ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market

risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way
that the net earning from interest is maximised within the overall risk-preference (present and future) of
the institutions. The ALM functions extend to liquidly risk management, management of market risk,
trading risk management, funding and capital planning and profit planning and growth projection.

Benefits of ALM - It is a tool that enables bank managements to take business decisions
in a more informed framework with an eye on the risks that bank is exposed to. It is an
integrated approach to financial management, requiring simultaneous decisions about the
types of amounts of financial assets and liabilities - both mix and volume - with the
complexities of the financial markets in which the institution operates

The concept of ALM is of recent origin in India. It has been introduced in Indian
Banking industry w.e.f. 1st April, 1999. ALM is concerned with risk management and
provides a comprehensive and dynamic framework for measuring, monitoring and
managing liquidity, interest rate, foreign exchange and equity and commodity price risks
of a bank that needs to be closely integrated with the banks’ business strategy.

Therefore, ALM is considered as an important tool for monitoring, measuring and

managing the market risk of a bank. With the deregulation of interest regime in India,
the Banking industry has been exposed to the market risks. To manage such risks, ALM
is used so that the management is able to assess the risks and cover some of these by
taking appropriate decisions.

The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows
or outflows. With a view to measure the liquidity and interest rate risk, banks use of
maturity ladder and then calculate cumulative surplus or deficit of funds in different time
slots on the basis of statutory reserve cycle, which are termed as time buckets.

As a measure of liquidity management, banks are required to monitor their cumulative

mismatches across all time buckets in their Statement of Structural Liquidity by
establishing internal prudential limits with the approval of the Board / Management
Committee.

The ALM process rests on three pillars:

i. ALM Information Systems

o Management Information Systems
o Information availability, accuracy, adequacy and expediency
ii. ALM Organisation
o Structure and responsibilities
o Level of top management involvement
iii. ALM Process
 o Risk parameters
o Risk identification
o Risk measurement
o Risk management
o Risk policies and tolerance levels.

As per RBI guidelines, commercial banks are to distribute the outflows/inflows in

different residual maturity period known as time buckets. The Assets and
Liabilities were earlier divided into 8 maturity buckets (1-14 days; 15-28 days; 29-
90 days; 91-180 days; 181-365 days, 1-3 years and 3-5 years and above 5 years),
based on the remaining period to their maturity (also called residual maturity). All
the liability figures are outflows while the asset figures are inflows. In September,
2007, having regard to the international practices, the level of sophistication of
banks in India, the need for a sharper assessment of the efficacy of liquidity
management and with a view to providing a stimulus for development of the term-
money market, RBI revised these guidelines and it was provided that

 (a) the banks may adopt a more granular approach to measurement of liquidity risk
by splitting the first time bucket (1-14 days at present) in the Statement of
Structural Liquidity into three time buckets viz., next day , 2-7 days and 8-14 days.
Thus, now we have 10 time buckets.

After such an exercise, each bucket of assets is matched with the corresponding
bucket of the liabililty. When in a particular maturity bucket, the amount of
maturing liabilities or assets does not match, such position is called a mismatch
position, which creates liquidity surplus or liquidity crunch position and depending
upon the interest rate movement, such situation may turnout to be risky for the
bank. Banks are required to monitor such mismatches and take appropriate steps
so that bank is not exposed to risks due to the interest rate movements during that
period.

 (b) The net cumulative negative mismatches during the Next day, 2-7 days, 8-14
days and 15-28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the
cumulative cash outflows in the respective time buckets in order to recognise the
cumulative impact on liquidity.

The Board’s of the Banks have been entrusted with the overall
responsibility for the management of risks and is required to decide the
risk management policy and set limits for liquidity, interest rate, foreign
exchange and equity price risks.

Asset-Liability Committee (ALCO) is the top most committee to oversee the

 implementation of ALM system and it is to be headed by CMD or ED. ALCO
considers product pricing for both deposits and advances, the desired maturity
profile of the incremental assets and liabilities in addition to monitoring the risk
levels of the bank. It will have to articulate current interest rates view of the bank
and base its decisions for future business strategy on this view.

BALANCE SHEET ANALYSIS

Sources of Funds

1) Capital

2) Reserves & Surplus

3) Term Liabilities

4) Current Liabilities

Uses of Funds

 1) Fixed Assets
 2) Intangible Asets
 3) Non Current Assets
 4) Current Assets

 Capital :
 1) Authorised Capital
 2) Issued Capital
 3) Subscribed Capital
 4) Paid-up Capital

 Reserves :
 1) Subsidy Received From The Govt
 2) Development Rebate reserve
 3) Revaluation of fixed assets
 4) Issue of Shares at Premium
 5) General Reserves

 Surplus
 The credit balance in profit and loss account
 Tangible Net Worth
 This refers to the total funds arrived by paid-up capital , Reserves and
P&L Surplus
 Less
 Intagible Assets
 Term Liabilities
 Redeemable preference shares
 Debentures
 Deferred payment gaurantees
 Public Deposits(Repayable after 12 months)
 Term loans and unsecured loans from friens, relatives,directors repayable over
a period of time
 Remark : The company can raise public deposits to the extent of 25% of paid
up capital plus free reserves and 10% from share holders for the maturity
period ranging from 6 months to 3 yrs

 Current Liabilities
 Working capital bank borrowings
 T.loans deferred credit inst falling due in 12 mths
 public deposits maturing within 12 months
 unsecured loans, unless the repayment is on deferred terms
 sundry creditors
 advances from dealers and customers
 interest accrued but not paid
 tax provisions
 Dividend declared and payable

 Contingent Liabilities

 Tax disputes
 Legal litigations
  Bills and cheques discounted with banks
 Claims against the company not acknowledged

************

 Fixed Assets
 Infrastructure like land & building
 plant & machinery
 Vehicles

 Furniture & fixtures

 Depreciation
 Straight line method
 Written down Value Method
 Remark : Dep added to profit to arrive repayment obligation especially in term
loans

 Investments
 1) Shares And Securities
 2) Associate Companies
 3) Fixed deposits with banks/finance companies
 Remark : While analysing BS we can analyse necessity of such investments
 Remark : While fixed deposits with banks are considered as fixed assets, the
investmetns in associate concerns are treated as non current assets.

