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in IMPORTANT BANKING TERMS

www.anujjindal.in IMPORTANT BANKING TERMS

1. AMORTIZATION
Ø WHAT - Amortization is a method of spreading the cost (writing off) of an intangible
asset (copyrights, goodwill, software, agreements, license) over a specific period of
time.
Ø WHY – To prorate (allocate) the cost of Intangible asset over its useful (estimated) life.
Ø TELL ME MORE – In banking terms, Amortization is the elimination of debt by repaying
it on periodic payments.
o This payment covers the interest levied on the principle amount along with the
principle amount as long as, you pay the periodic installment.
o For Example – If the insurance premium is Rs 6000 annually, then it would be
distributed as Rs500 each month.

2. DEPRECIATION
Ø WHAT - Depreciation is a method of spreading the cost of a tangible asset over a
specified period of time.
Ø WHY - The purpose of depreciation is to match the expense of obtaining an asset to the
income it helps a company earn.
Ø TELL ME MORE - Tangible assets are the one which are physical or can be touched like
building, furniture, equipment, vehicles, etc.

3. ASSETS OF BANK
Ø WHAT - Bank assets are the physical and financial "property" of a bank, what a bank
owns.
Ø TELL ME MORE - A bank can have different types of assets, including physical assets
(buildings, land, furniture), loans, including interest from consumer and business loans;
reserves, or holdings of deposits of the central bank. Loans taken from a bank are
considered as assets for that bank as it is bound to get it back with interest from the
debtor.

4. LIABILITIES OF BANK
Ø WHAT – Any legal debts or obligations that arise during the course of the bank.
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Ø TELL ME MORE – Deposits (Current or Saving) done by the customer, Borrowings made
from the other banks including RBI.
Ø Assets and liabilities of bank can be calculated to find the bank’s capital.
Ø Bank Capital = Total Assets – Total Liabilities; as the total amount of money the bank
has and the money which is to be kept aside to be given to customers and lenders.

5. BANCASSURANCE
Ø WHAT - Bancassurance means selling insurance product through banks.
Ø WHY - Banks and insurance company come up in a partnership wherein the bank sells
the tied insurance company's insurance products to its clients.
o Banks are an important channel for distributing insurance products given their
reach with retail customers.
Ø TELL ME MORE – The concept of bancassurance was introduced in 2000 when insurance
sector was opened for the private sector. This channel enables banks, which have
trusted relationship with the customers, to provide them various financial products
through a single-window service.
o On the one hand, the bank earns fee amount (non-interest income) from the
insurance company apart from the interest income whereas on the other hand,
the insurance firm increases its market reach and customers. Bank acts as
intermediary between Insurance Companies and customers. Example - Bajaj
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Allianz General Insurance and Vijaya Bank, SBI Life Insurance Company, ICICI
Lombard, Axis Bank – MetLife Ltd.

6. BANKING E-LOBBY
Ø WHAT - E-Lobby is a facility which is now provided by banks so that their customers can
do their banking transactions as per their convenience 24×7 i.e. without any time
restriction.
Ø WHY - It saves their time as customers need not stand in queue to get their work
completed and also offers additional several banking service facilities that ATMs don’t
offer.
Ø TELL ME MORE – Available on Bank holidays as well. Self service facilities which can be
done at banking e-lobbies include ATM withdrawals, cash deposits, card-to-card
transfers, mobile phone top-ups, railway booking, passbook printing, NEFT, opening of
FD/RD accounts, SMS alerts, cheque drop box, bill payments, mini statements, etc.

