions; those that don't—non-
depository institutions—include finance companies, insurance companies, and
brokerage firms.

Treasury Bills

Treasury Bills are short term (up to one year) borrowing instruments of the
Government of India or by a central authority of any country which enable
investors to park their short term surplus funds while reducing their market risk.

Treasury bills are also known as Zero Coupon Bonds.

Page 64 of 75
Certificate of Deposits

Certificate of Deposit or CD is a fixed-income financial instrument governed under

the Reserve Bank and India (RBI) issued in a dematerialized form. The amount at
pay out is assured from the beginning. A CD can be issued by any All-India
Financial Institution or Scheduled Commercial Bank. They are issued at a discount
provided on face value. Like a fixed deposit (FD), a CD’s purpose is to denote in
writing that you have deposited money in a bank for a fixed period and that bank
will pay you interest on it based on the amount and duration of your deposit.

Difference Between CD vs FD (Fixed Deposits of Banks)

There is no major difference between a certificate of deposit and a fixed deposit.

They are one and the same. Fixed deposits are even referred to as CDs or time
deposits by certain banks. They come with the same term period, a minimum
requirement for a deposit, and high-interest rates compared to traditional savings
accounts. One difference is that CDs are freely negotiable while FDs are not.

Commercial Paper

Meaning of Commercial Paper

Commercial paper is an unsecured, short period debt tool issued by a company,

usually for the finance and inventories and temporary liabilities. These papers are
like a promissory note allotted at a huge cost and exchangeable between the All-
India Financial Institutions (FIs) and Primary Dealers (PDs).

Most of the commercial paper investors are from the banking sector, individuals,
corporate and incorporated companies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs), etc. However, FII can only invest according to the limit
outlined by the Securities and Exchange Board of India (SEBI)

In India, commercial paper is a short-term unsecured promissory note issued by

the Primary Dealers (PDs) and the All-India Financial Institutions (FIs) for a short
period of 90 days to 364 days.

Page 65 of 75
Types of Commercial Paper

According to the Uniform Commercial Code (UCC), commercial papers are divided
into four different types.

Draft – It is written guidance by an individual to another and to pay a stipulated

sum to a third party.

Check – It is a unique draft where the drawee is a bank.

Note –an individual is promised to pay another individual or bank a particular

amount.

Certificates of Deposit – In this type, a bank confirms the receipt of deposit.

According to security, there are two types of commercial papers

Unsecured Commercial Papers – These are traditional papers and allotted

without any security.

Secured Commercial Papers – It is also known as Asset-Backed Commercial

Papers (ABCP) and assured by other financial assets.

Difference between CD vs Commercial Paper

There are two glaring differences between commercial paper and a CD. The first is
who can issue them. A CD is issued by financial institutions and banks.
Commercial papers are issued by primary dealers, large corporations and All-India
Financial Institutions. The second difference is the minimum amount of deposit. A
certificate of deposit requires a minimum investment of ₹1 lakh and thereafter
permits multiples of it. A commercial paper, on the other hand, is issued for
investments of at least ₹5 lakhs and in multiples of ₹5 lakh, thereafter.

Page 66 of 75
Hedge Funds

A Hedge Fund is a pool of money that takes both short and long positions, buys
and sells equities, initiates arbitrage, and trades bonds, currencies, convertible
securities, commodities and derivative products to generate returns at reduced
risk.

A hedge fund is an investment vehicle that pools capital from high-net-worth

investors and invests in a wide variety of assets. Hedge funds have complex
portfolio-construction and risk-management techniques.

The word "hedge", meaning a line of bushes around the perimeter of a field, has
long been used as a metaphor for placing limits on risk. Early hedge funds sought
to hedge specific investments against general market fluctuations by shorting the
market, hence the name.

Difference between Hedge Funds and Mutual Fund

Mutual funds are regulated investment products offered to the public and
available for daily trading. Hedge funds are private investments that are only
available to accredited investors. Hedge funds are known for using higher risk
investing strategies with the goal of achieving higher returns for their investors.

Venture Capital Funds

Venture capital funds are pooled investment funds that manage the money of
investors who seek private equity stakes in startups and small- to medium-sized
enterprises with strong growth potential.

These investments are generally characterized as very high-risk/high-return

opportunities.

Start up companies with a potential to grow need a certain amount of investment.

Wealthy investors like to invest their capital in such businesses with a long-term
growth perspective. This capital is known as venture capital and the investors are
called venture capitalists.

Page 67 of 75
Hedge Funds vs. Venture Capital Funds

Hedge funds target high-growth firms that are also quite risky. As a result, these
are only available to sophisticated investors that can handle losses, along with
illiquidity and long investment horizons. Venture capital funds are used as seed
money or "venture capital" by new firms seeking accelerated growth, often in
high-tech or emerging industries.

Vulture Funds

A vulture fund is an investment fund that seeks out and buys securities in
distressed investments, such as high-yield bonds in or near default, or equities
that are in or near bankruptcy.

Merchant Banks

Merchant banking refers to the process of using a financial institution that

provides services such as underwriting, mergers and acquisitions advice, asset
management, and corporate finance. Merchant banks are usually private
institutions and are not affiliated with any commercial or retail bank.

Finance Companies (Loan Companies)

Finance company, specialized financial institution that supplies credit for the
purchase of consumer goods and services by purchasing the time-sales contracts
of merchants or by granting small loans directly to consumers.

Chit Fund Companies

Chit basically means transaction. It has various other names such as chit fund,
chitty, kuree etc. The mechanism of chit funds is that a person enters into an
agreement along with a specified number of people such that all of them shall
subscribe to a certain amount of money or some kind of gain. When the person’s
turn comes, either by claiming it himself or by lot mechanism or by some kind of
auction he draws the amount of money he needs. By means of periodical
instalments over a time period, he must repay the money gained.

Page 68 of 75
Nidhi Companies

A Nidhi company is a type of company in the Indian non-banking finance sector,

recognized under section 406 of the Companies Act, 2013.

Their core business is borrowing and lending money between their members.

They are also known as Permanent Fund, Benefit Funds, Quasi Bank, Mutual
Benefit Funds and Mutual Benefit Company.

They are regulated by Ministry of Corporate Affairs, which is also empowered to

issue directions to them in matters relating to their deposit acceptance activities.
However, in recognition of the fact that these companies deal with their
shareholder-members only.

Nidhi means a company which has been incorporated with the object of
developing the habit of thrift and reserve funds amongst its members and also
receiving deposits and lending to its members only for their mutual benefit.

Nidhi companies existed even prior to the existence of companies Act 2013. The
basic concept of Nidhi is "Principle of Mutuality" These companies are more
popular in South India, and 80% of Nidhi companies are located in Tamil Nadu.

Islamic Banks

Islamic banking is different from conventional one, with its emphasis on risk
sharing and, for certain products, collateral-free loans, is compatible with the
needs of poor and micro-entrepreneurs which promotes entrepreneurship, and
hence, expanding Islamic banking to the poor could foster development under
the right application.

The main focus of Islamic finance is on transparency, cooperative ventures, risk

sharing and ethical investing.

Islamic banking is a system of banking with Shariah laws, which is against the
collection or payment of interest, commonly called ' riba'.

Islamic law also prohibits investing in business that are considered unlawful or
Haraam. The basic principle of Islamic banking is based on risk sharing, which is a
component of trade rather than risk-transfer which is seen in conventional
banking.

Page 69 of 75
Leasing Companies

A leasing company is a business that specializes in providing leases for various

types of equipment or vehicles, such as cars, trucks, machinery, and real estate.

The purpose of a leasing company is to provide customers with an alternative to

purchasing equipment or vehicles outright. Instead, customers can lease the
equipment or vehicles for a specified period of time and make payments on a
regular basis.

This can be beneficial for businesses or individuals who need equipment or

vehicles but do not want to make a large upfront investment.

Additionally, leasing can also offer more flexible terms, such as the ability to
upgrade to newer equipment or vehicles more easily, and the option to return the
equipment or vehicles at the end of the lease term.

Financial leasing companies engage in financing the purchase of concrete assets.

Though leasing company is the legal owner of the goods, the ownership and
possession is effectively conveyed to the lessee, who earns all benefits, costs, and
risks linked to ownership of the assets.”

Depositories (Depository is different from Depository Institution)

Depositories acts like your bank account. As you store money in your bank
account similarly, a depository helps you store securities in your Demat account.

In India, there are two depositories: National Securities Depositories Ltd (NSDL)
and Central Securities Depositories Ltd (CDSL). Both the depositories hold your
financial securities, like shares and bonds, in dematerialised form and facilitate
trading in stock exchanges.

NSDL and CDSL

The process of buying and selling shares is possible in India because of

depositories .

In India, there are two depositories: National Securities Depositories Ltd (NSDL)
and Central Securities Depositories Ltd (CDSL).

Both the depositories hold our financial securities, like shares and bonds, in
dematerialised form and facilitate trading in stock exchanges.

Page 70 of 75
Both are regulated by SEBI and provide similar trading and investing services. The
only difference between both the depositories is their operating markets. While
NSDL has National Stock Exchange (NSE) as the primary operating market, CDSL's
primary market is the Bombay Stock Exchange (BSE).

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Page 71 of 75
 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book Title
No

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

Page 72 of 75
20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

Page 73 of 75
43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basics Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

Page 74 of 75
 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1282 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th…) one Lesson on Banking &
Finance (Banking Tutor’s Lessons - BTL), started on 06-09-2018,
so far shared 525 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 25 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

20-03-2023 Sekhar Pariti

+91 9440641014

Page 75 of 75
 Notes for JAIIB
Indian Economy & Indian Financial System
(IE & IFS)

Compiled by Sekhar Pariti

Book No 60 from The Banking Tutor

Page 1 of 138
 Preface
With a view to help the young Bankers in preparation for Promotion Tests or
Professional Examinations conducted by various Institutes, I want to share Notes
related to Indian Economy & Indian Financial System (IEFS), which is prepared
based on the revised syllabus, 2023 of IIBF.

IIBF Syllabus consists the following 4 Modules –

A) Indian Economic Architecture

B) Economic Concepts Related to Banking

C) Indian Financial Architecture

D) Financial Products and Services

In this Notes, I am covering topics related to Module D - Financial Products and

Services . With this Notes related to all 4 Modules is completed. Also I will share
Objective Type Points covering all 4 Modules in one book soon.

I hope this Book may be useful to those Bankers who are appearing for Promotion
Tests, Certificate/Diploma Examinations conducted by various Institutes.

22-03-2023 Sekhar Pariti

+91 94406 41014

Page 2 of 138
 Syllabus 2023

Module A: Indian Economic Architecture

An Overview of Indian Economy, Sectors of the Indian Economy, Economic

Planning in India & NITI Aayog, Role of Priority Sector and MSME in the Indian
Economy, Infrastructure including Social Infrastructure, Globalisation- Impact on
India, Economic Reforms, Foreign Trade Policy, Foreign Investments and Economic
Development, International Economic Organizations (World Bank, IMF, etc.),
Climate change, Sustainable Development Goals (SDGs), Issues Facing Indian
Economy.

Module B: Economic Concepts Related to Banking

Fundamentals of Economics, Microeconomics, and Macroeconomics and Types of

Economies, Supply and Demand, Money Supply and Inflation, Theories of Interest,
Business Cycles, Monetary Policy and Fiscal Policy, System of National Accounts
and GDP Concepts, Union Budget.

Module C: Indian Financial Architecture

Indian Financial System-An Overview, Indian Banking Structure, Banking Laws –

Reserve Bank of India Act, 1934 & Banking Regulation Act, 1949, Development
Financial Institutions, Micro Finance Institutions, Non-Banking Financial
Companies (NBFCs),Insurance Companies, Indian Financial System- Regulators
and Their Roles, Reforms & Developments in the Banking Sector

Module D: Financial Products and Services

Financial Markets, Money Markets, Capital Markets and Stock Exchanges, Fixed
Income Markets – Debt and Bond Markets, Foreign Exchange Markets,
Interconnectedness of Markets and Market Dynamics, Merchant Banking Services,
Derivatives Market, Factoring, Forfaiting and Trade Receivables Discounting
System (TReDS), Venture Capital, Lease Finance and Hire Purchase, Credit Rating
and Credit Scoring, Mutual Funds, Insurance Products, Pension Products, Para
Banking and Financial Services Provided by Banks, Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (Inv!Ts)

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Page 3 of 138
 Index – Module D
Financial Products and Services
Chapter No Topics covered

01 Financial Markets - Money Markets, Capital Markets

02 Stock Exchanges

03 Fixed Income Markets

04 Debt and Bond Markets

05 Foreign Exchange Markets

06 Interconnectedness of Markets

07 Market Dynamics

08 Merchant Banking Services

09 Derivatives Market

10 Factoring and Forfaiting

11 Trade Receivables Discounting System (TReDS)

12 Venture Capital

13 Lease Finance and Hire Purchase

14 Credit Rating and Credit Scoring

15 Mutual Funds

16 Insurance Products

17 Pension Products

18 Para Banking and Financial Services Provided by Banks

19 Real Estate Investment Trusts (REITs) and Infrastructure Investment

Trusts (Inv!Ts)

20 Miscellaneous Concepts

Page 4 of 138
01. Financial Markets - Money & Capital Markets
A financial market is a word that describes a marketplace where bonds, equity,
securities, currencies are traded. Few financial markets do a security business of
trillions of dollars daily, and some are small-scale with less activity. These are
markets where businesses grow their cash, companies decrease risks, and
investors make more cash.

Meaning of Financial Markets

A Financial Market is referred to space, where selling and buying of financial

assets and securities take place. It allocates limited resources in the nation’s
economy. It serves as an agent between the investors and collector by mobilising
capital between them.

In a financial market, the stock market allows investors to purchase and trade
publicly companies share. The issue of new stocks are first offered in the primary
stock market, and stock securities trading happens in the secondary market.

Types of Financial Markets

Over the Counter (OTC) Market

An over-the-counter (OTC) market is a decentralized market in which market

participants trade stocks, commodities, currencies, or other instruments directly
between two parties and without a central exchange or broker. Over-the-counter
markets do not have physical locations; instead, trading is conducted
electronically.

The OTC market dealing with companies are usually small companies that can be
traded in cheap and has less regulation.

Bond Market – A financial market is a place where investors loan money on bond
as security for a set if time at a predefined rate of interest. Bonds are issued by
corporations, states, municipalities, and federal governments across the world.

Page 5 of 138
Money Markets – They trade high liquid and short maturities, and lending of
securities that matures in less than a year.

Derivatives Market –They trades securities that determine its value from its
primary asset. The derivative contract value is regulated by the market price of the
primary item — the derivatives market securities, including futures, options,
contracts-for-difference, forward contracts, and swaps.
Forex Market – It is a financial market where investors trade in currencies. In the
entire world, this is the most liquid financial market.

Functions of Financial Market

a) It mobilises savings by trading it in the most productive methods.

b) It assists in deciding the securities price by interaction with the investors and
depending on the demand and supply in the market.

c) It gives liquidity to bartered assets.

d) Less time-consuming and cost-effective as parties don’t have to spend extra

time and money to find potential clients to deal with securities.

e) It also decreases cost by giving valuable information about the securities traded
in the financial market.

Classification of Financial Market

The financial market can be classified into three different forms.

By Nature of Claim

Debt Market – It is a market where fixed bonds and debentures or bonds

are exchanged between investors.

Equity Market – It is a place for investors to deal with equity.

Page 6 of 138
By Maturity of Claim

Money Market – It deals with monetary assets and short-term funds such
as a certificate of deposits, treasury bills, and commercial paper, etc. which
mature within twelve months.

Capital Market – It trades medium and long term financial assets.

By Timing of Delivery

Cash Market – It is a market place where trade is completed in real-time.

Futures Market – It is a market place where, the delivery or compensation

of products are taken in the future specified date.

By Organizational Structure

Exchange-Traded Market – It has a centralised system with a patterned

procedure.

Over-the-Counter Market – It has a decentralised organisation with

customised procedures.

Money Market

According to the RBI, “The money market is the centre for dealing mainly of short
character, in monetary assets; it meets the short term requirements of borrowers
and provides liquidity or cash to the lenders.

It is a place where short term surplus investible funds at the disposal of financial
and other institutions and individuals are bid by borrowers, again comprising
institutions and individuals and also by the government.”

Page 7 of 138
Functions of Money Market

To maintain the balance between the demand and supply for money when it
comes to short-term money-related transactions(monetary equilibrium)

To promote economic growth. The money market can do this by making funds
available to various units in the economy such as agriculture, small scale
industries, etc.

To provide help to Trade and Industry. The money market provides adequate
finance to trade and industry.

Similarly, it also provides the facility of discounting bills of exchange for trade and
industry.

To help in implementing Monetary Policy. It provides a mechanism for the

effective implementation of the monetary policy.

To help in Capital Formation. The money market makes available investment

avenues for the short term period. It helps in generating savings and investments
in the economy.

Features of Money Market

The money market provides non-inflationary sources of finance to the

government. It is possible by issuing treasury bills to raise short loans. However,
this does not lead to increases in prices.

Money Market consists of all the organizations and institutions which deal or
facilitate dealings in short term debt instruments. These institutions include RBI,
commercial banks, cooperative banks, non-banking financial companies like LIC,
GIG, UTI, and special institutions like Discount and Finance House of India (DFHI).
The important money market instruments or securities (financial assets) are as
follows.

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Types of Money Markets

Money market instruments have different securities, which can be utilised for
short term borrowings. A few different types of market money are:

Call Money- It portrays a short term loan with maturities term starting from one
day to fourteen days, and it can be repaid on demand.

Treasury Bill- It is the oldest and traditional money market instrument and is
practised across the globe. The instrument is declared by the Government and
does not have to pay any interest. This is available at a discounted rate at the time
of issue.

Ready Forward Contract (Repo)-The word repo is acquired from the phrase
“repurchase agreement”. It is an agreement that specifies the sale and purchase of
an asset. In India, this agreement is prepared between different banks and
sometimes between bank and RBI for short term loans.

Money Market Mutual Fund-This is the alternative name for liquid funds and are
the lowest risk debt funds.

Interest Rate Swaps- This is the latest money market instruments in India. Here,
two parties sign an agreement, where one decides to pay a fixed rate of interest,
and the other pays a floating rate of interest.

Capital Market

The capital market is the market for medium and long term funds. It consists of all
the financial institutions, organizations, and instruments which deal with lending
and borrowing transactions of over one-year maturity.

Types of Capital Market

Primary Market
Secondary Market

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Primary Market

It issues security for the first time. The primary market is where securities are
created. In the primary market, companies sell new stocks and bonds to the public
for the first time, such as with an initial public offering (IPO).

A primary market is a marketplace where corporations imbibe a fresh issue of

shares for being contributed by the public for soliciting capital to meet their
necessary long-term funds like extending the current trade or buying a unique
entity. It plays a motivational part in the mobilisation of savings in the economy.

Multiple types of issues made by the establishment are – Offer for sale, public
issue, issue of Indian Depository Receipt (IDR), bonus Issue, right issue, etc.

The Secondary Market

For buying equities, the secondary market is commonly referred to as the "stock
market." This includes Stock Exchanges – NSE, BSE etc. The defining characteristic
of the secondary market is that investors trade among themselves.

That is, in the secondary market, investors trade previously issued securities
without the issuing companies' involvement.

A secondary market is a capital market where debentures, current shares, options,

bonds, treasury bills, commercial papers, etc., of the enterprises are patronised
amongst the investors.

The secondary market can be an auction business where the business of bonds is
functioned through a dealer market or the stock exchange, usually called over the
counter.

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Recap

Financial markets (bonds and stocks), instruments (derivatives, bank CDs, and
futures), and institutions (banks, pension funds, insurance companies, and mutual
funds) give the investors the opportunities to specialize in specific services and
markets.

Financial markets dispense efficiently flow of investments and savings in the

economy and facilitate the growth of funds for producing goods and services. The
right blend of financial products and instruments and financial markets and
institutions fuels the demands of investors, receiver and the overall economy of a
country.

Financial markets consist of two major segments:

Money Market: The market for short term funds

Capital Market: The market for long and medium-term funds.
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02 Stock Exchanges
Stock exchange in India can be defined as an important factor in the capital
market. It serves as a market where financial securities like stocks, bonds and
commodities are traded.

It is a platform for buyers and sellers to trade their financial assets by adhering to
SEBI’s guidelines.

There are a total of 23 stock exchanges in India.

These exchanges also regulate the issue and redemption of securities.

Stock exchanges also function as 'continuous auction' markets where traders

consummate transactions through electronic trading platforms.

Functions of Stock Exchange

Important functions that are performed by stock exchange are as under.

a) Stock exchange serves as an economic barometer that is indicative of the state

of the economy.

b) Stock market helps in the valuation of securities based on the factors of supply
and demand. Valuation of securities helps creditors, investors and government in
performing their respective functions.

c) Transactional safety is ensured as the securities that are traded in the stock
exchange are listed, and the listing of securities is done after verifying the
company’s position.

d) Stock exchange offers a platform for trading of securities of the various

companies. This process of trading involves continuous disinvestment and
reinvestment, which offers opportunities for capital formation and subsequently,
growth of the economy.

e) Stock exchange helps in providing information about investing in equity

markets and by rolling out new issues to encourage people to invest in securities.

f) By permitting healthy speculation of the traded securities, the stock exchange

ensures demand and supply of securities and liquidity.

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g) The most important role of the stock exchange is in ensuring a ready platform
for the sale and purchase of securities. This gives investors the confidence that the
existing investments can be converted into cash, or in other words, stock
exchange offers liquidity in terms of investment.

h) Profit-making companies will have their shares traded actively, and so such
companies are able to raise fresh capital from the equity market.

i) Stock market serves as an important source of investment in various securities

which offer greater returns.

Features of Stock Exchange:

A market for securities- It is a wholesome market where securities of

government, corporate companies, semi-government companies are bought and
sold.

Second-hand securities- It associates with bonds, shares that have already been
announced by the company once previously.

Regulate trade in securities- The exchange does not sell and buy bonds and
shares on its own account. The broker or exchange members do the trade on the
company’s behalf.

Dealings only in registered securities- Only listed securities recorded in the

exchange office can be traded.

Transaction- Only through authorised brokers and members the transaction for
securities can be made.

Recognition- It requires to be recognised by the central government.

Measuring device- It develops and indicates the growth and security of a

business in the index of a stock exchange.

Operates as per rules– All the security dealings at the stock exchange are
controlled by exchange rules and regulations and SEBI guidelines.

A stock exchange in India adheres to a set of rules and regulations directed by

Securities and Exchange Board of India or SEBI. SEBI functions to protect the
interest of investors and aims to promote the stock market of India.

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The entire process of trading in stock exchange in India is order-driven and is
conducted over an electronic limit order book.

In such a set-up, orders are automatically matched with the help of the trading
computer. It functions to match investors’ market orders with the most suitable
limit orders.

The major benefit of such an order-driven market is that it facilitates transparency

in transactions by displaying all market orders publicly.

Brokers play a vital role in the trading system of the stock exchange market, as all
orders are placed through them.