 Non Current Assets

 Deferred recievables/Overdue recievables(like disputed amounts and Over Due
> 6 mths)
 Non moving stocks/inventory/un usable spares
 Investment/Lending to associate concern
 Borrowing of the directors from the company
 Telephone deposits/ ST deposits etc
  Intangible Assets

 Preliminary & Preoperative expenses

 Deferred Revenue Expenditure
 Goodwill
 Trade mark
 Patents
 Rem : The o/s balance to be written off every year by charging P&L account

 Current Assets
 Raw materials, work-in-progress,finished goods,spares and consumables
 Sundry debtors and recievables < 6 mths
 Advances paid to suppliers of raw materials
 Cash and bank balances
 Interest recievables
 Other current assets such as Government securities, Bank deposits ..etc

What is Bancassurance?

Bancassurance is a French term referring to the selling of insurance through a bank's established
distribution channels. In other words, we can say Bancassurance is the provision of insurance
(assurance) products by a bank. The usage of the word picked up as banks and insurance
companies merged and banks sought to provide insurance, especially in markets that have been
liberalised recently. It is a controversial idea, and many feel it gives banks too great a control
over the financial industry. In some countries, bancassurance is still largely prohibited, but it
was recently legalized in countries like USA when the Glass Steagall Act was repealed after the
passage of the Gramm Leach Bililey Act.

Bancassurance is the selling of insurance and banking products through the same channel, most
commonly through bank branches. Selling insurance.means distribution of insurance and other
financial products through Banks. Bancassurance concept originated in France and soon became
a success story even in other countries of Europe. In India a number of insurers have already tied
up with banks and some banks have already flagged off bancassurance through select products.
Bancassurance has become significant. Banks are now a major distribution channel for insurers,
and insurance sales a significant source of profits for banks. The latter partly being because
banks can often sell insurance at better prices (i.e., higher premiums) than many other channels,
and they have low costs as they use the infrastructure (branches and systems) that they use for
banking.

Bancassurance primarily rests on the relationship the customer has developed over a period of
time with the bank. And pushing risk products through banks is a much more cost-effective affair
for an insurance company compared to the agent route, while, for banks, considering the falling
interest rates, fee based income coming in at a minimum cost is more than welcome.

Advantages of Bancassurance:

The following factors have mainly led to success of bancassurance

(i) Pressure on banks' profit margins. Bancassurance offers another area of profitability to banks
with little or no capital outlay. A small capital outlay in turn means a high return on equity.

(ii) A desire to provide one-stop customer service. Today, convenience is a major issue in
managing a person's day to day activities. A bank, which is able to market insurance products,
has a competitive edge over its competitors. It can provide complete financial planning services
to its customers under one roof.

(iii) Opportunities for sophisticated product offerings.

(iv) Opportunities for greater customer lifecycle management.

(v) Diversify and grow revenue base from existing relationships.

(vi) Diversify risks by tapping another area of profitability.

(vii) The realisation that insurance is a necessary consumer need. Banks can use their large base
of existing customers to sell insurance products.

(viii) Bank aims to increase percentage of non-interest fee income

(ix) Cost effective use of premises

Various Models for Bancassurance

Various models are used by banks for bancassurance. (a) Strategic Alliance Model : Under this
Model, there is a tie-up between a bank and an insurance company. The bank only markets the
products of the insurance company. Except for marketing the products, no other insurance
functions are carried out by the bank. (b) Full Integration Model : This model entails a full
integration of banking and insurance services. The bank sells the insurance products under its
brand acting as a provider of financial solutions matching customer needs. Bank controls sales
and insurer service levels including approach to claims. Under such an arrangement the Bank has
an additional core activity almost similar to that of an insurance company. (c) Mixed Models:
Under this Model, the marketing is done by the insurer's staff and the bank is responsible for
generating leads only. In other words, the database of the bank is sold to the insurance company.
The approach requires very little technical investment.

Status of Bancassurance in India

Reserve Bank of India (RBI) has recognized "bancassurance" wherein banks are allowed to
provide physical infrastructure within their select branch premises to insurance companies for
selling their insurance products to the banks’ customers with adequate disclosure and
transparency, and in turn earn referral fees on the basis of premia collected. This would utilize
the resources in the banking sector in a more profitable manner.

Bancassurance can be important source of revenue. With the increased competition and
squeezing of interest rates spreads profit of the are likely to be under pressure. Fee based income
can be increased through hawking of risk products like insurance.

There is enormous potential for insurance in India and recent experience has shown massive
growth pace. A combination of the socio-economic factors are likely to make the insurance
business the biggest and the fastest growing segment of the financial services industry in India.

However, before taking the plunge in to this new field, banks as insurers need to work hard on
chalking out strategies to sell risk products especially in an emerging competitive market.
However, future is bright for bancassurance. Banks in India have all the right ingredients to
make Bancassurance a success story. They have large branch network, huge customer base,
enjoy customer confidence and have experience in selling non-banking products. If properly
implemented, India could take leadership position in bancassurance all over the world

Government of India Notification dated August 3, 2000, specified ‘Insurance’ as a permissible

form of business that could be undertaken by banks under Section 6(1)(o) of the Banking
Regulation Act, 1949. Then onwards, banks are allowed to enter the insurance business as per
the guidelines and after obtaining prior approval of Reserve Bank of India.
Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords.
These accords deal with risk management aspects for the banking sector. In a nut shell we
can say that Basel iii is the global regulatory standard (agreed upon by the members of the
Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and
market liquidity risk. (Basel I and Basel II are the earlier versions of the same, and were
less stringent)

What does Basel III is all About ?

According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of

reform measures, developed by the Basel Committee on Banking Supervision, to
strengthen the regulation, supervision and risk management of the banking sector".

Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel
Committee on Banking Supervision to enhance the banking regulatory framework under
Basel I and Basel II. This latest Accord now seeks to improve the banking sector's abilit

to deal with financial and economic stress, improve risk management and strengthen the
banks' transparency.

What are the objectives / aims of the Basel III measures ?

Basel 3 measures aim to:


 → improve the banking sector's ability to absorb shocks arising from financial and
economic stress, whatever the source
 → improve risk management and governance
 → strengthen banks' transparency and disclosures.
 Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to
withstand periods of economic and financial stress as the new guidelines are more stringent
than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by
RBI from time to time, will be challenging task not only for the banks but also for GOI. It
is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital
in next nine years or so i.e. by 2020 (The estimates vary from organisation to
organisation). Expansion of capital to this extent will affect the returns on the equity of
these banks specially public sector banks. However, only consolation for Indian banks is
the fact that historically they have maintained their core and overall capital well in excess
of the regulatory minimum.

