Deposit Insurance - DICGC

Customers deposit their money in banks to avail several services provided to them by their respective banks. But what if
the bank itself fails, or merges with another bank or it becomes cease to exist? What will happen to the valuable deposits
of the customers?
Considering these, bank deposits are provided with insurance covers in most of the banking systems in the world. India
is no exception. However, the insurance cover may be in full or part.

Deposit Insurance in India

All the banks operating in Indian Territory (with some exceptions) are covered under the deposit insurance facility
provided by Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully owned subsidiary of RBI. It
established on July 15, 1978 with Deposit Insurance and Credit Guarantee Corporation Act, 1961.
DICGC insures all bank deposits (including saving, current, fixed, recurring) up to a maximum limit of Rs. 1 lakh
(principal with interest).

Banks insured under DICGC

Commercial banks - Public sector banks, Private Sector Banks, Foreign Banks operating in Indian territory, Regional
Rural Banks, Local Area Banks
Cooperative banks - State, Central and Primary Cooperative Banks (collectively called Urban Cooperative Banks, or
UCB) that have amended Cooperative Societies Act, empowering RBI to control them
Currently approx. 2,130 banks are insured by DICGC.

Not covered under DICGC

Cooperative banks operating in Meghalaya, Chandigarh, Lakshadweep and Dadra & Nagar Haveli
Primary Cooperative Societies

Insurance coverage

DICGC protects bank deposits that are payable in India, including savings, current, fixed, recurring, etc. except the
following deposits Foreign government deposits
Central and state government deposits
Inter-bank deposits, etc.
Note that this insurance is aimed to cover individual customer deposits or small business with maximum cover up to Rs.
1 lakh. Therefore the above exceptions are justified.

Insurance Premiums

Customers need not pay any premium to insure their deposits. DICGC charges a nominal premium from the banks.
Customer deposits are automatically (from the customer's point of view) insured when they open any kind of deposits
with the bank.

Insurance Claim

In case of a bank failure, customers need not make any claim under deposit insurance (in contrast to other insurances,
where insurance claim is needed).
The official liquidator would make a claim on customers' behalf to the DICGC. DICGC is bound to pay the valid insurance
claim within 2 months period from receipt of claim from the liquidator. The liquidator then provides the claim amount to
each customer.

When DICGC is liable to pay

If a bank goes into liquidation (fails)

If a bank is reconstructed or amalgamated / merged with another bank

Inter-Bank Offer Rate

When a bank offers loan to other banks (or any other financial institutions), then it charges interest on that loan. The interest
rates charged on the loans vary from bank to bank. But these rates need to follow a benchmark, so that interest rates does not
differ too much among them (meaning, it should not happen, that an X bank charges 10 % interest per annum on a loan,
whereas, Y bank charges 20 % on the same type of loan, it should be at par)
Generally, Inter-bank offer rate is of short-term nature (overnight to 1 year), and is followed for deciding interest rates to be
charged on the loans offered to other banks (refer Call / Notice / Term Money) (inter-bank market). It acts like a benchmark for
deciding interest rates.
Several financial markets follow different Inter-bank offer rates, like

London Inter-Bank Offer Rate (LIBOR)

Mumbai Inter-Bank Offer Rate (MIBOR)
Tokyo Inter-Bank Offer Rate (TIBOR)
Singapore Inter-Bank Offer Rate (SIBOR)
Hong Kong Inter-Bank Offer Rate (HIBOR), etc.

LIBOR
LIBOR was first published in 1986 for three currencies - USD, GBP (Great Britain Pound) and JPY (Japanese Yen).
Later on several other currencies were added in the list (currently 10 currencies). It is published daily at 11:30
A.M (London time) by Thomson Reuters, and Libor rates are determined for 15 borrowing periods (e.g., overnight, 1
week, 2 weeks, 1 month, etc. up to 1 year).
Formerly the Libor was maintained by British Bankers' Association (BBA), but the responsibility is now transferred
to Intercontinental Exchange.

How is Libor rate calculated?

At 11:00 AM, major banks (18 major global banks for the USD Libor) are called to participate on the survey asking for
the inter-bank offer rates. The highest four and the lowest four interest rates (on the survey) are trimmed out (not used
for calculation). Then the remaining (remaining 10 for USD Libor) interest rates are averaged, and makes the Libor
rate.
Libor rate is published at 11:30 A.M. This happens for all the 10 currencies, taking major banks for each currency.

MIBOR

MIBOR rate is for Indian inter-bank market, and is calculated on daily basis by National Stock Exchange
(NSE), along with Fixed Income Money Market and Derivative Association of India (FIMMDA).
It is a weighted average of lending rates of a group of banks (including Public Sector banks, Private Sector
Banks, Primary Dealers, Foreign Banks in India, etc.), on funds lent to first-class borrowers (well rated borrowers .
MIBOR is published on different timings (e.g., 9:40 A.M., 11:30 A.M. etc), and for several maturity
periods (e.g., overnight, 3 days, 2 weeks, 1 month, etc.)
MIBID

Mumbai Inter-Bank Bid Rate (MIBID) is the opposite of MIBOR. While MIBOR is the benchmark rate at which banks
are willing to offer loans to other bank, MIBID is the benchmark rate at which banks are willing to take loans (paying
the MIBID interest rate) from other banks.
The MIBID is calculated everyday by the National Stock Exchange as a weighted average of interest rates of a group
of banks, on funds deposited by first-class depositors.
Note that MIBID rate is always less than MIBOR rate, because, banks will try to pay less interest after taking loans,
and will try to get more interest while offering loans. It is also the weighted average of interest rates at which several
banks (taken as survey) are willing to pay.
Currently FIMMDA and NSE came with a new product, named as 'FIMMDA-NSE MIBID/MIBOR' which acts like
the benchmark for the inter-bank market in India (taking both MIBOR and MIBID together)

Products linked with LIBOR/MIBOR

Call, Notice, Term Money

Forward Rate Agreements

Future Interest Rate

Interest Rate Swaps (IRS)

Swap Options

Overnight Index Swaps, etc.

Know Your Customer (KYC)

If you visit to a bank branch to open a bank account, you first need to let them know who you are, and where do you
live. Without knowing this information, a bank will not open your account. This process of knowing about you
(customer) is Know Your Customer (KYC).

Components

It is obvious now, that KYC process has 2 components -

Identity - Who are you?

Address - Where do you live?

Two more things are necessary - your photograph and your signature / thumb impression (These two are the most
important)
Documents
The government has notified 6 documents as 'Officially Valid Documents (OVDs) for the purpose of proving your identity Passport
Driving License
Voters' Identity Card
PAN Card
Aadhaar Card issued by UIDAI
NREGA Card
If these documents also contain your address, then no separate proof of address will be required. Otherwise, you need to
provide another valid address proof.
Special case
Suppose, you don't have any of the OVDs specified above to proof your identity. Then can you open an account?
The answer is YES! However, the account opened cannot be a normal account. It will be a limited facility account, termed
as 'Small Account'. Limitations such as Balance at any point of time, shouldn't exceed Rs. 50,000

1 year Total Credit shouldn't exceed Rs. 1,00,000

Total withdrawal and transfers shouldn't exceed Rs. 10,000 / month

Foreign remittances cannot be credited

Such accounts remain operational initially for a period of 12 months (1 year), and thereafter, for a further 1 year (if
the holder can prove that he has applied for any of the OVDs in respective office within 1 year of opening the
account).

Question: If a customer comes to your branch to open an account, but doesn't have any valid documents as proof of
identity, then would you open an account for him?

The answer is YES (as you already know now!)

Take his photograph and make him sign or provide thumb impression. And tell him you are opening a 'Small
Account' for him (also tell him about the limitations, and the need to submit valid documents within 1 year)
Please note that KYC should be completed within 1 year of opening Small Account, and KYC is mandatory.
Refer - RBI Press Release - Aug, 2014 http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=31935

e-KYC

It is electronic KYC. As the term means, here KYC will be done electronically (online). Note that it is possible only (or
atleast for now) for those who have valid Aadhaar numbers with them.
You have to authorize the UIDAI (the issuer of Aadhaar card), by explicit consent, to release your identity /
address through biometric authentication to the bank branches (or, business correspondents (BC)).
UIDAI then will transfer your data (that was taken from you when you applied for Aadhar card) to the bank,
and KYC will be done electronically.

