LATEST

BANKING & FINANCIAL AWARENESS
JOURNAL OF

A.K. GUPTA’S
BANKERS TRAINING INSTITUTE (BTI)
VOLUME –I MAY 2010 ISSUE -11

HIGHLIGHTS
RBI’S ANNUAL POLICY STATEMENT: 2 RBI NOTIFICATIONS: 5 TO 11 WAYS & MEANS ADVANCES: 5 ROAD MAP FOR FINANCIAL SECTOR: 6 BASE RATE GUIDELINES : 11 MANAGEMENT QUESTIONS : 12 FINANCIAL & GENERAL AWARENESS: 14 ECONOMICS: 17 GOVERNMENT SECURITIES: 19 RECALLED QUESTIONS: 20

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ANNUAL POLICY STATEMENT : 2010-11
State of the Economy 1. GDP growth: The final real GDP growth for 2009-10 may settle between 7.2 and 7.5 per cent. 2. Industrial Production: The index of industrial production (IIP) recorded a growth of 17.6% in December 2009, 16.7% in January 2010 and 15.1% in February 2010. 14 out of 17 industry groups recorded accelerated growth during April 2009February 2010. 3. Imports: After a continuous decline for eleven months, imports expanded by 2.6% in November 2009, 32.4% in December 2009, 35.5% in January 2010 and 66.4% in February 2010. 4. Exports: After contracting for twelve straight months, exports have turned around since October 2009 reflecting revival of external demand. 5. Growth in demand side components of growth: private consumption (36%), govt. consumption (14%), fixed investments (26%), net exports (20%). 6. Inflation: (a) Headline inflation, as measured by year-on-year variation in Wholesale Price Index (WPI), 9.9% in March 2010. (b) Year-on-year WPI non-food manufactured products (weight: 52.2%) inflation, which was (-) 0.4% in Nov 2009, rose to 4.7% in March 2010. (c) WPI inflation is no longer driven by supply side factors alone. The contribution of non-food items to overall WPI inflation, which was negative at (-) 0.4% in November 2009 rose sharply to 53.3% by March 2010. (d) Consumer price index (CPI) based measures of inflation were in the range of 14.9-16.9 per cent in January/February 2010. 7. Credit Growth: Year on year Non-food credit growth was recorded at 16.9 per cent by March 2010. 8. Fiscal Deficit for 2010-11: Budgeted at 5.5% of GDP in 2010-11 as compared with 6.7% in 2009-10. 9. Revenue deficit for 2010-11: Budgeted at 4% of GDP in 2010-11 as compared with 5.3% in 2009-10 10. Current account deficit: During April-December 2009 it was US$ 30 billion as compared with US$ 28 billion for the corresponding period of 2008. 11. Net capital inflows:at US$ 42 billion were also substantially higher than US$ 7 billion in the corresponding period last year. 12. Forex Reserves: Foreign exchange reserves stood at US$ 279 billion as on March 31, 2010. 13. REER: The six-currency trade-based real effective exchange rate (REER) (1993-94=100) appreciated by 15.5 per cent during 2009-10 up to February as against 10.4 per cent depreciation in the corresponding period of the previous year. Outlook and Projections 1. IMF has projected that global growth will recover from (-) 0.8 per cent in 2009 to 3.9 per cent in 2010 and further to 4.3 per cent in 2011. Three major factors that have contributed to the improved global outlook are the massive monetary and fiscal support, improvement in confidence and a strong recovery in Emerging Market Economies (EMEs).

2. GDP growth for 2010-11: RBI projections for 2010-11 is placed at 8.0 per cent with an upside bias Inflation 3. Inflation: The baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent. This is based on following factors. (i) Though there are some signs of seasonal moderation in food prices, overall food inflation continues at an elevated level. (ii) The firming up of global commodity prices poses upside risks to inflation. (iii) Corporates are increasingly regaining their pricing power in many sectors. (iv) Household inflation expectations have remained at an elevated level. 4. M3 growth for 2010-11: is placed at 17.0 per cent. 5. Aggregate deposits of SCBs: to grow by 18%. 6. Non-food credit of SCBs: projected to grow by: 20% 7. Exchange Rate policy: RBI’s policy has been to retain the flexibility to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. 8. The overall size of the government borrowing programme is still very large and can exert pressure on interest rates. Fiscal consolidation has to shift from one-off gains to structural improvements on both tax and expenditure sides, and focus increasingly on the quality of fiscal consolidation. Policy Stance Policy stance for 2010-11 has been guided by the following three major considerations: 1. Recovery is consolidating. Growth in 2010-11 is projected to be higher and more broad-based than in 2009-10. In the emerging scenario, lower policy rates can complicate the inflation outlook and impair inflationary expectations. 2. Inflationary pressures have accentuated in the recent period. Inflation, which was earlier driven entirely by supply side factors, is now getting increasingly generalised. There is already some evidence that the pricing power of corporates has returned. Inflation expectations also remain at an elevated level. There is, therefore, a need to ensure that demand side inflation does not become entrenched. 3. Despite lower budgeted government borrowings in 2010-11 than in the year before, fresh issuance of securities will be 36.3 per cent higher than in the previous year. RBI has to do a fine balancing act and ensure that while absorbing excess liquidity, the government borrowing programme is not hampered. Therefore, the stance of monetary policy of RBI is to: 1. Anchor inflation expectations 2. Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. 3. Maintain an interest rate regime consistent with price, output and financial stability. Monetary Measures 1. Bank Rate: retained at 6.0 per cent. 2. Repo Rate: increased by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. 3. Reverse Repo Rate: increased by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. 4. Cash Reserve Ratio: increased by 25 basis points from 5.75 per cent to 6.0 per cent of net demand

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and time liabilities (NDTL) effective the fortnight beginning April 24, 2010. As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbed from the system. Expected Outcomes 1. Inflation will be contained and inflationary expectations will be anchored. 2. The recovery process will be sustained. 3. Government borrowing requirements and the private credit demand will be met. 4. Policy instruments will be further aligned in a manner consistent with the evolving state of the economy. Development and Regulatory Policies 1. The focus of the Reserve Bank’s regulation will continue to be (i) to improve the efficiency of the banking sector while maintaining financial stability. (ii) vigorously pursue the financial inclusion agenda to make financial sector development more inclusive. 2. Financial Stability: The first Financial Stability Report (FSR) was released on March 25, 2010. The Financial Stability Reports will be published half-yearly. 3. Interest Rate Policy: Guidelines on the Base Rate system were issued on April 9, 2010. It is expected that the Base Rate system will facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of transmission of monetary policy. Financial Markets 1. Interest Rate Futures: The Interest Rate Futures contract on 10-year notional coupon bearing Government of India security was introduced on August 31, 2009. It is proposed to introduce Interest Rate Futures on 5-year and 2-year notional coupon bearing securities and 91-day Treasury Bills. 2. Introduction of Exchange-Traded Currency Option Contracts: Currently, residents in India are permitted to trade in futures contracts in four currency pairs on two recognised stock exchanges. In order to expand the menu of tools for hedging currency risk, the recognised stock exchanges to be permitted to introduce plain vanilla currency options on spot US Dollar/Rupee exchange rate for residents. Corporate Bond Market 1. Non-SLR Bonds of companies engaged in infrastructure: Valuation: At present, banks’ investments in non-SLR bonds are classified either under held for trading (HFT) or available for sale (AFS) category and subjected to ‘mark to market’ requirements. Considering that the long-term bonds issued by companies engaged in infrastructure activities are generally held by banks for a long period and not traded and also with a view to incentivising banks to invest in such bonds, banks to be allowed to classify their investments in non-SLR bonds issued by companies engaged in infrastructure activities and having a minimum residual maturity of seven years under the held to maturity (HTM) category. 2. Investment in Unlisted Non-SLR Securities: At present, banks’ investments in unlisted non-SLR securities should not exceed 10 per cent of their total