What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel
iii Accord ?

Basel III: Three Pillars Still Standing :

Any one who has ever heard about Basel I and II, is most likely must have heard about
Three Pillars of Basel. Three Pillar of Basel still stand under Basel 3.

Basel III has essentially been designed to address the weaknesses that become too obvious
during the 2008 financial crisis world faced. The intent of the Basel Committee seems to
prepare the banking industry for any future economic downturns.. The framework
enhances bank-specific measures and includes macro-prudential regulations to help create
a more stable banking sector.
The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets

(RWAs) : Maintaining capital calculated through credit, market and operational risk
areas.

Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with
peripheral risks that banks face.

Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to
increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and
Basel II?

What are the Major Features of Basel III ?

(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much
stricter definition of capital. Better quality capital means the higher loss-absorbing
capacity. This in turn will mean that banks will be stronger, allowing them to better
withstand periods of stress.

(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks will
be required to hold a capital conservation buffer of 2.5%. The aim of asking to build
conservation buffer is to ensure that banks maintain a cushion of capital that can be used
to absorb losses during periods of financial and economic stress.

(c) Countercyclical Buffer: This is also one of the key elements of Basel III. The
countercyclical buffer has been introducted with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow
banking activity when it overheats and will encourage lending when times are tough i.e. in
bad times. The buffer will range from 0% to 2.5%, consisting of common equity or other
fully loss-absorbing capital.
(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum
requirement for common equity, the highest form of loss-absorbing capital, has been raised
under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital
requirement, consisting of not only common equity but also other qualifying financial
instruments, will also increase from the current minimum of 4% to 6%. Although the
minimum total capital requirement will remain at the current 8% level, yet the required
total capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value of
many assets fell quicker than assumed from historical experience. Thus, now Basel III
rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative
amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of
leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested
before a mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will be
created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are
to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential

framework, systemically important banks will be expected to have loss-absorbing
capability beyond the Basel III requirements. Options for implementation include capital
surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III :

Under
Under Basel
Requirements Basel
III
II
Minimum Ratio of Total
8% 10.50%
Capital To RWAs
Minimum Ratio of 4.50% to
2%
Common Equity to RWAs 7.00%
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to
2% 5.00%
RWAs
Capital Conservation
None 2.50%
Buffers to RWAs
Leverage Ratio None 3.00%
0% to
Countercyclical Buffer None
2.50%
Minimum Liquidity
None TBD (2015)
Coverage Ratio
Minimum Net Stable
None TBD (2018)
Funding Ratio
Systemically important
Financial Institutions None TBD (2011)
Charge

What is BPLR ? Meaning of BPLR ? Define BPLR. What does BPLR stands for in
banking?

In banking parlance, the BPLR means the Benchmark Prime Lending Rate. However,
with the introduction of Base Rate (explained below), BPLR has now lost its importance
and is made applicable normally only on the loans which have been sanctioned before the
introduction of Base Rate (i.e. July 2010).

The BPLR system, introduced in 2003, fell short of its original objective of bringing
transparency to lending rates. This was mainly because under the BPLR system, banks
could lend below BPLR. For the same reason, it was also difficult to assess the transmission
of policy rates of the Reserve Bank to lending rates of banks

Thus, BPLR was / is the interest rate that commercial banks normally charge (or we can
say they were expected to charge) their most credit-worthy customers. [ Although as per
Reserve Bank of India rules, Banks were free to fix Benchmark Prime Lending Rate
(BPLR) for credit limits over Rs.2 lakh with the approval of their respective Boards yet
BPLR was to be declared and made uniformly applicable at all the branches. The Asset-
Liability Management Committee (ALCO) of respective bank fixed interest rates on
Deposits and Advances, subject to their reporting to the Board immediately thereafter. The
banks were also to declare the maximum spread over BPLR with the approval of the
ALCO/Board for all advances ]

What is Base Rate ? Define Base Rate. Meaning of Base Rate ? Which categories of loans
are exempted from Base Rate ?

The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in
cases allowed by RBI.

The Base Rate system has replaced the BPLR system with effect from July 1, 2010. Base
Rate shall include all those elements of the lending rates that are common across all
categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a
specific tenor that may be disclosed transparently.

There can be only one Base Rate for each bank. However, banks have the freedom to
choose any benchmark to arrive at a single Base Rate but the same needs to disclosed
transparently.

As per RBI guidelines (as in July 2012), the following categories of loans could be priced
without reference to Base Rate :-

(a) DRI Advances;

(b) Loans to banks' own employees including retired employees;

(c) Loans to banks' depositors against their own deposits

Base Rate Guidelines for Restructured Loans :

In case of restructured loans, if some of the WCTL, FITL etc needs to be granted below the
Base Rate for the purpose of viability, and there are recompense etc. caluses, such lending
will not be constructed as a violation of the Base Rate guidelines.

What are the Guidelines for applicability of Base Rate where subvention or Refinance is
available :

Cases Where Subvention is Available

(i) Interest Rate Subvention on Crop Loans :

a.
b. In case of crop loans up to Rupees three lakh, for which subvention is available, banks
should charge farmers the interest rates as stipulated by the Government of India. If the
yield to the bank (after including subvention) is lower than the Base Rate, such lending
will not be construed a violation of the Base Rate guidelines.
c. As regards the rebate provided for prompt repayment, since it does not change the yield
to the banks [mentioned at (a) above] on such loans, it would not be a factor in reckoning
compliance with the Base Rate guidelines.

(ii) Interest Rate Subvention on Export Credit

Interest rates applicable for all tenors of rupee export credit advances will be at or above the
Base Rate. In respect of cases where subvention of Government of India is available, banks will
have to reduce the interest rate chargeable to exporters as per Base Rate system by the amount of
subvention available. If, as a consequence, the interest rate charged to exporters goes below the
Base Rate, such lending will not be construed a violation of the Base Rate guidelines.