Non Performing Assets (NPA)

Bank Assets

Assets are something that you own, meaning you are the legal owner of the asset. Similarly, bank assets are
those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.) or financial property.
Banks generally have four types of assets - Physical Assets, Loans/Advances, Reserves and Investments.
Among the above four types, loans or advances are the most important and risky asset of a bank. It is most
important because, it can generate maximum profit, and at the same time, it is the most risky because if the borrower
fails to repay the loan amount, then the bank will face loss.

Non-Performing Assets (NPA)

If the borrower (of a loan/advance from a bank) is unable to repay the interest and principal repayments to the bank,
for a considerable amount of time, then the loan/advance will be called non-performing. Since loans /
advances are assets of the bank, it will be known as Non-performing Assets (NPA).
In Indian context, if the borrower has failed to make interest or principal payments for 90 days (3 months) from the
specified due date for payment, then the loan/advance is considered NPA.
(In layman's terms NPA refers to - you lend money, but you don't get it back when you expected)

Recovery/Non-recovery of NPA
Interests earned on loan repayments are the most important income of a bank. Therefore, due to default in repayment,
banks will suffer loss. Though, by selling the collateral securities (if any) against the loan - banks could recover the loan
amount, the process of selling the securities (with the help of Asset Reconstruction Companies, and they
will charge fee) is a tedious and long term job, and even the seizure of mortgage or hypothecation, etc is difficult process.
Moreover, if the company or individual borrower becomes bankrupt, then the loss will be catastrophic for the lender
bank. Even in some cases, there could be some corrupted bank officials who would sanction
loan to uncreditworthy borrowers for bribes, or ministerial / political pressures!
Conditions to become NPA
An asset becomes NPA when it ceases to generate income for the bank Term Loan - Interest and/or installment of principal amount remain overdue for more than 90 days
Overdraft / Cash Credit - The account remains 'out of order' for 90 days
Bill - The bill remains overdue for more than 90 days in the case of bills purchased and discounted
Short duration crops - The installment of principal or interest remains overdue for 2 crop seasons
Long duration crops - The installment of principal or interest remains overdue for 1 crop season
Securitisation transaction - The amount of liquidity facility outstanding for more than 90 days
Derivative transaction - The overdue receivables representing positive mark-to-market value of a derivative contract,
if these remain unpaid for 90 days from the specified due date for payment.
NPA Classification
Banks are required to classify NPAs into the following 3 categories, based on the nonperforming period and
the realisability (recoverability) of the dues

Substandard Assets - (90 days - 12 months)

Assets remained NPA for less than or equal to 12 months (1 year) are Substandard Assets.
Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

Doubtful Assets - ( > 12 months)

Assets remained Substandard assets for 12 months (1 year) are Doubtful Assets.

Such an asset will have all the weaknesses inherent in substandard assets, with the added characteristic that
the weakness make collection or liquidation in full - on the basis of currently known facts, conditions and values highly questionable and improbable.

Loss Assets Assets where loss has been identified by the bank or internal/external auditors or the RBI inspection, but the amount
has not been written off wholly.
Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is
not warranted although there may be some salvage or recovery value.

Upgradation of NPA to Standard

If arrears of interest and principal are paid by the borrower in case of loan accounts classified as NPAs, the account
should no longer be treated as nonperforming and may be classified as 'standard' accounts.

NPA Recovery

Non Performing Assets can be reduced by taking some major steps by the banks. Some steps are as follows by which
bank can reduce NPA -

1.

SARFAESI ACT 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of
the Court.
The Act provides 3 alternative methods for recovery of non-performing assets, namely: a) Securitisation
b)Asset Reconstruction
c) Enforcement of Security without the intervention of the Court.
The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts
where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.
Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or
assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable for attachment under sec.60
of CPC, are not covered under this Act

Why SARFAESI Act?

Earlier to recover the bad loans / NPAs, banks needed to move to the courts - Debt Recovery Tribunal (DRT) and Debt
Recovery Appellate Tribunals (DRAT), which made the recovery a long-term process, and there were
several loopholes which could be misused by the borrowers.

Then Andhyarujina committee recommended enacting a new legislation for the establishment of
Securitization and Reconstruction companies and empowering the banks and financial institutions to take possession /
seize the securities without moving to the courts.

Applicability of the Act

Secured Loans - SARFAESI Act is applicable only for the secured loans (meaning loans backed by underlying
securities). In this case, banks or financial institutions can seize and/or sell the underlying securities,
like hypothecation, pledge, mortgage, etc and recover the loan amount.

Unsecured Loans / Agricultural lands - For unsecured loans (not backed by underlying securities) or agricultural
loans (where agricultural land is the underlying security), banks cannot seize or sell by itself. In these case, banks
need to move to court and file Civil case against the defaulters.

If on receipt of demand notice, the borrower makes any representation or raises any objection, authorised officer shall
consider such representation or objection carefully and if he comes to the conclusion that such representation or
objection is not acceptable or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK of
receipt of such representation or objection.
A borrower / guarantor aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not
with any civil court. The borrower / guarantor has to deposit 50% of the dues before an appeal with DRAT.

Provisions of the Act

If any borrower fails to discharge his liability in repayment of any secured debt within 60 days(2 months)
of Notice, the secured creditor is conferred with powers under the SARFAESI Act to
1.
2.
3.

Take possession of / seize / auction /sell the secured assets of the borrower
Takeover of the management of the business of the borrower
Appoint any person to manage the secured assets, etc.

Note that agricultural property is exempted from the provisions of the Act.

2.

Lok Adalats: Lok Adalat is for the recovery of small loans. According to RBI guidelines issued in 2001, they cover NPA
up to Rs. 5 lakhs, both suit filed and non-suit filed are covered.

3.

Compromise Settlement: It is a scheme which provides a simple mechanism for recovery of NPA. It is applied to
advances below Rs. 10 Crores.

4.

Credit Information Bureau: A Credit Information Bureau help banks by maintaining a data of an individual defaulter
and provides this information to all banks so that they may avoid lending to him/her.

5.

DEBT RECOVERY TRIBUNALS (DRT): The debt recovery tribunal act was passed by Indian Parliament in 1993 with
the objective of facilitating the banks and financial institutions for speedy recovery of dues in cases where the loan
amount is Rs. 10 lakhs and above.

Some Securitization Companies and Reconstruction Companies in India

Asset Reconstruction Company (India) Ltd. (ARCIL)

Assets care & Reconstruction Enterprise Ltd. (ACRE)

ASREC (India) Ltd.

Pegasus Assets Reconstruction Pvt. Ltd.

Phoenix ARC Pvt. Ltd.

Assets and Liabilities

Assets

Assets are those tangible and intangible things that you own. You can sell them in the market to get money, or you
can retain those for your personal enjoyment.
Assets are classified into different types based on their convertibility to cash; use in business or basis their physical
existence.
Basing on their easy convertibility into cash Asset are two types : Current Assets or Fixed Assets.

1.

Current Assets

Assets which are easily convertible into cash like stock, inventory, marketable securities, short-term investments, fixed
deposits, accrued incomes, bank balances, debtors, prepaid expenses etc. are classified as current assets. Current
assets are generally of a shorter life span as compared to fixed assets which last for a longer period. Current assets
can also be termed as liquid assets.

2.

Fixed assets

Fixed assets are of a fixed nature in the context that they are not readily convertible into cash. They require elaborate
procedure and time for their sale and converted into cash. Land, building, plant, machinery, equipment and furniture
are some examples of fixed assets. Other names used for fixed assets are non-current assets, long-term assets or
hard assets. Generally, the value of fixed assets generally reduces over a period of time (known as depreciation).

Another classification of assets is based on their physical existence, an asset is either a tangible asset or intangible
asset.
Tangible Assets :
Tangible assets are those assets which we can touch, see and feel. All fixed assets are tangible. Moreover, some
current assets like inventory and cash fall under the category of tangible assets too.

1.

2.

Intangible Assets:

Intangible assets cannot be seen, felt or touched physically by us. Some examples of intangible assets are goodwill,
franchise agreements, patents, copyrights, brands, trademarks etc .Monetary value of these intangible assets is hard
to assess.

Basing on usage of the asset for business operation assets are either operating or non-operating.

1.

Operating Assets:

All assets required for the current day-to-day transaction of business are known as operating assets. In simple words,
the assets that a company uses for producing a product or service are operating assets. These include cash, bank
balance, inventory, plant, equipment etc.
Non-operating Assets:
All assets which are of no use for daily business operations but are essential for the establishment of business and for
its future needs are termed as non-operational. This could include some real estate purchased to earn from its
appreciation or excess cash in business, which is not used in an operation.

2.