investments in non-SLR securities as on March 31 of the previous year. Since there is a time lag between issuance and listing of security, banks may not be able to participate in primary issues of non-SLR securities, which are proposed to be listed but not listed at the time of subscription. In view of the above, investment in non-SLR debt securities (both primary and secondary market) by banks where the security is proposed to be listed on the Exchange(s) may be considered as investment in listed security at the time of making investment. If such security, however, is not listed within the period specified, the same will be reckoned for the 10 per cent limit specified for unlisted non-SLR securities. Financial Market Infrastructure 1. Reporting Platform for CD and CP: to be introduced for all secondary market transactions in CDs and CPs. Credit Delivery and Financial Inclusion 1. Financing MSE: Banks to be asked not to insist on collateral security in case of loans up to Rs.10 lakh extended to all units of the micro and small enterprises (MSEs) sector. 2. High Level Task Force on MSMEs headed by Shri T.K.A. Nair has recommended that: (i) all scheduled commercial banks should achieve a 20 per cent yearon-year growth in credit to micro and small enterprises (ii) any shortfall in the achievement of sub-target of 60 per cent for lending to micro enterprises of the total advances granted to the micro and small enterprises, would also be taken into account for the purpose of allocating amounts for contribution to rural infrastructure development fund (RIDF) or any other Fund. (iii) all scheduled commercial banks should achieve a 15 per cent annual growth in the number of micro enterprise accounts. Banks should take steps to increase the flow of credit to the MSE sector, particularly to micro enterprises. 3. Business Correspondents: Relaxations: With a view to providing more flexibility to banks, banks to be permitted to engage any individual, including those operating Common Service Centres (CSCs), as BC, subject to banks’ comfort level and their carrying out suitable due diligence. 4. Priority Sector Lending Certificates: Working Group: Working Group on Introduction of Priority Sector Lending Certificates (PSLCs) (Chairman: Shri V.K.Sharma) constituted by RBI to examine the pros and cons of the recommendation made by the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan) relating to PSLCs and make suitable recommendations on its introduction and their trading in the open market. Customer Service 1. Committee to be set up to look into banking services rendered to retail and small customers, including pensioners. 2. Mechanism, for implementing the Reserve Bank’s guidelines on customer service, to be strengthened through on-site and off-site inspections. 3. Banks to devote exclusive time in a Board meeting once every six months on customer service.

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Regulatory and Supervisory Measures 1. Convergence of Indian Accounting Standards with International Financial Reporting Standards: All scheduled commercial banks will convert their opening balance sheet as at April 1, 2013 in compliance with the IFRS converged IASs. 2. Infrastructure Financing: In terms of extant instructions, rights, licenses and authorisations of borrowers, charged to banks as collateral in respect of project loans (including infrastructure projects) are not eligible for being reckoned as tangible security for the purpose of classifying an advance as secured loan. As toll collection rights and annuities in the case of road/highway projects confer certain material benefits to lenders, RBI has proposed to treat annuities under build-operate-transfer (BOT) model in respect of road/highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable. 3. Provisioning of sub standard infrastructure loans: Banks are required to make provision of 20% on unsecured sub standard accounts. In view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts classified as sub-standard will attract a provisioning of 15 per cent instead of the current prescription of 20 per cent. 4. Presence of Foreign Banks: to prepare a discussion paper on the mode of presence of foreign banks through branch or Wholly owned subsidiary. 5. Licensing of New Banks: RBI has proposed to prepare a discussion paper marshalling the international practices, the Indian experience as also the extant ownership and governance (O&G) guidelines for granting license to new banks. 6. Conversion of Term Deposits, Daily Deposits or Recurring Deposits for Reinvestment in Term Deposits: As per extant guidelines, banks should allow conversion of term deposits, daily deposits or recurring deposits to enable depositors to immediately reinvest the amount lying in the aforesaid deposits with the same bank in another term deposit. Banks are required to pay interest in respect of such term deposits without reducing the interest by way of penalty, provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract. On a review of the extant regulatory norms and in order to facilitate better asset-liability management (ALM), banks to be permitted to to formulate their own policies towards conversion of deposits. 7. Compensation Practices: RBI to issue comprehensive guidelines based on Financial Stability Board (FSB) principles on sound compensation practices by endJune 2010. The guidelines will cover effective governance of compensation, alignment of compensation with prudent risk-taking and disclosures for whole time directors (WTDs)/chief

executive officers (CEOs) as well as risk takers of banks. 8. Implementation of Pillar 2 of Basel II: RBI to implement the Supervisory Review and Evaluation Process (SREP) framework for banks from the inspection cycle 2010-11 as an integral part of the Annual Financial Inspection (AFI) of banks. One of the major objectives of SREP is to evaluate whether the capital maintained by the bank is adequate keeping in view its risk profile and to determine the supervisory capital ratio (SCR). 9. Cross-border Supervision: The Working Group headed by Shri S. Karuppasamy examined the legal position on cross-border supervision arrangements. With a view to ensuring effective cross-border supervision and supervisory co-operation, RBI has proposed to enter into bilateral MoU with overseas supervisory authorities within the existing legal provisions, consistent with the Basel Committee on Banking Supervision (BCBS) principles. 10. Information Technology and Related Issues: RBI to set up a Working Group on information security, electronic banking, technology risk management, and tackling cyber frauds. Institutional Developments 1. Core Investment Companies (CICs): CICs having an asset size of Rs.100 crore and above to be treated as systemically important core investment companies. Such companies will be required to register with the Reserve Bank. The CICs fulfilling minimum capital and leverage criteria will be given exemption from maintenance of net owned fund and exposure norms applicable to NBFCs-ND-SI. 2. Securitisation Companies/Reconstruction Companies: (i) SCs/RCs can acquire the assets either in their own books or directly in the books of the trusts set up by them.(ii) The period for realisation of assets acquired by SCs/RCs can be extended from five years to eight years by their Boards of Directors. (iii) Asset/Security Receipts (SRs), which remain unresolved/not redeemed as at the end of five years or eight years, as the case may be, will henceforth be treated as loss assets. (iv) It will be mandatory for SCs/RCs to invest an amount not less than 5 per cent of each class of SRs issued under a particular scheme and continue to hold the investments till the time all the SRs issued under that class are redeemed completely. (v) With a view to bringing transparency and market discipline in the functioning of SCs/RCs, additional disclosures relating to assets realised during the year, value of financial assets unresolved as at the end of the year, value of SRs pending redemption, among others, are being prescribed. 3. High Value Clearing: As a step towards encouraging migration of paper-based high value payments to more secure electronic modes, High value clearing discontinued w.e.f. March 31, 2010. 4. NEFT: As at end-March 2010, over 66,500 branches of 95 banks had participated in NEFT and the volume of transactions processed increased with a record volume of 8.3 million transactions in March 2010. 5. Mobile Banking in India: Currently, this channel is used to settle on an average 1.9 lakh transactions of average value 12 crore in a month.