Cases where Refinance Is Available : (a)Financing of Off-Grid and Decentralised Solar

applications Government of India, Ministry of New and Renewable Energy (MNRE) has
formulated a scheme on financing of Off-Grid and Decentralised Solar (Photovoltaic and
Thermal) applications as part of the Jawaharlal Nehru National Solar Mission (JNNSM). Under
the scheme, banks may extend subsidized loans to entrepreneurs at interest rates not exceeding
five percent, where refinance of two percent from Government of India is available. Such
lending at interest rates not exceeding five percent per annum where refinance of Government of
India is available, would not be considered a violation of our Base Rate Guidelines.

(b) Extending financial assistance under Micro Credit scheme of National Scheduled Tribes
Finance and Development Corporation (NSTFDC) and various schemes of National
Handicapped Finance and Development Corporation (NHFDC) : Banks may charge interest at
the rates prescribed under the schemes of NSTFDC /NHFDC to the extent refinance is available.
Such lending, even if it is below the Base Rate, would not be considered a violation of our Base
Rate Guidelines. Interest rate charged on the part not covered under refinance should not be
below Base Rate.

(c) Extending financial assistance under schemes of National Safai Karmacharis Finance &
Development Corporation (NSKFDC) : Banks may charge interest at the rates prescribed under
the schemes of National Safai Karmacharis Finance & Development Corporation (NSKFDC) to
the extent refinance is available. Such lending, even if it is below the Base Rate, would not be
considered as a violation of our Base Rate Guidelines. Interest rate charged on the part not
covered under refinance should not be below Base Rate.

(d) Lending to Primary Agricultural Credit Societies (PACS) : Banks financing Primary
Agricultural Credit Societies (PACS) for short term seasonal agricultural operations may lend
below their Base Rate to the extent refinance is available from NABARD. However, when banks
use their own funds, they are not allowed to lend below Base Rate

Base Rate - BPLR Differeences ?

The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending
rate (BPLR) recommended that the BPLR nomenclature be scrapped and a new
benchmark rate — known as Base Rate — should replace it. Base Rate is much more
transparent and banks are not allowed to lend below the base rate (except for cases
specified by RBI and given above). Base Rate is to be reviewed by the respective banks at
least on quarterly basis and the same is to be disclosed publicly. Moreover, the
calculations of BPLR was mostly NOT transparent and banks were frequently lending
below the BPLR to their prime borrowers and also under pressure due to various reasons.

When was the Base Rate Made Applicable for Banks in India ? To whom the Base Rate is
applicable now ?

RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010. Base
Rate system is applicable to all new loans and for those old loans that come up for renewal
after July 2010. Existing loans based on the BPLR system may run till their maturity. In
case existing borrowers want to switch to the new system, before expiry of the existing
contracts, an option may be given to them, on mutually agreed terms

As per RBI guidelines (as in July 2012), the following categories of loans could be priced
without reference to Base Rate :-

(a) DRI Advances;

(b) Loans to banks' own employees including retired employees;

(c) Loans to banks' depositors against their own deposits

Do RBI fixes Base Rate ? Who fixes Base Rate ? How do the Banks arrive at BPLR and
How is now Base Rate calculated?

Remember, RBI does NOT fix the base rate. It has issued broad guidelines to bank as to
how they should arrive at the base rate. Thus, individual bank itself fixes its own base
rate.
The calculations of the BPLR by various banks was not transparent. In case of BPLR,
Banks normally used to take into consideration the factors like cost of funds,
administrative costs and a margin over it. However, such parameters were neither
disclosed by banks nor were same for all the banks.

The Base Rate calculations include all those cost elements which can be clearly identified
and are common across borrowers. The constituents of the Base Rate includes (i) the card
interest rate on retail deposit (deposits below Rs. 15 lakh) with one year maturity (adjusted
for CASA deposits); (ii) adjustment for the negative carry in respect of CRR and SLR; (iii)
unallocatable overhead cost for banks which would comprise a minimum set of overhead
cost elements; and (iv) average return on net After factoring in costs incurred while
sanctioning a loan, the proposed base rate could be as low as around 8.50% in the current
interest rate scenario (October 2009).

Why Banks are still continuing with BPLR whereas Base Rate has been made Applicable :

Although RBI has introduced Base Rate as a reference benchmark rate for all floating rate
loan products wef 1st July, 2010, yet RBI has allowed to continue until maturity,
according the same interest rate methodology at which they were approved. Existing
borrowers will have the option of approaching the bank to switch to the base rate system
before the expiry of their loans.

Do all banks have common Base Rate ?

No, each bank will arrive at its own base rate

What is the Rate of Interest in Case of Consortium Loans where banks have different Base
Rates :
Banks need not charge a uniform rate of interest under a consortium arrangement. Each
member bank may charge a rat of interest on the portion of the credit limits extended by it
to the borrower, subject to the condition that such rate of interest is determined with
reference to its Base Rate.

How often the Base Rate will be changed by Banks ?

Banks are required to review the base rate at least once every quarter. Banks can review
the same even more than once a quarter. After review, the Bank may decide to change or
continue the same base rate.

Whether BPLR was a good benchmark for fixing pricing of the loans?

For a long time, this has been debatable question. The BPLR varied from Bank to Bank.
Moreover, the variation was quite wide, stretching over 4% sometimes. Therefore, a lot of
debate took place for several years to replace the same with a new benchmark. The
Working Group set up on Benchmark Price Lending Rate (BPLR) in its report submitted
in October, 2009, strongly felt that “The BPLR has tended to be out of sync with market
conditions and does not adequately respond to changes in monetary policy. In addition, the
tendency of banks to lend at sub-BPLR rates on a large scale raises concerns of
transparency…..On account of competitive pressures, banks were lending at rates which
did not make much commercial sense” Therefore, the Group was of the view that the
extant benchmark prime lending rate (BPLR) system has fallen short of expectations in its
original intent of enhancing transparency in lending rates charged by banks and needs to
be modified.

What is Bank rate? Bank Rate is the rate at which central bank of the country (in India it
is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses
for short-term purposes. Any upward revision in Bank Rate by central bank is an
indication that banks should also increase deposit rates as well as Base Rate / Benchmark
Prime Lending Rate. Thus any revision in the Bank rate indicates that it is likely that
interest rates on your deposits are likely to either go up or go down, and it can also
indicate an increase or decrease in your EMI.
What is Bank Rate ? (For Non Bankers) : This is the rate at
which central bank (RBI) lends money to other banks or financial
institutions. If the bank rate goes up, long-term interest rates also
tend to move up, and vice-versa. Thus, it can said that in case bank
rate is hiked, in all likelihood banks will hikes their own lending
rates to ensure that they continue to make profit.