7. BANKING OMBUDSMAN
Ø WHAT - The Banking Ombudsman is a senior official appointed by the Reserve Bank of
India to redress customer complaints against deficiency in certain banking services
rendered by banks.
Ø WHY - Banking Ombudsman Scheme, 2006 is introduced with the objective of enabling
resolution of complaints relating to certain services rendered by banks and to facilitate
the satisfaction or settlement of such complaints.
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Ø TELL ME MORE - Banking Ombudsman Scheme, 2006 is introduced with the objective of
enabling resolution of complaints relating to certain services rendered by banks and to
facilitate the satisfaction or settlement of such complaints.
o As on date, twenty Banking Ombudsmen have been appointed with their offices
located mostly in state capitals (As per RBI Website Updated on July 14, 2017).
All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary
Co-operative Banks are covered under the Scheme.
o One can file a complaint before the Banking Ombudsman if the reply is not
received from the bank within a period of one month after the bank concerned
has received one's complaint, or the bank rejects the complaint, or if the
complainant is not satisfied with the reply given by the bank.
o No Charge for filing complaint
o The amount, if any, to be paid by the bank to the complainant by way of
compensation for any loss suffered by the complainant is limited to the amount
arising directly out of the act or omission of the bank or ₹20 lakhs (₹ Two
Million), whichever is lower.
o If unsatisfied with Ombudsman, then he/she can approach the appellate
authority against the Banking Ombudsmen’s decision. Appellate Authority is
vested with a Deputy Governor of the RBI.

8. CHEQUE TRUNCATION SYSTEM

Ø WHAT - 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.
o This means that with this system, physical cheques will not move for clearing at
different banks. This enables the outstation cheques to get cleared in a single day
and also the associated cost with the movement of physical cheques gets
eliminated.
Ø WHY - 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
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the cost of collection of cheques, and removes reconciliation-related and logistics-

related problems, thus benefitting the system as a whole.
Ø TELL ME MORE - CTS 2010 is the standard prescribed by the RBI recently for cheques
issued by all banks in the country. CTS has been implemented in New Delhi, Chennai
and Mumbai with effect from February 1, 2008 (pilot basis), September 24, 2011 and
April 27, 2013 respectively. After migration of the entire cheque volume from MICR
(Magnetic Ink Character Recognition) system to CTS, the traditional MICR-based cheque
processing has been discontinued across the country.
o The new approach is based on the grid-based approach. It is consolidated into
the three grids in New Delhi, Chennai and Mumbai.
o New Delhi Grid: National Capital Region of New Delhi, Haryana, Punjab, Uttar
Pradesh, Uttarakhand, Bihar, Jharkhand, Rajasthan and the Union Territory of
Chandigarh.
o Mumbai Grid: Maharashtra, Goa, Gujarat, Madhya Pradesh and Chhattisgarh.
o Chennai Grid: Andhra Pradesh, Telangana, Karnataka, Kerala, Tamil-Nadu,
Odisha, West Bengal, Assam and the Union Territory of Puducherry.
o There is no major change in the clearing process for customers.
o Benefits to customers - Shorter clearing cycle
1. Superior verification and reconciliation process
2. No geographical restrictions as to jurisdiction
3. Operational efficiency for banks and customers alike
4. Reduction in operational risk and risks associated with paper
clearing
5. No collection charges for collection of cheque drawn on a bank
located within the grid.
o MICR (Magnetic Ink Character Recognition) – It is a technology used in the
banking industry in printing the MICR codes.
o MICR code is a code printed using MICR (Magnetic Ink Character Recognition
technology) on cheques to enable identification the cheques.
o A MICR code is a 9-digit code that uniquely identifies a bank and a branch
participating in an Electronic Clearing System (ECS). The first 3 digit of the code
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represents the city code, the middle ones represent the bank code and last 3
represents the branch code.
o This code enables faster processing of cheques.

9. CONSORTIUM BANKING
Ø WHAT - In Consortium financing, several banks (or financial institutions) finance a single
borrower. In this case there is a common documentation, joint supervision and follow-
up exercises between all banks/financial institutions. So, the participating banks form a
new consortium bank.
Ø WHY – When the borrower needs large amount of funds. Under this the risk gets divided
among the banks. Arrangement participating banks acquire a common interest and
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share equally in the risk and the profits. Upon completion of the project the consortium
bank is disbanded.
Ø TELL ME MORE - The whole loan amount is divided among those banks forming
consortium, so the risk also gets divided. The bank which takes the higher risk (by giving
the highest amount of loan) will act as a leader and thus it acts as an intermediary
between the consortium and the borrower.