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RBI NOTIFICATIONS : APRIL 2010
REPO AND REVERSE REPO RATES RBI has increased the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.00 per cent to 5.25 per cent and the reverse repo rate by 25 basis points from 3.50% to 3.75% with effect from 20.4.10. INCREASE IN CRR RBI has increased the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks by 25 basis points from 5.75% to 6% of their net demand and time liabilities with effect from the fortnight beginning April 24, 2010. CONVERSION OF TERM DEPOSITS Present guidelines: Banks should allow conversion of term deposits, daily deposits or recurring deposits to enable depositors to immediately reinvest the amount lying in the aforesaid deposits with the same bank in another term deposit. Banks are required to pay interest in respect of such term deposits without reducing the interest by way of penalty, provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract. Revised guidelines: On a review of the extant regulatory norms, and in order to facilitate better asset-liability management (ALM), RBI has permitted banks to formulate their own policies towards conversion of deposits with immediate effect. EDUCATIONAL LOANS: COLLATERAL FREE LOANS Present instructions:No security may be insisted upon for educational loans upto Rs.4 lakh. Revised instructions: Banks must not, mandatorily, obtain collateral security for educational loans upto Rs. 4 lakh. EXPORT CREDIT FOR AGRICULTURE RBI has clarified that loans granted by banks for agriculture and allied activities, are eligible for classification under priority sector irrespective of whether the borrowing entity is engaged in export or otherwise. This will also include working capital limits granted to units engaged in agricultural and allied activities and to food and agro-based processing units by way of export credit. The export credit granted for agricultural and allied activities may be reported separately under heading "Export credit to agriculture sector". USE OF BUSINESS CORRESPONDENTS (BCS) Current guidelines: Only certain select categories of individuals are permitted to be engaged as BCs. Banks have been permitted to engage the following as BCs: (i) retired bank employees, (ii) ex-servicemen (iii) retired government employees, (iv) Individual kirana/medical/fair price shop owners (v) Individual Public Call Office(PCO) operators (vi) Agents of Small Savings Schemes of Government of India/Insurance Companies (vii) Individuals who own Petrol Pumps (viii) Retired teachers and (ix) Authorised functionaries of well run Self Help Groups(SHGs) linked to banks. Revised guidelines: On a review and with a view to providing more flexibility to banks, RBI has permitted banks to engage any individual, including those operating Common Service Centres (CSCs) as BC, subject to banks’ comfort level and their carrying out suitable due diligence as also instituting additional safeguards as may be considered appropriate to minimise the agency risks. EXPORT CREDIT: INTEREST SUBVENTION Period of Subvention: The Government of India has decided to extend Interest Subvention of 2 percentage points w.e.f.

April 1, 2010 to March 31, 2011 on pre and post shipment rupee credit. Sectors eligible for export: Employment oriented export sectors as under: (i) Handicrafts (ii) Carpets (iii) Handlooms (iv) Small & Medium Enterprises (SME). Effective Interest Rate: As per the existing guidelines, banks charge interest rate not exceeding BPLR minus 2.5 percentage points on rupee pre-shipment credit up to 270 days and post-shipment credit up to 180 days. Banks will now charge interest rate not exceeding BPLR minus 4.5 percentage points on pre-shipment credit up to 270 days and post-shipment credit up to 180 days on the outstanding amount for the period April 1, 2010 to March 31, 2011 to the above mentioned sectors. However, the total subvention will be subject to the condition that the interest rate, after subvention will not fall below 7 per cent which is the rate applicable to the agriculture sector under priority sector lending. The banks may ensure that the benefit of the 2 per cent interest subvention is passed on completely to the eligible exporters. Procedure for claiming subvention: i) The amount of subvention would be reimbursed on the basis of claim submitted as at the end of respective quarters in the format enclosed. ii) The amount of subvention will be calculated on the amount of export credit from the date of disbursement (a) up to the date of repayment; or (b) up to the date beyond which the outstanding export credit becomes overdue; or (c) for pre-shipment credit up to 270 days and postshipment credit up to 180 days, whichever is earlier. iii) The claims should be accompanied by an External Auditor's Certificate certifying that the claims for subvention for the respective quarter is true and correct. INTEREST RATE CEILING ON RUPEE EXPORT CREDIT Present instructions: RBI has prescribed the ceilings on interest rates on pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days at BPLR minus 2.5 per cent, valid up to April 30, 2010. Revised instructions: RBI has extended the validity of the above dispensation up to June 30, 2010. Further, as BPLR system is being replaced with a Base Rate System from July 1, 2010, RBI has decided to deregulate the interest rates on pre-shipment rupee export credit up to 270 days and postshipment rupee export credit up to 180 days. Banks shall be free to decide the lending rate on export credit at or above the Base Rate with effect from July 1, 2010 WAYS AND MEANS ADVANCES (WMA) Limit for Central Govt: The limit for Ways and Means Advances (WMA) to Central Government for the year 201011 will be as under: (i) Rs.30,000 crore for the first half of the year (April to September) and Rs.10,000 crore for the second half of the year (October to March). When 75 per cent of the limit of WMA is utilised by the Government, the Reserve Bank may trigger fresh floatation of market loans. Interest rate on WMA/overdraft will be as under: a) Ways and Means Advances: Repo Rate b) Overdraft: Two percent above the Repo Rate Minimum balance required to be maintained by the Government of India with the Reserve Bank of India will not be less than Rs.100 crore on Fridays, on the date of closure of Government of India's financial year and on June 30, i.e., closure of the annual accounts of the Reserve Bank of India and not less than Rs.10 crore on other days. Maximum period: As per the provisions of the Agreement dated March 26, 1997 between the Government of India and the Reserve Bank of India, overdrafts beyond ten consecutive working days will not be allowed.