Both institutional investors and retail customers can avail the benefits associated
with direct market access or DMA. By using the trading terminals provided by
stock exchange market brokers, investors can place their orders directly into the
trading system.

Benefits of Listing with Stock Exchange

Listing means the formal admission of securities of a company to the trading

platform of the Exchange. It is a significant occasion for a company in the journey
of its growth and development. It enables a company to raise capital while
strengthening its structure and reputation.

Listing with a stock exchange extends special privileges to company securities. For
instance, only listed company shares are quoted on a stock exchange.

Being listed on a reputed stock exchange is deemed beneficial for companies,

investors and the public in general and they tend to benefit in these following
ways –

Only stocks listed with a reputable stock exchange are considered to be higher in
value. Companies can cash in on their market reputation in the stock exchange
market by increasing their number of shareholders. Issuing shares in the market
for shareholders to acquire is a potent way of increasing shareholder base and
base, which in turn increases their credibility.

One of the most effective ways of availing cheap capital for a company is by
issuing company shares in the stock exchange market for shareholders to acquire.

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Listed companies can generate comparatively more capital through share
issuance owing to their repute in a stock exchange market and use it to keep their
company afloat and its operations running.

Almost all lenders accept listed securities as collateral and extend credit facilities
against them. A listed company is more likely to avail a faster approval for their
credit request; as they are deemed more credible in the stock exchange market.

Listing helps shareholder avail the advantage of liquidity better than other
counterparts and offers them ready marketability. It allows shareholders to
estimate the value of investment owned by them.

Additionally, it permits share transactions with a company and helps them to even
out the associated risks. It also helps shareholders to improve their earnings from
even the slightest increase in overall organisational value.

The quoted price also tends to represent the real value of a particular security in a
stock exchange in India.

The fact that the prices of listed securities are set as per the forces of demand and
supply and are disclosed publicly, investors are assured to acquire them at a fair
price.

Major stock exchanges in India

There are two major types of Stock Exchanges in India, namely the –

Bombay Stock Exchange (BSE): BSE was established in 1875 in Mumbai at Dalal
Street. It renowned as the oldest stock exchange not just in Asia and is the
‘World’s 10th largest Stock Exchange’. Bombay Stock Exchange is the largest and
first securities exchange market in India. It was established in 1875 as the Native
Share and Stock Brokers' Association. It provides an equities trading platform for
small-and-medium enterprises. BSE has diversified into providing other capital
market services including clearing, settlement, and risk management.

National Stock Exchange (NSE): The NSE was established in 1992 in Mumbai
and is accredited as the pioneer among the demutualised electronic stock
exchange markets in India. NSE was established with the objective to eliminate
the monopolistic impact of the Bombay Stock exchange in the Indian stock
market.

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Stock Market Index/Indices
Stock market indexes indicate a specific collection of shares chosen based on
specific characteristics such as trading frequency, share size, and so on. The
sampling technique is used in the stock market to depict market direction and
change through an index.

A stock market index is a statistical source that measures financial market

fluctuations. The indices are performance indicators that indicate the performance
of a certain market segment or the market as a whole.

A stock market index is constructed by choosing equities from similar companies

or those that match a predetermined set of criteria. These shares are already listed
on the exchange and traded. Share market indexes can be built using a range of
variables, including industry, segment, or market capitalization.

Each stock market index tracks the price movement and performance of the
stocks that comprise the index. This simply means that the success of any stock
market index is precisely proportionate to the performance of the index's
constituent stocks. In layman's words, if the prices of the stocks in an index rise,
the index as a whole rises as well.

Stock market indices represent a certain group of shares selected based on

particular criteria like trading frequency, share size, etc. The stock market uses the
sampling technique to represent the market direction and change through an
index.

A stock market index is created by selecting certain stocks of similar companies or

those that meet a set of predetermined criteria. These shares are already listed
and traded on the exchange. Share market indices can be created based on a
variety of selection criteria, such as industry, segment, or market capitalization,
among others.

Uses of Stock Market Indices

The performance of market indices acts as a nearly accurate indicator of the state
of the markets and reflects the general sentiments of investors.

These indices also provide investors with a wealth of information that helps them
create and implement investment strategies.

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Provide Important Information for Benchmarking:

Many traders, investors and other market participants use the performance of the
indices as a benchmark for analyzing their investments in the stock market.

Help Minimize Exposure to Risk:

One way to outperform the market is by investing in index funds. The risk of
underperformance is low in index funds because they contain stocks from several
sectors and industries, thereby essentially diversifying our investment portfolio.
When we invest in specific stocks, our corpus might be eroded if those stocks
don’t perform well. With stock market indices our risk exposure is largely reduced.

Help Passive Investors:

Picking the right stocks to invest in requires a great deal of research. This may be
impractical for passive investors, who are looking for avenues to invest in over the
long term without constantly monitoring their portfolio actively.

Types of Stock Market Indices

a) Sectoral Index

Both the BSE and the NSE have some strong indicators that gauge companies in a
given sector. Indices like the S&P BSE Healthcare and NSE Pharma are known to
be good indicators of changes in the pharmaceutical sector. Another notable
example is the S&P BSE PSU and Nifty PSU Bank Indices, which are indices of all
listed public sector banks. However, neither exchange is required to have
equivalent indexes for all industries, yet this is a key cause in general.

b) Benchmark Index

The Nifty 50 index, which consists of the top 50 best-performing equities, and the
BSE Sensex index, which consists of the top 30 best-performing stocks, are
indicators of the NSE and the Bombay Stock Exchange, respectively. This group of
equities is known as a benchmark index since they employ the best standards to
regulate the companies they select. As a result, they are regarded as the most
reliable source of information about how markets work in general.

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c) Market Cap Index

Few indices select companies on the basis of their market capitalization. Market
capitalization refers to the stock exchange market value of any publicly traded
corporation. Indices such as the S&P BSE and NSE small cap 50 are companies
with a lower market capitalization as defined by the Securities Exchange Board of
India (SEBI).

d) Other Kinds of Indices

Several additional indices, such as the S&P BSE 500, NSE 100, and S&P BSE 100,
are slightly larger and have a greater number of stocks listed on them. You may
have a low-risk appetite, but Sensex stocks may have a high-risk appetite.
Investment portfolios are not designed to fulfil all demands. As a result, investors
must remain focused and invest in areas where they feel secure.

India’s stock markets have two benchmark indices - BSE Sensex and NSE Nifty.

S&P BSE Sensex:

Sensex is a blend of the words sensitive and index. It was introduced in 1986 and
is the oldest in India. The BSE Sensex consists of the top 30 largest and most
frequently traded stocks listed in the Bombay Stock Exchange (BSE).

CNX NIFTY (NIFTY 50):

Also known as the NSE Nifty, this share market index consists of the top 50 largest
and most frequently traded stocks within the NSE. First created in 1996, NSE
NIFTY is owned and maintained by India Index Services & Products Limited (IISL),
which is a joint-venture organization between an Indian credit rating agency
CRISIL and the National Stock Exchange. The CNX portion in the CNX NIFTY
stands for CRISIL and NSE.

India's three major stock indices

Benchmark indices - BSE Sensex and NSE Nifty are two prominent indicators in
India.

Sectoral indices such as the BSE Bankex and the CNX IT.

Indices based on market capitalization, such as the BSE Smallcap and BSE Midcap.

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Understanding Stock Market Index

Let's assume that the base value to 100 and imagine the stock is now trading at
200. If the stock price is 260 tomorrow, the rise in price is 30%. As a result, the
index will rise from 100 to 130, signifying a 30% increase. If the stock price falls to
208, it will be a 20% drop from 260.

Conclusion

Being a vital part of the Indian stock market, a stock exchange in India tends to
influence the country’s financial sector to a great extent. Their collective
performances happen to be a deciding factor of economic growth.

Also, all major types of stock exchanges are closely integrated with each other; if
one major stock exchange falls, it will have a ripple effect on all other major
exchanges across the globe.

For example, if the index of Bombay Stock Exchange falls, its effect will be felt
across stock exchanges like New York Stock Exchange, Tokyo Stock Exchange,
Shanghai Stock Exchange, etc. as well.

A stock exchange is an important factor in the capital market. It is a secure place

where trading is done in a systematic way. Here, the securities are bought and
sold as per well-structured rules and regulations. Securities mentioned here
includes debenture and share issued by a public company that is correctly listed
at the stock exchange, debenture and bonds issued by the government bodies,
municipal and public bodies.

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03 Fixed Income Markets
Fixed income broadly refers to those types of investment security that pay
investors fixed interest or dividend payments until their maturity date. At maturity,
investors are repaid the principal amount they had invested. Government and
corporate bonds are the most common types of fixed-income products.

Unlike equities that may pay out no cash flows to investors, or variable-income
securities, where payments can change based on some underlying measure—such
as short-term interest rates—the payments of a fixed-income security are known
in advance and remain fixed throughout.

The major differences between equity and fixed-income markets are the types of
securities traded, the accessibility of the markets, the levels of risk, the expected
returns, the goals of investors, and the strategies used by market participants.
Stock trading dominates equity markets, while bonds are the most common
securities in fixed-income markets. Individual investors often have better access to
equity markets than fixed-income markets. Equity markets offer higher expected
returns than fixed-income markets, but they also carry higher risk. Equity market
investors are typically more interested in capital appreciation and pursue more
aggressive strategies than fixed-income market investors.

Most investors are always looking for fixed income products. Our love for ‘fixed
income’ is why nearly 50% of Indians still invest in fixed deposits since they are
safe and perfect for low-risk investors.

Fixed Income Product is different from Fixed Deposits. Fixed income includes
everything from treasury bills to corporate bonds.

The fixed income market in India offers superior returns than bank deposits.

Fixed income securities are financial instruments that guarantee a ‘fixed income’.
They carry a fixed rate of return and maturity period.

Fixed income securities are issued by both, government and private companies.
They can be short term or long term.

Fixed income securities maturing before 91 days are known as money market
securities.

Long term fixed income securities have maturity dates of up to 40 years!

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Common examples of fixed income securities are:

NHAI Bonds ; REC Bonds ; 75% RBI tax-free Bonds; L&T Finance Limited Bonds ;
Shriram City Union Finance Limited

Fixed Income Market

Fixed income market is where fixed income investments are bought and sold.

In the fixed income market, investors provide loans to government and private
companies. In return, investors get ‘fixed income’ in the form of interest payments.

The Indian fixed income market is divided into two parts:

Primary fixed income market

Secondary fixed income market

In the primary market, fixed income securities are directly sold to investors.
Example: RBI tax free Bonds, Sovereign Gold Bonds etc. are directly sold to
investors.

Once issued, these fixed income products are traded i.e. bought and sold in the
secondary market. Brokers help investors buy and sell fixed income securities in
the secondary market.

The fixed income market in India is jointly regulated by RBI & SEBI.

Key Players in the Fixed Income Market

The fixed income market in India is mostly dominated by banks and other
institutions. Retail investors’ participation is almost negligible.

Here’s a list of key players in the Indian fixed income market

State & Central Government ; Municipal Corporations ; Public & Private Sector
Banks ; Rural/Regional Banks ; Provident Funds ; Financial Institutions (NBFCs) ;
Insurance Companies ; Mutual Funds ; Retail Investors

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Let’s understand how the fixed income market works with this simple example.

Ram needed Rs 5 Lakhs to start a business. He approaches the bank for a loan.
But banks are charging 12% interest! His friend, Govind offers to give him Rs 5
Lakhs at 7% rate of interest.

The deal is simple: Ram will return the Rs 5 Lakhs after 3 years. Ram will also give
a fixed yearly interest of Rs 35,000. Ram got cheap finance while Govind got fixed
interest & guaranteed return of capital.

In similar way Government or Companies borrow money from investors. They pay
fixed interest and repay the principal on maturity.

Type of Securities Traded in the Fixed Income Market

Two types of securities are traded in the fixed income market:

Government Fixed Income Securities

Corporate Fixed Income Securities

Government Fixed Income Securities:

These securities are issued by the government. Government borrows money for
economic growth. The Indian fixed income market is dominated by government
securities. They are safest as they are backed by the government of India.
Examples: Treasury bills, Certificates of Deposits, etc.

Corporate Fixed Income Securities:

Bond issued by private companies carry high credit risk. Companies borrow funds
for growth and expansion.

There is no limit on who can invest in fixed income securities. Ideally, fixed income
securities are the best investment option for retirees and senior citizens. They
provide guaranteed returns (principal repayment and interest payments).

Investors who want to diversify their equity portfolio can invest in corporate
bonds. It offers higher returns than the G-secs.

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Advantages of Investing in Fixed Income Securities

1. Safety: Government securities are one of the safest investment options in India.
Both principal repayment and interest payment is guaranteed by the government.
G-secs carry zero default risk i.e. you will not lose your money. While corporate
securities carry risk, the risk can be managed by investing in AAA rated securities
only.

2. Superior Returns: Fixed income securities like NHAI, REC bonds etc. have given
an average return of 6% – 7% in the last 10 years. The RBI tax free bond provides
a return of 7.75%! In comparison, the average 10-year return on Bank FD was only
4.5% – 5%. Hence fixed income securities are superior to bank deposits.

3. High Liquidity: Fixed income securities with high credit ratings are highly
liquid. They can be easily bought and sold on the secondary market. So, investors
have an early exit option.

4. Helps Save Tax: Government fixed income securities such as NHAI, REC bonds
etc. help investors save long term capital gains tax u/s 54EC.

5. Diversification: Fixed income securities are perfect to balance equity risk. Their
guaranteed return helps in managing share market volatility.

Risks in the Fixed Income Market

While they provide high returns, fixed income securities are not Risk-Free and
they carry following Risks.

1. Credit Risk: Credit risk is when the borrower is unable to repay the principal or
pay interest. Default risk can be reduced by investing in only well reputed, top
rated fixed income securities. Government securities carry zero default risk.

2. Liquidity Risk: Liquidity risk when you cannot sell an asset quickly.
Government securities carry high liquidity but low-quality bonds are highly
illiquid.

3. Interest Rate Risks: Interest rate risk is when you lock in your funds at a lower
interest rate. For example, Ram invested Rs 1 Lakh in 7.75% RBI Bonds for a tenure
of 10 years. After a year, the interest rates increased to 8%. Now he will earn
0.25% less each year for the next 10 years.

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4. Reinvestment Risk: Reinvestment risk arises on maturity. Assume after 10
years, Ram’s bond has matured. But the interest rates have fallen. He can reinvest
at only 7%. The 0.75% loss between the old and new interest rate is his
‘reinvestment risk’.

The recent Sovereign Gold Bonds was popular among retail investors. They can
invest in the fixed income market through BSE’s NDS-RST platform or NSE’s BOLT

The fixed income market in India is perfect for low-risk investors. It offers them
higher returns with less risk. It is also perfect for individuals with huge equity
exposure. Fixed income securities are win-win for low & high risk investors.

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04. Debt and Bond Markets
The bond market—often called the debt market, fixed-income market, or credit
market—is the collective name given to all trades and issues of debt securities.
Governments typically issue bonds in order to raise capital to pay down debts or
fund infrastructural improvements.

Publicly traded companies issue bonds when they need to finance business
expansion projects or maintain ongoing operations.

A bond market is a marketplace for debt securities. This market covers both
government-issued and corporate-issued debt securities. It allows capital to be
transferred from savers or investors to issuers who want funds for projects or
other operations. The debt, fixed-income, or credit market are all terms used to
describe this sector.

Bond Market Meaning

You can issue fresh debt in the primary market or exchange debt securities in the
secondary market in the bond market. Bonds are the most common type of
trading. However, bills and notes can also be used. Institutional investors, traders,
governments, and individuals all use the bond market.

Bond markets are divided into three categories: corporate, government, and
agency. The most important of the three is government bonds, which are used to
compare other bonds and assess credit risk.

Stability of Bond Rates

Companies are contractually bound to make the stated interest payments on time
and to return the face value of bonds when they mature. Defaulting on a bond is
a significant matter that usually results in a company's insolvency. (Even if a
corporation goes bankrupt, bondholders will be reimbursed with available
company assets.) As a result, corporations prioritize making timely bond
payments.

When compared to stocks, the value of a bond will normally move in a relatively
restricted range because the terms of the bond are known in advance.

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Types of Bond Market

Depending on the type of bond and the type of buyer, multiple types of bond
markets exist:

a) Primary Market - The main market is where the bond issuer sells bonds to
investors directly. New debt securities are being issued in primary markets.

b) Secondary Market - The definition of the bond market incorporates flexibility.

Bonds purchased in the primary market can be sold on the secondary market.
Brokers assist in the secondary market buying and selling of bonds.

Types of Bond Markets Based on the Type of Bond:

a) Treasury Bonds

b) Agency Bonds

c) Municipal Bonds

d) Corporate Bonds

e) Savings Bonds

f) Corporate Bonds

Treasury Bonds

Treasury bills, notes, and bonds issued by the Treasury Department are the most
important bonds. All other long-term, fixed-rate bonds have their rates
determined by them. The Treasury auctions them out to pay for the federal
government's activities.

On the secondary market, these bonds are also resold. They are the safest
because the government guarantees them. As a result, they also provide the
lowest return. Almost every institutional investor, firm, and sovereign wealth fund
owns a stake in them.

Agency Bonds

These are the bonds that are guaranteed by the government.

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Municipal Bonds

Different cities issue municipal bonds. They are tax-free. However, their interest
rates are slightly lower than corporate bonds. They carry a slightly higher risk than
federal government bonds. Cities do default on occasion.

Corporate Bonds

Companies of all shapes and sizes issue corporate bonds. As they are riskier than
government-backed bonds, they pay higher interest rates. The representative
bank sells them.

Savings Bonds

The Treasury Department also issues savings bonds. Individual investors are
supposed to buy these bonds. They are printed in small enough quantities to be
inexpensive to individuals. I bonds are similar to savings bonds, but they are
inflation-adjusted every six months.

Corporate Bonds

Companies of all shapes and sizes issue corporate bonds. Since they are riskier
than government-backed bonds, they pay higher interest rates. The representative
bank sells them.

Here are the two ways to profit from bond investments:

The first choice is to keep the bonds until they reach maturity and earn interest
payments. Interest on bonds is typically paid twice a year.

The second approach to earning from bonds is to sell them for a higher price than
you paid for them.

Other Types of Bonds:

Convertible Bond

Unlike regular bonds that are redeemed upon maturity, a convertible bond gives
the purchaser a right or an obligation to convert the bond into shares of the
issuing company. The quantum of shares and the value of the shares are usually
predetermined by the issuing company. However, an investor can convert the
bond into stock only at certain specified times during the bond’s tenure.

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It features a fixed tenure and pays out interest payments periodically at
predetermined intervals. Convertible bonds can be further classified as:

Regular convertible bonds

Regular convertible bonds come with a fixed maturity date and a predetermined
conversion price but they give the investor merely the right, and not an
obligation, to convert. Companies generally prefer to issue these types of
convertible bonds to the public.

Mandatory convertible bonds

Unlike regular convertible bonds, these bonds obligate the investor to convert
them into equity shares of the issuing company upon maturity. Since investors are
essentially forced to convert their bonds, companies usually offer a higher rate of
interest on mandatory convertible bonds.

Reverse convertible bonds

With reverse convertible bonds, the issuing company holds the right to convert
them into equity shares upon maturity at a predetermined conversion price.

Advantages of convertible bonds:

For the investor

In addition to receiving a fixed rate of interest on their investments till the time of
maturity, investors also get to enjoy the benefits of stock value appreciation.

In the event of liquidation of the issuing company, bondholders tend to get first
preference on the liquidation proceeds of the company.

For the issuing company

The issuing company gets to raise capital right away without having to dilute their
shares immediately.

Since the investor gets to take part in the share value appreciation process,
issuing companies generally offer a slightly lower rate of interest on convertible
bonds when compared to the rate on traditional corporate debt securities.

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Government Bonds

Bonds can be issued by the central as well as state governments of the country
when the issuer is faced with a liquidity crisis and is in need of funds such that
they can develop infrastructure. Serving as long-term investment tools they can
be issued for periods that range from 5 to 40 years.

Government bonds form a bulk of the Indian bond market. Government bonds
generally offer stable returns and are considered extremely safe as they are
guaranteed by the Indian government. The interest rate on G-sec varies between
7% and 10%.

G-Secs nowadays target not just large investors ranging from companies to
commercial banks, but also individual investors and cooperative banks.

Types of Government Bonds

Fixed-rate bonds – The interest rate applicable on these government bonds is

fixed for the entire tenure of the investment regardless of fluctuating market rates.
The lock-in period for such bonds is usually one to five years.

For example, 6.5% GOI 2020 implies a rate of interest applicable on the face value
amounting to 6.5%, with the government of India being the issuer and the year of
maturity being 2020.

However, premature withdrawal of bonds can lead to penalties for investors. Also,
due to the year-on-year rise of inflation, the higher the bond term, the more it
runs the risk of reducing bond value.

Floating rate bonds (FRBs) – These bonds have variable interest rates based on
periodic changes experienced by the rate of returns. The intervals within which
these changes occur are made clear prior to the bonds being issued.

These bonds can also exist with the rate of interest being split into a base rate and
a fixed spread. This spread is determined via auction and remains stable right up
to maturity.

There are a few essential things to be considered in floating rate bonds: the
benchmark rate, the spread, the amount of shift in rate over and above the
benchmark rate, and reset frequency at which period one is going to reset the
benchmark.

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Floating rate bonds help to mitigate interest rate risk to a great extent as a high
floating rate means high returns. So, the best time to buy such bonds is when
their rates are low and are expected to increase. The change in the interest rate is
heavily dependent on the performance of the benchmark rates.

Sovereign Gold Bonds (SGBs) – Under this scheme, entities are allowed to invest
in digitized forms of gold for an extended period of time without having to avail
of gold in its physical form. Interest generated via these bonds is tax-free.
Ordinarily, the nominal value of an SGB is arrived at by calculating the simple
average of the closing price of gold that has a purity level of 99 percent three
days prior to the issuance of the bond in question. There exists limits that are
imposed on what amount of SGB an individual entity may hold. Liquidity of SGBs
is possible following a period of 5 years. Redemption, however, is only possible
based on the date of interest disbursal.

Inflation-Indexed Bonds – the principal and interest earned on such bonds are
in accordance with the inflation. Ordinarily, these bonds are issued for retail
investors and are indexed in accordance with the consumer price index (or CPI) or
wholesale price index (or WPI).

Bonds with Call or Put Option – Issuers are entitled to buy back such bonds via
a call option or the investor has the right to sell the same with the put option to
the issuer.

Zero-Coupon Bonds – These bonds don’t earn interest. Instead, investors accrue
returns via the difference that exists between the issuance price and the
redemption value. They aren’t issued via auction but are created via existing
securities.

Pros and Cons of Investing in Government Bonds

Pros:

sovereign guarantee

inflation-adjusted tools

regular stream of income.

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Cons:

Barring the 7.75% GOI Savings Bond, interest-earning on other G-Sec bonds is
lower.

Municipal Bonds

Municipal bonds (or muni) are debt instruments that are issued on behalf of
municipal corporations or bodies associated with them across the country aimed
at socio-economic development. Municipal bonds can be purchased with a
maturity period that amounts to three years.