10. MULTIPLE BANKING

Ø WHAT - Multiple banking is an arrangement where a borrower takes loan amount from
several banks. In this case no bank knows that his borrower has taken loan from other
banks too.
Ø WHY – Multiple banking is used when the borrower needs large amount of funds. He /
She acquires funds from various banks.
Ø TELL ME MORE - There is no contractual relationship between various banks like that in
consortium banking and each bank holds its individual security and own credit rates.
There are various loopholes in multiple banking arrangements, and also it can lead to
frauds so consortium banking is better for economy. Public Credit Registry (PCR) has
been launched by RBI to tackle the issue of Multiple Banking. PCR was recommended by
Deosthale Committee. You can read on PCR separately.

11. CROSS SELLING AND UP SELLING

Ø WHAT – Cross selling is when banks sell any extra banking products/services to their
customer along with the product the customer wants. Up selling means encouraging
customers to purchase a higher-end product or we can say a more costly product than
the customer has asked for.
Ø WHY – This can be a highly effective tool for growing business, acquiring new to bank
clients and enhance customer life time value by encouraging multiple product holdings
by Individual customer.
Ø TELL ME MORE – Example (Cross Selling): selling a credit card and internet banking to a
savings or current account customer, selling their any bancassurance products, etc.
Selling Credit Card with more and costlier facilities than what has been asked by
customer is Up Selling.
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12. DORMANT ACCOUNT

Ø WHAT – In dormant account, there is no activity from a very long time by the account
holder like Debit, Credit, cheque issue or any other activity except interest posting by
the bank. If An account holder doesn’t do any type of activity in period of 1 year, this
account automatically becomes an inactive account and if this continues for a period of
2 year, It becomes a Dormant Account.
Ø WHY – When people shift to new cities and open new bank accounts, leaving a job and
work with a new company.
Ø TELL ME MORE – For maintaining bank accounts, charges are levied. So, if there are
many inoperative or dormant accounts, maintaining of such accounts will be an extra
burden on bank. So, RBI asked banks to track dormant accounts so that the balance can
either be revived, or the balance can be transferred to a new account or the legal heirs.

13. FREEZING OF ACCOUNT

Ø WHAT – Freezing of account means the transactions in such account cannot be
performed until further notice. No payments could be done in such accounts and even
cheques drawn before freezing will not be encashed.
Ø WHY – There could be many reasons for the same – tax dues, unpaid loans or money to
any individuals/organizations, illegal or suspicious activity like money laundering,
terrorist financing, etc.
Ø TELL ME MORE – Banks by themselves cannot freeze the account. However, they can
take active part in discovering the accounts that show any suspicious transactions. RBI,
SEBI, Income-tax authorities, and court have the right to freeze the account.

14. EXTERNAL COMMERCIAL BORROWING (ECB)

Ø WHAT – ECB is basically a loan availed by an Indian entity from a nonresident lender.
Most of these loans are provided by foreign commercial banks and other institutions.
Ø WHY – The Government of India permits ECBs as a source of finance for Indian
Corporates for expansion of existing capacity as well as for fresh investment.
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Ø TELL ME MORE – External Commercial Borrowing in India can be accessed via two
routes viz. Automatic Route (No permission from RBI or Government of India) and
Approval Route (Permission required from RBI or Government of India).
o ECB and Foreign Direct Investment (FDI) are different as the money raised
through ECB cannot be used to finance Equity Capital.
o The cost of funds borrowed from external sources are sometimes cheaper than
domestic funds.
o ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, etc.
o Now, ECB has been permitted to –
1. Housing Finance Companies, regulated by the National Housing
Bank
2. Port Trusts constituted under the Major Port Trusts Act, 1963 or
Indian Ports Act, 1908 to avail of ECBs under all tracks.
3. Companies engaged in the business of Maintenance, Repair and
Overhaul and freight forwarding to raise ECBs denominated in INR
only
o Rationalization of end-use provisions for ECBs- Currently, there were positive
and negative list prescribed for the same. It has been decided to replace them
with only negative list for all tracks. It would include the following –
1. Investment in real estate or purchase of land except when used
for affordable housing
2. Investment in capital market
3. Equity Investment
4. Working Capital Purpose
5. General corporate purposes
6. Repayment of Rupee Loans
7. On-lending to entities for the above activities from (1) to (6)