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Limit for State Governments: The limit for Ways and Means Advances to State Governments for the Fiscal Year 2010-11 will be same as was for 2009-10. The aggregate Normal WMA limit for the State Governments inclusive of the Government of Union Territory of Puducherry is placed at Rs.9,925 crore for the year 2010-11. ROAD MAP FOR THE FINANCIAL SECTOR Background: A Core Group constituted by the Ministry of Corporate Affairs for convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS) from the year 2011 has deliberated and approved the roadmap in respect of insurance companies, banking companies and non-banking finance companies. Salient features of the roadmap are as under: i) Insurance companies: All insurance companies will convert their opening balance sheet as at 1st April, 2012 in compliance with the converged Indian Accounting Standards. ii) Banking companies: (a) All scheduled commercial banks and those urban cooperative banks (UCBs) which have a net worth in excess of Rs. 300 crores will convert their opening balance sheet as at 1st April, 2013 in compliance with the first set of Accounting Standards (i.e. the converged Indian Accounting Standards). (b) Urban co-operative banks which have a net worth in excess of Rs. 200 crores but not exceeding Rs. 300 crores will convert their opening balance sheets as at 1st April, 2014 in compliance with the first set of Accounting Standards(i.e. the converged Indian Accounting Standards). (c) Urban co-operative banks which have a net worth not exceeding Rs. 200 crores and Regional Rural banks (RRBs) will not be required to apply the first set of Accounting Standards i.e. the converged Indian Accounting Standards (though they may voluntarily opt to do so) and need to follow only the existing notified Indian Accounting Standards which are not converged with IFRSs. iii) Non-Banking Financial companies (a) The following categories of non-banking financial companies (NBFCs) will convert their opening balance sheet as at 1st April, 2013 if the financial year commences on 1st April (or if the financial year commences on any other date, then on the date immediately following 1st April, 2013) in compliance with the first set of Accounting Standards (i.e the converged Indian Accounting Standards). These NBFCs are:a. Companies which are part of NSE – Nifty 50 b. Companies which are part of BSE - Sensex 30 c. Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores. (b) All listed NBFCs and those unlisted NBFCs which do not fall in the above categories and which have a net worth in excess of Rs. 500 crores will convert their opening balance sheet as at 1st April 2014 if the financial year commences on 1st April (or if the financial year commences on any other date, then on that date following 1st April 2014) in compliance with the first set of Accounting standards (i.e converged Indian Accounting Standards). (c) Unlisted NBFCs which have a net worth of Rs. 500 crores or less will not be required to follow the first set of accounting standards (i.e the converged Indian accounting standards), though they may voluntarily opt to do so, but need to follow only the notified Indian accounting standards which are not converged with the IFRSs. INVESTMENT IN UNLISTED NON-SLR SECURITIES Extant guidelines: (i) Bank’s investment in unlisted non-SLR securities should not exceed 10 per cent of its total

investment in non-SLR securities as on March 31, of the previous year. (ii) Banks have been allowed to invest in unrated bonds of companies engaged in infrastructure activities within the ceiling of 10 per cent of unlisted nonSLR securities. Revised guidelines: Since there is a time lag between issuance and listing of securities, which are proposed to be listed but not listed at the time of subscription, banks may not be able to participate in primary issues of non-SLR securities. In view of the above, RBI has decided that: (i) investment in non-SLR debt securities (both primary and secondary market) by banks where the security is proposed to be listed on the Exchange(s) may be considered as investment in listed security at the time of making investment. (ii) However, if such security is not listed within the period specified, the same will be reckoned for the 10 per cent limit specified for unlisted non-SLR securities. In case such investments included under unlisted non-SLR securities lead to a breach of the 10 per cent limit, the bank would not be allowed to make further investment in nonSLR securities (both primary and secondary market) as also in unrated bonds issued by companies engaged in infrastructure activities till such time bank’s investment in unlisted non-SLR securities comes within the limit of 10%. PRUDENTIAL NORMS ON ADVANCES TO INFRASTRUCTURE SECTOR Extant instructions: (i) Rights, licenses and authorisations of borrowers, charged to banks as collateral in respect of project loans (including infrastructure projects) are not eligible for being reckoned as tangible security for the purpose of classifying an advance as secured loan. (ii) The provisioning requirement for unsecured sub-standard exposures, at present is 20% of the outstanding balance. Revised instructions: (i) As toll collection rights and annuities in the case of road/highway projects confer certain material benefits to lenders, banks may treat annuities under build-operatetransfer (BOT) model in respect of road/highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable. (ii) In view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 15 per cent instead of the current prescription of 20 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows. INVESTMENTS BY BANKS IN BONDS ISSUED BY COs ENGAGED IN INFRASTRUCTURE ACTIVITIES Present instructions: Banks’ investments in non-SLR bonds are classified either under held for trading (HFT) or available for sale (AFS) category and subjected to ‘mark to market’ requirements. Revised instructions: Considering that the long-term bonds issued by companies engaged in infrastructure activities are generally held by banks for a long period and not traded and also with a view to incentivising banks to invest in such bonds, RBI has decided that any investment by scheduled commercial banks in the long-term bonds issued by companies engaged in executing infrastructure projects and having a minimum residual maturity of seven years may be classified under HTM category. The modified composition of HTM category is given below:

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Held to Maturity: i) The securities acquired by the banks with the intention to hold them up to maturity will be classified under 'Held to Maturity (HTM)'. ii) Banks are allowed to include investments included under HTM category up to 25 per cent of their total investments. The following investments are required to be classified under HTM but are not accounted for the purpose of ceiling of 25 per cent specified for this category: (a) Recapitalisation bonds received from the Government of India towards their recapitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes. (b) Investment in subsidiaries and joint ventures (A Joint Venture would be one which the bank, along with its subsidiaries, holds more than 25 percent of the equity). (c) Investment in the long-term bonds (with a minimum residual maturity of seven years) issued by companies engaged in infrastructure activities. iii) Banks are, however, allowed since September 2, 2004 to exceed the limit of 25 percent of total investment under HTM category provided: (a) the excess comprises only of SLR securities, and (b) the total SLR securities held in the HTM is not more than 25 percent of their DTL as on the last Friday of the second preceding fortnight. iv) The non-SLR securities, held as part of HTM as on September 2, 2004 may remain in that category. No fresh non-SLR securities, are permitted to be included in HTM, except the following: (a) Fresh re-capitalisation bonds, received from the Government of India, towards their recapitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes. (b) Fresh investment in the equity of subsidiaries and joint ventures. (c) RIDF / SIDBI / RHDF deposits. (d) Investment in longterm bonds (with a minimum residual maturity of seven years) issued by companies engaged in infrastructure activities. (v) To sum up, banks may hold the following securities under HTM: (a) SLR Securities up to 25 percent of their DTL as on the last Friday of the second preceding fortnight. (b) Non-SLR securities included under HTM as on September 2, 2004. (c) Fresh re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in Investment portfolio. (d) Fresh investment in the equity of subsidiaries and joint ventures. (e) RIDF / SIDBI / RHDF deposits. (f) Investment in long-term bonds (with a minimum residual maturity of seven years) issued by companies engaged in infrastructure activities.
CREDIT/DEBIT CARD TRANSACTIONS