Understanding Total Assets and Net Assets

The meaning of total assets is truly reflected in the accounting equation as the sum total of liabilities and owners equity. While
Net Assets is a term used to state the difference between total assets and total liabilities. Consequently, it can be noted that

net assets and owners equity are virtually the same i.e. both represent the difference between Total Assets and Total
Liabilities
Bank Assets and Liabilities
Bank Assets are those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.)
or financial property.
Banks generally have four types of assets Physical Assets - These are relatively minor assets of banks, that generally doesn't earn money for bank. Physical
assets include land, furniture, equipment, buildings, etc.
Loans / Advances - These are the most important assets of bank, because these are the primary source of
their earning. Banks get interest from the loans / advances they lend to customer.
Reserves - Banks need to maintain some reserves, so that they can meet the demands of their customers and
facilitate daily transactions (e.g., a customer comes to a bank, and demands to withdraw money,
or encash a cheque. Banks need to maintain reserve in its vault to meet these).
Investments - Banks invest some of its money in government securities, or other investment instruments (like, buying
shares, etc.). Investments are less riskier than loan (loans can become NPA), and have less return (loans bear high
interest return) for a bank.
Bank Liabilities
Liabilities are something that you owe, meaning assets (of some other person) you hold, which you need to return to
its original owner. Similarly, bank liabilities are those things that a bank owes to its customers, or investors. It
includes financial property and debts (for electricity, office supplies, employee wages, etc.)
Banks generally have several type of liabilities. (Note that this is not exhaustive list)
Customer Deposits - These are the most important liabilities of a bank. These are the assets for customers,
but liabilities for banks. Banks need to return the money on demand or after a maturity period.
Certificate of Deposits (CD) - Banks issue Certificate of Deposits to the general public to raise money. These are
also liabilities of a bank, because banks need to return the amount invested by the investor.
Borrowings - Banks can borrow from other banks or financial institutions, including External Commercial
Borrowings (ECB), which need to be returned. These are also liabilities of a bank
Other liabilities - There are several other type of liabilities, like wages, taxes, leases, pension obligations, etc.

CAPITAL

Capital is the fund that is required to run a business, like buying machinery and equipment, etc., to
produce goods and services. Generally, funds are arranged from the investors and the lenders .
Only those assets, which are used to make money, or to run business, or to produce goods and services, are considered
as Capital.
Now, consider the following example Suppose you have bought a van which is used in your business to make profit, then this asset can be considered
as Capital Asset, whereas if you have bought a luxury car, which is for your personal use only, but of no-value for
your business, then it will be your Asset, not a Capital Asset.
Now, don't confuse Capital Assets with Capital. Capital is only fund, taken from the investors or lenders to run business.
Funds taken as loans from banks or bonds from investors will be liabilities of the business, which need to pay back, but
is the Capital for the business. Funds taken from shareholders are also Capital, but is not a liability for the business.

The forms, classification or types of capital are:-

1.

Fixed capital : It refers to durable capital goods which are used in production again and again till they wear out.
Machinery, tools, means of transport, factory building, etc are fixed capital. Fixed capital does not mean fixed in location.
Since the money invested in such capital goods is fixed for a long period, it is called Fixed Capital.

2.

Working capital : Working capital or variable capital is referred to the single use produced goods like raw materials.
They are used directly and only once in production. They get converted into finished goods. Money spend on them is fully
recovered when goods made out of them are sold in the market.

3.

Circulating capital : It is referred to the money capital used in purchasing raw materials. Usually the term working
capital and circulating capital are used synonymously.

4.

Sunk capital : Capital goods which have only a specific use in producing a particular commodity are called Sunk
capital. E.g. A textile weaving machine can be used only in textile mill. It cannot be used elsewhere. It is sunk capital.

5.

Floating capital: Capital goods which are capable of having some alternative uses are called floating capital. For e.g.
electricity, fuel, transport vehicles, etc are the floating capital which can be used anywhere.

6.

Money capital : Money capital means the money funds available with the enterprise for purchasing various types of
capital goods, raw material or for construction of factory building, etc. it is also called liquid capital. At the beginning the
money capital is required for two purposes one for acquiring fixed assets i.e. fixed capital goods and another for
purchasing raw materials, payment of wages and meeting certain current expenses i.e. working capital.

7.

Real capital: On the other hand, real capital is referred to the capital goods other than money such as machinery,
factory buildings, semi-finished goods, raw materials, transport equipments, etc.

8.

Private capital: All the physical assets (other than land), as well as investments, which bring income to an individual
are called private capital.

9.

Social capital: All the assets owned by a community as a whole in the form of non-commercial assets are called
social capital e.g. roads, public parks, hospitals, etc.

10. National capital: Capital owned by the whole nation is called national capital. It comprises private as well as public
capital. National capital is that part of national wealth which is employed in the reproduction of additional wealth.
11. International capital: Assets owned by international organizations like UN, WTO, World Bank, etc., constitutes an
International Capital.

SECURITIES FOR LOAN

Securities for loan
If you want a loan from a bank (or any other financial institution), you generally need to provide some kind of security against
the loan to the bank. There are several types of securities, against which a bank will offer you a loan 1. Pledge - It is used when the bank (or, lender, known as pledgee) takes actual possession of the securities, such
as goods, certificates, golds, etc, (you provide it to bank to avail loan) which are generally movable in nature.
Bank keeps the securities with itself, and provide loan to you.
Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after you repay all
the debts (i.e., loan) to the bank. In case you are unable to pay back, then the bank has the right to sell the assets,
and recover the loan amount (with interest).
Example - Gold loans, Jewellry loans, advances against NSC (National Saving Certificates), or loans against any
other assets.
2.

Hypothecation - It is used when you (borrower) have the actual possession of the asset, for which you have taken
the loan. Generally, this is charged against loans for movable assets, like car, bus, etc. (i.e., vehicle loans). Here,
the assets (bus, car, etc.) remain with you, and you are hypothecated to the bank for the loan granted.
In case you are unable to repay the loan amount, then the bank has the right to sell the asset (bus, car, etc.), (which
is possessed by you) and recover the total amount (with interest).
Example - Car loans, Bus loans, etc.

3.

Mortgage - It is used when you (borrower) have the actual possession of the assets, for which you are
granted loan (e.g., house loan), or against which you are granted loan (e.g., house mortgaged). Mortgages are
generally those assets, which are permanently attached with Earth surface, like house, land, factory etc.
In case you are unable to repay the loan amount, the bank has the right to seize and sell the mortgage,
and recover the loan amount (with interest).

4.

Lien - It is almost similar to Pledge, except that in case of lien, the lender can only detain the asset/goods until
the borrower repays the loan, but have no right to sell the asset, unless explicitly declared in the lien contract. (For
a pledge, the lender can sell the asset, if the borrower is unable to pay the loan)

5.

Note the followings Movable assets - Pledge, Hypothecation, Lien

Immovable assets - Mortgage

Possessed by lender - Pledge, Lien

Possessed by borrower - Hypothecation, Mortgage

Assignment - An assignment constitutes an action taken with a contract. Assignment occurs when the owner of a
contract, known as the assignor, gives a contract to another party, known as the assignee. The assignee assumes

all responsibilities and benefits of the contract. When it comes to loans, assignment can relate to life insurance
policies and mortgage contract from one party to another. Mortgages and other contracts sometimes contain
provisions limiting or stipulating conditions for assignment.
One example of assignment is 'transfer by the holder of a life insurance policy (the assignor) of the benefits or
proceeds of the policy to a lender (the assignee), as a collateral for a loan'. In such case in the event of the death of
the assignor, the assignee is paid first and the balance (if any) is paid to the policy's beneficiary.
However,
insurance policies other than life insurance, may not be used for this purpose.
6. Set-Off Clause
A set-off clause is a legal clause that gives a lender the authority to seize a debtor's deposits when they default on a
loan. A set-off clause can also refer to a settlement of mutual debt between a creditor and a debtor through offsetting
transaction claims. This allows creditors to collect a greater amount than they usually could under bankruptcy
proceedings.
If a debtor is unable to meet an obligation to his or her bank, the bank can seize the customer's current deposit. Set-off
provisions are not limited to loans between banks and their customers, but are also widely used in other industries,
such as construction.
The Truth in Lending Act prohibits set-off clauses from applying to credit card transactions; this protects consumers
who decline to pay for defective merchandise.
7. Alienation Clause
A clause in a mortgage contract that requires full payment of the balance of a mortgage at the lender's discretion if the
mortgegage property is to be sold or the title to the propertyis to be transferred (alienated) to an entity other than the
borrower (mortgagor). . Nearly all mortgages have an alienation clause.
An alienation clause protects a lender by preventing a borrower from assigning debt without the lender's approval.
8.