15. MORATORIUM PERIOD

Ø WHAT – A moratorium period is a time during the loan term when the borrower is not
required to make any repayment. It is a waiting period before which repayment by way
of EMIs begins.
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Ø WHY – Sometimes banks provide concessional interest rate during the Moratorium
period.
Ø TELL ME MORE – Although the borrower is not required to pay EMIs, the loan amount
would still continue to incur interest during this period. For example – Education Loans
are repaid by the students after they start earning and build their finances. There might
be a time lag between their completing studies and before getting a job. That is why a
provision for moratorium period is made.

16. GRACE PERIOD

Ø WHAT – Grace time period refers to the time span given after the payment becomes
due.
Ø WHY – Sometimes people who fulfill their obligations on time may get late on rare
occasions. Thus, to help them maintain their credit worthiness and avoid penalties, a
grace period is given.
Ø TELL ME MORE – No interest rates are charged during this period. Example – Grace
period given for paying insurance premiums or credit card bills.

17. PRIMARY SECURTIES

Ø WHAT – When an asset acquired by the borrower under a loan is offered to the lender
as security for the financed amount then that asset is called Primary Security or the
thing which is being financed.
Ø WHY – Securities reduces the risk of default on the part of borrower and also provides
more time period to repay the loan.
Ø TELL ME MORE – if a person has got his car financed from bank against the car itself,
then it is primary security.

18. COLLATERAL SECURTIES

Ø WHAT – When additional security or security other than the one for which loan is being
granted, been kept as security against taking credit loan is known as collateral security.
Ø WHY – Sometimes, banks don’t feel secure or satisfied with the primary security.
Ø TELL ME MORE – Getting Jewellery mortgaged for the loan.
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19. SHADOW BANKING

Ø WHAT – Shadow banking refers to all the Non-Bank Financial Intermediaries that
provide services similar to those of traditional commercial banks, but do so outside the
traditional system of regulated depository institutions.
o Shadow banking activities, thus, include -
1. Credit Intermediation – any kind of lending activity where the
saver does not lend directly to the borrower, and at least one
intermediary is involved
2. Liquidity Transformation – investing in illiquid assets while
acquiring funding through more liquid liabilities
3. Maturity Transformation – use of short-term liabilities to fund
investment in long-term assets
Ø WHY – They are similar to commercial banks. But work without any regulating authority.
Thus, named as shadow banking. The shadow banking system makes up 25 to 30
percent of the total financial system, according to the Financial Stability Board (FSB), a
regulatory task force for the world’s group of top 20 economies (G20).
o In the context of developing economies, shadow banks play a gainful role in
credit delivery and financial inclusion as they can facilitate credit availability to
certain sectors that might otherwise have difficulty in access to credit.
o They play both the commercial and substitute role for commercial banks as they
are able to map the financing needs of the borrowers with the financing
provision where the formal banking systems are confronted with regulatory
constraints.
Ø TELL ME MORE – The term ‘shadow bank’ was coined by Paul McCulley in 2007, with
specific reference to American non-bank financial institutions that used short-term
deposits to finance long-term loans.
o Later, the Financial Stability Board defined shadow banking as the ‘credit
intermediation involving entities and activities (fully or partially) outside the
regular banking system’.
o The shadow banking sector plays an important role in promoting financial
inclusion.
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o The main advantages of shadow banks lie in their ability to reduce transaction
costs, their quick decision-making ability, and customer orientation and prompt
delivery of services.
o The type of entities which are called shadow banks elsewhere are known in India
as the Non-Banking Finance Companies (NBFCs) and are regulated by RBI.
o In the wake of failure of several banks in the late 1950s and early 1960s in India,
large number of ordinary depositors lost their money.
o This led to the formation of the Deposit Insurance Corporation by the Reserve
Bank, to provide the necessary safety net for the bank depositors. The Reserve
Bank did then note that the deposit taking activities were undertaken by non-
banking companies also.
o Though they were not systemically as important as the banks, the Reserve Bank
initiated regulating them, as they had the potential to cause pain to their
depositors.
o The ‘NBFCs’ of India include not just the finance companies, but also a wider
group of companies that are engaged in investment, insurance, chit fund, nidhi,
merchant banking, stock broking, alternative investments etc. as their principal
business.
o In a sense, shadow banks are like icebergs - more deeply spread than what they
seem to be.