Types of Municipal Bonds in India

General Obligation Bonds – These bonds generate finance for various projects in
general and therefore their repayments are made from the general revenues of
the municipality.

Revenue Bonds – These bonds are focused on generating funds for specified
projects and the repayment and interest issued to bondholders are processed via
revenue explicitly generated via the projects declared in the bonds. They have
extended maturity periods of upto 30 years and higher returns than GO bonds.

Advantages of Municipal Bonds

Transparency – Municipal bonds that have a credit rating amounting to BBB or

higher as set forth by the country’s leading credit rating agencies (such as CRISIL)
are entitled to be issued to the public.

No taxes – interest rates developed via municipal bonds are also free of taxation.

Minimal risk

Disadvantages of Municipal Bonds

Lock-in period is 3 years – affects liquidity

Hard to sell bonds of unpopular municipalities

Low interest rates

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Retail bonds

A retail bond offering allows a company to raise additional capital by borrowing

at a fixed rate from an investor for a specific length of time. Companies typically
issue retail bonds to expand their business, pay off debt, or fund a specific project,
as with any capital raising. Retail bonds are typically listed and can thus be bought
and sold during regular market hours, allowing investors more flexibility.

Junk Bonds

Also known as high-yield bonds, junk bonds those bonds that fall below
investment grade made clear by the three large bond rating agencies i.e., Moody’s
Standard & Poor’s, and Fitch. Junk bonds are characteristic of having a higher risk
of default in comparison to other bonds as well as higher returns.

Pros of Junk Bonds

Potentially higher rates of return.

During liquidation, holders of junk bonds are given precedence over stockholders

They can serve as risk indicators

Cons of Junk Bonds

Comparatively high likelihood of defaulting.

Further, if a company’s credit rating sinks below where it presently stands, the
value that their bonds hold falls.

The prices of junk bonds are volatile owing to the uncertainty

Electoral Bonds

General public can issue these bonds to fund eligible political parties. A political
party that classifies as eligible to run campaigns must be registered in the
Representation of the People Act, 1951, under Section 29A. Additionally, to
classify as a registered political party, the party should secure not less than 1% of
votes polled from the prior general election to the legislative assembly. There are
tax benefits to issuing electoral bonds.

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Advantages of Electoral Bond Scheme

Makes election funding more secure and digitized. Any donation above ₹2000 is
now legally required to be in the form of cheques of electoral bonds.

All bonds issued are to be redeemed by bank accounts that have been disclosed
by the Election Commission of India, hence, visibility of any potential malpractice
is strengthened.

Secured and unsecured bonds

Broadly, there are two types of bond instruments: secured bonds and unsecured
bonds. The fundamental difference between these two types of bonds is that
secured bonds offer collateral to bondholders while unsecured bonds do not. Due
to this security, investors consider secured bonds good investments even at low
rates of interest. Hence, these types of bonds are suited to people with lower
appetites for risk in their investments. Investors choose unsecured bonds based
on the credit-worthiness of the issuer.

Retail Direct Scheme (RDS)

Under the Retail Direct Scheme, small investors can buy or sell government
securities (G-Secs), or bonds, directly without an intermediary like a mutual fund.

It is similar to placing funds in debt instruments such as fixed deposits in banks.

However, the same tax rules apply to income from G-Secs.

Benefits of RDS

With the government being the borrower, there is a sovereign guarantee for the
funds and hence zero risk of default.

Also, government securities may offer better interest rates than bank fixed
deposits, depending on prevailing interest rate trends.

Investors wishing to open a Retail Direct Gilt account directly with the RBI can do
so through an online portal set up for the purpose of the scheme.

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Once the account is activated with the aid of a password sent to the user’s mobile
phone, investors will be permitted to buy securities either in the primary market
or in the secondary market.

The minimum amount for a bid is ₹10,000 and in multiples of ₹10,000 thereafter.
Payments may be made through Net banking or the UPI platform.

Need for RDS

Broader investor base: The scheme would help broaden the investor base and
provide retail investors with enhanced access to the government securities market
— both primary and secondary.

Institutional investment: Accessing retail investors could free up room for

companies to bring funds from institutional investors which may otherwise have
been cornered by the government.

Diverse borrowing for government: This scheme would facilitate smooth

completion of the Government borrowing programme.

Structural reform: It is a major structural reform placing India among select few
countries which have similar facilities.

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05. Foreign Exchange Markets
The FOREX market, also known as the Foreign Exchange Market, is a decentralized
global marketplace for foreign currency trading.

The FOREX market is an OTC (over-the-counter) market and foreign exchange

rates are dictated by it.

It also entails selling, purchasing, and exchanging currencies at market rates. In

terms of trade rate, the Foreign Exchange Trading is the largest in the world.

Banks, dealers, commercial companies, investment management firms, and hedge

funds make up the foreign exchange markets. In all major financial centers, all
major currencies are exchanged.

The foreign exchange market is the marketplace in which participants are able to
sell, purchase, exchange and theorize on currencies. Foreign exchange markets
are made up of investment management firms, banks, central banks, hedge funds,
commercial companies and investors and retail forex brokers.

The major participants involved in the foreign exchange market are forex brokers,
commercial banks, and other legitimized dealers and monetary authorities. It is
important to note that although participants may possess their own trading
centres, the market in itself is spread worldwide. There is close and continuous
contact between the trading centres, and there is more than one market where
the participants can deal.

Demand for Foreign Exchange

People demand foreign exchange because, they want to buy commodities and
services from other nations; they want to send presents abroad and they want to
buy financial assets of a particular nation.

Supply of Foreign Exchange

Foreign currency flows into the host nation due to the following reasons:

Exports by a nation lead to the buy its domestic commodities and services by the
foreigners send presents or make transfers

The assets of a host nation are bought by the foreigners

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Foreign Exchange Rate

Forex rate or foreign exchange rate is the cost price of one currency in terms of
another currency. The currencies from the other nations are linked and associated,
which enables the comparison of international costs and prices.

In the forex market, currency trading entails the simultaneous buying and selling
of two currencies. In this method, the value of one currency (base currency) is
determined by comparing it to another currency (counter currency).

The forex market has no physical address. It is an electronically linked network.

In financial centers, the foreign exchange market is just a subset of the money
market. It is a location where foreign currencies are purchased and traded.

A foreign exchange market is made up of buyers and sellers of foreign currency

claims, as well as middlemen. In the foreign exchange market, there are many
different types of traders. Banks are the most significant among them.

Banks that deal in foreign exchange have branches in several countries with
significant balances. The services of such institutions commonly referred to as
“Exchange Banks,” are available all over the world through their branches and
correspondents.

These financial institutions discount and sell foreign bills of exchange, issue bank
drafts, conduct telegraphic transfers and other credit transactions, and discount
and collect payments based on such papers.

Features of Foreign Exchange Market in India

The following are the characteristics of the foreign exchange market in India:

Low Transaction Costs

Because of the lower online FOREX trading costs, even small investors will make
good money. Unlike other investment options, FOREX traders only charge a small
fee. The spread, or the difference between buying and selling prices for a currency
pair, is where the FOREX commission is limited.

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Elevated Leverage

In the FOREX market, we can sell on margins, which are technically borrowed
funds. The return on our investment is rising exponentially, so the value of our
investment is high. Since the FOREX market is so unpredictable, trading with
leverage (borrowed money) will result in significant losses if the market goes
against us. The foreign currency trading is a two-edged sword. If the market is on
our side, we will make a lot of money. If the market goes against our bet, we will
lose a lot of money.

Extremely Transparent

The foreign exchange market in India is a transparent market in which traders

have complete access to market data and information necessary for successful
transactions. Traders who operate on open markets have more leverage over their
investments and can make informed decisions based on the information available.

FOREX Market Accessibility

If we have an internet connection, we can access our foreign currency trading

account from anywhere. We can trade at any time and from any place. Since it is
easy for traders to position trade transactions at their leisure, the FOREX market
has an advantage over other markets.

Functions of Foreign Exchange Market:

1. The function of Transfer:

The primary purpose of the foreign exchange market is to make it easier to

convert one currency into another or to make buying power transfers between
nations. A number of credit instruments, such as telegraphic transfers, bank
draughts, and foreign bills, are used to transmit purchasing power. The foreign
exchange market performs the transfer function by making international
payments by clearing debts in both directions at the same time, similar to
domestic clearings.

For example, if an Indian exporter imports products from the United States and
the payment is to be paid in dollars, FOREX will simplify the conversion of the
rupee to the dollar. Credit instruments such as bank draughts, foreign exchange
bills, and telephone transfers are used to carry out the transfer function.

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2. The function of Credit:

Another important role of the foreign exchange market is to facilitate

international trade by providing credit, both domestic and international. When
foreign bills of exchange are used in overseas payments, a credit of around three
months is necessary before they mature. The FOREX provides importers with
short-term loans in order to promote the flow of goods and services between
countries. The importer can fund international imports with his own credit.

3. Hedging Function:

Hedging foreign exchange risks is a third function of the foreign exchange

market. Hedging is the process of avoiding foreign currency risk. When the
exchange rate, or the price of one currency in terms of another currency, changes
in a free exchange market, the party involved may earn or lose money. If there are
large amounts of net claims or net liabilities that must be satisfied in foreign
currency, a person or a company takes on a significant exchange risk.

As a whole, exchange risk should be avoided or minimized. For this, the exchange
market offers forward contracts in exchange as a means of hedging potential or
present claims or liabilities. A three-month forward contract is a contract to
purchase or sell foreign exchange against another currency at a price agreed
upon today for a defined period in the future. At the moment of the deal, no
money is exchanged. However, the contract allows you to ignore any potential
changes in the currency rate. As a result of the presence of a forward market, an
exchange position can be hedged.

Types of Foreign Exchange Market in India

The types of foreign exchange markets are as follows:

Spot Market

In this market, transactions involving currency pairs happen quickly. In the spot
market, transactions require immediate payment at the current exchange rate,
also known as the 'spot rate.' The traders on the spot market are not exposed to
the FOREX market's uncertainty, which increases or lowers the price between
trade and agreement.

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Futures Market

Future market transactions, as the name implies, require future payment and
distribution at a previously negotiated exchange rate, also known as the future
rate. These agreements and transactions are formal, which ensures that the terms
of the agreement or transaction are set in stone and cannot be changed. Traders
who conduct major FOREX transactions and pursue a consistent return on their
assets prefer future market transactions.

Forward Market

Forward market deals are identical to future market transactions. The main
difference is that in a forward market, the parties will negotiate the terms. The
terms of the agreement can be negotiated and adapted to the needs of the
parties concerned. Flexibility is provided by the forward market.

The Options Market

The Options Market allows traders the right to buy/sell currency at a specified
price on a specified date through a central exchange such as the NSE. The
currencies available are the same as that of the NSE currency futures market.

Currency Swaps

Currency swaps are agreements between two parties to exchange a principal and
interest amount in different currencies only to be re-exchanged at a specific later
date. At least one of the interest rates in the agreement is fixed.

Some of the benefits of the Foreign Exchange Market:

Flexibility: The forex market offers traders a great deal of freedom. This is due to
the fact that the quantity of money that may be traded is unlimited. Moreover,
market regulation is essentially non-existent.

Transparency: The Forex market is enormous in size and spans many time zones.
Despite this, information about the Forex market is freely available. Additionally,
neither government nor the central bank has the authority to corner the market or
set prices for an extended period of time. Because of the Temporal lag in
transferring information, some entities may get short-term benefits. The
magnitude of the Forex market makes it fair and efficient!

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Options Trading: Traders can choose from a wide range of trading alternatives
on the forex markets. Traders have lots of different currency pairs to select from.
Investors can also choose between spot trading and signing a long-term contract.
As a consequence, the Forex market has a remedy for any budgetary and
investor’s risk appetite.

There are various dealers in the foreign currency markets, with banks being the
most dominant. Foreign exchange is facilitated by Exchange Banks, which have
branches in a variety of nations. The foreign exchange market is a worldwide
market where different countries’ currencies are exchanged. It is decentralized in
the sense that it is not under the jurisdiction of a single authority, such as an
international agency or a government. Governments (typically through their
central banks) and commercial banks are the main players in this market. The act
of transferring one currency into another is known as foreign exchange. The
exchange rate is the rate agreed upon by the two parties in the transaction, which
might fluctuate substantially, resulting in foreign currency risk.

Foreign Exchange Dealers Association of India (FEDAI)

Foreign Exchange Dealers Association of India (FEDAI) was established in 1958

and incorporated under Section 25 of The Companies Act of 1956, it is an
association of Banks that deal with Indian foreign exchange markets. The Foreign
Exchange Dealers Association of India (FEDAI) is an association of commercial
banks that specializes in the foreign exchange (forex) markets in India. These
institutions are also called Authorised Dealers or ADs.

the Association regulates the rules that determine commissions, fees, and charges
that are attached to the interbank foreign exchange business.

he FEDAI is a self-regulating organization (SRO) that formulates rules around

Indian interbank forex dealings.

Some core functions of the FEDAI include advising and supporting member banks,
representing member banks on the Reserve Bank of India (RBI), and announcing
rates to member banks.

FEDAI also help stabilize markets through its cooperation with the RBI and the
Fixed Income Money Market and Derivatives Association of India (FIMMDA).

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Fixed Income Money Market and Derivatives Association of India (FIMMDA)

FIMMDA is an association of Scheduled Commercial Banks, Public Financial

Institutions, Primary Dealers and Insurance Companies in India representing the
Market for the Bond, Money and Derivatives Products.

It functions as the principal interface and works closely with the regulators, RBI,
SEBI, Ministry of Finance, IRDA and other important domestic and International
associations.

RBI identified FIMMDA as the benchmark administrator for all Indian rupee
interest rates. A new company named as Financial benchmarks India Pvt Ltd is
formed in association with two more banking associations, FEDAI and IBA.

FIMMDA is the Calculation agent for all valuation rates for Government securities
under the administration of FBIL. FIMMDA provides daily Corporate Bond matrix
for use by the industry. RBI mandated FIMMDA’s Code of conduct as well it’s
Dispute resolution mechanism for trading on G-Sec Platform.

FIMMDA evolved a Code of Fair practices for Debt markets in March 2018 in line
with the Global forex code of conduct and members gave their statement of
commitment to adhere to these standards.

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06. Interconnectedness of Financial Markets
Interconnectedness between financial institutions – banks and other financial
agents – is an inherent characteristic of developed financial systems that adds
flexibility to investment and to the financing of the economy. However, at times of
crisis, it may also contribute to propagating stress through the system.

In most developed economies the financial sector is made up of a network of

entities with different corporate structures and subject to different regulatory
regimes but which in some cases pursue similar activities. Within the financial
sector, banks tend to be the most relevant agents. Yet other agents also pursue
key activities and, in some cases, provide other economic agents with financing
similarly to the way banks do.

Non-bank financing is an alternative to bank financing that fosters competition

and broadens sources of funding. The existence of alternative financing sources
offers economic agents greater flexibility for securing funds for investment or
consumption and can further diversify the risks assumed by the financial system.

However, as the non-bank sector expands worldwide and becomes increasingly

involved in activities traditionally belonging to the banking sector (liquidity or
maturity transformation, imperfect transfer of credit risk, or leveraging), it may
become a source of risk, either directly or as the result of its interconnectedness
with the banking sector. Moreover, the increase in banking regulation has
prompted doubts as to the extent to which growing regulatory pressure may be
driving activity towards less regulated environments.

Interconnectedness is a natural development in any mature financial system. It

allows financing to flow from areas where savings build up to others that seek
funding, thus ensuring credit supply to the real economy. It also provides for
diversification and risk-sharing between agents. Yet as was observed in the last
great financial crisis, imbalances or shocks in one sector (or specific group of
entities within one sector) can pass through to the rest of the financial system. The
longer and more complex the credit intermediation chains, the greater this risk of
contagion may be, since it is more difficult to take measures if there is little
information available regarding these links.

The interlinkages embedded in the financial system architecture could turn even
relatively small subsectors into sources of systemic risk.

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Classifications of Interconnectedness

Interconnectedness may be classified as (a) Direct interconnectedness and Indirect

Interconnectedness.

Direct interconnectedness, where two entities are direct counterparties through

debt instruments, shares or other contractual relationships. In general, analysis of
these interlinkages focuses on cross-holdings:

instruments issued by one financial institution and held by another financial

institution belonging to the same or a different financial sector.

Indirect interconnectedness, where financial institutions hold common exposures

to certain sectors, markets or instruments, form part of the same collateral chains,
belong to the same corporate groups, or are exposed to reputational risk owing
to financial support provided to subsidiaries or similar entities aside of contractual
relationships (step-in risk).

There may be different types of indirect interconnectedness between financial

sectors. For example, they may hold exposures to the same issuers or group of
issuers (portfolio overlap), the distribution of securities in their portfolios may be
very similar (portfolio correlation), or they may form part of the same collateral
chains, belong to the same corporate groups or be exposed to reputational risk
owing to financial backing provided aside of contractual relationships. Here we
will cover the first two aspects.

Portfolio overlap

Different financial sectors hold similar securities (issued by financial or non-

financial sectors) in their portfolios. These are the common holdings that give rise
to what is known as portfolio overlap, which may become a contagion
mechanism. For example, in the event of a shock in the investment fund sector,
investment funds may need to sell assets that are also held by banks or insurance
companies. These fire sales may drive down the prices of these assets, prompting
valuation losses for other sectors, with the corresponding implications for financial
stability.

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For example, if a bank and an investment fund hold in portfolio the same debt
security issued by a nonfinancial company the amounts of that issue held by the
bank and the investment fund are counted to measure portfolio overlap.

Portfolio overlap on a security-by-security basis offers an incomplete picture of

indirect interconnectedness.

Portfolio correlation

A positive correlation between two sectors would suggest, for example, that
holdings whose volume is above the average of the portfolio total in one sector
would generally also have a higher than average value in the portfolio of the
other sector. Conversely, a negative correlation would suggest that holdings
whose volume is below the portfolio average in one sector would have a higher
than average value in the other sector. In addition, the smaller the dispersion of
the value of the holdings in each portfolio around their average value, the greater
the correlation between the portfolios.

The correlation coefficient is defined as the ratio of the covariance of the holdings
of each sector pair to the product of the variances of those holdings on each date.

As when measuring portfolio overlap, if the correlation is calculated at the level of

issuers (grouping together all securities issued by a single issuer), the correlation
coefficients between the different sectors’ portfolios could be higher.

Analysis of the interconnectedness between the various agents in the financial

system is essential to understand the relations between them and the possible
transmission channels for the risks generated in each sector. A first step is to
comprehend the direct relationships between these agents.

The scale of cross-border interconnectedness is significant and deserves the same

level of attention as domestic interconnectedness. At the cross-border level,
Indian entities’ main connections are through resident entities’ holdings of
instruments issued by non-resident entities. In addition, although the banking
sector continues to play a key role at the cross-border level, investment funds also
play a significant part in channelling funds and, therefore, they too should be
monitored.

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Indirect interconnectedness shows that, despite the banking sector’s central role
in the financial system, the share of the other sectors has grown in recent years
(the banking sector’s common holdings have decreased as the size of its portfolio
has shrunk, while the opposite is true for the other sectors).

Analysis of this kind is key from a financial stability standpoint, since once the
interconnections have been identified, headway can be made to analyse potential
risks and develop measures to address them.

The scale of cross-border flows also indicates the importance of cooperation and
exchange of information between authorities and jurisdictions.

Financial contagion

Financial contagion is the spread of an economic crisis from one market or region
to another and can occur at domestic and international levels.

The contagion can affect goods and services, labour, and capital goods used
across markets connected by monetary and financial systems.

Events in one market can impact other markets.

Strong markets can buffer economic shocks, while fragile markets can magnify
negative shocks.

Contagion can be seen during credit bubbles and financial crises.

The real and nominal interconnections of markets can propagate and even
magnify economic shocks, likening the effect to the spread of disease like a
contagion.

Financial contagion is defined as a shock that initially affects a few financial

institutions and spreads to the rest of the financial system, commonly infecting
the economies of other countries.

Contagions are typically associated with the diffusion of crises throughout a

market, asset class, or geographic region. A similar effect can occur with economic
booms.

The phenomenon of financial contagion has implications for portfolio

management, trading, hedging, and diversification strategies.

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In economics, contagion is a situation where an adverse occurrence in a particular
economy or region spreads to other economies or regions through co-
movements in stock prices, exchange rates, sovereign spreads and capital flows.

There are several reasons that explain why financial contagion occurs. They are
spill-over effects and a financial crisis. These, in turn, are caused by four major
economic agents. The four agents that influence financial globalization are
governments, financial institutions, investors, and borrowers.

According to economists one of the fundamental causes of an economic

contagion includes macroeconomic shocks that have repercussions on an
international scale that are transmitted through trade links, competitive
devaluations and financial links.

Competitive devaluation is also associated with financial contagion. Also knowns

as a currency war, it is a situation in which multiple countries compete with each
other for an economic edge over each other by devaluing their currency by
undermining their exchange rates. The consequences are that market participant
will sell their shares elsewhere or refuse to lend short-term loans to borrowers in
those countries.

Consequences of financial contagion

Financial contagion can cause financial volatility in markets. They can also damage
the financial systems and economies of countries. Global investment and cross-
border trade make economic contagions more likely, particularly in emerging
economies.

In such markets, financial contagions are often aggravated by asymmetric

information, that leads to both unsustainable investments and reactionary market
downturns in reaction to the collapsing or weakening of nearby or closely
correlated markets. Bigger and established markets are better able to cope with
financial contagions than developing markets.

Examples of Financial Contagion

A domestic financial contagion occurred in the United States in 2008 when the
bankruptcy of global financial services firm Lehman Brothers set off a financial
crisis there.

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In a domestic market, if a large bank engages in fire sales, the confidence of
investors and customers in other large banks can drop significantly. Similarly, in
the international market, a market crash in one country can affect other countries
and banks in other countries as well because of increased cross-border
investments and trade. Sometimes, the disturbances can spread like wildfire – very
quickly. If any government has debt troubles, investors can land their focus on
governments with unbalanced books.

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07. Market Dynamics
Market dynamics are forces that will impact prices and the behaviors of producers
and consumers. In a market, these forces create pricing signals which result from
the fluctuation of supply and demand for a given product or service. Market
dynamics can impact any industry or government policy.

There are dynamic market forces other than price, demand, and supply. Human
emotions also drive decisions, influence the market, and create price signals.

Market dynamics are the forces that impact prices and the behaviors of producers
and consumers in an economy.

These forces create pricing signals that result from a change in supply and
demand.

The basis of supply-side economics is on the theory that the supply of goods and
services is most important in determining economic growth.

Demand-side economics holds that the creation of economic growth is from the
high demand for goods and services.

Economic models cannot capture some dynamics which affect markets and
increase market volatility, such as human emotion.

Market dynamics are the factors that change the supply and demand curves. They
form the basis of many economic models and theories. Because market dynamics
impact the supply and demand curves, policymakers aim to determine the best
way to use various financial tools to stimulate or cool down an economy. Is it
better to raise or lower taxes, increase wages or slow down wage growth, do
neither, or do both? How will these adjustments affect supply and demand and
the general direction of the economy?