Contingency clause
A clause that allows cancellation of a contract without penalty if a certain described thing happens (or fails to happen
(e.g., failure to obtain satisfactory financing) or specified condition fails to fulfill. A contingency clause contains a
condition for contract performance , If the party that is to fulfill the requirements of the contingency clause is unable to
do so, the other party is released from its obligations.

9. Acceleration Clause
A contract provision that allows a lender to require a borrower to repay all or part of an outstanding loan if certain
requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment.
Also known as "acceleration covenant"
For example, a borrower who fails to make a payment or who breaks a covenant may be required to pay the lender
the balance on a loan. In this case, the borrower is considered in breach of contract.

Inflation

Suppose, you lived in "peace" (in context of your spending) in the year 2010, when you bought vegetables or fruits (or any
other commodity) in much less price (than present). But at present i.e. in 2015, the prices of the same things have gone
up which means you have tospend much more, than you used to spend in 2010. This phenomenon is known as Inflation.
And if the government thinks that the year 2010 was "ideal" year to compare the prices with, then the year can be
determined as base year (fixed by government; and generally changes with trends in economy throughout periods of time)
For example, if in 2010 (suppose fixed as base year), the price of potato was Rs. 20 / kg, but the price
has increased significantly throughout the period, becoming Rs. 25 / kg in 2015. Then the inflation would be simply (25 20) / 20 x 100 % = 25 %
Note carefully, we cannot have a clear picture of overall inflation by taking only one commodity. But then, we cannot even
take all commodities (millions!) to measure inflation. Therefore, it is logical to take few (say 400 or 600, only a figure) most
used and important commodities in market to measure inflation.
Also note that the price of commodities can be less than the base year. then it will be known as Deflation (opposite
of Inflation).
Stages of Inflation
Depending on the intensity of inflation, we can have several stages A. Creeping Inflation - (slow) - 2 - 4 % inflation
B. Trotting Inflation - (moderate) - 4 - 10 % inflation
C. Galloping Inflation - (fast) - 10 - 20 % inflation
D. Hyper Inflation - (very fast) - more than 20 % inflation
Types of Inflation
Inflation can occur for several reasons, hence there are several types of inflation 1. Demand-Pull Inflation This type of inflation occurs, when the total demand for goods and services exceeds the available supply in the market
(meaning more goods needed, but limited stock). As an effect, prices of those commodities increase. It is also known
as Excess-Demand Inflation.
2.

Pricing Power Inflation This type of inflation occurs, when business houses or industries increase prices of commodities to increase their profit

margin significantly. Generally, they have few or no competitors in their market segment, making their business
into monopoly. It is also known as Administered Price Inflation or Oligopolistic Inflation.
3.

Cost-Push Inflation This type of inflation occurs, due to the increase in prices of raw materials, wage of employees, etc. making
the ultimate product more costly. For example, price of car will rise, if the price of raw materials to make
a car increases.

4.

Sectoral Inflation This type of inflation occurs in a sector, due to the rise in prices in another sector, on which the sector is dependent on.
For example, ticket price of bus will increase due to the increased price of diesel.

Measurement of Inflation
Price indices are used to measure the relative price changes (of goods and services) in a region (generally a country)
during a specific period of time (e.g., financial year, or quarter, or month).
With the price indices, we comprehend about how much the price of goods and services has increased
(Inflation) or decreased (Deflation) from a fixed normal year, known as base year (with respect to this base year, we
calculate how much increase or decrease in prices happened in this current year).
Price indices are generally used to measure the cost of living in order to determine the wage increases necessary to
maintain a constant standard of living.
Price Indices
Goods and services are provided to the consumer by the producer. It follows several stages / levels in between Producer level (produced, or manufactured) - PPI

1.

Wholesale level (at wholesale market, before going to the retail market) - WPI

Retail / consumer level (at retail market, from where consumers buy) CPI

Producer Price Index (PPI)

PPI is used to track pure price changes at producer level for goods as well as services over time. The Producer Price
Index (PPI) program measures the average change over time in the selling prices received by domestic producers for
their output. PPI prices of many products and some services are determined form first commercial transaction.
Note that in contrast to WPI, PPI doesn't contain tax components, keeping inflation free of tax fluctuations.
The government of India has set up (Sep, 2014) a committee (13 members), headed by Professor B.N.Goldar, to
devise PPI for Indian economy. It is an international standard, which is followed by major economies (e.g., USA) of the
world.
Why devising PPI in India?

Currently, there is no index tracking inflation in service sector, that contributes about 55 % to India's GDP (note
that WPI doesn't track services sector in India)

PPI tracks inflation excluding tax components. It will help to track actual change in prices (note that WPI, CPI,
both includes tax components)
2.

Wholesale Price Index (WPI)

WPI is used to track prices of consumer goods and services purchased by households at the wholesale stage
(meaning goods sold in bulk, rather that retailed), and traded between organizations, before going to consumers.
It is practically impossible to find price changes of all the goods traded in an economy (millions of goods!). So it is
logical to take a sample set, or 'basket of goods' (e.g., 676 commodities, or goods) to measure the inflation (few
important goods taken for measuring price changes).
Then determine a base year (e.g., 2004-05, 2010-11), with respect to which the current inflation will be measured.
WPI indicator tracks the price movement of each commodity individually, and then determine through
the averaging principle (Methods like Laspeyres formula, Ten-day Price Index, etc. are used)
Note that all commodities are classified into 3 groups, and then their weighted average is taken for measuring
WPI Primary Articles (e.g., food, non-food, mineral, etc.) - 20.1 % of total weight

Fuel & Power (Coal, Mineral Oil, Electricity, etc.) - 14.9 % of total weight

Manufactured Articles (food products, beverages, woods, paper, chemicals, machinery, transport, etc.) - 65
% of total weight

Consumer Price Index (CPI)

3.

While WPI is calculated in wholesale stage, CPI is determined at retail stage, where consumers are directly
involved. Hence, CPI method better measures the effect of inflation on general public. RBI adopted CPI as the key
measure for determining Inflation situation of economy, on recommendation of Urjit Patel committee.
CPI measures changes in prices, paid by consumers for a basket of goods (similar to WPI, but here retail

goods, instead of wholesale goods).

There are 3 broad types of CPIs - (for different type of consumers; new CPI system of 2012)
CPI for Urban population, known as CPI (Urban)

CPI for Rural population, known as CPI (Rural)

Consolidated CPI for Urban and Rural, which is based on CPI (Urban) and CPI (Rural) - key measure for CPI

CPI in India decreased to 144.90 Index Points in December 2014 from 145.50 in November.

Reflation

If the government tries to increase Inflation rate to stimulate economy, then it will be known as Reflation. It can be
done by Increasing money supply to the market
Reducing taxes, etc.
When Reflation is needed?
When the economy is in highly deflated state, i.e., in Deflation, where price level of commodities is too low,
or value of money is too high (meaning you can buy a lot of goods with small amount of money!)

Disinflation

It is the opposite of Reflation. Disinflation process will be used by the government, if it tries to decrease the Inflation
rate to recover the economy from a high Inflation state. It can be done by Decreasing money supply to the market
Increasing taxes, etc.
When Disinflation is needed?
When the economy is in highly inflated state, i.e., in Inflation, where price level of commodities is too high, or value
of money is too low (meaning you can buy a small amount of goods with a lot of money!)

Note that Reflation and Disinflation are the process of increasing and decreasing the Inflation rate, respectively.
But Inflation and Deflation are the state of economy, where the price level of goods are too high and too low,
respectively.
For example, suppose Inflation of January is 5 % (Inflation) and February is 4 % (Inflation). Then you can say that the
price is disinflated by 5 - 4 = 1 %, but is still in Inflated state (in Inflation) in February.
Now suppose Inflation of January is 1 % (Inflation) and February is -2 % (Deflation). Then you can say that the price
is disinflated by 1 - (-2) = 3 %, and is in Deflated state (in Deflation) in February.
There are two extreme cases of Inflation

Hyperinflation - This is an extreme situation of Inflation in an economy, when the country experiences very high
price level of goods (which is rapidly accelerating), and the real value of money is very low (which is
rapidly depreciating).In this situation, people try to hold foreign currencies (e.g., USD), because their local currency
has very low value. One of the most famous examples of hyperinflation occurred in Germany between January
1922 and November 1923.