Ø How are Shadow Banks Dissimilar to Banks?

o First – Commercial Banks, being Depository Institutions can create money while
Shadow banks cannot create money.
o Second – Commercial Banks are comprehensively and tightly regulated. But the
regulation of shadow banks is not that extensive and their business operations
lack transparency.
o Third - While commercial banks, by and large, derive funds through mobilization
of public deposits, shadow banks raise funds, by and large, through market-
based instruments such as commercial paper, debentures, or other structured
credit instruments.
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o Fourth, the liabilities of the shadow banks are not insured, while commercial
banks’ deposits enjoy Government guarantee to a limited extent.
o Fifth, in the times of distress, unlike banks, which have direct access to central
bank liquidity, shadow banks do not have such recourse.

20. SPECIAL DRAWING RIGHTS

Ø WHAT – The SDR is an international reserve asset, created by the International
Monetary Fund (IMF) in 1969 which comprises leading currencies globally to supplement
its member countries’ official reserves.
Ø WHY – Before its creation, the international community had to face several restrictions
in increasing world trade and the level of financial development as gold and US dollars,
which were the only means of trade, were in limited quantities. In order to address the
issue, SDR was created by the IMF.
Ø TELL ME MORE – SDR is often regarded as a 'Basket of National Currencies' comprising
five major currencies of the world - US dollar, Euro, British Pound and Yen (Japan),
Chinese Yuan. The composition of this basket of currencies is reviewed every five years
wherein the weightage of currencies sometimes gets altered.
o Any country holding SDRs can use them to buy any other global currency like for
their balance of payments settlements or for keeping foreign exchange reserves,
etc.
o When a country takes credit or loan from IMF, it is given in SDR and not in any
particular currency.

21. TEASER LOAN

Ø WHAT – When the banks charge ultra-low fixed rates in the initial years, but charge
market-linked rates thereafter for loans is known as teaser loan. Popular in case of
housing loans.
Ø WHY – The low interest rate lures the borrowers to take loans
Ø TELL ME MORE – RBI discouraged such loans by sharply hiking the mandatory provisions
for banks, against such teaser loans.
o The teaser loans are considered to be an aspect of sub-prime lending and banks
may be exposed to the risk of defaulters in future.
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o Example - In 2009-10, SBI flagged off a novel home loan scheme with interest
rates that were fixed at 8 per cent for the first year and 9 per cent for the second
and third years. From the fourth year onwards, the loan morphed into an
ordinary floating rate loan. This scheme was termed a ‘teaser loan’ scheme by
market players because it lured the borrower with low rates in the initial years,
only to bump up the rates later.