There are two primary economic approaches when it comes to changing the
supply or demand in an economy with the ultimate goal of impacting the
economy positively. One has a basis on supply-side theory and the other has a
demand-side base.

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Dynamics of Supply-Side Economics

Supply-side economics, also known as "Reaganomics," or "trickle-down

economics" is a policy made famous by the 40th U.S. President, Ronald Reagan,
based on the theory that more significant tax cuts for investors, corporations, and
entrepreneurs provide incentives for investors to supply more goods to an
economy, which results in other added benefits that trickle down to the rest of the
economy.

The supply-side theory has three pillars which are tax policy, regulatory policy,
and monetary policy. However, the overall concept is that production, or the
supply of goods and services, is most important in determining economic growth.

The supply-side theory contrasts with Keynesian theory, which considers that
demand for products and services can drop and, in that case, the government
should intervene with fiscal and monetary stimuli.

Dynamics of Demand-Side Economics

The demand-side economics argues that the creation of effective economic

growth comes from the high demand for products and services. If there is a high
demand for goods and services, consumer spending grows, and businesses can
expand and employ additional workers. Higher levels of employment further
stimulate aggregate demand and economic growth.

Demand-side economists believe tax cuts in general can stimulate aggregate

demand and move an economy that has significant unemployment back towards
a full employment scenario. However, tax cuts specifically for corporations and the
wealthy may not end up stimulating the economy. In this case, the additional
funds may not increase the demand for goods or services. Instead, it could be
argued that the incremental income generated may go back into stock buybacks
that boost the market value of the stock or to executive benefits but do not end
up materially stimulating the economy.

Market dynamics are not constant but always fluctuating, so it is necessary to

constantly re-evaluate them before making any investment or business decisions.

Demand-side economists argue that increased government spending will help to

grow the economy by spurring additional employment opportunities. They use
the Great Depression of the 1930s as evidence that increased government
spending stimulates growth at a greater rate than do tax cuts.
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Dynamics of Securities Markets

Economic models and theories attempt to account for market dynamics in a way
that captures as many relevant variables as possible. However, not all variables are
easily quantifiable.

Models of markets for physical goods or services with relatively straightforward

dynamics are, for the most part, efficient, and participants in these markets are
assumed to make rational decisions. However, in financial markets, the human
element of emotion creates a chaotic and difficult-to-quantify effect that always
results in increased volatility.

In financial markets, some, but not all, financial services professionals are
knowledgeable about how markets work. These professionals make rational
decisions that are in the best interests of their clients based on all of the available
information.

Savvy professionals base their decisions on comprehensive analysis, extensive

experience, and proven techniques. They also work to fully understand their
client's needs, goals, time horizons, and ability to withstand investment risks.

Unfortunately, some market participants are not professionals and possess limited
knowledge of the markets and the various events that can impact the market.

This segment of non-professionals includes small-to-intermediate traders who

seek to “get-rich-quick,” scam artists, driven by personal greed, and investors who
attempt to manage their investments rather than seek professional advice. Some
in this category of experts are self-proclaimed professionals who are, at times,
dishonest.

Greed and Fear in the Markets

Competent and professional traders determine entry and exit points of any
investment or trade using proven quantitative models or techniques. They define
the appropriate plan of action and follow it exactly. Through the practice of strict
money management, the execution of trades happens without deviating from the
well thought out, predetermined plan. Emotion seldom influences the decision-
making process of these traders.

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The government has the most impact when it comes to creating demand on a
national level due to its ability to affect various factors, such as taxes and interest
rates.

Conversely, for the novice investor or trader, emotion frequently plays a role in
their decision-making process. After the execution of a trade, if it becomes
profitable, greed may influence their next move.

These traders will ignore indicators and, at times, not take profits turning a
winning trade into a losing one. Fear is another emotion that can drive the
decisions of these investors. They may fail to exit a trade at a predetermined stop
loss. These are examples of irrational emotional behavior that is difficult to
capture in economic models, thus difficult to know how market dynamics will
impact supply and demand.

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08. Merchant Banking Services
Merchant banking refers to the process of using a financial institution that
provides services such as underwriting, mergers and acquisitions advice, asset
management, and corporate finance. Merchant banks are usually private
institutions and are not affiliated with any commercial or retail bank.

Merchant banking typically offers a range of services, such as investment banking,

corporate finance, asset management, and other services related to financial
markets. It may also offer credit facilities and risk management services.

A merchant bank is a financial institution that provides a variety of services, such

as merchant banking services, investment banking services, retail banking services,
and other financial services.

Merchant banks typically act as intermediaries between companies and investors,

providing services such as arranging deals and providing advice on financial
strategies.

Additionally, merchant banks may provide capital to companies in the form of

loans or investments, as well as manage financial assets and investments for
clients.

Merchant banks may also offer other services such as credit and debit card
processing, foreign currency exchange, and merchant services.

Functions/Benefits of Merchant Banking

Portfolio Management

Merchant banking companies provide portfolio management services to high-

net-worth individuals and corporate investors. These services include a selection
of securities, portfolio monitoring and review, advice on the rationalization of
portfolios, and tax planning.

Raising funds for clients

Merchant banking helps companies, both big and small, to raise funds from the
public through public issues of shares and debentures, rights issues of shares,
preferential allotment of shares, private placement of shares and debentures, and
other instruments.

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Loan Syndication

The main function of merchant banking involves loan syndication. Merchant

bankers help in arranging funds for large corporate borrowers by syndicating
loans from multiple lenders. They act as an intermediary between the borrowing
company and the lending institutions.

Leasing Services

Merchant banks provide leasing services to companies in the form of capital

goods, vehicles and office equipment. This helps to reduce the overall financial
burden of the companies.

Underwriting Services

Merchant banks also provide underwriting services for initial public offerings
(IPOs), private placements, follow-on public offerings (FPOs) and rights issues. This
service helps companies to raise the required funds from the public.

Services offered by Merchant Banks

Merchant banks provide a range of services, including:

Investment Banking

Merchant banks provide financial advice and services to businesses and

individuals, such as underwriting new securities, helping to make mergers and
acquisitions, and providing equity capital to companies.

Corporate Finance

Merchant banks help businesses raise capital to finance growth, expansion, or

other activities. This includes arranging debt or equity financing, advising on
mergers and acquisitions, and providing other financial advice.

Private Banking

Merchant banks provide private banking services, such as managing personal

wealth, investment portfolios, estate planning, and tax planning.

Trade Finance

Merchant banks provide trade finance services, such as issuing letters of credit,
arranging letters of guarantee, and providing foreign exchange services.

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Asset Management

Merchant banks provide asset management services, such as portfolio

management and advising on investments.

Cash Management

Merchant banks provide cash management services, such as managing cash flow
and advising on liquidity issues.

Advisory Services

Merchant banks also provide advisory services, such as helping businesses

develop strategies and manage risk.

Features of Merchant Banks

Merchant banking provides a wide range of financial services to clients, including

corporate finance, securities trading, and venture capital. They also provide advice
on mergers and acquisitions and other corporate restructurings.

Merchant banks are typically more involved in the management of their client’s
finances than other financial institutions, such as commercial banks. Merchant
banks provide advice and services on a wide range of financial matters, from
capital raising to foreign exchange risk management.

Merchant banks are typically more selective when it comes to the clients they
work with. They typically work with high-net-worth individuals and large
corporations.

Merchant banks often have a large network of contacts that they can use to help
their clients find the right financing and investment opportunities.

Merchant banks are often able to offer more competitive interest rates and fees
than other financial institutions.

Merchant banks often provide more personalised services than banks or other
financial institutions, as they are more focused on their client’s individual needs.

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Difference between Merchant Banks and Investment Banks

Despite playing a similar role, the target client and investment strategy employed
by merchant and investment banks differ.

Services offered

Merchant banking provides services such as issuing loans, providing advice on

mergers and acquisitions, and helping companies raise capital.

Investment banking, on the other hand, focuses more on providing advice to

investors and helping them to buy and sell securities.

Transaction type

Merchant banking is primarily focused on long-term investments

Investment banking focuses more on short-term transactions.

Main role in business

Merchant banking is more focused on offering advice to businesses on mergers

and acquisitions

Investment banking is more focused on providing advice to investors on buying

and selling securities.

Merchant banking is a valuable financial service that can provide businesses with
the necessary capital to operate and grow. It can also provide advice and
assistance in areas such as financial management, corporate strategy and risk
management.

By utilizing the services of a merchant bank, businesses can access capital, reduce
costs and gain access to a variety of specialized services. In short, merchant
banking is an essential component of any business’s financial strategy.

Merchant banks play an important role in the capital markets. They help
companies to raise capital in the form of debt or equity. They can also provide
advice on mergers and acquisitions, restructuring, and project financing. In
addition, they can provide valuable services such as portfolio management, asset
management, and advisory services.

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The main advantages of using merchant banks are access to capital markets,
expertise in dealing with financial products and services, and the ability to provide
valuable advice. Merchant banks can provide advice on mergers and acquisitions,
restructuring, and project financing. They can also offer a wide range of services
such as underwriting, issuing of securities, asset management, and portfolio
management.

Risks Of using Merchant Banks

The main risks associated with using merchant banks include the potential for
conflicts of interest, the cost of using their services, and the complexity of their
services. Additionally, there is the risk of mis-management of funds and potential
for fraudulent activities.

Merchant banks are non-depository financial institutions that offer services to

wealthy individuals and enterprises that require capital raising, financial guidance,
or assistance with investment decisions. These banks frequently provide
consumers with private equity financing in exchange for a share of the customer’s
ownership interest.

Smaller businesses interested in a private placement rather than an IPO are the
focus of merchant banks.

Companies frequently consult a merchant bank to learn about their financing

possibilities for the transaction as well as advise on whether to merge with or buy
another business.

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09. Derivatives Market
Indian Derivatives Market

In the derivatives market, we deal with derivative securities. Derivatives are a type
of security, whose value is derived from an underlying asset. These underlying
assets can be stocks, bonds, commodities, or currency. The main purpose of
derivatives is for reducing and hedging risk.

In the Indian derivatives market, trade takes place with the help of derivative
securities.

Such derivative securities or instruments are forward, futures options and swaps.

Participants in derivatives securities not only trade in these simple derivative

securities but also trade hybrid derivative instrument.

Derivatives are financial securities and are financial contracts that obtain value
from something else, known as underlying securities. Underlying securities may be
stocks, currency, commodities or bonds, etc.

Exchange refers to the formally established stock exchange wherein securities are
traded and have a defined set of rules for the participants.

Whereas OTC is a dealer-oriented market of securities, which is an unorganized

market where trading happens by way of phone, emails, etc.

Derivatives traded on the exchange are standardized and regulated.

On the other hand, OTC derivative constitutes a greater proportion of derivatives

contracts, but it carries higher counterpart risk and is unregulated.

These financial instruments help in making a profit by simply betting on the future
value of the underlying asset.

Hence the name derivative as they derive the value from the underlying asset.

Origin of the Derivatives Market in India

Derivatives market in India has a history dating back in 1875.

The Bombay Cotton Trading Association started future trading in this year.

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History suggests that by 1900 India became one of the world’s largest futures
trading industry. However after independence, in 1952, the government of India
officially put a ban on cash settlement and options trading. This ban on
commodities future trading was uplift in the year 2000. The creation of National
Electronics Commodity Exchange made it possible.

In 1993, the National stocks Exchange, an electronics based trading exchange

came into existence.

The Bombay stock exchange was already fully functional for over 100 years then.

Over the BSE, forward trading was there in the form of Badla trading, but formally
derivatives trading kicked started in its present form after 2001 only.

The NSE started trading in CNX Nifty index futures on June 12, 2000, based on
CNX Nifty 50 index.

In India, derivatives instruments are available for stocks, currency, bonds, and
commodities.

The NSE, the Bombay Stock Exchange, the Multi Commodity Exchange are the
main exchanges which facilitate derivatives trading.

While MCX purely deals with commodities, NSE and BSE deal exclusively in stocks.
However, we can trade in various currency derivatives on any of the three
exchanges. Also, derivatives product for bonds is part of National Stocks
Exchange.

The product family of the derivatives market in stocks segment includes stocks
future and options. Similarly, there are derivatives product for indices and includes
index future and options. Further, commodities derivatives products comprise
commodities future.

While currency derivatives instruments in India includes currency future and

options in 4 major currency pairs. These pairs are USD-INR, GBP-INR, JPY-INR, and
EUR-INR.

The NSE has a dedicated platform for bonds derivatives products in India. We can
trade Interest Rate Futures on this platform. The NSE offers two instruments on
Interest Rate Future segment. Futures on 6 years, 10 years and 13 year

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Government of India Security (NBF II) and 91-day Government of India Treasury
Bill (91DTB).

Derivative contracts like futures and options trade freely on exchanges and can be
employed to satisfy a variety of needs which includes the following-

a) Hedge your securities

The derivative contracts can be used to hedge your securities from price
fluctuations. The shares which you possess can be protected on the downside by
entering into a derivative contract. Moreover, it also protects you from the rise in
share price which you plan to purchase.

b) Transfer of risk

This is the most important use of derivative which helps in transferring risk from
risk-averse people to a risk-seeking investor. The risk-seeking investor can enter
into a risky contrarian trades to gain short-term profits. While the risk-averse
investor can enhance the safety of their position by entering into a derivative
contract.

c) Benefit from arbitrage opportunities

Arbitrage trading simply means buying low in one market and selling high in
another market. So with the help of derivative contracts, you can take advantage
of price differences in two markets. Thus it helps in creating market efficiency.

Difference between Cash and Derivative market:

In cash market, we can purchase even one share whereas in case of futures and
options the minimum lots are fixed.

In cash market tangible assets are traded whereas in derivatives contracts based
on tangible or intangible assets are traded.

Cash market is used for investment. Derivatives are used for hedging, arbitrage or
speculation.

In case of cash market, a customer must open a trading and demat account
whereas for futures a customer must open a future trading account with a
derivative broker.

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In case of cash market, the entire amount is put upfront whereas in case of futures
only the margin money needs to be put up.

When an individual buys shares, he becomes part owner of the company whereas
the same does not happen in case of a futures contract.

In case of cash market, the owner of shares is entitled to the dividends whereas
the derivative holder is not entitled to dividends.

Participants in the Derivative Market

The participants in the derivatives markets can be segregated into three

categories namely-

a) Hedgers

These are traders who wish to protect themselves from the risk or uncertainty
involved in price movement. They try to hedge their position by entering into an
exact opposite trade and pass the risk to those who are interested to bear the
same. By doing this they try to get rid of the uncertainty associated with the price.

For example, you have 1000 shares of XYZ Ltd. and the CMP is Rs 50. You are
planning to hold the stocks for 6-9 months and you expect a good upside.
However, in the short term, you feel that the stock might see a correction but you
do not want to liquidate your position today as you are expecting a good upside
in the near term.

For example, you can enter into an options contract (a part of the derivative
strategy) by paying a small price or premium and reduce your losses. Moreover, it
would help you benefit whether or not the price falls. This is how you can hedge
your risk and transfer it to someone who is willing to take the risk.

b) Speculators

They are extremely high-risk seekers who anticipate future price movement in the
hope of making large and quick gains. The motive here is to take maximum
advantage of the price fluctuations. They play a very key role in the market by
absorbing excess risk and also provide much-needed liquidity in the market when
normal investors don’t participate.

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c) Arbitrageurs

Arbitrage is a low-risk trade that involves buying securities in one market and
simultaneously selling it in another market. This happens when the same
securities are trading at different prices in two different markets.

For instance, say the cash market price of a share is Rs 100 and it is trading at Rs
110 per share on the futures market. An arbitrageur observes the same and
bought 50 shares @ Rs 100 per share in the cash market and simultaneously sells
50 shares @Rs 110 per share, thus gaining Rs 10 per share.

Different Types of Derivatives

The main instruments for derivatives trading in India are Forward Contract, Future
Contracts, Options Contracts, Swaps etc.

These instruments are originally meant for hedging purpose. However, their use
for speculation can’t be ruled out.

Derivatives can either be exchange-traded or traded over the counter (OTC).

Margins in Derivatives Trading

There are basically three types of margin in derivative trading.

These are Initial margin, Maintenance margin, and Variation margin-

a) Initial margin

It is the initial cash that you must deposit in your account before you start trading.

This is required to ensure that the parties honour their obligation and provides a
cushion to the losses in the trade.

In simple words, it is like the down payment for the delivery of the contract.

b) Maintenance Margin

It is a cash balance which a trader must bring to maintain the account as it may
change due to price fluctuations.

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The maintenance margin is a certain portion of the initial margin for a position.

If the margin balance in the account goes below such margin, the trader is asked
to deposit required funds or collateral to bring it back to the initial margin
requirement. This is known as a margin call.

c) Variation Margin

As soon as the margin falls below the maintenance margin, you need to deposit
cash or collateral to bring the account back to the initial margin.

Forward Contract

Forward Contracts are customized contractual agreements between two parties

where they agree to trade a particular asset at an agreed-upon price and at a
particular time in the future. These contracts are not traded on an exchange but
privately traded over the counter.

Suppose we need to buy some gold ornaments say from a local jewelry
manufacturer Gold Inc. Further, assume we need these gold ornaments some 3
months later in the month of October,2023. We agree to buy the gold ornaments
at INR 32000 per 10 gram on 15 October 2023. The current price, however, is INR
31800 per gram. This will be the forward rate or the delivery price four months
from now on the delivery date from the Gold Inc. This illustrates a forward
contract.

Please note that during the agreement there is no money transaction between us
and Gold Inc. Thus during the time of the creation of the forward contract no
monetary transaction takes place. The profit or loss to the Gold Inc. depends
rather, on the spot price on the delivery date. Now assume that the spot price on
delivery day becomes INR 32100 per 10 gram. In this situation, Gold Inc will lose
INR 100 per 10 gram and we will benefit the same on our forward contract. Thus,
the difference between the spot and forward prices on the delivery day is the
profit/loss to the buyer/seller.

Futures Contract (sometimes called a futures) is a standardized legal contract to

buy or sell something at a predetermined price for delivery at a specified time in
the future, between parties not yet known to each other.

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Futures contracts are the standardized versions of the forward contract which
takes place between two parties where they agree to trade a particular contract at
a specified time and at an agreed-upon price.

These contracts are traded on the exchange.

The asset transacted is usually a commodity or financial instrument.

The predetermined price of the contract is known as the forward price.

The specified time in the future when delivery and payment occur is known as the
delivery date.

Because it derives its value from the value of the underlying asset, a futures
contract is a derivative.

Types of Futures

Depending on the underlying asset, there are different types of futures contracts
available for trading. They are: –

a) Individual stock futures

They are contracts between 2 investors. The buyer promises to pay a specified
price for say 500 shares of a single stock at a predetermined future point. The
seller promises to deliver the stock at a specified price on the specified future
date.

b) Stock index futures

The underlying asset is the stock index. Stock index futures are more useful when
one is speculating on the general direction of the market rather than the direction
of an individual stock. It can be used for hedging a portfolio of shares.

c) Commodity futures

Here the underlying asset is a commodity like gold, silver, nickel, crude oil, etc.

In India, commodity futures are traded on 2 exchanges namely MCX ie Multi

Commodity Exchange, and NCDEX i.e. National Commodities and Derivatives
Exchange. The following are some of the examples of commodities – pulses,
cereals, fiber, oil and seeds, energy, metals, and bullion.

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d) Currency futures

These are exchange-traded futures contracts that specify the price in one currency
at which another currency can be bought or sold at a future date. These are
legally binding and the parties that hold the contracts on the expiry date must
deliver the currency amount on the specified date at the specified price.

e) Interest rate futures

The underlying asset, in this case, is the debt obligation which moves according to
the changes in the interest rates.

Difference between Forward and Futures Contract

The main difference between forward and futures contracts are:

a) Forward contracts are traded on personal basis while future contracts are
traded in a competitive arena.

b) Forward contracts are traded over the counter whereas futures are exchange
traded.

c) Forward contracts settlement takes place on the date agreed upon between the
parties whereas futures contracts settlements are made daily. While futures, in
general, settle daily whereas forwards settles on expiration. The daily settlement is
technically known as marked-to-market.

e) Cost of forward contracts is based on bid- ask spread whereas futures contract
have brokerage fees for buy and sell order.

f) In case of forwards, they are not subject to marking to market. On the other
hand, futures are marked to market. While futures, in general, settle daily whereas
forwards settles on expiration. The daily settlement is technically known as
marked-to-market.

g) Margins are not required in case of forward market whereas in futures margin
is required.

h) In a forward contract, credit risk is borne by each party whereas in case of

futures the transaction is a 2 way transaction, hence both the parties need not
bother about the risk.

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Basics of Options Trading in The Indian Derivatives Market

Consider the same example. Let us now suppose that the seller Gold Inc. believes
that the spot price may rise above INR 32000 per 10 gram during the forward
contract agreement with us. So to limit loss, Gold Inc. purchases a call option for
Rs. 105 at the exercise price of INR 32000 per 10 gram with the three months
expiration date.

The exercise price is technically known as a strike price.

Similarly, the price of the call option is technically known as the option price or
the premium.

Actually, the call option gives the seller the right to buy the gold at the strike price
on the expiration date. However, there is no obligation to buy on the expiration
date. He may or may not exercise his right on the expiration date.

For instance, if the spot price decline below INR 31800 our Gold Inc will choose
not to exercise the option. In this way, his loss would be limited to the premium of
INR 105 per 10 gram.

In an alternative situation, when we expect the price to fall below the spot price in
the future, we have the option to purchase put options. Buying a put option
provides us the advantage to sell at the strike price on the expiration date. Here
also we have no obligation to exercise your right.

Swaps

The swaps contract involve an exchange of cash flows over time. Swaps are
typically done between two parties. One party makes a payment to the other. This
depends on whether a price is above or below a reference price. This reference
price is the basis of the swap contract and is there is mention regarding it in the
contract.

Badla Trading

The “Badla” trading is a mechanism of trade settlement in India. “Badla” is a Hindi

term for carryover transactions. This kind of trading facilitates trade shares on the
margin on the Bombay Stock Exchange.

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Further, it also allows to carry forward the positions to the next settlement cycle.
There was no fixed expiration date, contract terms for such carryover transactions.
Also, no standard margin requirement was there.

Moreover, earlier such transactions were carry forward indefinitely. But this was
later fixed for a maximum period of 90 days. The SEBI put a complete ban on
Badla trading in 2001 with the introduction of futures trading.

Option Trading Strategies

Option is an agreement between a buyer and a seller which gives the buyer the
right but not the obligation to buy or sell a particular asset at a later date at an
agreed-upon price.

The term option refers to a financial instrument that is based on the value of
underlying securities such as stocks. An options contract offers the buyer the
opportunity to buy or sell—depending on the type of contract they hold—the
underlying asset. Unlike futures, the holder is not required to buy or sell the asset
if they decide against it.

Each options contract will have a specific expiration date by which the holder
must exercise their option. The stated price on an option is known as the strike
price.