Stagflation - This is an extreme situation of Inflation, which is associated with high unemployment (stagnant
inflation). It raises a dilemma for government, because reducing inflation will rise unemployment, while
reducing unemployment will increase inflation. This happened in the United States during the 1970s when world oil
prices rose dramatically, increasing the costs of goods and contributing to a increase in unemployment.

Recession and Subprime Lending

Recession
For a healthy economy, a country needs to have smooth economic activities of production distribution and consumption of
goods and services at all levels. But what if all these activities drastically reduced (due to some reason) to a very low-state and
continues to be in that state for a long time?
This kind of slowdown or a massive contraction in economic activities, is known as Recession. It may last for some quarters,
which have a great adverse effect on the growth of an economy (making negative GDP growth, may be). Other adverse
effects, like

Unemployment

Drop in Stock Market

Decline in Housing Market

Business losses

Social effects, like low living standards, low wages, etc.

The technical indicator of a recession may be two consecutive quarters of negative GDP growth. Recessions can occur for
excessive subprime lending, as described below.
Subprime Loans
A bank generally follows a credit scoring system to determine borrowers eligibility for a loan. If a borrower doesn't have a
good credit history, then the bank can deny him/her a loan. But if the bank decides to allow him/her a loan (even with
that limited credit history), then the loan is known as subprime loan.
This type of loan carries more credit risk, and therefore carries higher interest rate. Think what will happen, if he/she eventually
cannot pay back the loan (with extra interest rate on it!)
US Subprime Crisis of 2007-09
US banks started to lend subprime loans to the low credit borrowers, with houses, or properties as mortgage. They thought that
if the borrowers become unable to pay back, then they could seize the properties and sell in high prices to recover the loans.
But what happened is the prices of houses/properties declined drastically, leading to mortgage delinquencies and devaluation
of housing-related securities. This led the banks to become bankrupt (e.g., Lehman Brothers), because they
couldn't recover the amount of their huge subprime lending against mortgage securities.
Current Recession in Venezuela
Due to political instability and falling oil prices, Venezuelan economy (highly dependent on oil exports) shrank by 2.8 % in 2014,
while inflation topped 64 %. It led Venezuela to fall in recession.

NOSTRO, VOSTRO, LORO Accounts

Nowadays, bank operations are not confined within a national border. Banks are opening branches inforeign countries. But the
problem is - Is it possible for a bank to open branch in each and every country?
Obvious answer is no. Then what is the easiest way to handle this situation?
Open an account in the foreign countries' bank!!
Here Nostro, Vostro and Loro accounts come into play. Note that all these accounts are termed as one's own country-basis.

NOSTRO Account
Italian word 'nostro' means 'ours'. Hence, Nostro account points at - "Our account with you"
Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic bank (from our
perspective, our bank). It obviates that account is maintained in that foreign currency.
For example, SBI account with HSBC in U.K. (may be)
VOSTRO Account
Italian word 'vostro' means 'yours'. Hence, Vostro account points at - "Your account with us"
Vostro accounts are generally held by a foreign bank in our country (with a domestic bank). It generally maintained in Indian
Rupee (if we consider India)
For example, HSBC account is held with SBI in India. (may be)
LORO Account
Again, Italian word 'loro' means 'theirs'. Therefore, it points at - "Their account with them"
Loro accounts are generally held by a 3rd party bank, other than the account maintaining bank or with whom account
is maintained.
For example, BOI wants to transact with HSBC, but doesn't have any account, while SBI maintains an account with HSBC in
U.K. Then BOI could use SBI account. (again may be)

Real Time Gross Settlement (RTGS)

The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time)
settlement of funds transfers individually on an order by order basis (without netting).
'Real Time' means the processing of instructions at the time they are received rather than at some later time;
'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by
instruction basis).

Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and
irrevocable.

Transaction limit

Transaction Hour 9.00 hours to 16.30 hours Monday to Friday

9.00 hours to 14:00 hours on Saturdays
Service Charge
In Inward transactions No charges to be levied on beneficiaries/reciver for at destination bank
branches (For credit to beneficiary/ recivers accounts)
Outward transactions at originating bank branches charges applicable for the remitter
2 lakh to ` 5 lakh - not exceeding -` 30/- per transaction;
Above ` 5 lakh not exceeding 55/- per transaction.

Mini Amount 2,00,000/ Max Mount- no Upper Limit The RTGS system is primarily meant for large value transactions.

Time Taken :
Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds
are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within 30 minutes of
receiving the funds transfer message.

In case Transaction fails?

Funds, received by a RTGS member for the credit to a beneficiary customers account, will be returned to the originating
RTGS member within 1 hour of the receipt of the payment at the PI of the recipient bank or before the end of the RTGS
Business day, whichever is earlier, if it is not possible to credit the funds to the beneficiary customers account for any
reason e.g. account does not exist, account frozen, etc. Once the money is received back by the remitting bank, the
original debit entry in the customer's account is reversed.

Min Requirments for initiating a RTGS remittance:

Amount to be remitted
Remitting customers account number which is to be debited
Name of the beneficiary bank and branch
The IFSC Number of the receiving branch
Name of the beneficiary customer
Account number of the beneficiary customer
Sender to receiver information, if any

How RTGS is different from National Electronics Funds Transfer System (NEFT)?
Ans. NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles
transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time.
These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled
individually. For example, currently, NEFT operates in hourly batches. [There are twelve settlements from 8 am to 7 pm
on week days and six settlements from 8 am to 1 pm on Saturdays.] Any transaction initiated after a designated
settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are
processed continuously throughout the RTGS business hours.

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer.
Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme.

Who can transfer funds using NEFT?

Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT.

Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFTenabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to
a maximum of Rs.50,000/- per transaction. Such customers have to furnish full details including complete address,
telephone number, etc. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even
without having a bank account.

Who can receive funds through the NEFT system?

Individuals, firms or corporates maintaining accounts with a bank branch can receive funds through the NEFT
system. It is, therefore, necessary for the beneficiary to have an account with the NEFT enabled destination bank
branch in the country.
The NEFT system also facilitates one-way cross-border transfer of funds from India to Nepal. This is known as the
Indo-Nepal Remittance Facility Scheme. A remitter can transfer funds from any of the NEFT-enabled branches in to
Nepal, irrespective of whether the beneficiary in Nepal maintains an account with a bank branch in Nepal or not. The
beneficiary would receive funds in Nepalese Rupees.

Transaction limit

Minimum Amount -1 /- INR

Maximum Amount No limit
However, maximum amount per transaction is limited to Rs.50,000/- for cash-based remittances within India for
walk-in customers and also for remittances to Nepal under the Indo-Nepal Remittance Facility Scheme.

Operating hours of NEFT

Presently, NEFT operates in hourly batches - there are 12 settlements from 8 am to 7 pm on week days (Monday
through Friday) and 6 settlements from 8 am to 1 pm on Saturdays.

Processing or service charges for NEFT transactions?

The structure of charges that can be levied on the customer for NEFT is given below:
Inward transactions at destination bank branches (for credit to beneficiary accounts)

Free, no charges to be levied on beneficiaries

Outward transactions at originating bank branches charges applicable for the remitter
For transactions up to Rs 10,000 : not exceeding Rs 2.50 (+ Service Tax)
For transactions above Rs 10,000 up to Rs 1 lakh: not exceeding Rs 5 (+ Service Tax)
For transactions above Rs 1 lakh and up to Rs 2 lakhs: not exceeding Rs 15 (+ Service Tax)
For transactions above Rs 2 lakhs: not exceeding Rs 25 (+ Service Tax)

With effect from 1st July 2011, Originating banks are required to pay a nominal charge of 25 paise each per
transaction to the clearing house as well as destination bank as service charge. However, these charges cannot be
passed on to the customers by the banks.

When can the beneficiary expect to get the credit to his bank account?

The beneficiary can expect to get credit for the NEFT transactions within two business hours (currently NEFT business
hours is from morning 8 AM to evening 7 PM on all week days and from morning 8 AM to afternoon 1 PM on
Saturdays) from the batch in which the transaction was settled.
If the NEFT transaction is not credited or returned within the stipulated time then the banks are liable to pay penal
interest to the affected customers. Banks are required to pay penal interest at the current RBI LAF Repo Rate plus 2%
for the period of delay / till the date of refund as the case may be to the affected customers account without waiting for
a specific claim to be lodged by the customer in this regard.

If credit is not afforded to the account of the beneficiary?