22. DEBT CONSOLIDATION

Ø WHAT – Debt consolidation means combining more than one debt obligation into a new
loan with a favourable term structure to pay off other debts. In simple terms, taking one
more loan to pay previous loans.
Ø WHY – Debt consolidation is used by consumers to pay off a small debt in one go by
taking one big loan. By doing this they save on interest as well as the finance cost of the
small loan owed by them. The borrower would now have to make one payment instead
of making multiple payments to other creditors.
Ø TELL ME MORE – It is also known as Debt Refinancing. It can happen on debts which are
not tied up with the asset. Example – education loan, credit card, personal loan.

23. PARA-BANKING ACTIVITY

Ø WHAT – Para Banking activities refer to those activities which are undertaken by banks
apart from the normal day to day activities. RBI has specified list of activities which come
under the Para banking activities of bank like –
o Equipment Leasing, Hire Purchase Business and Factoring Services
o Underwriting of corporate shares and debentures
o Underwriting of bonds of PSUs.
o Mutual Fund Business
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o Retailing of Govt. Securities

o Insurance Business
o Refferal Services
o Pension Fund Management, etc
Ø WHY – To obtain economic benefits out of these activities
Ø TELL ME MORE – Banks can undertake para banking activities departmentally or through
subsidiaries or through affiliated companies controlled by them.

24. INITIAL PUBLIC OFFERING

Ø WHAT – Initial public offering is the process by which a private company can go public
by sale of its stocks to general public. It could be a new, young company or an old
company which decides to be listed on an exchange and hence goes public.
Ø WHY – To raise money for further expanding the business. Apart from this, spreading
the risk of ownership among shareholders. Unlike Debt, company offering its shares to
the public is not obliged to repay the capital to public investors.
Ø TELL ME MORE – Companies can raise equity capital with the help of an IPO by issuing
new shares to the public or the existing shareholders can sell their shares to the public
without raising any fresh capital.
o The company which offers its shares, known as an 'issuer', does so with the help
of investment banks. After IPO, the company's shares are traded in an open
market. Those shares can be further sold by investors through secondary market
trading.
o The Investment Banks act as an intermediary between the corporations and
investors.
o The bank evaluates the company and determines a price at which to offer the
stock shares.
o But there are some disadvantages as well – high cost of raising funds, loss of
control due to spread of ownership.

25. FOLLOW-ON PUBLIC OFFER

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Ø WHAT – FPO (Follow on Public Offer) is a process by which a company, which is already
listed on an exchange, issues new shares to the investors or the existing shareholders,
usually the promoters.
Ø WHY – FPO is used by companies to diversify their equity base.
Ø TELL ME MORE – A company uses FPO after it has gone through the process of an IPO
and decides to make more of its shares available to the public or to raise capital to
expand or pay off debt.

Basis IPO FPO

Full Form Initial Public Offer Follow-On Public Offer
Unlisted Company but gets
Status Listed Company
listed after issuing shares
Raising capital through Follow on investment for
Objective
public investment further expansion
Raising Capital First time Subsequent Follow up
Risk High Low
26. MUTUAL FUNDS
Ø WHAT – A mutual fund collects money from investors and invests the money on their
behalf. It is a professionally managed investment fund that pools money from many
investors.
Ø WHY – Mutual funds are an ideal investment vehicle for regular investors who do not
know much about investing. Investors can choose a mutual fund scheme based on their
financial goal and start investing to achieve the goal.
Ø TELL ME MORE – The mutual fund industry in India started in 1963 with the formation of
Unit Trust of India (UTI) at the initiative of the Reserve Bank of India (RBI) and the
Government of India. The first scheme, and for long one of the largest launched by UTI,
was Unit Scheme 1964. The objective then was to attract small investors and introduce
them to market investments.
o The Securities and Exchange Board of India has categorized mutual fund in India
under five broad categories -
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i. Equity Mutual Funds - These schemes invest directly in stocks. These

schemes can give superior returns but can be risky in the short-term as
their fortunes depend on how the stock market performs. Investors
should look for a longer investment horizon of at least five to 10 years to
invest in these schemes.
ii. Debt Mutual Funds - These schemes invest in debt securities. Investors
should opt for debt schemes to achieve their short-term goals that are
below five years. These schemes are safer than equity schemes and
provide modest returns
iii. Hybrid Mutual Funds - These schemes invest in a mix of equity and debt,
and an investor must pick a scheme based on his risk appetite.
iv. Solution-Oriented Mutual Funds - These schemes are devised for
particular solutions or goals like retirement and child’s education. These
schemes have a mandatory lock-in period of five years.
v. Others – Like Index Funds, ETFs.