Options are financial derivatives that give buyers the right, but not the obligation,
to buy or sell an underlying asset at an agreed-upon price and date.

Call options and put options form the basis for a wide range of option strategies
designed for hedging, income, or speculation.

Options contracts involve a buyer and seller, where the buyer pays a premium for
the rights granted by the contract. Call options allow the holder to buy the asset
at a stated price within a specific timeframe. Put options, on the other hand, allow
the holder to sell the asset at a stated price within a specific timeframe. Each call
option has a bullish buyer and a bearish seller while put options have a bearish
buyer and a bullish seller.

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Traders and investors buy and sell options for several reasons. Options
speculation allows a trader to hold a leveraged position in an asset at a lower cost
than buying shares of the asset. Investors use options to hedge or reduce the risk
exposure of their portfolios.

In some cases, the option holder can generate income when they buy call options
or become an options writer. Options are also one of the most direct ways to
invest in oil. For options traders, an option's daily trading volume and open
interest are the two key numbers to watch in order to make the most well-
informed investment decisions.

American options can be exercised any time before the expiration date of the
option, while European options can only be exercised on the expiration date or
the exercise date. Exercising means utilizing the right to buy or sell the underlying
security.

Types of Options

Calls

A call option gives the holder the right, but not the obligation, to buy the
underlying security at the strike price on or before expiration. A call option will
therefore become more valuable as the underlying security rises in price (calls
have a positive delta).

A long call can be used to speculate on the price of the underlying rising, since it
has unlimited upside potential but the maximum loss is the premium (price) paid
for the option.

Puts

Opposite to call options, a put gives the holder the right, but not the obligation,
to instead sell the underlying stock at the strike price on or before expiration. A
long put, therefore, is a short position in the underlying security, since the put
gains value as the underlying's price falls (they have a negative delta). Protective
puts can be purchased as a sort of insurance, providing a price floor for investors
to hedge their positions.

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American vs. European Options

American options can be exercised at any time between the date of purchase and
the expiration date. European options are different from American options in that
they can only be exercised at the end of their lives on their expiration date.

The distinction between American and European options has nothing to do with
geography, only with early exercise. Many options on stock indexes are of the
European type. Because the right to exercise early has some value, an American
option typically carries a higher premium than an otherwise identical European
option. This is because the early exercise feature is desirable and commands a
premium.

In the U.S., most single stock options are American while index options are
European.

Special Considerations

Options contracts usually represent 100 shares of the underlying security. The
buyer pays a premium fee for each contract.

Another factor in the premium price is the expiration date. Just like with that
carton of milk in the refrigerator, the expiration date indicates the day the option
contract must be used. The underlying asset will determine the use-by date. For
stocks, it is usually the third Friday of the contract's month.

Options Spreads

Options spreads are strategies that use various combinations of buying and
selling different options for the desired risk-return profile. Spreads are
constructed using vanilla options, and can take advantage of various scenarios
such as high- or low-volatility environments, up- or down-moves, or anything in-
between.

Spread strategies can be characterized by their payoff or visualizations of their

profit-loss profile, such as bull call spreads or iron condors.

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Options Risk Metrics: The Greeks

The options market uses the term the "Greeks" to describe the different
dimensions of risk involved in taking an options position, either in a particular
option or a portfolio. These variables are called Greeks because they are typically
associated with Greek symbols.

Each risk variable is a result of an imperfect assumption or relationship of the

option with another underlying variable. Traders use different Greek values to
assess options risk and manage option portfolios.

Delta

Delta (Δ) represents the rate of change between the option's price and a Re1
change in the underlying asset's price. In other words, the price sensitivity of the
option relative to the underlying. Delta of a call option has a range between zero
and one, while the delta of a put option has a range between zero and negative
one.

Delta also represents the hedge ratio for creating a delta-neutral position for
options traders.

Theta

Theta (Θ) represents the rate of change between the option price and time, or
time sensitivity - sometimes known as an option's time decay. Theta indicates the
amount an option's price would decrease as the time to expiration decreases, all
else equal.

Theta increases when options are at-the-money, and decreases when options are
in- and out-of-the money. Options closer to expiration also have accelerating time
decay. Long calls and long puts usually have negative Theta. Short calls and short
puts, on the other hand, have positive Theta. By comparison, an instrument whose
value is not eroded by time, such as a stock, has zero Theta.

Gamma

Gamma (Γ) represents the rate of change between an option's delta and the
underlying asset's price. This is called second-order (second-derivative) price
sensitivity. Gamma indicates the amount the delta would change given a Re 1
move in the underlying security.

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Gamma is used to determine the stability of an option's delta. Higher gamma
values indicate that delta could change dramatically in response to even small
movements in the underlying's price. Gamma is higher for options that are at-the-
money and lower for options that are in- and out-of-the-money, and accelerates
in magnitude as expiration approaches.

Gamma values are generally smaller the further away from the date of expiration.
This means that options with longer expirations are less sensitive to delta
changes. As expiration approaches, gamma values are typically larger, as price
changes have more impact on gamma.

Options traders may opt to not only hedge delta but also gamma in order to be
delta-gamma neutral, meaning that as the underlying price moves, the delta will
remain close to zero.

Vega

Vega (V) represents the rate of change between an option's value and the
underlying asset's implied volatility. This is the option's sensitivity to volatility.
Vega indicates the amount an option's price changes given a 1% change in
implied volatility.

For example, an option with a Vega of 0.10 indicates the option's value is
expected to change by 10 cents if the implied volatility changes by 1%.

Because increased volatility implies that the underlying instrument is more likely
to experience extreme values, a rise in volatility correspondingly increases the
value of an option. Conversely, a decrease in volatility negatively affects the value
of the option. Vega is at its maximum for at-the-money options that have longer
times until expiration.

Those familiar with the Greek language will point out that there is no actual Greek
letter named vega. There are various theories about how this symbol, which
resembles the Greek letter nu, found its way into stock-trading lingo.

Rho

Rho (p) represents the rate of change between an option's value and a 1% change
in the interest rate. This measures sensitivity to the interest rate. Rho is greatest
for at-the-money options with long times until expiration.

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Minor Greeks

Some other Greeks, which aren't discussed as often, are lambda, epsilon, vomma,
vera, speed, zomma, color, ultima.

These Greeks are second- or third-derivatives of the pricing model and affect
things like the change in delta with a change in volatility. They are increasingly
used in options trading strategies as computer software can quickly compute and
account for these complex and sometimes esoteric risk factors.

Advantages and Disadvantages of Options

Buying Call Options

As mentioned earlier, call options allow the holder to buy an underlying security
at the stated strike price by the expiration date called the expiry. The holder has
no obligation to buy the asset if they do not want to purchase the asset. The risk
to the buyer is limited to the premium paid. Fluctuations of the underlying stock
have no impact.

Buyers are bullish on a stock and believe the share price will rise above the strike
price before the option expires. If the investor's bullish outlook is realized and the
price increases above the strike price, the investor can exercise the option, buy the
stock at the strike price, and immediately sell the stock at the current market price
for a profit.

Their profit on this trade is the market share price less the strike share price plus
the expense of the option—the premium and any brokerage commission to place
the orders. The result is multiplied by the number of option contracts purchased,
then multiplied by 100—assuming each contract represents 100 shares.

If the underlying stock price does not move above the strike price by the
expiration date, the option expires worthlessly. The holder is not required to buy
the shares but will lose the premium paid for the call.

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Selling Call Options

Selling call options is known as writing a contract. The writer receives the
premium fee. In other words, a buyer pays the premium to the writer (or seller) of
an option. The maximum profit is the premium received when selling the option.
An investor who sells a call option is bearish and believes the underlying stock's
price will fall or remain relatively close to the option's strike price during the life of
the option.

If the prevailing market share price is at or below the strike price by expiry, the
option expires worthlessly for the call buyer. The option seller pockets the
premium as their profit. The option is not exercised because the buyer would not
buy the stock at the strike price higher than or equal to the prevailing market
price.

However, if the market share price is more than the strike price at expiry, the seller
of the option must sell the shares to an option buyer at that lower strike price. In
other words, the seller must either sell shares from their portfolio holdings or buy
the stock at the prevailing market price to sell to the call option buyer. The
contract writer incurs a loss. How large of a loss depends on the cost basis of the
shares they must use to cover the option order, plus any brokerage order
expenses, but less any premium they received.

As you can see, the risk to the call writers is far greater than the risk exposure of
call buyers. The call buyer only loses the premium. The writer faces infinite risk
because the stock price could continue to rise increasing losses significantly.

Buying Put Options

Put options are investments where the buyer believes the underlying stock's
market price will fall below the strike price on or before the expiration date of the
option. Once again, the holder can sell shares without the obligation to sell at the
stated strike per share price by the stated date.

Since buyers of put options want the stock price to decrease, the put option is
profitable when the underlying stock's price is below the strike price. If the
prevailing market price is less than the strike price at expiry, the investor can
exercise the put. They will sell shares at the option's higher strike price. Should
they wish to replace their holding of these shares they may buy them on the open
market.

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Their profit on this trade is the strike price less the current market price, plus
expenses—the premium and any brokerage commission to place the orders. The
result would be multiplied by the number of option contracts purchased, then
multiplied by 100—assuming each contract represents 100 shares.

The value of holding a put option will increase as the underlying stock price
decreases. Conversely, the value of the put option declines as the stock price
increases. The risk of buying put options is limited to the loss of the premium if
the option expires worthlessly.

Selling Put Options

Selling put options is also known as writing a contract. A put option writer
believes the underlying stock's price will stay the same or increase over the life of
the option, making them bullish on the shares. Here, the option buyer has the
right to make the seller, buy shares of the underlying asset at the strike price on
expiry.

If the underlying stock's price closes above the strike price by the expiration date,
the put option expires worthlessly. The writer's maximum profit is the premium.
The option isn't exercised because the option buyer would not sell the stock at
the lower strike share price when the market price is more.

If the stock's market value falls below the option strike price, the writer is
obligated to buy shares of the underlying stock at the strike price. In other words,
the put option will be exercised by the option buyer who sells their shares at the
strike price as it is higher than the stock's market value.

The risk for the put option writer happens when the market's price falls below the
strike price. The seller is forced to purchase shares at the strike price at expiration.
The writer's loss can be significant depending on how much the shares depreciate.

The writer (or seller) can either hold on to the shares and hope the stock price
rises back above the purchase price or sell the shares and take the loss. Any loss is
offset by the premium received.

An investor may write put options at a strike price where they see the shares
being a good value and would be willing to buy at that price. When the price falls
and the buyer exercises their option, they get the stock at the price they want with
the added benefit of receiving the option premium.

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Pros

A call option buyer has the right to buy assets at a lower price than the market
when the stock's price rises.

The put option buyer profits by selling stock at the strike price when the market
price is below the strike price.

Option sellers receive a premium fee from the buyer for writing an option

Cons

The put option seller may have to buy the asset at the higher strike price than
they would normally pay if the market falls.

The call option writer faces infinite risk if the stock's price rises and are forced to
buy shares at a high price.

Option buyers must pay an upfront premium to the writers of the option

Example of an Option

Suppose that Infosys shares trade at Rs 108 per share and you believe they will
increase in value. You decide to buy a call option to benefit from an increase in
the stock's price.

You purchase one call option with a strike price of Rs 115 for one month in the
future for 37 paise per contact. Your total cash outlay is Rs 37 for the position plus
fees and commissions (0.37 x 100 = Rs 37).

If the stock rises to Rs 116, your option will be worth Rs 1, since you could
exercise the option to acquire the stock for Rs 115 per share and immediately
resell it for Rs 116 per share. The profit on the option position would be 170.3%
since you paid 37 paise and earned Re 1- that's much higher than the 7.4%
increase in the underlying stock price from Rs 108 to Rs 116 at the time of expiry.

In other words, the profit in rupee terms would be a net of 63 paise or Rs 63 since
one option contract represents 100 shares [(Re 1 - 0.37) x 100 = Rs 63].

If the stock fell to Rs 100, your option would expire worthlessly, and you would be
out Rs 37 premium. The upside is that you didn't buy 100 shares at Rs108, which
would have resulted in an Rs 8 per share, or Rs 800, total loss. As you can see,
options can help limit your downside risk.

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Main Advantages of Options

Options can be very useful as a source of leverage and risk hedging. For example,
a bullish investor who wishes to invest Rs 1,000 in a company could potentially
earn a far greater return by purchasing Rs 1,000 worth of call options on that firm,
as compared to buying Rs 1,000 of that company’s shares.

In this sense, the call options provide the investor with a way to leverage their
position by increasing their buying power.

On the other hand, if that same investor already has exposure to that same
company and wants to reduce that exposure, they could hedge their risk by
selling put options against that company.

Main Disadvantages of Options

The main disadvantage of options contracts is that they are complex and difficult
to price. This is why options are considered to be a security most suitable for
experienced professional investors. In recent years, they have become increasingly
popular among retail investors. Because of their capacity for outsized returns or
losses, investors should make sure they fully understand the potential implications
before entering into any options positions. Failing to do so can lead to
devastating losses.

Options Differ from Futures

Both options and futures are types of derivatives contracts that are based off of
some underlying asset or security. The main difference is that options contracts
grant the right but not the obligation to buy or sell the underlying in the future.
Futures contracts have this obligation.

Options are a type of derivative product that allow investors to speculate on or

hedge against the volatility of an underlying stock. Options are divided into call
options, which allow buyers to profit if the price of the stock increases, and put
options, in which the buyer profits if the price of the stock declines. Investors can
also go short an option by selling them to other investors. Shorting (or selling) a
call option would therefore mean profiting if the underlying stock declines while
selling a put option would mean profiting if the stock increases in value.

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The Spot Market vs. the Derivatives Market

The spot market is where financial instruments, such as commodities, currencies,

and securities, are traded directly for delivery. On the other hand derivatives
market is based on the delivery of the underlying asset at a future date.

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10. Factoring and Forfaiting
Factoring

Factoring is a financial service under which the ‘factor’ renders various services
which include: Discounting of bills (with or without recourse) and collection of the
client’s debts. Under this, the receivables on account of sale of goods or services
are sold to the factor at a certain discount. There are two methods of factoring—
recourse and non-recourse. Under recourse factoring, the client is not protected
against the risk of bad debts. On the other hand, the factor assumes the entire
credit risk under non-recourse factoring. Providing information about the
creditworthiness of prospective client’s etc., Factors hold large amounts of
information about the trading histories of the firms.

Factoring is a very common method used by exporters as a way to accelerate their

cash flow. In this type of agreement, the exporter sells all of his open invoices to a
trade financier ( the factor) at a discount. The factor then waits until the payment
is made by the importer. This relieves the exporter from the risk of bad debts and
provides working capital for them to keep trading. The factor, or trade financier,
then make a profit when the importer pays the full agreed-upon price for the
goods since the exporter sold the account receivables at a discount to the
factoring company.

A factor is an intermediary agent that provides cash or financing to companies by

purchasing their accounts receivables. A factor is essentially a funding source that
agrees to pay the company the value of an invoice less a discount for commission
and fees. Factoring can help companies improve their short-term cash needs by
selling their receivables in return for an injection of cash from the factoring
company. The practice is also known as factoring, factoring finance, and accounts
receivable financing.

Example of Factoring In Finance

Let us assume that ABC Corp. is a growing company. ABC sells goods to XYZ Ltd.
worth Rs 16000 on credit. The amount will be encashed within 45 days.

During this period, however, ABC Corp. runs out of working capital. Therefore,
ABC approaches Balaji Funding Ltd. to avail factoring in finance. Balaji Funding
agrees to buy accounts receivables at a 10% discount. Therefore, ABC opts for a
recourse factoring.
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Based on the given details, determine what will happen if XYZ Ltd. defaults on its
payment.

Solution:

Given:

Unpaid Invoice = Rs 16000

Discount Rate = 10% of $16000 = Rs1600

Now,

Money Financed = Unpaid Invoice – Discount Rate

Money Financed = Rs16000 – Rs1600 = Rs14400

Hence, Balaji Funding Ltd. lends Rs 14400 to ABC Corp. On the due date, if XYZ
Ltd. fails to pay the invoice amount to Balaji Funding Ltd., then ABC Corp. is liable
to pay an outstanding sum of Rs 16000 to the factor.

Advantages:

a) Cheaper than financing through other means such as bank credit.

b) Factoring as a source of funds is flexible and ensures a definite pattern of cash

inflows from credit sales. It provides security for a debt.

c) It does not create any charge on the assets of the firm.

d) The client can concentrate on other functional areas of business as the

responsibility of credit control is shouldered by the factor.

Disadvantages:

a) This source is expensive when the invoices are numerous and smaller in
amount.

b) The advance finance provided by the factor firm is generally available at a

higher interest cost.

c) The factor is a third party to the customer who may not feel comfortable while
dealing with it.

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Factoring Regulation Amendment Act, 2021

On the 7th of August 2021, Rajya Sabha passed the Factoring Regulation
Amendment Bill intending to bring various changes to the legislative system to
help the Micro, Small, and Medium Enterprises (MSME) sector.

The Factoring Regulation act of 2021 is aimed towards the expansion of credit
facilities available to small businesses.

It looks forward to helping them by allowing them access to funds from non-
banking financial companies (NBFC). The bill has taken several suggestions from
the U.K. Sinha committee.

Major Provisions of the Factoring Regulation Amendment Bill

The first provision of the bill is bringing change in various definitions of terms like
“receivable”, “assignment”, and “factoring business”. The aim is to bring these
terms up at par with global standards.

The Factoring Regulation Act of 2021 aims to amend certain areas of the same act
of 2011 to increase the scope of the parties engaging in the factoring business.
The old law allowed the RBI to exercise authority to decide who remains in
factoring business based on whether these non-bank finance companies made
this their principal business. The new act removes this threshold and opens a
stream of new opportunities for these businesses.

Further, the bill also mentions that trade receivables that are financed through
TreDS or Trade Receivables Discounting System should be filed with the Central
Registry by the responsible TReDS.

Furthermore, the bill also lands power in the hands of RBI to regulate the grant for
registration certificates to a factor.

Finally, the bill overrules the 30 days rule of registering every transaction made by
the factors.

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Significance of the Factoring Regulation Amendment Act 2021

The bill allows non-NBFC factors along with some others to partake in the
factoring business. This is significant because it is expected to majorly increase the
availability of funds for smaller businesses. This, in retrospect, might bring down
the cost of funds and allow various small businesses that are credit-hungry. This
will ensure and increase the regularity of timely payments.

Further, the bill also signifies the introduction of easier liquidity, which will
accelerate the operations in the MSME sector.

The MSME sector was always the victim of delayed receivables due to a huge
tension in the liquidating process. The bill seeks to resolve that tension and is
estimated to bring in smoother working capital and a healthier flow of cash.

Finally, Factoring Regulation Amendment Act 2021 looks forward to liberating the
restrictive provisions of the 2011 act as well as ensuring that a strong regulatory
provision is administered with the help of the Reserve Bank of India.

Forfaiting

Forfaiting is a form of agreement whereby the exporter sells all of his accounts
receivable to a forfaiter at a certain discount in exchange for cash. By so doing,
the exporter transfers the debt he owes to the importer to the forfaiter. The
receivables bought by the forfaiter must be guaranteed by the importer's bank.
This is due to the fact that the importer takes the goods on credit, and sells them
before paying any money to the forfaiter.

Differences between factoring and forfaiting

Factoring is used in both domestic and international trade, whereas forfaiting is

only used in international trade financing.

Letters of credit are not involved in factoring, but they are part of the forfaiting
process.

Factoring generally only provides 80 to 90 percent of the amount of the accounts

receivable, but forfaiting can provide up to 100 percent of the amount of the
invoices.

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Another point to bear in mind is that factoring involves accounts receivables,
whereas forfaiting deals with negotiable instruments (such as bills of lading,
promissory notes, etc.). Because forfaiting is based on negotiable instruments,
there is a secondary market for forfaiting in which those instruments can be
bought and sold, thus increasing the liquidity of forfaiting.

Forfait differ from Forfeit (see spelling) : Generally, both the terms “Forfait” and
“Forfeit” are used to mean same thing. However, there is a slight difference.

"Forfeit" means to forego something. For example, when we buy a Insurance

Policy, we are supposed to continue the Policy for minimum stipulated period by
remitting premia. Suppose we don’t continue the Policy for minimum stipulated
period, then the Insurance Company may absorb the premia whatever we have
paid to its account and nothing will be repaid to us. This is known as “forfeit”.

Reverse Factoring

Reverse factoring is a type of supplier finance solution that companies can use to
offer early payments to their suppliers based on approved invoices. Suppliers
participating in a reverse factoring program can request early payment on
invoices from the bank or other finance provider, with the buyer sending payment
to the financial institution on the invoice maturity date. By giving suppliers access
to reverse factoring, buyers can reduce the risk of disruption in their supply chains
and strengthen their supplier relationships, while also improving their own
working capital position.

Reverse factoring is also widely known as supply chain finance, although the term
‘supply chain finance’ is also occasionally used as an umbrella term to include a
range of supplier financing solutions.

Factoring and Reverse factoring

Factoring is a type of receivables finance where a supplier company sells its

invoices to a third-party (the factor) for cash, and the buyer then pays the factor,
rather than the supplier, at the invoice due date. Reverse factoring, on the other
hand, is initiated by the buyer in the transaction.

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Reverse Factoring Vs Dynamic Discounting

Reverse factoring is not to be confused with dynamic discounting, although there

are similarities between the two types of program. While dynamic discounting is
also a solution that enables buyers to offer early payments to their suppliers, there
is an important difference: the program is funded not by an external finance
provider, but by the buyer itself.

Consequently, when using dynamic discounting, the buyer offers suppliers early
payment on their invoices in exchange for a discount. In this case, the buyer can
deploy its own cash in order to achieve attractive risk-free returns, while
supporting suppliers and reducing the risk of supply chain disruption.

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11. Trade Receivables Discounting System (TReDS)
TReDS is an electronic platform for facilitating the financing / discounting of trade
receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple
financiers. These receivables can be due from corporates and other buyers,
including Government Departments and Public Sector Undertakings (PSUs).

TReDS is a payment system authorised under the Payment and Settlement

Systems (PSS) Act, 2007. It is a platform for uploading, accepting, discounting,
trading and settling invoices / bills of MSMEs and facilitating both receivables as
well as payables factoring (reverse factoring). MSME sellers, corporate and other
buyers, including Government Departments and PSUs, and financiers (banks,
NBFC-Factors and other financial institutions, as permitted) are direct participants
in the TReDS and all transactions processed under this system are ‘”without
recourse” to MSMEs.

Sellers, buyers and financiers are the participants on a TReDS platform.

Only MSMEs can participate as sellers in TReDS.

Corporates, Government Departments, PSUs and any other entity can participate
as buyers in TReDS.

Banks, NBFC – Factors and other financial institutions as permitted by the Reserve
Bank of India (RBI), can participate as financiers in TReDS.