Ans: If it is not possible to afford credit to the account of the beneficiary for whatever reason, destination banks are
required to return the transaction (to the originating branch) within two hours of completion of the batch in which the
transaction was processed.

For example, if a customer submits a fund transfer request at 12.05 p.m. to a NEFT-enabled branch, the branch in turn
forwards the message through its pooling centre to the NEFT Clearing Centre for processing in the immediately
available batch which (say) is the 1.00 pm batch. If the destination bank is unable to afford the credit to the beneficiary
for any reason, it has to return the transaction to the originating bank, not later than in the 3.00 pm batch. On receiving
such a returned transaction, the originating bank has to credit the amount back to account of the originating customer.

Can NEFT be used to transfer funds from / to NRE and NRO accounts?

Ans: Yes. NEFT can be used to transfer funds from or to NRE and NRO accounts in the country. This, however, is
subject to the adherence of the provisions of the Foreign Exchange Management Act, 2000 (FEMA) and Wire Transfer
Guidelines.

Can remittances be sent abroad using NEFT?

Ans: No. However, a facility is available to send outward remittances to Nepal under the Indo-Nepal Remittance Facility
Scheme

Pre-requisites for originating a NEFT transaction

Following are the pre-requisites for putting through a funds transfer transaction using NEFT
Originating and destination bank branches should be part of the NEFT network
Beneficiary details such as beneficiary name, account number and account type, name and IFSC of the beneficiary
bank branch should be available with the remitter
Customers should exercise due care in providing the account number of the beneficiary, as, in the course of
processing NEFT transactions, the credit will be given to the customers account solely based on account number
provided in the NEFT remittance instruction / message.

How does the NEFT system operate?

Step-1 : An individual / firm / corporate intending to originate transfer of funds through NEFT has to fill an application
form providing details of the beneficiary (like name of the beneficiary, name of the bank branch where the beneficiary
has an account, IFSC of the beneficiary bank branch, account type and account number) and the amount to be
remitted. The application form will be available at the originating bank branch. The remitter authorizes his/her bank
branch to debit his account and remit the specified amount to the beneficiary. Customers enjoying net banking facility
offered by their bankers can also initiate the funds transfer request online. Some banks offer the NEFT facility even
through the ATMs. Walk-in customers will, however, have to give their contact details (complete address and telephone
number, etc.) to the branch. This will help the branch to refund the money to the customer in case credit could not be
afforded to the beneficiarys bank account or the transaction is rejected / returned for any reason.
Step-2 : The originating bank branch prepares a message and sends the message to its pooling centre (also called
the NEFT Service Centre).
Step-3 : The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell,
Reserve Bank of India, Mumbai) to be included for the next available batch.
Step-4 : The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting
entries to receive funds from the originating banks (debit) and give the funds to the destination banks(credit).
Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT
Service Centre).
Step-5 : The destination banks receive the inward remittance messages from the Clearing Centre and pass on the
credit to the beneficiary customers accounts.

Whether the system is centre-specific or has any geographical restriction?

Ans: No. There is no restriction of centres or of any geographical area within the country. The NEFT system takes
advantage of the core banking system in banks. Accordingly, the settlement of funds between originating and receiving
banks takes places centrally at Mumbai, whereas the branches participating in NEFT can be located anywhere across
the length and breadth of the country.

What is IFSC?

IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch
participating in the NEFT system.
This is an 11 digit code with
the first 4 alpha characters representing the bank,
The 5th character is 0 (zero) act as separating bit.
The last 6 characters representing the branch.
IFSC is used by the NEFT system to identify the originating / destination banks / branches and also to route the
messages appropriately to the concerned banks / branches.
All the banks have also been advised to print the IFSC of the branch on cheques issued to their customers.

Electronic Clearing Service (ECS)

ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used
by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or
for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan instalment
repayments, periodic investments in mutual funds, insurance premium etc.
Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa. ECS
includes transactions processed under National Automated Clearing House (NACH) operated by National Payments
Corporation of India (NPCI).
Types Of ECS
Primarily, there are two variants of ECS - ECS Credit and ECS Debit.
ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for instance, employees,
investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by
raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards
distribution of dividend, interest, salary, pension, etc., of the user institution.

ECS Debit is used by an institution for raising debits to a large number of accounts (for instance, consumers of utility

services, borrowers, investors in mutual funds etc.) maintained with bank branches at various locations within the
jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for
payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments
in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution by
large number of customers etc.
Categories of ECS Scheme
Based on the geographical location of branches covered, there are 3 broad categories of ECS Schemes
Local ECS , Regional ECS and National ECS . These schemes are either operated by RBI or by the designated
commercial banks. NACH is also one of the form of ECS system operated by NPCI
Local ECS
This is operating at 81 centres / locations across the country. At each of these ECS centres, the branch coverage is
restricted to the geographical coverage of the clearing house, generally covering one city and/or satellite towns and
suburbs adjoining the city.
Regional ECS
This is operating at 9 centres / locations at various parts of the country. RECS facilitates the coverage all corebanking-enabled branches in a State or group of States and can be used by institutions desirous of reaching
beneficiaries within the State / group of States. The system takes advantage of the core banking system in banks.
Accordingly, even though the inter-bank settlement takes place centrally at one location in the State, the actual
customers under the Scheme may have their accounts at various bank branches across the length and breadth of the
State / group of States.

National ECS

National ECS is the centralized version of ECS Credit which was launched in October 2008. The Scheme is operated
at Mumbai and facilitates the coverage of all core-banking enabled branches located anywhere in the country. This
system too takes advantage of the core banking system in banks. Accordingly, even though the inter-bank settlement
takes place centrally at one location at Mumbai, the actual customers under the Scheme may have their accounts at
various bank branches across the length and breadth of the country. Banks are free to add any of their core-bankingenabled branches in NECS irrespective of their location
Who can initiate an ECS Credit transaction?
ECS Credit payments can be initiated by any institution (called ECS Credit User) which needs to make bulk or
repetitive payments to a number of beneficiaries. The institutional User has to first register with an ECS Centre. The
User has to also obtain the consent of beneficiaries (i.e., the recipients of salary, pension, dividend, interest etc.) and
get their bank account particulars prior to participation in the ECS Credit scheme.
ECS Credit payments can be put through by the ECS User only through his / her bank (known as the Sponsor bank).
ECS Credits are afforded to the beneficiary account holders (known as destination account holders) through the
beneficiary account holders bank (known as the destination bank). The beneficiary account holders are required to
give mandates to the user institutions to enable them to afford credit to their bank accounts through the ECS Credit
mechanism.
How does the ECS Credit Scheme work?

The User intending to effect payments through ECS Credit has to submit details of the beneficiaries (like name, bank /
branch / account number of the beneficiary, MICR code of the destination bank branch, etc.), date on which credit is to
be afforded to the beneficiaries, etc., in a specified format (called the input file) through its sponsor bank to one of the
ECS Centres where it is registered as a User.

The bank managing the ECS Centre then debits the account of the sponsor bank on the scheduled settlement day and
credits the accounts of the destination banks, for onward credit to the accounts of the ultimate beneficiaries with the
destination bank branches.

Is there any limit on the value of individual transactions in ECS Credit?

Ans : No. There is no value limit on the amount of individual transactions.

The processing / service charges levied under ECS Credit is decided by Sponsor bank . With effect from 1st July 2011,
originating banks are required to pay a nominal charge of 25 paise per transaction to the Clearing house and destination
bank respectively. Destination bank branches have been directed to afford ECS Credit free of charge to the beneficiary
account holders.
What will happen if credit is not afforded to the account of the beneficiary?

If a Destination Bank is not in a position to credit the beneficiary account due to any reason, the same would be
returned to the ECS Centre to enable the ECS Centre to pass on the uncredited items to the User Institution through
the Sponsor Bank. The User Institution can then initiate payment through alternate modes to the beneficiary.

In case of delayed credit by the destination bank, the destination bank would be liable to pay penal interest (at the
prevailing RBI LAF Repo rate plus two percent) from the due date of credit till the date of actual credit. Such penal
interest should be credited to the Destination Account Holders account even if no claim is lodged to the effect by the
Destination Account Holder.

Who can initiate a ECS Debit transaction?

Ans : ECS Debit transaction can be initiated by any institution (called ECS Debit User) which has to receive / collect
amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic
investments in mutual funds, insurance premium etc. It is a Scheme under which an account holder with a bank
branch can authorise an ECS User to recover an amount at a prescribed frequency by raising a debit to his / her bank
account.