RBI has already advised for adoption a system of "Online Alerts" to the cardholder for all 'card not present' transactions of the value of Rs. 5,000/ and above. ISSUE OF SHARES BY PRIVATE SECTOR BANKS Present instructions: All banks in private sector are required to obtain approval of RBI for issue of shares through Initial Public Offers (IPOs) and preferential issues. Revised instructions: SEBI had introduced an additional capital raising route in May 2006 viz. Qualified Institutional Placements (QIPs) that would enable listed companies to raise funds from the domestic market. Since in terms of SEBI Guidelines, the allotments under QIP are on private placement basis, the QIP issues have been treated as preferential issue of shares which requires RBI's prior approval. Accordingly, the guidelines in respect of issue and pricing of shares by private sector banks have been revised as given below: (A) Initial Public Offers (lPOs): All banks should obtain RBI approval for IPOs. After listing on the stock exchanges, banks are free to price their subsequent issues. Issue price should be based on merchant banker's recommendation. (B) Rights issues: RBI approval is not required for rights issues by both listed and unlisted banks. (C) Bonus issues: Private sector banks, both listed and unlisted, need not seek RBI's approval for bonus issues. The issues would, however, be subject to SEBI's requirements on issue of bonus shares, viz. bonus issues (a) should be made from free reserves built out of genuine profits or share premium, (b) should not dilute the value or rights of partly or fully convertible debentures, (c) should not be in lieu of dividend and (d) should not be made unless all partly paid-up shares are fully paid-up. Further, bonus issues may be issued without linkage to rights issues. (D) Preferential issue: All preferential issues would require prior approval of RBI. Pricing of preferential issues by listed banks may be as per SEBI formula, while for unlisted banks the fair value may be determined by a chartered accountant or a merchant banker. (E) Qualified Institutional Placement (QIP): Private Sector Banks need to approach RBI for prior 'in principle' approval in case of Qualified Institutional Placements. Banks need to approach RBI along with details of the issue once the bank’s Board approves the proposal of raising capital through this route. Further, allotment to the investors would be subject to compliance with SEBI guidelines on QIPs and RBI guidelines on acknowledgement of allotment / transfer of shares. Once the allotment process is complete, the banks should furnish complete details of the issue to RBI for seeking post facto approval. This would be irrespective of whether any acquisition results in shareholding of 5% or more of the paid up capital of the bank. NAME:___________________________________________ ADDRESS:________________________________________ ________________________________________________ ________________________________________________ ________________________________Pin_____________ EMAIL ID:_____________________Mobile:_____________ Draft No.__________dated________Drawn on______Bank, for Rs 200 favouring Bankers Training Institute payable at Delhi. Period: _______________to ________________
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Present guidelines: In February 2009, RBI issued a directive making it mandatory for banks to put in place additional authentication/validation based on information not visible on the cards for all on-line card not present (CNP) transactions except IVR transactions. The system was to be effective from 01.08.09. Revised guidelines: RBI has now decided to extend this requirement of additional authentication/validation to all CNP transactions including IVR transactions. Accordingly, banks should implement these guidelines to all CNP transactions with effect from January 01, 2011.

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(F) In case of pricing of issues where RBI approval is not required, pricing of issues should be as per SEBI guidelines; in cases where prior approval of RBI is required, pricing should take into account both SEBI and RBI guidelines. READY FORWARD CONTRACTS IN CORPORATE DEBT SECURITIES Present guidelines: RBI had issued directions relating to Repo in Corporate Debt Securities on Jan 8, 2010 which indicated that the following entities are eligible to enter into ready forward contracts in corporate debt securities: (i) Any scheduled commercial bank excluding RRBs and LABs; (ii) Any Primary Dealer authorized by the Reserve Bank of India; (iii) Any non-banking financial company registered with RBI (iv) All-India Financial Institutions, namely, Exim Bank, NABARD, NHB and SIDBI; (v) Other regulated entities, subject to the approval of the regulators concerned, viz., Any mutual fund registered with the Securities and Exchange Board of India; Any housing finance company registered with the National Housing Bank; and Any insurance company registered with the Insurance Regulatory and Development Authority Revised guidelines: In addition to above entities, India Infrastructure Finance Company Limited (IIFCL) has been permitted to undertake ready forward contracts in corporate debt securities. MAINTENANCE OF COLLATERAL BY FIIS FOR TRANSACTIONS IN THE CASH SEGMENT Present guidelines: FIIs are permitted to offer cash and foreign sovereign securities with AAA rating as collateral to the recognized Stock Exchanges in India for their transactions in the derivative segment. As per the extant Securities and Exchange Board of India (SEBI) norms, the FIIs are required to post collaterals for their transactions in the cash segment of the market. Revised guidelines: RBI, in consultation with the Government of India and the SEBI, has decided to permit the FIIs to offer domestic Government Securities (subject to the overall limits specified by the SEBI from time to time; the current limit being USD 5 billion), and foreign sovereign securities with AAA rating, as collateral to the recognized
KNOW YOUR FACULTY SHRI A. K. GUPTA Shri A.K. Gupta is a post graduate in commerce, LL.B, CAIIB, PG Dip in Personnel Management and IR, PG Dip in Marketing and Management, PG Diploma in Training and Development, Cert in Industrial Finance; Ex- Chief Manager, Punjab National Bank with an experience of more than 28 years as a banker; Experience of more than 12 years in training in the bank’s training college (Principal for 5 years); helped thousands of bankers in their banking career; Has been examiner with Indian Institute of Banking & Finance (IIBF, Mumbai) for about 5 years; Remained associated with number of management institutions at MBA level including Masters of Finance, University of Delhi, International Management Institute etc teaching Management of Banks, Financial Services, Financial Management, Merchant Banking. Conducted programmes in the area of Asset Liability Management and Credit risk management for top management executives in the rank of Chief General Manager/General Manager/DGM/ AGMs of SIDBI, Central Bank of India, Dena Bank, Punjab & Sind Bank Was a student of University of Manchester for 3 months for an advanced programme in Development Banking. Has been visiting faculty to training colleges of several banks like PNB, BOI, Canara, UCO etc.