Broadly, following steps take place during financing / discounting through TReDS:

Creation of a Factoring Unit (FU) – standard nomenclature used in TReDS for

invoice(s) or bill(s) of exchange – containing details of invoices / bills of exchange
(evidencing sale of goods / services by the MSME sellers to the buyers) on TReDS
platform by the MSME seller (in case of factoring) or the buyer (in case of reverse
factoring);

Acceptance of the FU by the counterparty – buyer or the seller, as the case may
be;

Bidding by financiers;

Selection of best bid by the seller or the buyer, as the case may be;

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Payment made by the financier (of the selected bid) to the MSME seller at the
agreed rate of financing / discounting;

Payment by the buyer to the financier on the due date.

RBI has not made it compulsory for any buyer, seller or financier to participate in
TReDS. The response has been tepid from the buyers' side. Reasons for their
reluctance could range from internal processes, indifferent attitude towards
payments to be made to MSMEs, balance sheet related compulsions, etc. In view
of this, the Government has made it compulsory for certain segments of
companies to mandatorily register as buyers on TReDS platform(s). The
government directive, however, does not make it compulsory for these entities to
perform transactions in TReDS.

Related concepts/terminology

Factoring Unit (FU)

A Factoring Unit (FU) is a standard nomenclature used in TReDS for invoice(s) or

bill(s) of exchange. Each FU represents a confirmed obligation of the corporates or
other buyers, including Government Departments and PSUs.

In TReDS, FU can be created either by the MSME seller or the buyer. If MSME
seller creates it, the process is called factoring; if the same is created by
corporates or other buyers, it is called as reverse factoring.

Reverse Factoring and TreDS

The TReDS could deal with both receivables factoring as well as reverse factoring.

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12. Venture Capital
Entrepreneurs need investments for their start-up companies. The investments or
the capital that these entrepreneurs receive from wealthy investors is called
Venture Capital and the investors are called Venture Capitalists.

VC firms reduce the risk of investments by co-investing with other VC firms.

Usually, there will be the main investor called the ‘lead investor’ and other
investors will be called ‘followers’.

Venture Capital Fund is made up of investments from wealthy individuals or

companies who give their money to a VC firm to manage their investment
portfolios for them and to invest in high-risk start-ups in exchange for equity.

The basic idea is to invest in a company’s balance sheet and infrastructure.

Venture Capitalist nurtures the idea of an entrepreneur for a short period of time
and exits with the help of an investment banker.

In a start-up company, VC will receive an equity partnership in exchange for

investments in the start-up company.

VC’s receive liquidation preference, it means in the worst-case scenario where the
company fails, VCs are given the first claim to all the company’s assets and
technology. It also offers voting rights over key decisions like Initial Public Offer
(IPO) or even sale of the company.

Entities in VC Market

Venture Capital (VC) industry has 4 main entities, which are mentioned below

Entrepreneurs who need funding

Investors with an objective of securing very high returns.

Investment bankers who need companies to sell.

Venture Capitalists (VC) who make money for themselves by creating a

market for the above 3 players in the industry.

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Methods of Venture Capital Funding

The type of VC funding is based on the money extended at a particular stage of

the startup’s development. Venture capital and private equity differ here because
they invest in a company at a different stage. VCs invest at the early stages of the
startup with the PE firms showing up at a more established stage.

The venture capital funding procedure is completed through the six stages, which
are as follows –

Seed Money: This is low-level financing provided for developing an idea of an

entrepreneur.

Startup: These are businesses that are operational and need finance for meeting
marketing or product development expenses. They receive funding to finish the
development of their products or services.

First Round: This type of finance is for manufacturing and funding early sales. It
helps companies who have utilized all their capital and need fresh finance to start
full-fledged business activities.

Second Round: This financing is for companies involved in sales but are still not
in profits or are at break-even.

Third Round: These funds are used for backing the expansion of a new valuable
company.

Fourth Round: Also termed as bridge financing, this is the money used for going
public.

Early-stage Financing has seed financing, startup financing & first stage
financing as three subdivisions. In contrast, Expansion Financing can be
categorized into second-stage financing, bridge financing, and third stage
financing or mezzanine financing.

Apart from this, Second-Stage Financing is also provided to companies for

expanding their business. Bridge financing is generally offered as short-term
interest-only finance. It is also provided to assist companies that employ initial
public offers (IPO). VC firms also keep highly liquid investments such as money
market assets and cash reserves referred to an as dry powder. They are kept as a
reserve to meet future obligations.

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Advantages of Venture Capital

Banks usually prefer to finance a new business which has hard assets. In the
current information-based economy, new start-ups hardly have any hard asset.
Venture Capitalists step in under these circumstances.

They can provide more insights into the market.

Can help in strategy formulation.

Can help in developing strategic networks

Innovation and entrepreneurship are the kernels of a capitalist economy. New

businesses, however, are often highly-risky and cost-intensive ventures. As a
result, external capital is often sought to spread the risk of failure. In return for
taking on this risk through investment, investors in new companies are able to
obtain equity and voting rights. Venture capital, therefore, allows startups to get
off the ground and founders to fulfill their vision.

Venture capital funds usually go into a particular industry in a particular time

period. One can safely conclude that VC funding is guided more by the growth
potential in a particular industry rather than the potential and skills of individual
entrepreneurs.

Venture Capital different from an Angel Investor

While both provide money to startup companies, Venture Capitalists are typically
professional investors who invest in a broad portfolio of new companies and
provide hands-on guidance and leverage their professional networks to help the
new firm. Angel Investors, on the other hand, tend to be wealthy individuals who
like to invest in new companies more as a hobby or side-project and may not
provide the same expert guidance. Angel investors also tend to invest first and are
later followed by VCs.

Venture Capital and Private Equity

Venture capital is a subset of private equity. In addition to VC, private equity also
includes leveraged buyouts, mezzanine financing, and private placements.

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13. Lease Finance and Hire Purchase
Leasing and hire purchase are types of debt finance used by businesses to obtain
a wide range of assets – everything from office equipment to vehicles.

Lease Finance

In simple words, a Lease is a financial contract between the business customer

(user/lessee) and the equipment supplier (normally owner/lessor) for using a
particular asset/equipment over a period of time against the periodic payments
called “Lease rentals.”

The lease generally involves two parties, i.e., the lessor (owner) and the lessee
(user). Under this arrangement, the lessor transfers the right to use to the lessee in
return for the lease rentals agreed upon.

A lease also acts as an alternative to financing business assets. There are many
options for a finance manager to choose from. He can opt for equity finance, debt
finance, term loan, hire purchases, or many others. All the means of financing
differ due to their different characteristics.

Virtually, all financial lease agreements fall into one of four types of lease
financing.

Types of Lease Agreements

1. Capital Lease

2. Operating Lease

3. Sale and Leaseback

4. Leveraged Leasing:

Capital Lease:

Capital Lease is also called ‘financial lease’. A capital lease is a long-term

arrangement which is non-cancellable. The lessee is obligated to pay lease rent till
the expiry of lease period. The period of lease agreement generally corresponds
to the useful life of the asset concern.

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A long-term lease in which the lessee must record the leased item as an asset on
his/her balance sheet and record the present value of the lease payments as debt.
Additionally, the lessor must record the lease as a sale on his/her own balance
sheet. A capital lease may last for several years and is not canceable. It is treated
as a sale for tax purposes.

Operating Lease:

Contrary to capital lease, the period of operating lease is shorter and it is often
cancellable at the option of lessee with prior notice. Hence, operating lease is also
called as an ‘Open end Lease Arrangement.’ The lease term is shorter than the
economic life of the asset. Thus, the lessor does not recover its investment during
the first lease period. Some of the examples of operating lease are leasing of
copying machines, certain computer hardware, world processors, automobiles,
etc.

There is some criticism too labelled against capital leasing and operating leasing.
Let us give the arguments given by the proponents and opponents regarding the
two types of equipment leasing. It is argued that a firm knowing about the
possible obsolescence of high technology equipment may not want to purchase
any equipment. Instead, it will prefer to go for operating lease to avoid the
possible risk of obsolescence. There is one difference between an operating lease
and capital/financial lease.

Operating lease is short-term and cancellable by the lessee. It is also called as an

‘Open end Lease Agreement’. In case of a financial lease, the risk of equipment
obsolescence is shifted to the lessee rather than on the lessor.

The reason is that it is a long-term and non-cancellable agreement or contract.

Hence, lessee is required to make rental payments even after obsolescence of
equipment. On the other hand, it is said that in operating lease, the risk of loss
shifts from lessee to lessor.

This reasoning is not correct because if the lessor is concerned about the possible
obsolescence, he will certainly compensate for this risk by charging higher lease
rentals. As a matter of fact, it is more or less a ‘war of wits’ only.

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Sale and Leaseback:

Sale and Leaseback is a sub-part of finance lease. Under a sale and leaseback
arrangement, a firm sells an asset to another party who in turn leases it back to
the firm. The asset is usually sold at the market value on the day. The firm, thus,
receives the sales price in cash, on the one hand, and economic use of the asset
sold, on the other.

Yes, the firm is obliged to make periodic rental payments to the lessor. Sale and
leaseback arrangement is beneficial for both lessor and lessee. While the former
gets tax benefits due to depreciation, the latter has immediate cash inflow which
improves his liquidity position.

In fact, such arrangement is popular with companies facing short-term liquidity

crisis. However, under this arrangement, the assets are not physically exchanged
but it all happens in records only.

This is nothing but a paper transaction. Sale and lease back transaction is suitable
for those assets, which are not subjected to depreciation but appreciation, say for
example, land.

Leveraged Leasing

A special form of leasing has become very popular in recent years. This is known
as Leveraged Leasing. This is popular in the financing of “big-tickets” assets such
as aircraft, oil rigs and railway equipments. In contrast to earlier mentioned three
types of leasing, three parties are involved in case of leveraged lease arrangement
– Lessee, Lessor and the lender.

Leveraged leasing can be defined as a lease arrangement in which the lessor

provides an equity portion (say 25%) of the leased asset’s cost and the third-party
lenders provide the balance of the financing. The lessor, the owner of the asset is
entitled to depreciation allowance associated with the asset.

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Advantages or benefits of Leasing to Lessee

1. 100 percent financing

Lease agreement finances assets which require huge investment. The lessee is
able to avail of 100 percent financing without resorting to any immediate down
payment. Thus, the lessee experiences no hurdles in commencing his business
without making any initial investment.

2. Alternative use of funds

Leasing facilitates the acquisition of equipment, plant and machinery without the
necessary capital outlay. So, the financial resources of the business may be spared
for alternative use. Internal accruals from the exploitation of the leased equipment
enhance the working capital position of the firm.

3. Cheaper sources of finance

Leasing costs less than other alternatives available. Moreover, leasing permits
firms to acquire equipment without going through stringent formalities. So, lease
financing is faster as well as cheaper.

4. Use and control over assets

Leasing involves divorce of ownership from the economic use of equipment.

Though ownership of the property rests with ‘ the lessor, lessee has a full control
over the leased equipment in his possession. The other modes of long-term
finance for example, equity or debentures dilute the ownership of promoters of
the business.

5. Free from Restrictive covenants and conditions

Lease finance is considered preferable to institutional finance. The lessee feels free
from restrictive covenants and conditions such as representation on the board,
conversion of debt into equity, payment of dividends so on. So, lease finance is
not an invasion on the financial freedom of the lessee.

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6. Flexibility in structuring of rentals

Lease rentals can be structured to accommodate the cash flow position of the
lessee. The lessee is able to pay the lease rentals from the funds generated from
operations. The lease period is also chosen to suit the lessee’s capacity to pay
rentals. But in institutional finance repayment in earlier years is burdensome
wherein the project may not actually generate cash flows sufficient to pay rentals.

7. Faster and simple documentation

A lease finance arrangement is free from cumbersome procedures. It involves

faster and simple documentation. But in institutional finance, compliance of
covenants and formalities and bulk documentation cause procedural delays in
getting loans.

8. Tax concession

A lot of tax advantages can be derived by the lessee through suitably structured
rental payments. In case of heavy taxation, rentals may be increased to lower
taxable income. Rental payments are deductible from income. If the lessor is liable
to tax, the rentals may be lowered. Less incomes attract less tax. The lessor can
pass on a part of tax benefit to the lessee.

9. No risk of obsolescence

The lessor being the owner of the asset bears the risks of obsolescence. Further.,
the lessee at any time can replace the asset with latest technology.

Advantages or benefits of leasing to Lessor

The following advantages are available to the lessor

1. Security: The lessor can repossess the leased equipment where the lessee
defaults on payments. So, the lessor interest is fully secured.

2. Tax benefits: The lessor can claim tax relief by way of depreciation. Depreciation
is deductible from income. Less tax is charged for less income. Moreover, the
lessor in high tax bracket can lease out assets with high depreciation rates.
Resultantly, he can reduce his tax liability.

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3. Profitability: The lease rentals are received from the lessee. The lessor can cover
the capital outlay and earn sufficient profit. The rate of return is more than what
the lessor pays on his borrowings.

4. Capital Gearing: Trading on equity is possible for lessors. With low equity
capital and substantial borrowings, lessors can earn high return on equity.

5. Growth Potential: The leasing industry has a high growth potential. Even during
recession where lessees are hard pressed for funds, they can acquire equipment
for business use. This ultimately maintains growth pace even during recessionary
period.

Limitations of Leasing

The drawbacks of lease financing are given below.

1. The lessee is not free to make additions or alterations to the leased equipment.

2. A financial lease entails a higher payout obligations. The lease is non

cancellable. If the equipment is not suitable, the lessee will suffer. Cancellation of
lease is possible only at a very heavy cost.

3. The lessee is not the owner of the leased asset He is thus deprived of the
residual value of assets. He is not even entitled to any improvement done by him.
On the expiry of the lease period, the leased equipment reverts to the lessor.

4. Serious consequences of default: It the lessee defaults in paying lease rentals,

the consequences for him are far more serious. The lessor may terminate the lease
and repossess the equipment. In case of finance lease, the lessee has to pay for
damages and accelerated rental payments.

5. Leased assets do not figure in balance sheet. So there is an effective

understatement of assets value. However, leased assets are disclosed by way of
footnote to the balance sheet

6. Lease financing costs more than debt financing.

7. Benefits of appreciation in the value of real assets like land and buildings are
not available to lessee.

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Hire Purchase

A hire purchase is a kind of installment purchase where the businessman (hirer)

agrees to pay the cost of the equipment in different installments over a period of
time. This installment covers the principal amount and the interest cost towards
purchasing an asset for the period the asset was in use. The hirer gets possession
of the asset when the hire purchase agreement is signed. He becomes the owner
of the equipment after he makes the last payment. The hirer has the right to
terminate the contract anytime before taking the title or the ownership of the
asset.

The term hire purchase is commonly used in the United Kingdom and it's more
commonly known as an installment plan in the United States.

Hire Purchase price consists of two elements: (i) cash price; and (ii) interest. Cash
price is an expenditure incurred for the acquisition of an asset towards payment
of capital (principal) amount and (ii) interest is a expense in the nature of revenue
for delay in making the full payment.

Advantages of Hire Purchase Agreements

Hire purchase agreements allow companies with inefficient working capital to

deploy assets. It can also be more tax-efficient than standard loans because the
payments are booked as expenses—though any savings will be offset by any tax
benefits from depreciation.

Businesses that require expensive machinery—such as construction,

manufacturing, plant hire, printing, road freight, transport, and engineering—may
use hire purchase agreements, as could startups that have little collateral to
establish lines of credit.

A hire purchase agreement can flatter a company's return on capital employed

(ROCE) and return on assets (ROA). This is because the company doesn't need to
use as much debt to pay for assets.

Disadvantages of Hire Purchase Agreements

Hire purchase agreements usually prove to be more expensive in the long run
than making a full payment on an asset purchase. That's because they can have
much higher interest costs. For businesses, they can also mean more
administrative complexity.

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In addition, hire purchase and installment systems may tempt individuals and
companies to buy goods that are beyond their means. They may also end up
paying a very high-interest rate, which does not have to be explicitly stated.

Rent-to-own arrangements are also exempt from the Truth in Lending Act
because they are seen as rental agreements instead of an extension of credit.

Hire purchase buyers can return the goods, rendering the original agreement void
as long as they have made the required minimum payments.

However, purchasers suffer a huge loss on returned or repossessed goods,

because they lose the amount they have paid towards the purchase up to that
point.

Types Of Hire Purchases

There are two main types of hire purchases based on the functional purpose of
the asset involved. These types are the consumer and industrial hire purchase
agreements.

Difference between Lease Financing and Hire Purchase

Ownership of the Asset

In a lease, ownership lies with the lessor. The lessee has the right to use the
equipment and does not have the option to purchase it. Whereas in hire
purchase, the hirer has the opportunity to purchase. The hirer becomes the owner
of the asset/equipment immediately after he pays the last installment.

Depreciation

In lease financing, the depreciation is claimed as an expense in the lessor’s books.

On the other hand, the depreciation claim is allowed to the hirer in the case of the
hire purchase transaction.

Rental Payments

The lease rentals cover the cost of using an asset. Commonly, it is derived from
the cost of an asset over the asset life. In the case of hire purchase, installment
includes the principal amount and the interest for the time period the asset was in
use.

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Duration

Generally, lease agreements are for a longer duration and for more enormous
assets like land, property, etc. Hire Purchase agreements are primarily for shorter
duration and cheaper assets like hiring a car, machinery, etc.

Tax Impact

In the lease agreement, the total lease rentals are shown as expenditures by the
lessee. The hirer claims the asset’s depreciation as an expense in hire purchase.

Repairs and Maintenance

Repairs and maintenance of the asset in the financial lease are the lessee’s
responsibility, but in an operating lease, it is the lessor’s responsibility. In hire
purchase, the responsibility lies with the hirer.

The Extent of Finance

Lease financing can be called the complete financing option in which no down
payments are required, but in the case of hire purchase, normally, an amount of
margin money is required to be paid upfront by the hirer. Therefore, we call it
partial finance like loans, etc.

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14. Credit Rating and Credit Scoring
Credit Rating

A credit rating expresses the creditworthiness of a government or a business

whereas a credit score determines the creditworthiness of an individual.

A credit rating is expressed in a letter grade format such as Triple-A ratings for
those governments or corporations that have a healthy capacity for meeting all
financial commitments followed by a double-A, A, Triple-B, Double-B and so on,
until D for default. Pluses and minuses can also be added to these ratings.

An analysis of all credit risks that is associated with a financial entity is known as
credit rating. This is given to that particular company or entity based on their
credentials, as well as the extent to which their financial statements are sound,
based on the lending and borrowing that has been done by the company. This
rating is in the form of a detailed report and helps other companies or Rating
Agencies determine the solvency of that entity. Ratings are published by
numerous agencies such as, Moody’s Investors Service, Standard and Poor’s and
ICRA, based on detailed analysis.

Credit Score

A credit score is a 3 digit numeric representation of a individual’s

creditworthiness. These numbers range between 300 to 900. The closer the score
is to 900, the higher is the individual’s creditworthiness. An individual will have to
try to stay between 700 to 900 in order to have an optimum credit score. This
score is generated by a mathematical algorithm based on the information
provided in the credit report and is designed specifically, to predict risk.

The Reserve Bank of India has provided authorization to companies that have
registered under The Credit Information Companies (Regulation) Act, 2005 to
provide credit scores or ratings based on the past performances that have been
reported by numerous member credit institutions and banks. CIBIL or Credit
Information Bureau India Limited is India’s leading credit information bureau.
Other key players in India are Equifax and Experian. Credit scores are issued by the
above three bureaus. The most sought after bureau in India is CIBIL, since it is the
oldest player in the country, but lenders also use Equifax and Experian and hence
it is mandatory for lenders to provide data to all of the above bureaus.

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A credit score or rating is a direct indicator of the individual’s or company’s credit
health. In case a reliable credit rating or credit score is maintained, it makes it
easier for them to receive loans and additional credit cards without any hassle and
at terms that is favourable to the customer. A good score or rating is an indicator
that the individual is a low risk customer which is always an attractive prospect to
potential lenders.

Having a bad credit score or rating is highly undesirable in today’s competitive

economy. Individuals having a low credit score are deemed to be financially very
risky and will not be able to receive loans at good interest rates or flexible tenures.
Similarly, companies or governments that come with a bad credit rating are seen
to be risky and will deter other companies or governments from doing business
with them.

Difference between Credit Rating and Credit Score

A Credit Score and credit rating is sometimes used interchangeably but there are
certain significant differences. These are -

Credit scores are 3 digit numeric representation of an individual’s creditworthiness

and range from 300 to 900. The closer the score is to 900, higher is the
creditworthiness of that individual.

Credit Information Companies (CIC) and Credit Score

The Reserve Bank of India has provided authorization to companies that have
registered under The Credit Information Companies (Regulation) Act, 2005 to
provide credit scores or ratings based on the past performances that have been
reported by numerous member credit institutions and banks. CIBIL or Credit
Information Bureau India Limited is India’s leading credit information bureau.
Other key players in India are Equifax and Experian. Credit scores are issued by the
above three bureaus. The most sought after bureau in India is CIBIL, since it is the
oldest player in the country, but lenders also use Equifax and Experian and hence
it is mandatory for lenders to provide data to all of the above bureaus.

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A credit score or rating is a direct indicator of the individual’s or company’s credit
health. In case a reliable credit rating or credit score is maintained, it makes it
easier for them to receive loans and additional credit cards without any hassle and
at terms that is favourable to the customer. A good score or rating is an indicator
that the individual is a low risk customer which is always an attractive prospect to
potential lenders.

Credit Rating vs. Credit Score

Generally, ratings are for businesses and countries, scores are for individuals

The two terms might be used interchangeably in some cases, but there is a
distinction between them. A credit rating, expressed as a letter grade, conveys the
creditworthiness of a business or government. A numerical credit score, also an
expression of creditworthiness, can be used for individual consumers or small
businesses.

Credit scores for individuals have a range of 300 to 850.

Both ratings and scores are designed to show potential lenders and creditors a
borrower’s likelihood of repaying a debt.

They are created by independent third parties rather than by creditors or

consumers.

Credit scores are paid for by the entity requesting it as well as the creditor.

Credit ratings are expressed as letter grades and used for businesses and
governments.

Credit scores are numbers used for individuals and some small businesses.

An individual’s credit score is based on information from the three major credit
reporting agencies, and scores range from 300 to 850.

Credit ratings are produced by credit rating agencies, such as S&P Global.

CRAs (Credit Rating Agencies) in India

Credit Rating reflects the payback abilities of individuals or companies.

Credit rating is a numerical representation of the creditworthiness of an individual

or a business.

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A credit rating is an assessment of the creditworthiness of a borrower in general
terms or with respect to a particular debt or financial obligation. It can be
assigned to any entity that seeks to borrow money — an individual, corporation,
state or provincial authority, or sovereign government.

Evaluating the creditworthiness of an instrument comprises of both qualitative

and quantitative assessments, making credit rating far from a straightforward
mathematical calculation. A credit rating agency (CRA) provides independent
evidence and research-based opinion on the ability and willingness of the issuer
to meet debt service obligations.