The User institution has to first register with an ECS Centre. The User institution has to also obtain the authorization
(mandate) from its customers for debiting their account along with their bank account particulars prior to participation in
the ECS Debit scheme. The mandate has to be duly verified by the beneficiarys bank. A copy of the mandate should
be available on record with the destination bank where the customer has a bank account.

How does the ECS Debit Scheme work?

The ECS Debit User intending to collect receivables through ECS Debit has to submit details of the customers (like
name, bank / branch / account number of the customer, MICR code of the destination bank branch, etc.), date on
which the customers account is to be debited, etc., in a specified format (called the input file) through its sponsor bank
to the ECS Centre.

The bank managing the ECS Centre then passes on the debits to the destination banks for onward debit to the
customers account with the destination bank branch and credits the sponsor bank's account for onward credit to the
User institution. Destination bank branches will treat the electronic instructions received from the ECS Centre on par
with the physical cheques and accordingly debit the customer accounts maintained with them. All the unsuccessful
debits are returned to the sponsor bank through the ECS Centre (for onward return to the User Institution) within the
specified time frame.

Can the mandate once given by a customer be withdrawn or stopped?

Ans : Yes. In case of any need to withdraw or stop a mandate the customer can do so by approaching the user
institution to withdraw the mandate. The account holder / customer can also withdraw the mandate / debit instruction
directly from his / her banker without involvement of the User institution. The withdrawal instructions of a customer in
such cases would be treated equivalent to a stop payment instruction in cheque clearing system. However, as a
matter of best practice, the customer may also provide prior notice or intimation of mandate withdrawal to the ECS
user institution well in time, so as to ensure that the input files submitted by the user institution does not include the
ECS Debit details in respect of the withdrawn / stopped mandates, leading to avoidable returns/rejections etc.

Can a customer stipulate any ceiling on the amount of debit, purpose or validity period of the
mandate under the ECS Debit Scheme?

Yes. It is left to the choice of the individual customer and the ECS user to decide these aspects. The mandate can
contain a ceiling on the maximum amount of debit, specify the purpose of debit and validity period of the mandate.

Is there any limit on the value of Individual transactions in ECS Debit?

No. There is no value limit on the amount of individual transactions that can be collected by ECS Debit.

What are the processing / service charges levied under ECS Debit?

The Reserve Bank of India has deregulated the charges to be levied by sponsor banks from user institutions. The
sponsor banks are, however, required to disclose the charges in a transparent manner. With effect from 1st July 2011,
originating banks are required to pay a nominal charge of 25 paise and 50 paise per transaction to the Clearing house
and destination bank respectively. Bank branches do not generally levy processing / service charges for debiting the
accounts of customers maintained with them.

Magnetic Ink Character Recognition (MICR) code

A MICR code is unique to each bank branch. Thus, a MICR code can be used to uniquely identify any bank branch.
It comprises of 3 parts:
The first 3 digits represent the city (City Code). They are aligned with the PIN code we use for postal addresses in
India.The next 3 digits represent the bank (Bank Code) and The last 3 digits represent the branch (Branch Code)
City code for Mumbai: 400
Bank code for SBI: 002
Branch code for Andheri (West): 003
Thus, the MICR code is: 400002003

Cheque Truncation System

1.

What is Cheque Truncation?

Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point by the
presenting bank en-route to the paying bank branch. In its place an electronic image of the cheque is transmitted to
the paying branch through the clearing house, along with relevant information like data on the MICR band, date of
presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across
bank branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the
associated cost of movement of the physical cheques, reduces the time required for their collection and brings
elegance to the entire activity of cheque processing.

2.

Why Cheque Truncation in India?

As explained above, Cheque Truncation speeds up the process of collection of cheques resulting in better service to
customers, reduces the scope of loss of instruments in transit, lowers the cost of collection of cheques, and removes
reconciliation-related and logistics-related problems, thus benefitting the system as a whole.

With the other major products being offered in the form of RTGS and NEFT, the Reserve Bank has created the
capability to enable inter-bank and customer payments online and in near-real time. However, cheques continue to be
the prominent mode of payments in the country. Reserve Bank of India has therefore decided to focus on improving
the efficiency of the cheque clearing cycle. Offering Cheque Truncation System (CTS) is a step in this direction.

In addition to operational efficiency, CTS offers several benefits to banks and customers, including human resource
rationalisation, cost effectiveness, business process re-engineering, better service, adoption of latest technology, etc.
CTS, thus, has emerged as an important efficiency enhancement initiative undertaken by Reserve Bank in the
Payments Systems arena.

3.

How CTS works?

In CTS, the presenting bank (or its branch) captures the data (on the MICR band) and the images of a cheque using
their Capture System (comprising of a scanner, core banking or other application) which is internal to them, and have
to meet the specifications and standards prescribed for data and images.

To ensure security, safety and non-repudiation of data / images, end-to-end Public Key Infrastructure (PKI) has been
implemented in CTS. As part of the requirement, the collecting bank (presenting bank) sends the data and captured
images duly signed digitally and encrypted to the central processing location (Clearing House) for onward transmission
to the paying bank (destination or drawee bank). For the purpose of participation the presenting and paying banks are
provided with an interface / gateway called the Clearing House Interface (CHI) that enables them to connect and
transmit data and images in a secure and safe manner to the Clearing House (CH).

The Clearing House processes the data, arrives at the settlement figure and routes the images and requisite data to
the paying banks. This is called the presentation clearing. The paying banks through their CHIs receive the images
and data from the Clearing House for payment processing.

The paying banks CHIs also generates the return file for unpaid instruments, if any. The return file / data sent by the
paying banks are processed by the Clearing House in the return clearing session in the same way as presentation
clearing and return data is provided to the presenting banks for processing.

The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions
are successfully processed. The entire essence of CTS technology lies in the use of images of cheques (instead of the
physical cheques) for payment processing.

4.

What type of instruments can be presented for clearing through CTS?

It is preferable to present instruments complying with CTS-2010 standards for clearing through CTS for faster
realisation. Instruments not complying with CTS-2010 standards will continue be accepted but will be cleared at less
frequent intervals i.e. once a week(every Monday

5.

If a customer desires to see the physical cheque issued by him for any reason, what are the options
available?

Under CTS the physical cheques are retained at the presenting bank and do not move to the paying banks. In case a
customer desires, banks can provide images of cheques duly certified/authenticated. In case, however, a customer
desires to see / get the physical cheque, it would need to be sourced from the presenting bank, for which a request
has to be made to his/her bank. An element of cost / charge may also be involved for the purpose. To meet legal
requirements, the presenting banks which truncate the cheques need to preserve the physical instruments for a period
of 10 years.

6.

What is Cheque Standardisation and what does CTS 2010 Standard mean?

All banks providing cheque facility to their customers have been advised to issue only 'CTS-2010' standard cheques.
Cheques not complying with CTS-2010 standards will be cleared at less frequent intervals i.e. weekly once from
November 1, 2014 onwards.

7.

How the image and data transmitted over the network is secured?

The security, integrity, non-repudiation and authenticity of the data and image transmitted from the presenting bank to
the paying bank through Clearing House are ensured using the Public Key Infrastructure (PKI). CTS is compliant to the
requirements of the IT Act, 2000. It has been made mandatory for the presenting bank to sign the images and data
from the point of origin itself. PKI is used throughout the entire cycle covering capture system, the presenting bank, the
clearing house and the paying bank. The PKI standards used are in accordance with the appropriate Indian acts and
notifications of Controller of Certifying Authority (CCA).

8.

How are the images of cheques taken?

Images of cheques are taken using specific scanners. Images are classified as black and white, gray-scale or colour
based on how the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a
range of gray shades between black and white. The entire image of the original document gets mapped as some
shade of gray, lighter or darker, depending on the colour of the source. In the case of black and white images, such
mapping is made only to two colours based on the range of values of contrasts. A black and white image is also called
a binary image.

9.

What are the image specifications in CTS in the Indian context?

Imaging of cheques can be based on various technology options. The cheque images can be Black & White, Gray
Scale or Coloured. These have their associated advantages and disadvantages. Black & White images are light in
terms of image-size, but do not reveal all the subtle features that are there in the cheques. Coloured images are ideal
but increase storage and network bandwidth requirements. Gray Scale images are mid-way. CTS in India use a
combination of Gray Scale and Black & White images. There are three images of each cheques that need to be taken
- front Gray Scale, front Black & White and back Black & White

Bharat Bill Payment System (BBPS)

What is Bharat Bill Payment System (BBPS)?