What is CRR? The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and
has come into force with its gazette notification. Consequent upon amendment to sub-
Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary
stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks
without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms
of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled
banks between 3 per cent and 20 per cent of total of their demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of
the economy from time to time. Increase in CRR means that banks have less funds
available and money is sucked out of circulation. Thus we can say that this serves duel
purposes i.e.(a) ensures that a portion of bank deposits is kept with RBI and is totally risk-free,
(b) enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the
banks in lending money.

What is CRR (For Non Bankers): CRR means Cash Reserve Ratio. Banks in India are
required to hold a certain proportion of their deposits in the form of cash. However,
actually Banks don’t hold these as cash with themselves, but deposit such case with
Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to
holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held
as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus,
When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks
will have to hold additional Rs 6 with RBI and Bank will be able to use only Rs 94 for
investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower
is the amount that banks will be able to use for lending and investment. This power of
RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the
hands of a central bank through which it can control the amount that banks lend. Thus, it
is a tool used by RBI to control liquidity in the banking system.

What is SLR? Every bank is required to maintain at the close of business every day, a
minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form
of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand
and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is empowered to
increase this ratio up to 40%. An increase in SLR also restrict the bank’s leverage position to
pump more money into the economy.

What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio.
This term is used by bankers and indicates the minimum percentage of deposits
that the bank has to maintain in form of gold, cash or other approved securities.
Thus, we can say that it is ratio of cash and some other approved securities to
liabilities (deposits) It regulates the credit growth in India.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks
against securities. When the repo rate increases borrowing from RBI becomes more
expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the
banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for
banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the
RBI. The banks use this tool when they feel that they are stuck with excess funds and are not
able to invest anywhere for reasonable returns. An increase in the reverse repo rate means that
the RBI is ready to borrow money from the banks at a higher rate of interest. As a result, banks
would prefer to keep more and more surplus funds with RBI.

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected
in the banking system by RBI, whereas Reverse repo rate signifies the rate at which
the central bank absorbs liquidity from the banks

What is the full form of FDI :

 The full form of FDI is Foreign Direct Investment.

What is the meaning of FDI ?

The Foreign Direct Investment means “cross border investment made by a resident in one
economy in an enterprise in another economy, with the objective of establishing a lasting
interest in the investee economy.

FDI is also described as “investment into the business of a country by a company in another
country”. Mostly the investment is into production by either buying a company in the target
country or by expanding operations of an existing business in that country”. Such investments
can take place for many reasons, including to take advantage of cheaper wages, special
investment privileges (e.g. tax exemptions) offered by the country.

Why Countries Seek FDI ?

(a) Domestic capital is inadequate for purpose of economic growth;

(b) Foreign capital is usually essential, at least as a temporary measure, during the period when the
capital market is in the process of development;

(c) Foreign capital usually brings it with other scarce productive factors like technical know how,
business expertise and knowledge

What are the major benefits of FDI :

(a) Improves forex position of the country;

(b) Employment generation and increase in production ;

(c) Help in capital formation by bringing fresh capital;

(d) Helps in transfer of new technologies, management skills, intellectual property

(e) Increases competition within the local market and this brings higher efficiencies

(f) Helps in increasing exports;

What is Inflation or What is the meaning of Inflation :

In economics inflation means, a rise in general level of prices of goods and services in a
economy over a period of time. When the general price level rises, each unit of currency
buys fewer goods and services. Thus, inflation results in loss of value of money. Another
popular way of looking at inflation is "toomuch money chasing too few goods". The last
definition attributes the cause of inflation to monetary growth relative to the output /
availability of goods and services in the economy.

In case the price of say only one commodity rise sharply but prices of other commodities
fall, it will not be termed as inflation. Similarly, in case due to rumors if the price of a
commodity rise during the day itself, it will not be termed as inflation.

What are different types of inflation :

Broadly speaking inflation is divided into two categoires i.e.

(a) DEMAND - PULL INFLATION: In this type of inflation prices increase results from an
excess of demand over supply for the economy as a whole. Demand inflation occurs when
supply cannot expand any more to meet demand; that is, when critical production factors are
being fully utilized, also called Demand inflation.

(b) COST - PUSH INFLATION: This type of inflation occurs when general price levels rise
owing to rising input costs. In general, there are three factors that could contribute to Cost-Push
inflation: rising wages, increases in corporate taxes, and imported inflation. [imported raw or
partly-finished goods may become expensive due to rise in international costs or as a result of
depreciation of local currency ]

What is Deflation ? :

Deflation is the opposite of inflation. Deflation refers to situation, where there is decline in
general price levels. Thus, deflation occurs when the inflation rate falls below 0% (or it is
negative inflation rate). Deflation increases the real value of money and allows one to buy more
goods with the same amount of money over time. Deflation can occur owing to reduction in the
supply of money or credit. Deflation can also occur due to direct contractions in spending,
either in the form of a reduction in government spending, personal spending or investment
spending. Deflation has often had the side effect of increasing unemployment in an economy,
since the process often leads to a lower level of demand in the economy.

What is Stagflation :

Stagflation refers to economic condition where economic growth is very slow or stagnant and
prices are rising. The term stagflation was coined by British politician Iain Macleod, who used
the phrase in his speech to parliament in 1965, when he said: “We now have the worst of both
worlds - not just inflation on the one side or stagnation on the other. We have a sort of
‘stagflation’ situation.” The side effects of stagflation are increase in unemployment-
accompanied by a rise in prices, or inflation. Stagflation occurs when the economy isn't growing
but prices are going up. At international level, this happened during mid 1970s, when world oil
prices rose dramatically, fuelling sharp inflation in developed countries.

What is Hyperinflation :

Hyperinflation is a situation where the price increases are too sharp. Hyperinflation often occurs
when there is a large increase in the money supply, which is not supported by growth in Gross
Domestic Product (GDP). Such a situation results in an imbalance in the supply and demand for
the money. In this this remains unchecked; it results into sharp increase in prices and
depreciation of the domestic currency.