Stock Exchanges in India, in addition to cash, for their transactions in the cash segment of the market. However, cross-margining of Government Securities (placed as margins by the FIIs for their transactions in the cash segment of the market) shall not be allowed between the cash and the derivative segments of the market. INVESTMENT PORTFOLIO OF PRIMARY DEALERS Present guidelines: Standalone Primary Dealers (PDs) were allowed in March 10, to categorize Government securities up to 100% of their paid up capital in the Held to Maturity (HTM) category. Revised guidelines: RBI has decided to permit the PDs to hold Government securities in the HTM category to the extent of their audited net owned funds (NOF) as at the end March of the preceding financial year. Agricultural Debt Waiver and Debt Relief Scheme The period for debt relief in respect of Other farmers was extended by 6 months up to 30.6.10. In view of this six month extension for the debt relief portion of the ADWDRS, 2008, the last date of receipt of grievances by Grievance Redressal Officers of the lending institutions may also be accordingly extended upto 31.7.2010. The "Final" claims pertaining to "Debt Relief" arising till December 31, 2009 (including the cases settled through the Grievances Redressal Mechanism operating till January 31, 2010) may be submitted to RBI by June 30, 2010. As no interest shall be paid by Government of India to the lending institutions for the six month extension period of the Scheme while reimbursing 25% amount to the lending institutions, banks may forward a separate claim to RBI, in respect of "Debt Relief" cases that may be settled during the period January 1, 2010 to June 30, 2010 (including the cases settled through the Grievances Redressal Mechanism operating from February 1, 2010 to July 31, 2010). CAPITAL ADEQUACY -INTERNAL MODELS APPROACH FOR MARKET RISK Background: RBI, vide circular dated July 7, 2009, had advised that banks desirous of moving to advanced approaches under Basel II can apply for migrating to Internal Models Approach for market risk from April 1, 2010 onwards, provided they are adequately prepared. Methods for calculation of capital for Market Risk: Basel II Framework offers a choice between two broad methodologies in measuring market risks for the purpose of capital adequacy. (i) Standardised Measurement Method (SMM) which is being used by banks in India since March 31, 2005. (ii) Internal Models Approach (IMA) which allows banks to use risk measures derived from their own internal market risk management models. The permissible models under IMA are the ones which calculate a value-at-risk (VaR) based measure of exposure to market risk. VaR-based models could be used to calculate measures of both general market risk and specific risk. As compared to the SMM, IMA is considered to be more risk sensitive and aligns the capital charge for market risk more closely to the actual losses likely to be faced by banks due to movements in the market risk factors. RBI has now issued guidelines governing use of internal models for measuring the capital charge for market risk. To begin with banks in India may model general market risk and continue to use SMM for specific risk. However, banks should endeavour to develop capabilities to model specific risk including Incremental Risk.

1.

2. 3. 4. 5.

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Banks interested in migrating to IMA for computing capital charge for market risk should assess their preparedness with reference to RBI guidelines and may first give to RBI a notice of intention for the same. RBI will first make a preliminary assessment of the bank’s risk management system and its modelling process. If the result of this preliminary assessment is satisfactory, then RBI will allow the bank to make a formal application for migrating to IMA. RBI will then perform a detailed analysis of its model with a view to approving the same. Approaches for other risks: Banks would have the discretion to adopt IMA for market risk, while continuing with simpler approaches for computation of capital charge for credit and operational risks. CAPITAL ADEQUACY AND MARKET DISCIPLINE – PARALLEL RUN AND PRUDENTIAL FLOOR Present guidelines: RBI, vide circular dated February 8, 2010, had advised that the banks should have parallel run of the revised framework along with the then current framework (Basel I). Banks were also advised that the minimum capital maintained by them shall be subject to the prudential floors indicated in the circular. Revised guidelines: On a review of the implementation so far, RBI has decided to continue with the prudential floor until further advice. Accordingly, the foreign banks in India and Indian banks having operational presence outside India would continue to have the parallel run beyond the specified date (i.e., March 31, 2010) and ensure that their Basel II minimum capital requirement continues to be higher than 80 % of the minimum capital requirement computed as per Basel I framework for credit and market risk. All other commercial banks (except LABs and RRBs) would also continue to ensure compliance with the prescribed prudential floor limits. REMITTANCE OF GOVERNMENT REVENUES A committee had been constituted by CGA to review the expeditious movement of all categories of Government revenues to its exchequer and other related issues. After consideration of the recommendations of the Committee, it has been decided that a period of T+12 working days (excluding put through date, where T is the day when money is available to the branch), is allowed with effect from 01.01.2010 to Public Sector Banks for manual remittance of Government receipts to CAS, RBI, Nagpur in respect of branches located in Jammu & Kashmir, Leh, Uttarakhand, Himachal Pradesh, Sikkim, North Eastern Region (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura), Jharkhand and Chhattisgarh. The above norms for remote, difficult and hilly areas will not be applicable to remittance of funds under the deposit schemes viz. PPF / SCSS etc. of Ministry of Finance.
RELAXATION TO TRADE AND INDUSTRY IN THE STATE OF JAMMU & KASHMIR

and maintain submarine cable systems on co-ownership basis under the automatic route. Accordingly, AD Category - I banks may allow remittances by Indian companies for overseas direct investment, after ensuring that the Indian company has obtained necessary licence from the Department of Telecommunication, Ministry of Telecommunication & Information Technology, Government of India to establish, install, operate and maintain International Long Distance Services and also by obtaining a certified copy of the Board Resolution approving such investment. PRUDENTIAL ACCOUNTING NORMS PROJECTS UNDER IMPLEMENTATION Present instructions: For the purpose of retaining the standard asset classification, a grace period of two years for Infrastructure Projects, and six months for Industrial projects, is available for commencement of commercial operations after the original date of completion of the project, provided the account is serviced regularly. Revised instructions: There are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / reschedulement of loans by banks. Accordingly, RBI has decided to modify the asset classification norms for project loans before commencement of commercial operations as per the guidelines given below. These guidelines will, however, not be applicable to restructuring of advances classified as Commercial Real Estate exposures; Advances classified as Capital Market exposure; and Consumer and Personal Advances. Revised Guidelines on Asset Classification of Projects under Implementation 1. ‘Project Loan’ would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan/financial closure (in the case of multiple banking or consortium arrangements). For this purpose, all project loans have been divided into the following two categories: (i) Project Loans for infrastructure sector (ii) Project Loans for non-infrastructure sector 2. Project Loans for Infrastructure Sector (a) A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations (DCCO) as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard asset’. (b) A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as ‘standard asset’. (c) If a project loan classified as ‘standard asset’ is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms. (i) Infrastructure Projects involving court cases: Up to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

RBI has decided that the concessions/credit relaxations to borrowers/customers in the State of Jammu & Kashmir, as laid down in RBI circular dated April 21, 2004, will continue to be operative up to March 31, 2011. OVERSEAS INVESTMENTS – LIBERALISATION Present instructions: Indian entities are permitted to invest in overseas unincorporated entities in the oil sector, up to 400 per cent of the net worth of the Indian company, under the automatic route. Revised guidelines: As a measure of further liberalisation, Indian companies have been allowed to participate in a consortium with other international operators to construct

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(ii) Infrastructure Projects delayed for other reasons beyond the control of promoters: Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases. The aforesaid provisions are applicable if the application for restructuring is received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable would be: (a) In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts. (b) Banks should maintain provisions on such accounts as long as these are classified as standard assets as under: Until two years from the original DCCO: 0.40% ; During the third and the fourth years after the original DCCO: 1.00% . For the purpose of these guidelines, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same. 3. Project Loans for Non-Infrastructure Sector (a) A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard asset’. (b) A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if is regular as per record of recovery, unless it is restructured and becomes eligible for classification as ‘standard asset’. (c) In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of six months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the “standard” classification by undertaking restructuring of accounts provided the fresh DCCO does not extend beyond a period of twelve months from the original DCCO. This also imply that the restructuring application is received before the expiry of six months from the original DCCO, and when the account is still “standard” as per the record of recovery. The other conditions applicable would be: (a) In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond six months from the original DCCO, considering the high risk involved in such restructured accounts. (b) Banks should maintain provisions on such accounts as long as these are classified as standard assets as under: Until the first six months from the original DCCO: 0.40%; During the next six months: 1.00%. For this purpose, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same. 4. Other Issues Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if: (a) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project. (b)The rise in cost excluding any costoverrun in respect of the original project is 25% or more of the original outlay. (c) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCP. (d) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

CORRESPONDENCE COURSE PROMOTION EXAM
The course material is updated, very simple, lucid & concise. Prepared by highly qualified faculty with more than 12 years teaching experience in bank’s training college and more than 3 years experience of teaching at top management institutions. Number of Bankers have been benefited from this material. If you want to study at your respective place instead of attending classes, it will be extremely useful.