In India, CRAs are regulated by SEBI. The Securities and Exchange Board of India
tightened disclosure standards for credit rating agencies while assigning ratings
to companies and their debt instruments. The regulator directed that rating
agencies must now disclose the liquidity position of a company being rated. If the
rating is assigned on the assumption of cash inflow, the agencies would need to
disclose the source of the funding. Rating agencies must disclose their rating
history and how the ratings have transitioned across categories. Credit rating
firms will also have to analyze the deterioration of liquidity and also check for
asset liability mismatch.

The following are some of important CRAs registered under SEBI.

CRISIL (formerly Credit Rating Information Services of India Limited) is an Indian

analytical company providing ratings, research, and risk and policy advisory
services and is a subsidiary of American company S&P Global.

CARE (Credit Analysis and Research Limited Ratings) commenced its operations in
the year 1993 has established itself as the leading credit rating agency of India.
The company was promoted by major Banks/ FIs (financial institutions) in India. In
the global arena CARE Ratings is a partner in ARC Ratings, an international credit
rating agency.

SMERA (Small and Medium Enterprises Rating Agency) . It is a joint enterprise by

SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and
some chief banks in India.

ONICRA (Onida Individual Credit Rating Agency of India) has been promoted by
well known ‗ONIDA‘ group. It is also known as Onicra Credit Rating Agency.

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Fitch (India Ratings & Research) – Ind-Ra –(India Ratings and Research) is a
100% owned subsidiary of the Fitch Group. Fitch Group is a global leader in
financial information services with operations in more than 30 countries. Fitch
Group is majority owned by New York based Hearst Corporation. Fitch Ratings Inc.
is an American credit rating agency and is one of the "Big Three credit rating
agencies", the other two being Moody's and Standard & Poor's.

ICRA Limited (formerly Investment Information and Credit Rating Agency of India
Limited) was set up in 1991 by leading financial/investment institutions,
commercial banks and financial services companies as an independent and
professional investment Information and Credit Rating Agency. The ultimate
parent company of international Credit Rating Agency Moody‘s Investors Service
is the indirect largest shareholder of ICRA.

BWR (Brickwork Ratings) was established in 2007 and is promoted by Canara

Bank. It offers ratings for bank loans, SMEs, corporate governance rating,
municipal corporation, capital market instrument, and financial institutions. It also
grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational
institutions, MFI, and MNRE. Brickwork Ratings is recognised as external credit
assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings
in India.

IVRPL (Infomerics Valuation and Rating Private Limited) is a full-service rating

agency. It provides rating services for the entire range of money market & capital
market instruments and borrowing programmes. Infomerics also rates various
schemes of Mutual Funds and Alternative Investment Fund.

Acuite Ratings & Research Limited is an institutionally promoted organisation

with a unique combination of country's leading public & private sector banks
along with a global data & analytics company as its shareholders.

“The Big 3 Credit Agencies”-Globally The following 3 known as ―The Big 3

Credit Rating Agencies.

1. Fitch - Fitch Ratings is a leading provider of credit ratings, commentary and

research. It provides value beyond the rating through independent and
prospective credit opinions, It offers global perspectives shaped by strong local
market experience and credit market expertise. Fitch Group is a global leader in
financial information, providing critical insights that inform better decision making
in financial markets.
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Fitch Group is comprised of: Fitch Ratings, a global leader in credit ratings and
research; Fitch Solutions, an authority in credit and macro intelligence providing
fixed-income products and services to the global financial community; and Fitch
Learning, a preeminent source of training and professional development. Fitch
Group is owned by Hearst, a leader in diversified media, information and services.

2. Moody’s - Moody's Investors Service, often referred to as Moody's, is the

bond credit rating business of Moody's Corporation, representing the company's
traditional line of business and its historical name. Moody's Investors Service
provides international financial research on bonds issued by commercial and
government entities

3. S&P Global Ratings (previously Standard & Poor's and informally known as
S&P) is an American credit rating agency (CRA) and a division of S&P Global that
publishes financial research and analysis on stocks, bonds, and commodities. S&P
is considered the largest of the Big Three credit-rating agencies.

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15. Mutual Funds
Mutual funds are collective investments that are professionally managed by an
expert. Its introduction in India took place when the Government launched the
Unit Trust of India (UTI) in 1963.

A Mutual fund is a pool of investments by different investors in securities such as

debt, equity or both. In simple words, it collects funds from investors like
individuals and institutions and invests them in bonds, stocks or other short-term
investment plans.

Generally, a fund manager oversees this fund and charges a minimal amount
called expense ratio for the same. Besides, the Securities and Exchange Board of
India or SEBI regulates and moderates the mutual funds industry like security
markets.

Types of Mutual Funds

These funds are categorised into several types depending on return, risk, time
horizon, size, and other factors. Below are 5 significant categories of funds:

Equity Funds

These are direct investments in shares that possess high risk in long term
investments but obtain an optimum return in the long run. Experts further divide
it into small, mid and large-cap based on a company’s size. Investors with a high-
risk appetite usually opt for these types of investments.

Hybrid Mutual Fund

Its other name is exchange-traded funds (ETFs) which invest in a mix of multiple
investments in bonds and stocks. Hybrid mutual funds invest both in debt and
equity. However, investors must choose a scheme considering their risk appetite.

Debt Mutual Funds

These are investments in debt securities that help investors achieve their short-
term investment goals. Debt mutual funds are usually low in risk and provide
moderate returns. Further, there are 16 subdivisions under these funds.

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Fixed-Income Funds

These funds include government bonds, corporate bonds, or other debt

instruments that provide fixed income to investors. Therefore, these are
appropriate for investors who opt for lower risks. The investors receive the interest
income from the fund manager in such types of funds.

Solution-Oriented Mutual Funds

Solution-oriented mutual funds are goal or solution-specific investments. For

example, such goals can be a child’s education or retirement plans. Therefore, one
must invest in such funds for a minimum of 5 years.

Benefits of Mutual Funds

Following are some essential benefits of mutual funds:

Investors can diversify their funds into several securities, such as debt and equity,
which help lower the risk.

There is no entry load to invest in mutual funds.

Investors possess complete transparency on several investments of their money.

They can also withdraw their investment partially or entirely depending on their
requirements.

Investors obtain expert management and advice to take care of their funds.

Mutual funds provide flexibility in switching between funds.

Investors attain tax benefits by investing their money in securities.

Importance of Mutual Funds in Economic Progress

Mutual funds, like other security investments, can be an instrument of economic

development. Below are some pointers on how it helps in it:

A mutual fund helps accumulate money for investment purposes which stimulate
industries in the economy.

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It channelises and deploys the public’s small savings in the economy through
investments.

In addition, it defies the age-old idea of keeping cash in the house.

It helps in capital accumulation for developing countries like India to support

development.

A mutual fund also plays a crucial role in creating an investment-friendly

environment in India.

Lastly, it is essential to generate employment.

Related Points

1) Regulator of Mutual Funds - Securities and Exchange Board of India is a

statutory body, established in 1992, regulating mutual funds and India’s capital
market.

2) Expense Ratio is the sum of expenses involved in a mutual fund scheme. It

calculates the per-unit cost of fund management that the fund house charges
from investors. Generally, it stays between 1.5% to 2.5% of the scheme’s net assets
in a week.

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16. Insurance Products
Insurance is a legal agreement between an individual and the insurance company,
under which, the insurer promises to provide financial coverage (Sum assured)
against contingencies for an amount (premium). The types of insurance in India
can be broadly divided into two categories:

General Insurance

Life Insurance

Different Types of Insurance Policies Available in India

Following are the types of insurance available in India:

1. General Insurance

Following are some of the types of general insurance available in India:

Health Insurance

Motor Insurance

Home Insurance

Fire Insurance

Travel Insurance

2. Life Insurance

There are various types of life insurance. Following are the most common types of
life insurance plans available in India:

Term Life Insurance

Whole Life Insurance

Endowment Plans

Unit-Linked Insurance Plans

Child Plans

Pension Plans

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Types of insurance

General insurance policies are one of the types of insurance that offer coverage
in the form of sum assured against the losses incurred other than the death of the
policyholder. Overall, general insurance comprises different types of insurance
policy that offer financial protection against losses incurred due to liabilities such
as bike, car, home, health, and similar. These various general insurance types of
insurance policies include:

Health Insurance

Health insurances are types of insurance policy that covers the expenses incurred
due to medical care. Health insurance plans either pay or reimburse the amount
paid towards the treatment of any illness or injury. Different types of insurance
policy cover varied medical care expenses.

It usually offers protection against:

a) Hospitalization
b) Treatment of critical illnesses
c) Medical bills post hospitalization
d) Daycare procedures
There are a few types of health insurance plans also cover the cost of resident
treatment and pre-hospitalization expenses. Rising costs of healthcare in India Is
making health insurance a necessity.

Different types of health insurance plans available in India include,

1) Individual Health Insurance: Offers coverage to only an individual.

2) Family Floater Insurance: Allows your entire family to get coverage under a
single plan, which usually covers husband, wife, two children.

3) Critical Illness Cover: Specialized types of health insurance that offers coverage
against various life-threatening illnesses like stroke, heart attack, kidney failure,
cancer, and similar others. Policyholders get a lump sum amount on diagnosis of a
critical illness.

4) Senior Citizen Health Insurance: These types of insurance plans cater to all
individuals above 60 years of age.

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5) Group Health Insurance: Offered by an employer to its employee.

6) Maternity Health Insurance: This insurance type covers medical expenses for
prenatal, post-natal, and delivery stage, offering protection to both the mother
and the newborn.

7) Personal Accident Insurance: These types of insurance plans cover financial

liabilities arising due to accidental injuries, disability, or death.

Motor Insurance

Motor insurances are types of insurance that offer financial assistance in case your
bike or car get involved in an accident. Various types of Motor insurance policies
in India include:

1) Car Insurance: Individually owned four-wheelers are covered under this plan.
The car insurance types include- third-party insurance and comprehensive cover
policies.

2) Bike Insurance: These are types of insurance policy where individually owned
two-wheelers are covered against accidents.

3) Commercial Vehicle Insurance: This is one of the insurance types, which offers
coverage to any vehicle used for commercial purposes.

Home Insurance

As the name suggests, a home insurance policy offers comprehensive protection

to the contents and structure of your house against any physical destruction or
damage. In other words, this insurance type will provide coverage against any
natural and human-made calamity, such as fire, earthquake, tornado, burglaries,
and robbery.

Different types of home insurance policies include:

1) Home Structure/Building Insurance – Protects the structure of the house

against damage during any calamity.

2) Public Liability Coverage – Provides coverage against any damage to a guest or

third-party on the insured residential property.

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3) Standard Fire and Special Perils Policy – Coverage against damages caused due
to fire outbreaks, natural calamities (e.g., landslides, rockslides, earthquakes,
storms, and floods), and anti-social human-made activities (e.g., explosions,
strikes, and riots).

4) Personal Accident – Provides financial coverage to you and your family against
any kind of permanent dismemberment or sudden demise to the insured
individual, anywhere around the world.

5) Burglary and Theft Insurance – Provides compensation for stolen goods in case
of a burglary or theft.

6) Contents Insurance – Provides compensation for loss of furniture, vehicles, and

other appliances in case of a fire, theft, flood, or riots.

7) Tenants’ Insurance – Provides financial protection to you (as a tenant) against

any loss of personal property living in a rented house.

8) Landlords’ insurance – Provides coverage to you (as a landlord) against

contingencies such as public liability and loss of rent.

Fire Insurance

Fire insurance policies are different types of insurance coverages that compensate
any losses incurred due to a fire breakout with a sum assured. These types of
insurance policy usually provide a significant amount of coverage to help both
individuals and companies to reopen their places after incurring extensive
damage due to fire. These insurance types cover war risk, turmoil, riots losses as
well.

Different types of fire insurance in India are –

1) Valued policy

2) Specific Policy

3) Floating Policy

4) Consequential Policy

5) Replacement Policy

6) Comprehensive Fire insurance policy

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Travel Insurance

Travel Insurance is a type of insurance policy, providing financial protection for

you and your loved ones while you are visiting any place in India or abroad.
Whether you are travelling solo or with your loved ones, the travel insurance
coverage will help ensure that you have a peaceful journey.

The travel insurance policy coverage takes care of any issues that you may face
during your trip such as loss of baggage, flight cancellations, loss of passport,
personal and medical emergencies. Different types of travel insurance policies
include:

1) Domestic Travel Insurance: Within the country

2) International Travel Insurance: For any trips or vacations outside of India

3) Individual Travel Insurance: If you are travelling alone

4) Student Travel Insurance: If you are going abroad for further studies

5) Senior Citizen Travel Insurance: For senior citizens, ageing between 60 to 70

years

6) Family Travel Insurance: For any family vacations

Life Insurance

Life insurance plans offer coverage against unfortunate events like death or
disability of the policyholder. Besides financial protection, there are various types
of life insurance policies that allow the policyholders to maximize their savings
through regular contributions into different equity and debt fund options.

You can choose a life insurance policy to secure your family's financial future
against life's uncertainties. The policy coverage comprises of a large amount,
which is payable to your loved ones if anything happens to you. With this
insurance type, you have the flexibility to choose the life insurance policy period,
coverage amount, and payout option based on the financial requirements.

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Different types of life insurance policy are as follows:

Term Life Insurance

Whole Life Insurance

Endowment Plans

Unit-Linked Insurance Plans

Child Plans

Pension Plans

Term Life Insurance Plans

Term insurance is the purest and most affordable among the types of insurance
policy in which, you can opt for a high life cover for a specific period. You can
secure your family’s financial future with a term life insurance plan by paying a low
premium (term insurance plans generally do not have any maturity value, and
thus, offer lower rates of premium than other life insurance products.)

If anything happens to you within the policy period, your loved ones would
receive the agreed Sum Assured as per the payout option chosen (some term
insurance types offer multiple payout options as well)

Whole Life Insurance Plans

Whole life insurance plans, also known as ‘traditional’ life insurance plans, provide
coverage for the entire life of the insured individual, as opposed to any other life
insurance instrument that offers coverage for a specific number of years.

While a whole life insurance plan offers to pay a death benefit, the plan also
contains a savings component, which helps accrue a cash value throughout the
policy term. The maturity age for whole life insurance policy is 100 years. In case,
the insured individual lives past the maturity age, the whole life plan will become
matured endowment.

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Endowment Plans

Endowment plans essentially provide financial coverage to the policyholder

against life’s uncertainties, while allowing them to save regularly over a certain
period. Upon maturity of the endowment plan, the policyholder receives a lump
sum amount if he or she survives the policy term.

If anything happens to you (as Life Insured), the life insurance endowment policy
pays the complete Sum Assured to your family (beneficiaries)

Unit-Linked Insurance Plan (ULIP)

Unit Linked Insurance Plans are types of insurance policy that offer both
investment and insurance benefits under a single policy contract. A portion of the
premium that you pay towards a Unit Linked Insurance Plan is allocated to a
variety of market-linked equity and debt instruments.

The remaining premium contributes towards providing the life cover throughout
the policy tenure. In this investment-cum-insurance type product, you have the
flexibility to choose the allocation of premium into different instruments as per
your financial requirements and market risk appetite.

Child Plans

Child plans are types of insurance policy that helps you financially secure your
child’s life goals such as higher education and marriage, even in your absence. In
other words, child plans offer a combination of savings and insurance benefits
that aid you in the financial planning for your child’s future needs at the right age.

The sum of money received on Maturity under this insurance type can be used to
fulfill the financial requirements of your child.

Pension Plans

Pension plan , also known as retirement plan, is a type of investment plan that
aids you in accumulating a portion of your savings over an extended period.

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Essentially, a pension plan helps you deal with financial uncertainties post-
retirement, by ensuring that you continue to receive a steady flow of income even
after your working years are over.

In other words, a pension plan can be a type of insurance in India that allows you
to create a financial cushion for your life post-retirement, in which you contribute
a specific amount of money regularly until your retirement. Subsequently, the
accumulated amount is given back to you as annuity or pension at regular
intervals.

Tax Benefits of Various Types of Insurance in India

Amount paid toward premium for different types of life insurance plans is tax-
deductible

Under Section 80C of Income Tax Act, 1961, the premium payable towards all
types of life insurance plans is tax-deductible up to Rs 1.5 lakh.

Under Section 80D of Income Tax Act, 1961, the premium payable towards all
types of health insurance plans is tax-deductible, subject to a maximum of Rs
25,000 for self, wife and children and additional 25,000 for parents having age
below 60 years (the tax savings can go up to Rs 50,000 for senior citizens
individual and 50000 if parents are senior citizens. Total deduction can go upto
1Lakh).

Factors Defining Your Life Insurance Coverage

Although Life insurance coverage and its premiums depend upon various factors,
but some important ones are:

Age of the policyholder

Health conditions – both current and history

Occupation

Smoking and drinking habits

Type of insurance policy

Claim history

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17. Pension Products
At a younger age, most of us do not think of retirement planning as a financial
priority. But, as you approach the age of retirement, you may find yourself
hurrying to save enough money for it. It is in your best interest to create an
efficient financial plan today by finding the type of pension plan suitable to you.

Types of Pension Plans

Understanding different types of pension plans available in the market is a critical

step when you begin making retirement plans. It provides a closer look into how a
particular type of pension scheme can benefit you, in particular. It also gives you
the necessary tools to envision life after retirement.

Your financial requirements are likely to transform in the future due to an array of
reasons. Primarily, the loss of an income source is the most concerning thing
about retirement for most people. Finding the right type of pension plan can ease
your worries considerably.

Common Types of Pension Plans In India:

1. Deferred Annuity

The deferred annuity type of pension plan lets the policyholders receive annuity
on a later date through single or regular premium payments. Over the course of
the policy, they can save a substantial amount of money to be received as a
pension. You can also avail of tax benefits with this type of pension plan.

2. Immediate Annuity

Under the immediate annuity type of pension, you deposit a lump sum amount
and receive the annuities straightaway. It is up to you to choose from the range of
annuity options and the amount to invest. In case of an unfortunate incident, the
nominee is entitled to receive the benefits.

3. Annuity Certain/Guaranteed Period Annuity

In this type of pension plan, the policyholder receives the annuity for a specific
number of years. They can choose the period of payment at their convenience.
The nominee of this type of pension plan receives the payments in case of the
insured's demise.

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4. National Pension Scheme (NPS)

The Government of India provides different types of pension plans for the retired
population. It is also an opportunity for central and state government employees,
except armed forces, to save for retirement. With this type of pension plan, the
employees can invest at regular intervals in their pension account, which will be
payable post retirement.

5. Pension Plans with Life Cover

The pension plans include life cover as well as an investment component. It means
that the family members will receive a lump-sum payment upon the policyholder's
demise.

However, it is essential to note that the insurance benefit amount may not be
substantial with this type of pension plan.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Pradhan Mantri Vaya Vandana Yojana is an insurance policy-cum- pension
scheme that provides alternative avenues of income to senior citizens of the
country. Backed by the Indian government, this pension plan is provided by Life
Insurance Corporation (LIC) which caters to one’s need for post-retirement
financial planning.

Individuals, more than 60 years of age can avail this scheme. PMVVY, which was
earlier available from 4th May 2017 to 31st March 2020, was recently (Govt. Press
Release dated May 20, 2020) extended by the government for another three
financial years till 31st March 2023.

PMVVY gives a guaranteed pension pay out at a specified rate for 10 years. This
scheme will provide an assured return of 7.4 per cent per annum which will be
payable monthly for the entire duration of 10 years.

Features and Benefits of PMVVY

Retirement Financial Security via Pension Payment

Under Pradhan Mantri Vaya Vandana Yojana, individuals who have availed of this
pension plan are allowed to receive a fixed amount at the end of a certain period
chosen by an individual for a maximum term of 10 years.

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Assurance of Returns

PM Vaya Vandana Yojana will initially provide an assured rate of return of 7.40 %
per annum for the year 2022-23 per annum and thereafter to be reset every year.

Annual reset of the assured rate of interest with effect from April 1st of the
financial year in line with the revised rate of returns of the Senior Citizens Saving
Scheme (SCSS) up to a ceiling of 7.75% with a fresh appraisal of the scheme on
breach of this threshold at any point.

Periodic Payout Options

Individuals can opt for monthly, quarterly, half-yearly or annual payout with the
plan as per their financial requirements and convenience. The first payment must
be performed immediately after plan purchase, depending on one’s chosen
payment mode. For example, if a pensioner has chosen a quarterly mode of
payment, he/she should receive the first payment within 3 months from the date
of policy purchase.

Maturity Benefit

Pradhan Mantri Vy Vandna Yojna also comes with the maturity benefit of
receiving a lump sum purchase price of the plan along with the last instalment
payout. This facility is valid for the survival of a pensioner until this policy tenure’s
end.

Death Benefit

In the event of a pensioner’s death during the policy term, his/her beneficiary is
entitled to receive an entire purchase amount as a claim on submitting required
documents.

Surrender Value

Considering the monetary requirement to avail of the treatment of critical

illnesses for self or spouse, this scheme also allows a pensioner to surrender the
policy. Policyholders can receive 98% of the purchase value during premature exit
from the policy term.

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Free Lock-in Period

After purchasing a policy, if individuals are not comfortable with the terms and
conditions mentioned in the contract, they are allowed to return this scheme
within 30 days from the date of receipt in case of online purchase. Yet, the free
lock-in period for offline purchases is 15 days starting from the policy purchase
date. A reason for objection must also be enclosed while returning this policy.

The entire purchasing amount after a deduction of any applicable stamp duty or
released pension payment needs to be refunded within its free lock-in period.

Loan Facility

After completing 3 successful policy years, individuals can avail loan against a
Pradhan Mantri Vaya Vandana Yojana investment. Pensioners can borrow a
maximum of 75% of the purchase amount as a loan. Interest calculated on the
loan is recovered from the pension payment as per the chosen frequency of loan
repayment. The interest payable gets due on the pension payment date.

Furthermore, during maturity or surrender, the loan outstanding will be recovered

from its claim amount.

Exclusion

The pension-cum-insurance scheme also comes with a unique exclusion to this

policy’s purchase price return. Under this exclusion, the entire purchase price is
payable if a policyholder commits suicide.

Eligibility Criteria for the PM Vaya Vandana Yojana

Minimum age of entry: The individual must be 60 years or higher.

Maximum age of entry: There is no limit.

Duration of the policy: The tenure of the policy is 10 years.

Minimum pension that is earned: The minimum pension for a month, quarter,
half-yearly, and yearly are Rs.1,000, Rs.3,000, Rs.6,000, and Rs.12,000, respectively.

Maximum pension that can be earned: Rs.10,000, Rs.30,000, Rs.60,000, and

Rs.1,20,000 is the maximum pension that can be earned for a month, quarter, half-
yearly, and yearly, respectively.

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The entire family is considered when deciding the maximum pension ceiling. The
family under this scheme consists of the pensioner, his/her dependents, and
spouse.

Pension Fund Regulatory and Development Authority (PFRDA)

Pension Fund Regulatory and Development Authority (PFRDA) is a statutory

regulatory body set up under PFRDA Act enacted on 01.02.2014 with an objective
to promote old age income security and protect the interests of NPS subscribers.