What is RTGS

Define RTGS :
The full form of RTGS is "Real Time Gross Settlement". It is a project which is mainly
handled by RBI and it can be defined as "the continuous (real-time) settlement of funds transfers
individually on an order by order basis (i.e. without netting)".

What Do We mean by Real Time ? What is the meaning of Gross Settlement ?

Here the words 'Real Time' means that the processing of instructions is done at the time they are
received itself, rather than at some later time. On the other hand 'Gross Settlement' means the
settlement of funds transfer instructions occurs individually (on an instruction by instruction
basis). The settlement of funds actually takes place in the books of RBI and thus the payments
are considered as final and irrevocable.

What is the difference between RTGS and NEFT (National Electronic Fund Transfer) ?

NEFT is another electronic fund transfer system. However, NEFT operates on a Deferred Net
Settlement (DNS) basis rather than on real time basis. Thus, under NEFT transactions are
settled in in batches. Under DNS, the settlement takes place with all transactions received till
the particular cut-off time and all such transactions are also netted (i.e. payable and receivables
and netted). RBI operates NEFT in hourly batches (RBI can change the timing of settlement of
batches with prior intimation to banks) for example there are eleven settlements from 9 am to 7
pm on week days and five settlements from 9 am to 1 pm on Saturdays under NEFT. Any
transaction initiated after a designated settlement time would have to wait till the next designated
settlement time. On the other hand in RTGS, transactions are processed continuously
throughout the RTGS business hours.

What is the minimum amount that can be transferred through RTGS ? Is there any upper
limit for transfer of funds under RTGS?

Under RTGS, the minimum amount that can be remitted is Rs 2 lakh because RTGS is meant
only for high value transactions. However, there is no maximum limit or upper limit for transfer
of funds through RTGS.

How much time it takes to transfer the funds through RTGS ? I do not see that tranfer
takes place on real time basis ?
In terms of the procedure as laid down by RBI, the beneficiary branches are expected to receive
the funds on real time basis i.e. as soon as funds are transferred by the remitting bank.
However, there are delays due to processing at the remitting and receiving bank. RBI has
allowed the beneficiary banks to credit the beneficiary's account within two hours of receiving
the funds transfer message. Thus, we do not see the transfers on real time basis and there are
some delays. It is hoped that slowly this time will get reduced as more and bank and branches
improve their internal transfer systems.

What are timings for remitting of funds through RTGS ?

RBI keeps its RTGS service window for customer's transactions from 9.00 hours to 16.30 hours
on week days and from 9.00 hours to 13.30 hours on Saturdays for settlement at the RBI end.
(RBI can changes these business hours after giving due notice to Banks). However, the actual
timings that banks follow vary depending on the customer timings of the bank branches and
cushion kept by branches for sending the message to RBI.

Where can I fund IFSC code?

The easiest way to find IFSC code is to ask the beneficiary to give you the same as now a
days all cheque books also have IFSC code printed on every cheque. The person /
organisation to whom you wish to send the money, can find out the same by merely going
through the cheque leaf available with them. It is also available on RBI website

What are the charges for remitting the funds through RTGS ?

Each bank can decide the remitting charges for RTGS but these have to be within the
following range prescribed by RBI :

a) For Inward transactions – No charge (Free)

b) Outward transactions –

(i) Rs. 2 lakh to Rs. 5 lakh - not exceeding Rs. 30 per transaction.
(ii) Above Rs. 5 lakh - not exceeding Rs. 55 per transaction
Whom Should We contact if our amount is not credited or there is a delay in credit of the
funds ?

You should first contact your bank branch and lodge a complaint, but if the same is not resolved,
you can also lodge a complaint at the following address of RBI :-

The Chief General Manager,

Reserve Bank of India,
Customer Service Department,
1st Floor, Amar Building, Fort,
Mumbai – 400 001

or can send an email to cgmcsd@rbi.org.in

What is full form of SWIFT ? What does SWIFT stand for ?

The full form of SWIFT is "Society for Worldwide Interbank Financial

Telecommunication". The headquarter of this Society is at La Hulpe, Belgium.. It
handles the granting of codes to banks across the world and thus we can say that
registration of SWIFT codes is handled by this Society. As such "SWIFT" is the
registered trademarks of S.W.I.F.T. SCRL with its Registered Office being at ' Avenue Adèle
1, B-1310 La Hulpe, Belgium'.

SWIFT Codes are Used for What Purpose ?

SWIFT codes are a standard format of Bank Identifier Codes and each bank has a unique
identification code. Thus SWIFT is also sometimes known as BIC. The SWIFT code is
used for exchanging messages between banks. The most popular messages sent through
SWIFT relate to transferring money between banks i.e. international wire transfers. Thus,
in case you wish to transfer funds across countries, bank may ask you to give SWIFT code
of the bank where you wish to transfer your funds.

What does different digits of SWIFT indicate ?

The full SWIFT code for a branch consists of 11 characters (last three characters are
branch code). Thus, sometimes 8 digit code is also given for a bank. The code thus
consists of :-

(a) First FOUR characters : Bank Code (consists of only letters);

 (b) Next TWO characters : ISO 3166-1 alpha- 2 country code (only letters)

(c) Next TWO characters : Location Code (letters and digits) [Passive participants
will have 1 in the second character]

(d) Last THREE characters : These are optional and are used for branch specific codes
(For primary offices they use "XXX") - These can be letters and digits

What are Financial Markets ? Types of Financial Markets

Financial Markets means a market place which allows certain entities and / or people to
borrow and lend money, or trade (i.e. buy or sell) in certain assets like equities, bonds,
commodities, currencies or derivatives etc. at a low transaction cost and at transparent
pricing.. Thus, financial markets are a wide term and it encompass various markets.

We can broadly divide the financial markets into following sub categories :-

Types of Financial Markets :

 Money Market : Money market deals with short-term borrowing and lending
practices of securities with a maturity period of one year or less. Various
instruments such as treasury bills, commercial paper, certificates of deposit and
several other financial instruments are part of the trading in the money maket.
This markets essentially facilitate short term debt and capital financing.