Course kit includes • Training kits covering select questions on Banking Law & Practice, Advances, Ratio Analysis, Forex, Priority Sector, IT, NPA, • Mock Tests • Recalled Questions including latest exams. • Latest Financial Awareness based on RBI Notifications & other Material & GK

The best part of the course is the Recalled Questions collected from our participants which are updated
Comments by some participants of Corresp Course Recalled Questions are very useful. Most of the questions were from Recalled Questions. Thank you very much for my promotion. (Shakuntala, Syndicate Bank, Bangalore) • Sir most of the questions asked in our exam were from questions supplied by you near the exam (P.K. Sharma, Syndicate Bank Kurukshetra) • Most of the questions were from important questions on your website. ( An officer of PNB) • The fees for the complete set of study material is Rs 1500 which may be sent by DD for Rs 1500 (Rs One Thousand Five Hundred only) favouring “AKG INSTITUTE FOR DISTANCE LEARNING” payable at NEW DELHI or by crediting to account no. 150100 2100149730 with PNB, Punjabi Bagh, New Delhi (NEFT code PUNB0150100). For enrolment, pl send following particulars in Block Letters. 1. Name 2. Bank 3. Branch (complete address) 4. Address for correspondence 5. Mobile No. if any 6. Phone No. (Resi & Office with STD code) 7. DD No dated drawn on 8. Present Grade (If amount credited to a/c, pl advise date of credit and transaction ID No on Phone No. given below)

FLAT No. 75, BLOCK BG-1, PASCHIM VIHAR, NEW DELHI – 110063; TELE: 011 65476949, 011 25274157, email: akg.bti@gmail.com CORRESPONDENCE COURSE ALSO AVAILABLE

CAIIB/JAIIB

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BASE RATE GUIDELINES
RBI has decided that banks should switch over to the system of Base Rate with effect from July1, 2010. Weaknesses of BPLR: (i) 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. (ii) It was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. Objective of Base Rate: (i) Enhancing transparency in lending rates of banks (ii) Enabling better assessment of transmission of monetary policy. RBI guidelines for implementation: 1. The Base Rate system will replace the BPLR system with effect from July 1, 2010. 2. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. (Some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance;and (iv) profit margin). An illustration for computing the Base Rate is set out below. 3. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. 4. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate. (For example product-specific operating costs, credit risk premium and tenor premium etc). 5. In order to give banks some time to stabilize the system of Base Rate calculation, banks are permitted to change the benchmark and methodology any time during the initial six month period i.e. end-December 2010. 6. The actual lending rates charged may be transparent and consistent and be made available for supervisory review/scrutiny, as and when required. 7. Applicability of Base Rate: All categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks’ own employees (c) loans to banks’ depositors against their own deposits. 8. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal. 9. Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner. 10. Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. 11. The current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and direct bank finance will provide effective competition to other forms of high cost credit. 12. Reserve Bank of India will separately announce the stipulation for export credit. 13. The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. 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. Banks, however, should not charge any fee for such switch-over. 14. Banks may announce their Base Rates after seeking approval from their respective ALCOs/ Boards. 15. Review of Base Rate: Banks are required to review the Base Rate at least once in a quarter with the approval of the Board

or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. 16. Display of Base Rate: Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. 17. Information to RBI: Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis. 18. Effective date: The above guidelines on the Base Rate system will become effective on July 1, 2010. 19. Methodology for calculation of Base Rate: An illustration for computing the Base Rate is given below. Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is made available for supervisory review/scrutiny, as and when required. Illustrative Method for the Computation of the Base Rate Base Rate= a + b + c + d Where a = Cost of Deposits or funds = Dcost (benchmark) b = Negative Carry on CRR and SLR = [[{Dcost – (SLR* Tr)}/{1-(CRR+SLR)}]*100] - Dcost c = Unallocatable Overhead Cost = Uc /Dply *100 d = Average Return on Net Worth = (NP/NW) X (NW/ Dply) X100 Where: Dcost = Cost of Deposits or funds D = Total Deposits = Time Deposits + Current Deposits + Saving Deposits Dply = Deployable Deposits = Total deposits less share of deposits locked as CRR and SLR balances = D X [ 1- (CRR + SLR) ] CRR : Cash Reserve Ratio SLR : Statutory Liquidity Ratio Tr : 364 T-Bill Rate Uc : Unallocatable Overhead Cost NP : Net Profit NW : Net Worth = Capital + Free Reserves Explanation: 1. Negative Carry on CRR and SLR: Negative carry on CRR and SLR balances arises because the return on CRR balances is nil,while the return on SLR balances (proxied using the 364-day Treasury Bill rate) is lower than the cost of deposits. Negative carry on CRR and SLR is arrived at in three steps. In the first step, return on SLR investment was calculated using 364-day Treasury Bills. In the second step, effective cost was calculated by taking the ratio (expressed as a percentage) of cost of deposits (adjusted for return on SLR investment) and deployable deposits (total deposits less the deposits locked as CRR and SLR balances). In the third step, negative carry cost on SLR and CRR was arrived at by taking the difference between the effective cost and the cost of deposits. 2. Unallocatable Overhead Cost: is calculated by taking the ratio (expressed as a percentage) of unallocated overhead cost and deployable deposits. 3. Average Return on Net Worth: Average Return on Net Worth is computed as the product of net profit to net worth ratio and net worth to deployable deposits ratio expressed as a percentage.