27. SPECIAL ECONOMIC ZONES

Ø WHAT – SEZ is a geographical region that has economic laws different from a country's
typical economic laws. Usually the goal is to increase foreign investments.
Ø WHY – The primary motive is to attract the Foreign Investment (FDI) in the country.
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Ø TELL ME MORE – The Special Economic Zone (SEZ) policy in India first came into
inception on April 1, 2000. The idea was to promote exports from the country and
realizing the need that level playing field must be made available to the domestic
enterprises and manufacturers to be competitive globally.
o Asia’s and India’s first SEZ was set up in Kandla, Gujarat, 1965.
o Duty free import and domestic procurement of goods for the development,
operation, and maintenance of your company.
o 100 percent income tax exemption on export income for first five years, 50
percent for five years thereafter, and 50 percent of the export profit reinvested
in the business for the next five years.
o Permission to manufacture products directly, as long as the goods you are
producing fall within a sector which allows 100 percent FDI.

28. DOMESTIC SYSTEMICALLY IMPORTANT BANKS (D-SIB)

Ø WHAT – D-SIB means that the bank is Too Big To Fail. According to the RBI, some banks
become systemically important due to their size, cross-jurisdictional activities,
complexity and lack of substitute and interconnection. Banks whose assets exceed 2%
of GDP are considered part of this group. The RBI stated that should such a bank fail,
there would be significant disruption to the essential services they provide to the
banking system and the overall economy.
Ø WHY – The concept of D-SIB emerged after the global financial crisis.
Ø TELL ME MORE – As per the framework, from 2015, every August, the central bank has
to disclose names of banks designated as D-SIB. It classifies the banks under five buckets
depending on order of importance.
o ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three.
Based on the bucket in which a D-SIB is, an additional common equity
requirement applies.
o Banks in bucket one need to maintain a 0.15% incremental tier-I capital from
April 2018.
o Banks in bucket three have to maintain an additional 0.45%.
o With bucket three being higher than bucket one, SBI has a higher additional
requirement than ICICI Bank and HDFC Bank.
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o The additional Common Equity Tier 1 (CET1) requirement for D-SIBs has already
been phased-in from April 1, 2016 and will become fully effective from April 1,
2019.
Additional Common Equity Additional Common Equity
Tier 1 requirement as a Tier 1 requirement applicable
Bucket Banks
percentage of Risk Weighted from April 1, 2018 (as per
Assets (RWAs) for FY 2017-18 phase-in arrangement)
5 - 0.50% 0.75%
4 - 0.40% 0.60%

3 State Bank of India 0.30% 0.45%

2 - 0.20% 0.30%
ICICI Bank 0.10%
1 0.15%
HDFC Bank* -
• D-SIB surcharge for HDFC Bank will be applicable from April 1, 2018.

29. TYPES OF EXPENDITURE

Ø WHAT – Expenditure can be broadly categorized into three categories-
o Capital Expenditure – it refers to those expenditures which are used to
purchase, upgrade, improve or extend the life of Long term assets. It is non-
recurring in nature. Examples - Legal expenses on raising loans for the purchase
of fixed assets, premium given for lease, addition or extension of assets, etc.
o Revenue Expenditure – When money is spend on day to day business activities.
Examples – Interest on borrowed money, bad debts, etc.
o Deferred revenue Expenditure - Deferred Revenue Expenditure is the Revenue
Expenditure whose benefits can be extended to a number of years. Example –
Advertisement expenses.