Bharat Bill Payment System (BBPS) is an integrated bill payment system which will offer interoperable bill payment
service to customers online as well as through a network of agents on the ground. The system will provide multiple
payment modes and instant confirmation of payment.

What is Bharat Bill Payment Central Unit (BBPCU)?

Bharat Bill Payment Central Unit (BBPCU) will be a single authorized entity operating the BBPS. The BBPCU will set
necessary operational, technical and business standards for the entire system and its participants, and also undertake
clearing and settlement activities. As indicated in the circular dated November 28, 2015 National Payment Corporation
(NPCI) has been identified to act as BBPCU. It will be an authorized entity under the Payment and Settlement
Systems Act, 2007.

What is Bharat Bill Payment Operating Unit (BBPOU)?

Bharat Bill Payment Operating Units (BBPOUs) will be authorised operational entities, adhering to the standards set
by the BBPCU for facilitating bill payments online as well as through a network of agents, on the ground.

Banknotes Series
Pre-2005 Banknotes and MG-2005 Series
Banknotes Series
Since Independence of India, three different series of banknotes are issued

1.
2.
3.
4.
5.
6.
7.
8.
9.

Ashoka Pillar Banknotes - Issued in 1949

Mahatma Gandhi (MG) Series 1996 - Issued in 1996
Mahatma Gandhi (MG) Series 2005 - Issued from 2005

MG Series - 2005 Banknotes

These series banknotes are issued in the denomination of Rs. 10, 20, 50, 100, 500 and 1000, and contain
some additional new security features that MG Series-1996 doesn't have. Started from August 2005, MG Series 2005 banknotes are currently being used in India.
It is very easy to distinguish MG-Series 2005 notes from its predecessors, because these notes bear the year of
printing on the reverse side.
Withdrawal of Pre-2005 Banknotes
RBI changed the design of pre-2005 banknotes and introduce new security features primarily to minimize
the risk of counterfeiting. So that the economy can be protected from counterfeiters or forgers.

10.
Also, the withdrawal exercise is in conformity with the standard international practice of not having multiple series of
notes in circulation at the same time.
11.
12.
13.
14.
15.
16.
17.
18.

Public can visit any bank branch, or RBI Issue Office to exchange pre-2005 banknotes.
Recently, the deadline of January 1, 2015 has been extended to June 30, 2015 by RBI.
Situational Question
RBI has given a deadline for the exchange of pre-2005 banknotes. What will happen to those notes (that will still
remain in circulation) after the deadline? Will those remain a legal tender?

19.
20. RBI has clarified that the public can continue to freely use those notes for any transaction and
can unhesitatingly receive those notes in payment, as all such notes continue to remain legal tender.
21.
22. But public is encouraged to exchange pre-2005 notes with MG Series-2005 notes.
23. - See more at: http://www.bankoncepts.in/2015/02/pre-2005-banknotes-and-mg-2005series.html#sthash.3qDw8lny.dpuf

Small and Payment Bank

Small Banks
The objectives of setting up of Small Banks are to further financial inclusion, by providing Provision of savings facilities to under-served and un-served sections of the population

Supply of Credit to small business units, small farmers, micro and small industries, and other unorganized
sector entities, in their limited area of operations, through high technology - low cost operations

Activities of Small Banks The area of operations of the small bank will normally be restricted to contiguous districts in
a homogenous cluster of states/UTs so that the bank has the 'local feel' and culture. Branch expansion for first 3
years, need RBI's prior approval.
Primarily undertake basic banking activities, like acceptance of deposits and lending to small farmers, small
businesses, micro and small industries and unorganized sectors.
It can also undertake other simple financial activities with the prior approval of RBI.
It cannot set up subsidiaries to undertake non-banking financial services (NBFC) activities.
Capital Requirements - The minimum paid-up capital is Rs. 100 crore.
Funds Deployment In view of the inherent risk (since it can lend) of a small bank, it shall be required to maintain a minimum Capital Adequacy
Ratio (CAR) of 15 % of its Risk Weighted Assets (RWA) on a continuous basis. However, as small banks are not expected to
deal with sophisticated products, the CAR will be computed under simplified Basel I standards.

Payments Bank
The objectives of setting up of Payments Banks are to further financial inclusion, by providing

Small Savings accounts

Payments / remittance services to migrant labor workforce, low income households, small businesses,
other unorganized sector entities and other users.

Activities of Payment Banks 1.

They can accept Demand Deposits, but will initially be restricted to hold a maximum balance of Rs. 1,00,000 per
individual customer

2.

Issuance of ATM / Debit Cards, but they cannot issue Credit Cards

3.

Payments and remittance services through various channels

4.

They can act as Business

5.

Distribution of non-risk sharing simple financial products, like Mutual

etc.

6.

They cannot undertake lending activities (means cannot disburse loans)

Correspondents (BC) of another bank (following RBI guidelines)

Funds (MF) units and insurance products,

Capital Requirements The minimum paid-up capital is Rs. 100 crore.

Funds Deployment Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, it will be required to invest minimum 75 % of
its demand deposits in Statutory Liquidity Ratio (SLR) eligible government securities / T-bills with maturity up to 1 year, and

hold maximum 25 % in current and time/fixed deposits with other Scheduled Commercial Banks (SCBs) for operational
purposes and liquidity management.
Small Banks vs. Payment Banks
24. Small Banks can accept demand and time deposits from public as commercial banks do (Savings, Current, Fixed,
Recurring deposits, etc.)
But, Payment Banks can take only demand deposits (Savings and Current deposits), and cannot issue Credit
cards (however, can issue Debit cards)
25. Small Banks can give loans only to small business units, small farmers, micro and small industries, and
other unorganized sectors, but not to large industries.
But, Payment Banks cannot give any type of loans to public, but can invest in government securities or T-bills.
26. The target of Small Banks is to supply credit to small business units, small farmers, micro and small industries, and
other unorganized sector entities, in their limited area of operations. And provisions for savings for poor people.
The target of Payment Banks is payments / remittance services to migrant labor workforce, low
income households, small businesses, other unorganized sector entities, and savings for poor people.
- See more at: http://www.bankoncepts.in/2015/02/small-and-payment-bank.html#sthash.vOJrXoIz.dpuf

Cooperative Banks

In normal commercial banking, the banking business is owned or maintained by government (in case of Public Sector
Banks) or some private entity (in case of Private Sector Banks). In this case, banks, on behalf of government or that
private entity, lends to other individuals or business, i.e., borrowers. The sole purpose of this commercial banking
is profit.
But in case of cooperative banking, some small private entities or individuals come together, and form a small financial
institution (by their own funds / member funds), and lend to the members of that institution. Note that
the banking business here is on cooperative basis, i.e., one member is helping / lending to other member (now they do
lend to non-member individuals or entities as normal banks). These financial institutions are known as Cooperative
Banks.

Purpose of Cooperative Banks

Initially, cooperative banks were set up to meet the credit needs in rural area, especially to prevent money lenders, but now
they have vast area of services as follows

Agricultural and allied activities

Rural-based industries

Small trade and industry in Urban areas, etc.

Structure of Indian Cooperative Banks

Cooperative banks in India have a 3-tier structure

Primary Credit Societies (village/town/urban centers)

Central Cooperative Banks (district-level)

State Cooperative Banks (state-level)

Urban Cooperative Banks (UCBs)

Primary (urban) Credit Societies that meet certain criteria can apply to RBI for a banking license to operate as Urban
Cooperative Banks (UCBs).

Managerial aspects, like registration, management, recruitment, administration, etc. are controlled by Registrar of
Cooperative Societies (RCS) of the respective state governments (as per Co-operative Societies Acts)

Banking aspects are governed by RBI (as per Banking Regulation Act, 1949)

These banks cater to the needs of small borrowers including retail traders, small entrepreneurs, professionals, salaried
persons, etc.

District Central Cooperative Banks (DCCB)

DCCBs are cooperative banks at the district-level. Each district generally will have only one DCCB. Following the
establishment of NABARD in 1982, the supervisory function of these banks has been passed on to NABARD.

State Cooperative Banks (SCB)

SCBs are cooperative banks at the state-level. A number of DCCBs report to an SCB. NABARD has the supervisory
authority over these SCBs.

Note that DCCB and SCB has three supervisors - RCS, RBI and NABARD, whereas UCBs are controlled by RCS and RBI.
- See more at: http://www.bankoncepts.in/2015/03/cooperative-banks.html#sthash.T2UCGQPv.dpuf