Pension Fund Regulatory and Development Authority (PFRDA) is the regulatory

body for overall supervision and regulation of pensions in India. It operates under
the jurisdiction of Ministry of Finance in the Government of India. It was
established in 2003 based on the recommendations of the Indian government
OASIS report and was part of the establishment of the Indian National Pension
Scheme.

In 1999, the Government of India had commissioned a national project titled

"OASIS" (an acronym for old age social & income security) to examine policy
related to old age income security in India. Based on the recommendations of the
OASIS report the Government of India introduced a new Defined Contribution
Pension System for the new entrants to Central/State Government service, except
to Armed Forces, replacing the existing system of Defined Benefit Pension System.

On 23 August 2003, the Interim Pension Fund Regulatory & Development

Authority (PFRDA) was established through a resolution by the Government of
India to promote, develop and regulate pension sector in India. The contributory
pension system was notified by the Government of India on 22 December 2003 to
the National Pension System (NPS) with effect from 1 January 2004. The NPS was
subsequently extended to all citizens of the country with effect from 1 May 2009
including self employed professionals and others in the unorganized sector on a
voluntary basis.

The Pension Fund Regulatory & Development Authority Act was passed on 19
September 2013 and the same was notified on 1 February 2014. PFRDA regulates
the NPS, subscribed by employees of Govt. of India, State Governments and by
employees of private institutions/organizations & unorganized sectors. The
PFRDA ensures the orderly growth and development of pension market.

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National Pension System (NPS)

National Pension System (NPS) is a voluntary, defined contribution retirement

savings scheme designed to enable the subscribers to make optimum decisions
regarding their future through systematic savings during their working life. NPS
seeks to inculcate the habit of saving for retirement amongst the citizens. It is an
attempt towards finding a sustainable solution to the problem of providing
adequate retirement income to every citizen of India.

The NPS was for prospective employees; it was made mandatory for all new
recruits joining government service from January 1, 2004.

Contributions:

The defined contribution comprised 10 percent of the basic salary and dearness
allowance by the employee and a matching contribution by the government this
was Tier 1, with contributions being mandatory.

In 2019, the government increased its contribution to 14 percent of the basic

salary and dearness allowance.

Schemes under the NPS are offered by nine pension fund managers

It is sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Adita Birla, Tata, and
Max.

Under NPS, individual savings are pooled in to a pension fund which are invested
by PFRDA regulated professional fund managers as per the approved investment
guidelines in to the diversified portfolios comprising of Government Bonds, Bills,
Corporate Debentures and Shares. These contributions would grow and
accumulate over the years, depending on the returns earned on the investment
made.

At the time of normal exit from NPS, the subscribers may use the accumulated
pension wealth under the scheme to purchase a life annuity from a PFRDA
empanelled Life Insurance Company apart from withdrawing a part of the
accumulated pension wealth as lump-sum, if they choose so.

NRI can open an NPS account, however contributions made by NRI are subject to
regulatory requirements as prescribed by RBI and FEMA from time to time.

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Benefits of NPS

Flexible- NPS offers a range of investment options and choice of Pension Funds
(PFs) for planning the growth of the investments in a reasonable manner and
monitor the growth of the pension corpus. Subscribers can switch over from one
investment option to another or from one fund manager to another.

Simple – Opening an account with NPS provides a Permanent Retirement

Account Number (PRAN), which is a unique number and it remains with the
subscriber throughout his lifetime. The scheme is structured into two tiers:

Tier-I account: This is the non-withdrawable permanent retirement account into

which the regular contributions made by the subscriber are credited and invested
as per the portfolio/fund manager chosen of the subscriber.

Tier-II account: This is a voluntary withdrawable account which is allowed only

when there is an active Tier I account in the name of the subscriber. The
withdrawals are permitted from this account as per the needs of the subscriber as
and when required.

Portable- NPS provides seamless portability across jobs and across locations. It
would provide hassle-free arrangement for the individual subscribers while he/she
shifts to the new job/location, without leaving behind the corpus build, as
happens in many pension schemes in India.

Well Regulated- NPS is regulated by PFRDA, with transparent investment norms,

regular monitoring and performance review of fund managers by NPS Trust. The
account maintenance costs under NPS are the lowest as compared to similar
pension products across the globe. While saving for a long-term goal such as
retirement, the cost matters a lot as the charges can shave off a significant
amount from the corpus over 35-40 years of investment period.

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Dual benefit of Low Cost and Power of compounding: Till the retirement,
pension wealth accumulation grows over the period of time with a compounding
effect. The account maintenance charges being low, the benefit of accumulated
pension wealth to the subscriber eventually become large.

Ease of Access: The NPS account is manageable online. An NPS account can be
opened through the eNPS portal. Further contributions can be also be made
online through the following eNPS portals of CRAs:

NSDL CRA

Kfintech CRA

CAMS CRA

Once the PRAN account is opened, an online login id and password is provided to
the subscriber. He/she can login and view/manage his NPS account online, over a
click.

Disadvantages of the NPS

The NPS scheme has its own set of disadvantages when we compare it to the
other investment/pension options available.

Withdrawal Limits

Along with the NPS lock-in period, withdrawals from the pension account also
have restrictions. NPS restricts all kinds of withdrawals before the subscriber
reaches the age of 60 years. The subscriber can make the first withdrawal from
NPS after 10 years of opening the account, and a total of 3 withdrawals, till they
reach the age of 60 years. The withdrawal cannot be more than the total sum of
all the contributions made by the subscriber.

Taxation at the Time of Withdrawal

The NPS corpus, which the subscriber can use for buying an annuity or for
drawing pensions, is taxable when the schemes mature. 60% of the investment in
the NPS is taxed by the Government of India, while 40% escapes taxation.

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Account Opening Restrictions

A person can maintain a single NPS account through an NPS CRA login in their
lifetime. While the PRAN can be easily ported across geography and jobs, 1 single
individual will get a single PRAN.

Limited Exposure to Equities

The investment limit on equities has been confined to 75%. This may be a
significant issue for individuals in their 20's-30's. This implies a possible loss of
opportunity to get exposure to the equity markets.

Mandatory Annuity

The withdrawal from Tier 1 account is restricted as it is the primary account for
pension savings. At the time of maturity, one can withdraw 60% of the funds, and
the remaining are used to buy an annuity. The returns of annuity are not tax
exempted.

NPS Lock-in Period

Since NPS is a retirement product, the NPS lock-in period is till retirement.

Complexity towards Choosing the Best NPS Fund Manager

Many people are not aware of the financial terms relating to equities, debt,
securities, and others. Hence, they fail to choose the best NPS fund manager for
their NPS investments.

Criticism of NPS

Many states, including Himachal Pradesh, Rajasthan, Chhattisgarh, and Jharkhand,

all non-BJP ruled, have reverted back to OPS. One of the major arguments for
bringing back OPS is that they want to save their fiscal resources.

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More fiscal space now

NPS was not implemented retroactively. NPS is for employees who started
working for the government in 2004 or who retired after that date. If the average
age of these employees when they joined is assumed to be 30, the first cohort of
NPS retirees will be generated in 2034. (assuming a retirement age of 60). Thus,
under the OPS, the liability to pay for this cohort of employees will come in 2034
and not now. However, under the NPS, states have to presently set aside funds in
their pension funds as their contribution.

Employees demand

A section of government employees says that by bringing in the NPS, the

government is putting the social security of workers at stake. NPS is not as
attractive as OPS for them. Under the new mechanism, employees will be required
to deposit 10% of the basic pay, along with the dearness allowance, as their
contribution to the pension corpus. Moreover, NPS does not offer GPF (General
Provident Fund).

Another issue with the new scheme is the uncertain amount of the pension. Under
NPS, the pay-out is market-linked and return-based, unlike OPS, where it is
predetermined.

Under OPS, the employees need not contribute anything to their pensions, so
they have more cash as a monthly salary.

Political angle

One must also understand that government employees are a big vote bank. Thus,
restoration of the older scheme has become a big agenda item in the election
manifestos of political parties.

OPS Rollback has been a big political issue, with several parties echoing the
demand of employees in hope of banking handsome votes.

The central government recently decided to offer a one-time option for the "Old
Pension Scheme" to a select group of central government employees. The move
was initiated in response to various representations, references, and court
decisions.

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According to the order, public employees who are eligible for the option but
choose not to use it by the deadline will remain covered by the National Pension
System.

Employees who joined the central government before December 22, 2003, the
date the National Pension System (NPS) was announced, are eligible to join the
old pension scheme under the Central Civil Services (Pension) Rules, 1972 (now
2021).

By August 31, 2023, the select group of government employees will be able to opt
into the Old Pension Scheme. Once exercised, the option is final.

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18. Para Banking and Financial Services
Para-banking activities are those a bank engages in that are not part of its regular
business operations (such as deposits, withdrawals, etc).

Banking activities include serving as trustees of pension funds, providing portfolio

management services, operating money market mutual funds, underwriting PSU
bonds, investing in venture capital funds, and so on.

Para banking activities are the activities that are done by a Bank apart from its
normal day-to-day activities (like deposits, withdrawals, etc.).

Important Banks like HDFC Bank, State Bank of India, and many such high-market
capitalization banks have subsidiaries that offer numerous financial services such
as dealing with mutual funds, investing in venture capital funds (VCF), leasing
equipment, etc. These services are known as para banking services

Types of Banking Activities

Different types of Banking Activities are given below

1. Payment and Remittance Services

2. Overdraft

3. Currency Exchange

4. Consultancy

5. Online Banking

6. Mobile Banking

7. Home Banking

8. Credit and Debit Cards

9. Lockers

10. Money Transfer

11. Investment Banking

12. Wealth Management

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The Para Banking activities differ from the Normal Bank works.

Global Debit Cards, Global Credit Cards, Bancassurance, Life insurance products,
Non-life insurance products, and cash management are examples of para banking
activities. Here is the list of important para bank services of the commercial banks.

Sponsor to Infrastructure Debt Funds

Investment in Venture Capital Funds

Insurance business

Portfolio management services

Pension fund management

Mutual funds business

Money market mutual funds underwriting of bonds of PSUs

Retailing of Government Securities

Referral Services

Safety Net Schemes

Primary Dealership Business

Equipment leasing, Hire Purchase business, and Factoring services

Purpose of Para Banking Services:

To provide a framework of rules/regulations/instructions to the Scheduled

Commercial Banks for undertaking certain financial services or para banking
services as permitted by RBI, excluding the issue of credit, debit, and pre-paid
cards for which a separate Master Circular has been issued.

Banks should adopt adequate safeguards and implement the following guidelines
in order to ensure that the financial services or para banking activities undertaken
by them are run on sound and prudent lines.

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Difference between PARA Bank and Para Banking.

PARA Bank (wherein PARA stands for Public Sector Asset Rehabilitation Agency). It
is also known as ‘Bad Bank.’ Toxic assets can be removed from banks books and
transferred to Bad Bank which has the sole purpose of aiding the recovery of risky
assets.

Para Banking services are the works of banks apart from their normal day-to-day
branch works. Some examples of the para banking services include
Bancassurance, mutual fund business, investment in venture capital funds,
Retailing of Government Securities, Safety Net Schemes, Referral Services, etc.

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19 REITs and Inv!Ts
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
were introduced in the US during the 1960s and given a nod to be launched in
India by the Securities and Exchange Board of India (SEBI) in 2014.

While both REITs and InvITs are traded over the stock exchange, REITs are more
liquid since they have a lower unit price compared to InvITs. Also, more familiarity
with the real estate sector as compared to infrastructure makes it an attractive
option to retail investors.

Infrastructure Investment Trusts (InvIT)

An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables

direct investment of small amounts of money from possible
individual/institutional investors in infrastructure to earn a small portion of the
income as return.

InvITs work like mutual funds or real estate investment trusts (REITs) in features.

InvITs can be treated as the modified version of REITs designed to suit the specific
circumstances of the infrastructure sector.

They are similar to REIT but invest in infrastructure projects such as roads or
highways which take some time to generate steady cash flows.

Real Estate Investment Trusts (REIT)

A REIT is roughly like a mutual fund that invests in real estate although the
similarity doesn’t go much further.

The basic deal on REITs is that you own a share of property, and so an appropriate
share of the income from it will come to you, after deducting an appropriate share
of expenses.

Essentially, it’s like a group of people pooling their money together and buying
real estate except that it’s on a large scale and is regulated.

The obvious pitch for a REIT is that it enables individuals to generate income and
capital appreciation with money that is a small fraction of what would be required
to buy an entire property.

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However, the resemblance to either mutual funds or to owning property ends
there.

According to Indian regulation on REITs, these are meant to primarily own

finished and rented out commercial properties –– 80 per cent of the investments
must be in such assets. That excludes a real estate that is under development.

Need for InvITs and REITs

Infrastructure and real estate are the two most critical sectors in any developing
economy.

A well-developed infrastructural set-up propels the overall development of a

country.

It also facilitates a steady inflow of private and foreign investments, and thereby
augments the capital base available for the growth of key sectors in an economy,
as well as its own growth, in a sustained manner.

Given the importance of these two sectors in the country, and the paucity of
public funds available to stimulate their growth, it is imperative that additional
channels of financing are put in place.

SEBI rule

SEBI said the issuer will have to disclose objects of the issue, related-party
transactions, valuation, financial details, review of credit rating and grievance
redressal mechanism in the placement document.

The SEBI had first notified REITs and InvIT Regulations in 2014, allowing setting up
and listing of such trusts which are popular in some advanced markets.

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20. Miscellaneous Concepts
Gilt-Edged Market

The Gilt-edged market refers to the market for government and semi-government
securities, backed by the RBI. The term gilt-edged means ‘of the best quality’. It is
known so because the government securities do not suffer from the risk of default
and are highly liquid. The RBI is the sole supplier of such securities. These are
demanded by commercial banks, insurance companies, provident funds, and
mutual funds.

The gilt-edged market may be divided into two parts- the Treasury bill market
and the government bond market. Treasury bills are issued to meet short-term
needs for funds of the government, while government bonds are issued to finance
long-term developmental expenditure.

Commercial Bills

Commercial Bills are also called Trade Bills or Bills of Exchange. Commercial bills
are drawn by one business firm to another in lieu of credit transactions. It is a
written acknowledgment of the debt by the maker directing to pay a specified
sum of money to a particular person. They are short-term instruments generally
issued for 90 days. These are freely marketable. Banks provide working capital
finance to firms by purchasing the commercial bills at a discount; this is called
‘discounting of bills’.

Listing

Listing means the formal admission of securities of a company to the trading

platform of the Exchange. It is a significant occasion for a company in the journey
of its growth and development. It enables a company to raise capital while
strengthening its structure and reputation.

Trading, Clearing and Settlement

The trading in securities is buying and selling of securities listed on the recognized
stock exchanges.

The clearing is a process of determination of obligations of member-brokers by

the stock exchanges after which the same are discharged by the concerned
parties by settlement.

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The settlement is a process of settling of transactions in securities between buyers
and sellers by exchange of money and securities respectively.

NEAT (National Exchange for Automated Trading)

National Exchange for Automated Trading (NEAT) NEAT is a screen-based trading

system. NSE also offers “NEAT Plus” package that provides members trading in
multiple markets on the exchange with a unified trading interface.

In order to provide efficiency, liquidity and transparency, NSE introduced, a

nationwide, on-line, fully-automated Screen based trading system (SBTS) in
November 1994 known as National Exchange for Automated Trading (NEAT)
system.

BSE’s BOLT (BSE's Online Trading System)

Bombay Stock Exchange's trading system is popularly known as BOLT (BSE's

Online Trading System). The BSE has deployed an Online Trading system (BOLT)
on March 14, 1995

BOLT has a two-tier architecture. The trader workstations are connected directly
to the backend server, which acts as a communication server and a Central
Trading Engine (CTE).

Other services like information dissemination, index computation, and position

monitoring are also provided by the system.

Access to market related information through the trader workstations is essential

for the market participants to act on real-time basis and take immediate decisions

BOLT has been interfaced with various information vendors like Bloomberg,
Bridge, and Reuters. Market information is fed to news agencies in real time

It makes the trade efficient, transparent and time saving.

BSE’s NDS-RST platform

BSE developed a reporting platform - New Debt Segment – Reporting, Settlement

and Trading (NDS-RST) for reporting of all corporate deals done in respect of
debt that is listed on any Indian stock exchange.

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The BSE New Debt Segment offers reporting facilities through the NDS-RST
platform, a browser based system, which is an efficient and reliable reporting
system for all corporate bonds. NDS Members of the BSE reports all G-sec trades
on NDS-RST. The reporting of Commercial Paper and Certificate of Deposit
happens on F-Tracks whereas the settlement of Commercial Paper and Certificate
of Deposit is happens on the NDSRST platform.

NDS- RST Platform has the below-mentioned advantages:

Single system for reporting and settlement

Portfolio creation facility
Single order entry screen for reporting Corporate Bond, Commercial Paper
(CP) and Certificate of Deposit (CD), Government Securities
Reporting and Settlement from same order entry window
Rating Tracker
Information memorandum (IM) available for More than 8000 Plus bonds
Trade History
Autofill functionality in ISIN and Participant Search
Daily Market Analytical Reports
Dated Securities

Dated Securities are so named as the date of maturity is expressed explicitly in

these securities. Also, the interest rate might be expressed as the coupon rate in
these securities. Dated Government securities are a unique type of securities
because they either have fixed or a floating rate of interest also called the coupon
rate. They are issued at face value at the time of issuance and remains constant till
redemption.

Ekuber of RBI

E-Kuber is a 'core banking solution' platform of the Reserve Bank of India. It is a

payment system launched by the Reserve Bank of India with the goal of replacing
traditional methods of government payments and others. Banks can use E-Kuber
to connect their single current accounts across the country. Scheduled Urban
Cooperative banks (UCBs), insurance companies, commercial banks who maintain
securities accounts and current accounts with the RBI use the E-kuber platform.

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Annuities

Annuity plans are essentially an agreement between the two parties, one being
the insurance company and the other being the buyer. It is a series of equal
payments that are made at regular intervals of time. It is a popular choice among
people who want a steady income and wish to enjoy the golden period of their
lives without any financial stress or burden.

The term "annuity" refers to an insurance contract issued and distributed by

financial institutions with the intention of paying out invested funds in a fixed
income stream in the future. Investors invest in or purchase annuities with
monthly premiums or lump-sum payments. The holding institution issues a
stream of payments in the future for a specified period of time or for the
remainder of the annuitant's life. Annuities are mainly used for retirement
purposes and help individuals address the risk of outliving their savings.

Annuities are financial products that offer a guaranteed income stream, usually for
retirees.

The accumulation phase is the first stage of an annuity, whereby investors fund
the product with either a lump sum or periodic payments.

The annuitant begins receiving payments after the annuitization period for a fixed
period or for the rest of their life.

Annuities can be structured into different kinds of instruments, which gives

investors flexibility.

These products can be categorized into immediate and deferred annuities and
may be structured as fixed or variable.

Dematerialization

Dematerialization or "Demat" is a process whereby your securities like shares,

debentures etc, are converted into electronic data and stored in computers by a
Depository. It is safe, secure and convenient buying, selling and transacting stocks
without suffering endless paperwork and delays. You can convert your securities
to electronic format with a Demat Account. There are many advantages of holding
a demat account. A few important ones' are as below.

Shorter settlements thereby enhancing liquidity

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No stamp duty on transfer of securities held in demat form.

No concept of Market Lots.

Change of name, address, dividend mandate, registration of power of attorney,

transmission etc. can be effected across companies held in demat form by a single
instruction to the DP.

A few features of a Demat account are:

Dematerialization of Securities

Settlement of Securities traded on the exchange as well as off market transactions

Pledging and Hypothecation of Dematerialized Securities

Electronic credit in public issue

Receipt of non-cash benefits in electronic form

@@@

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 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one
free of cost, without any permission from me or without any intimation to me.

Book Title
No

01 Banking Jargon - Vol 01

02 Alerts - Vol 01

03 Forex - Vol 01

04 Banker and Legal Enactments - Vol 01

05 Banker and Financial Statements

06 Confusables – Vol 01

07 Banking Jargon - Vol 02

08 ABC (Awareness of Basics of Credit)

09 The Can Support_2020

10 The Core Support_2020

11 The Sundries_2020

12 The Soft Support

13 Management of W C Limits

14 The Notes_2021 (for Promotion Test)

15 Confusables - Vol 02

16 Banking Information

17 Banking Jargon - Vol 03

18 Bankers and Court Verdicts - Vol 01

19 Inland Bank Guarantees

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20 The Dirty Dozen

21 SPA (Not related to Banking)

22 Banks - Supporting Agencies - Vol 01

23 Banking Jargon - Volume 4

24 Banks - Supporting Agencies - Vol 2

25 Banks - Supporting Agencies - Vol 3

26 JAIIB Notes - PPB

27 JAIIB Notes - LRB

28 JAIIB Notes – AFB

29 CAIIB Notes – ABM

30 CAIIB Notes – BFM

31 Confusables - Vol 03

32 Banking Jargon - Vol 05

33 The Banking Regulations & Business Laws (BRBL)

34 Accounting & finance for Bankers

35 Bank Financial Management

36 Retail Banking & Wealth Management

37 Concepts for Credit Professional - OT

38 Advance Business Management

39 Principles & Practice of Banking

40 Indian Economy & Indian Financial System - OT

41 Concepts for Credit Professional - Notes

42 Less Known Forex Terminology

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43 KYC & AML – Notes & MCQ

44 Treasury Management - Objective Type

45 Treasury Management - Notes

46 Indian Economy & Indian Financial System - Notes

47 MSME -Notes

48 MSME – Objective Type

49 Banking Jargon – Volume 06

50 50 Essays in Practical Banking

51 Promotion 2022

52 Basics of Bank Audits

53 The Shortens

54 Recap TIN 2022

55 NumLogEx

56 Basics Statistics for Bankers

57 JAIIB IE & IFS - Module A : Indian Economic Architecture

58 JAIIB IE & IFS - Module B : Economic Concepts Related to Banking

59 JAIIB IE & IFS - Module C : Indian Financial Architecture

60 JAIIB IE & IFS - Module D : Financial Products and Services

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 My Activity
I am sharing the following in my WhatsApp Groups (The Banking
Tutor), Telegram Group of The Banking Tutor ; TBT Exam Corner
and Blog (The Banking Tutor - TBT).

1. One Point related to Banking & Finance Daily (Daily Point).

Started on 16-09-2019, so far shared 1284 points without any
break.

2. Once 3 days (on 3rd, 6th, 9th ,12th….) one Lesson on Banking
& Finance (Banking Tutor’s Lessons - BTL), started on 06-09-
2018, so far shared 525 lessons.

3. Monthly Last day - TIN - Terms in News (related to Banking &

Finance). Started on 28-02-2021, so far shared 25 issues.

4. Monthly First Day – Recap of Daily Points shared during the

previous month.

5. Sharing lessons for IIB Exams and Promotion tests of various

Banks daily in Telegram Group “TBT- Exam Corner” (earlier Name
of this Group is “TBT JACA”)

My mail id – [email protected] ;
WhatsApp +91 94406 41014
Banking Tutor Blog – https://thebankingtutor.blogspot.com/

22-03-2023 Sekhar Pariti

+91 9440641014

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