 Capital Market : Capital markets deal with the trade of certain types of bonds or
stocks. Capital markets can either relate to newly issued bonds / stocks, or it may
handle trades of pre-existing bonds and stocks. Thus, capital market can be broadly
subdivided into segments, namely (a) Stock markets; and (b) Bond markets. The
capital market is also frequently categorized into (i) Primary Market and (ii)
Secondary markets
  Commodity Markets : These allow trading of various types of commodities
inclduing agriculture commodities and precious metals etc

 Derivative Market : provides trading of instruments which help in controlling

financial risk;

 Foreign Exchange Markets : This market facilitates trading of foreign exchange or

trading of popular currencies of the world;

Financial markets are present in almost every country of the world. However, size of such
markets vary a lot from one country to another country.

What is banking and what is the role of banking in an economy?

In simple words, Banking can be defined as the business activity of accepting and
safeguarding money owned by other individuals and entities, and then lending out this
money in order to earn a profit. However, with the passage of time, the activities covered
by banking business have widened and now various other services are also offered by
banks. The banking services these days include issuance of debit and credit cards,
providing safe custody of valuable items, lockers, ATM services and online transfer of
funds across the country / world.

Banking business has done wonders for the world economy. The simple looking method of
accepting money deposits from savers and then lending the same money to borrowers,
banking activity encourages the flow of money to productive use and investments. This in
turn allows the economy to grow. In the absence of banking business, savings would sit idle
in our homes, the entrepreneurs would not be in a position to raise the money, ordinary
people dreaming for a new car or house would not be able to purchase cars or houses.
What is a bank ? Define a Bank

In simple words, we can say that Bank is a financial institution that undertakes the
banking activity ie.it accepts deposits and then lends the same to earn certain profit.

Which are the oldest banks in India :

In 1839, some Indian merchants in Calcutta established India's first bank known as
"Union Bank", but it could not survive for long and failed in 1848 due to economic crisis of
1848-49. Similarly, in 1863, "Bank of Upper India" was formed but it failed in 1913.

In 1865, "Allahabad Bank" was established as a joint stock bank. This bank has survived
till date and is now considered as the oldest surviving bank in India.

How Do the Banks Work / What is the most important element for a bank to
survive:

Trust is the most important element for a bank to survive. People keep money in a bank
only when they trust that it will be given back to them as and when they demand the same
on at least on the date of maturity in case the same has been given in the shape of fixed
deposits. Of course, there are other reasons also for which people prefer to keep money in
a bank rather than keep at home in their own safe. They can earn some extra money when
the money is kept in saving or fixed deposits. Moreover, they can make payment by
issuance of cheques and need not carry money for their day to day needs.

What is the Definition of Commercial Paper ? or What is Commercial Paper in India ? or

what is CP ?

We can define Commercial Paper (CP) as an "unsecured money market instrument issued
in the form of a promissory note". These are not usually backed by any form of collaterals
and is allowed to be issued only by corporate with high quality debt ratings.
When was Commercial Paper introduced in India and What is the Commercial Paper used
for in India ?

Commercial Paper were introduced in India in 1990 with a view to enable high rated
corporate borrowers to raise short term borrowers by this additional type of instrument
which was till that at time was not available in India. However, later on other players like
All India Financial Institutions and Primary Dealers too were allowed to issue Commercial
Papers for meeting their short term funding requirements

Who are allowed to invest in Commercial Paper?

The following are allowed to invest in CPs : (a) Individuals, (b) banking companies, (c)
other corporate bodies (registered or incorporated in India) and unincorporated bodies, (d)
Non-Resident Indians (NRIs) and (e) Foreign Institutional Investors (FIIs) etc. However,
investment by FIIs would be within the limits set for them by SEBI.

What is the minimum and maximum period for which Commercial Paper can be issued?
In what denominations Commercial Paper can be issued?

Commercial Paper in India can be issued for maturities between 7 days (minimum) and
up to one year (maximum) from the date of issue. Moreover, the maturity date of the CP
should not go beyond the date up to which the credit rating of the issuer is valid. These can
be issued in denominations of Rs.5 lakh or multiples thereof. These can at present be
issued either in as promissory note (Schedule I given in the Master Circular-Guidelines for
Issue of Commercial Paper by RBI ) or in a dematerialised (i.e. dmat ) form through any
of the depositories approved by and registered with SEBI. However, Banks, FIs and PDs
can hold CP only in dematerialised form. (World wise Commercial Paper are issued from
1 day to 270 days

Who can issue Commercial Paper in India? What are the eligibility conditions for issuing
Commercial Papers?

In India, the following can issue Commercial Paper : (a) Corporates; (b) Primary Dealers
(also called PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
However, for issuing Commercial Paper, a corporate is allowed to issue CP provided :-
a. the tangible net worth of the company, as per the latest audited balance sheet, is not less
than Rs. 4 crore

b. company has been sanctioned working capital limit by bank/s or all-India financial
institution/s; and

c. the borrowal account of the company is classified as a Standard Asset by the financing
bank/s/ institution/s.

How Inflation is Measured in India:

Inflation is usually measured based on certain indices. Broadly, there are two categories of
indices for measuring inflation i.e. Wholesale Prices and Consumer Prices. There are certain
sub-categories for these indices.

What is an Index Number :

An Index number is a single figure that shows how the whole set of related variables has
changed over time or from one place to another. In particular, a price index reflects the
overall change in a set of prices paid by a consumer or a producer, and is conventionally
known as a Cost-of-Living index or Producer's Price Index as the case may be.

Price Indexes / Indices used in India :

In India we use five major national indices for measuring inflation or price levels.
(A) The Wholesale Price Index (base 1993-94) is usually considered as the headline inflation
indicator in India.

(B) In addition to Whole Price Index ( WPI ), there are four different consumer price indices which
are used to assess the inflation for different sections of the labour force. These are discussed in
more details later on.

(C) In addition to above five indices, the GDP deflator as an indicator of inflation is
available for the economy as a whole and its different sectors, on a quarterly basis

Now let us discuss the above indices used in India to measure inflation in detail
to understand these better.

Wholesale Price Index (WPI) :

This index is the most widely used inflation indicator in India. This is published
by the Office of Economic Adviser, Ministry of Commerce and Industry. WPI
captures price movements in a most comprehensive way. It is widely used by
Government, banks, industry and business circles. Important monetary and
fiscal policy changes are linked to WPI movements. It is in use since 1939 and is
being published since 1947 regularly. We are well aware that with the changing
times, the economies too undergo structural changes. Thus, there is a need for
revisiting such indices from time to time and new set of articles / commodities are
required to be included based on current economic scenarios. Thus, since 1939,
the base year of WPI has been revised on number of occasions. The current
series of Wholesale Price Index has 2004-05 as the base year. Latest revision of
WPI has been done by shifting base year from 1993-94 to 2004-05 on the
recommendations of the Working Group set upwith Prof Abhijit Sen,, Member,
Planning Commission as Chairman for revision of WPI series. This new series
with base year 2004-05 has been launched on 14th September, 2010. A brief on
the historical development of this WPI is given below : -

Q1. What is Insurance:

Insurance is a contract between the insurer and the insured wherein against receipt of certain amount,
called premium, the insurer agrees to make good any financial loss that may be suffered by the
insured, due to the operation of an insured peril on the subject matter of insurance.

Q.2 : Why People Opt for Insurance?

The Life is full of uncertainties.. People opt for insurance purely for the reasons of uncertainties
in life. Insurance gives the insured a kind of peace of mind as he is assured to making up the
loss in the event of such uncertainities in life happen.

Q.3 How does Insurance work?

Insurance is a technique wherein a number of people, who are exposed to similar risk, participate
in the scheme and contribute in the shape of periodic premiums. Such premiums are received by
the insurer who is able to pay out of the premiums received by him, for the losses of some of
those who have participated in the scheme.

Thus it is wonderful technique of spreading and transfer or risks.

Q.4 : What kind of Insurance Are Available in India :

Insurance business is divided into four classes , namely :
1) Life Insurance. Popular Products in Life insurance are Endowment Assurance (Participating), and
Money Back (Participating). More than 80% of the life insurance business is from these products
2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous Insurance. Fire and Miscellaneous insurance
businesses are predominant. Motor Vehicle insurance is compulsory.

Life Insurers transact life insurance business; General Insurers transact the rest i.e. Fire
Insurance, Marine Insurance and Miscellaneous Insurance.

Q. 5 : What are the Primary Legislations for Insurance in India:

In India Insurance is a federal subject. The primary legislations that deals with insurance
business in India are:

Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999.

Q. 6: What are Consumer Protections Available in India :

Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress

customer grievances in respect of insurance contracts on personal lines where the insured amount
is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Addresses can be obtained
from the offices of LIC and other insurers.

(A) LIFE INSURANCE :

 Term Life Insurance

 Permanent Life Insurance

(B) GENERAL INSURANCE

 Fire Insurance
 Marine Insurance
 Accident Insurance

(A)Life Insurance

Life Insurance is a contract providing for payment of a sum of money to the

person assured or, following him to the person entitled to receive the same, on
the happening of a certain event. It is a good method to protect your family
financially, in case of death, by providing funds for the loss of income.

A1. TERM LIFE INSURANCE : Under a Term Life contract, the insurance
company pays a specific lump sum to the designated beneficiary in case of the
death of the insured. These policies are usually for 5, 10, 15, 20 or 30 years.

Term life insurance are the most popular in advance countries but were not so
popular in India. However, after the entry of the private operators and
aggressive marketing by few players this kind of policies are becoming popular.
The premium on such type of policies is comparatively quite low when compared
with other types of life insurance policies, mainly due to the fact that these
policies do not carry cash value.

PLUS OF TERM LIFE INSURANCE MINUSES OF TERM LIFE INSURANCE

- The premium payable on these policies is
low as they do not carry any cash value.
- One can afford for quite high value
insurance policies
- If one survives the period of the policy, he /
she does not get any money at the end of the
policy.
The premium on such policies keeps on
increasing with age mainly because the risk
of death of older people is more. Over the
page of 60, these policies become difficult to
afford.

A2. PERMANENT LIFE INSURANCE :

In a Permanent Life contract, a portion of the money paid as premiums is

invested in a fund that earns interest on a tax-deferred basis. Thus, over a
period of time, this policy will accumulate certain "cash value" which you will be
able to get back either during the period of the policy or at the end of the
policy.

Your need for life insurance can change over a lifetime. At any age, you should
consider your individual circumstances and the standard of living you wish to
maintain for your dependents. In most cases, you need life insurance only if
someone depends on you for support. Your life insurance premium is based on
the type of insurance you buy, the amount you buy and your chance of death
while the policy is in effect. This type of policy not only provides protection for
your dependents by paying a death benefit to your designated beneficiary upon
your death, but it also allows you to use some part of the money while you are
alive or at the end of the policy. Some examples of such policies are :- Whole
Life, Universal Life and Variable-Universal Life.

ENDOWMENT POLICIES
These policies provide for period payment of premiums and a lump sum amount
either in the event of death of the insured or on the date of expiry of the policy,
whichever occurs earlier.
MONEY BACK POLICIES
These policies provide for periodic payments of partial survival benefits during the
term of the policy itself. A unique feature associated with this type of policies is
that in the event of death of the insured during the policy term, the designated
beneficiary will get the full sum assured without deducting any of the survival
benefit amounts, which have already been paid as money-back components.
Moreover, the bonus on such policies is also calculated on the full sum assured.
ANNUITY / PENSION POLICIES / FUNDS
This policies / funds require the insured to pay the premium as a single lump sum
or through installments paid over a certain number of years. The insured in
return will receive back a specific sum periodically from a specified date onwards
(the returns can can be monthly, half yearly or annually), either for life or for a
fixed number of years. In case of the death of the insured, or after the fixed
annuity period expires for annuity payments, the invested annuity fund is
refunded, usually with some additional amounts as per the terms of the policy.
Annuities / Pension funds are different from from all other forms of life insurance
as an annuity policy / fund does not provide any life insurance cover but merely
offers a guaranteed income either for life or a certain period. Therefore, this type
of insurance is taken so as to get income after the retirement.

Till 01.04.2000, Insurance industry in India comprised mainly of only two state insurers
namely :-

Life Insurers:

 Life Insurance Corporation of India (LIC)

General Insurers:
  General Insurance Corporation of India (GIC) (with effect from December, 2000, it has been
made a National Reinsurer)

GIC had four subsidary companies, namely :-

1. The Oriental Insurance Company Limited

2. The New India Assurance Company Limited,
3. National Insurance Company Limited
4. United India Insurance Company Limited.

(However, with effect from Dec'2000, these subsidiaries have been de-linked from the parent
company and made as independent insurance companies).