VARIOUS RATES AT GLANCE Bank Rate 06.00% 29.04.2003 CRR 6.00% 24.04.2010 SLR 25.00% 07.11.2009 Repo Rate 5.25% 20.04.2010 ReverseRepo Rate 3.75% 20.04.2010

Latest Banking & Financial Awareness: MAY 2010

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MANAGEMENT QUESTIONS
1. Which of the following is not correct about Human relations theory? a) It views organization as a psychological and social system. b) It takes the social view of man c) It emphasizes the physiological and mechanical aspects of organization d) Assumes that people are homogenous e) Both (c) & (d) 2. The behavioural approach is considered to be: a) A human approach b) Based on Hawthorne findings c) Largely concerned with decision-making d) Both (a) & (b) e) None 3. Which one of the following is not correct with regard to the systems theory of organization? a) A system is characterized by parts and subparts. b) A change in one part affects changes in other parts c) A system is characterized by dynamic disequilibrium d) A system is open and interactive 4. Which one of the following principles of Henri Fayol is in contrast to F.W. Taylor’s concept of functional authority? a) Discipline b) Hierarchy c) Departmentalization d) Unity of Command 5. Which one of the following is not propounded by F.W. Taylor? a) Differential piece rate system b) Time and motion study c) Unit of command d) Shop management 6. According to Henri Fayol, decentralization is greater when: a) Policy decisions are made at lower levels. b) Important decisions are made at lower levels. c) More functions are affected by decisions at lower levels. d) Both (b) & (c) e) All these 7. Which of the following are not propounded by the Theory Y of Douglas Mc-Gregor? A person in an organization: a) Exercises self-direction in the service of objectives that he seeks to realize b) Has commitment to objectives as a function of rewards c) Inherently likes work d) Has a capacity for imagination, ingenuity and creativity e) None 8. Which one of the following leadership styles was identified by the Michigan University Leadership Studies as the most effective leadership style? a) Democratic style leadership b) Employee-centred leadership c) Participative group leadership d) Team leadership 9. Who among the following has observed that instead of hierarchy of needs, motivation should be understood in terms of series of needs?

a) Chester Barnard b) David McClelland c) Abraham Maslow d) Warren Bennis 10. According to Fredrick Herzberg, the determinants of job dissatisfaction include 1. Working conditions 2. Supervision 3. Salary 4. Responsibility 5. Recognition Which of the above are correct? a) 4 and 5 only b) 1, 2 and 3 only c) 1, 2, 3, 4 and 5 d) 1, 2,3 and 5 only 11. Which one of the following shows the correct sequence of the four basic steps in the position classification job? a) Job analysis – Grouping of positions – Standardization – Position allocation b) Standardization – Job analysis – Grouping of positions – Position allocation c) Grouping of position –Job analysis – Position allocation – Standardization d) Job analysis – Grouping of positions – Position allocation – Standardization 12. Given below are different stages in problem solving: 1. Collection of relevant information 2. Identification of the problem 3. Analysis of the information 4. Development of alternatives 5. Evaluation of choices Select the correct sequences of the above from the codes given below – a) 1, 2,3, 4 and 5 b) 2, 1, 3, 4 and 5 c) 4, 5, 2, 3 and 1 d) 4, 1, 5, 3 and 2 13. Formal Communication usually flows in: a) six directions b) four directions c) three directions d) nine directions 14. Which one of the following is not correct among the assumptions made by a Theory ‘Y’ leader? a) Expenditure of energy is undesirable b) Self-direction and self-control is desirable c) Self-actualization is a motivating force d) Working conditions conducive for acceptance of responsibilities are desirable 15. The four bases of organization as identified by Luther Gullick are : a) Planning, Organising, Coordinating, Controlling b) Objective, People, Plan, Action c) Plead, Persuade, Order, Punish d) Purpose, Process, Persons, Place 16. ‘Span of Control’ depends upon which of the following? (1)centralized system of authority (2) type of work to be supervised (3)competence of the supervisor (4)techniques of supervision a) 1 and 2 b) 1, 2 and 3 c) 2, 3 and 4 d) All the four 17. A formal organization: a) is a structure of authority b) is a division of functions c) consists of individuals d) reflects social and psychological relationships e) Both (a) & (b) 18. Decentralization: a) improves administrative efficiency b) reduces stress of responsibilities at the headquarter

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c)

provides for involvement of insiders in organizational functioning d) is responsible for cost-escalation e) Both (a) & (b) 19. Which of the following statements about ‘Delegation of authority’ are not correct? a) It should be made to an individual b) It should be properly planned c) It should be backed by adequate resources d) It can be conditional e) None 20. Which one of the following is not an intrinsic factor of job satisfaction as per the Hygiene Theory of Motivation? a) Achievement b) Advancement c) Opportunities for growth d) Job security 21. Fredrick Herzbgerg’s Theory of Motivation has listed some elements which are related to job content. Their number is: a) 5 b) 6 c) 8 d) 10 22. “A communication that cannot be understood can have no authority.” The above statement is attributed to: a) Ordway Tead b) C.I. Bernard c) Millet d) Peter Drucker 23. The aspects of organizational communication does not include: a) Internal communication b) external communication c) inter-personal communication d) intra-personal communication e) None 24. Which one of the following as qualities of leadership, a mentioned by Barnard is correct? a) Vitality and Endurance b) Decisiveness c) Persuasiveness and Responsibility d) All of these 25. Which one of the following statements about Decision-making is not correct? a) Every decision is based upon two premises b) A factual premise cannot be disproved c) A value premise can be tested d) Ends and means have their importance 26. Theory “Y” is connected with: a) Democratic leadership style b) Autocratic leadership style c) Laissez-faire leadership style d) None 27. Control function of management implies – a) To bring harmony in various activities b) To keep the workforce satisfied c) To take corrective course of action d) To dictate the subordinates 28. Coordination function of management aims at – a) Providing sufficient personnel b) Bringing harmony in various activities c) Taking up corrective course of action d) All these 29. “Authority flows downwards from top to the bottom whereas accountability flows upwards from bottom to top.” It is found in– a) Scalar chain b) Functional organization c) Committee structure d) Multivariate Approach 30. Maslow’s needs hierarchy theory relates to-

a) Motivation b) Leadership c) Communication d) Directing 31. MBO is a technique of – a) Planning only b) Controlling only c) Neither planning nor controlling d) Both planning and controlling 32. Henry Fayol is known for – a) Scientific Management b) Rationalisation c) Industries Psychology d) Principles of Management 33. Unity of command implies having not more than one – a) Subordinate b) Friend c) Boss d) Unit 34. ‘x’ and ‘y’ theory of Motivation has been propounded by – a) McGregor b) Maslow c) Ouchi d) Herzberg 35. Coordination has the following features – a) Continuous b) Vertical organization c) Horizontal relationship d) All these 36 Which of the following is not a barrier in communication? a) Noise b) Affection c) Fear and distrust d) Perception 37. Delegation of authority signifies the delegation of: a) Authority b) Responsibility c) Both of these d) None 38. Management by exception implies focusing attention on – a) All variations b) Normal variations c) Abnormal variations d) Randomly selected variations 39. Decentralisation – a) Increases the importance of supervision b) Decreases the importance of supervisors c) Increases the importance of subordinates d) Decreases the importance of subordinates 40. Application of Theory ‘X’ implies practicing of – a) Free leadership b) Democratic leadership c) Autocratic leadership d) None 41. An association of banks is an example of – a) Diagonal combination b) Vertical combination c) Horizontal combination d) Lateral Combination 42. The technique of “Carrot and Stick” is used in business organization for – a) Reducing absenteeism b) Motivation c) Effective leadership d) Rewarding workers

1 2 3 4 5 6 7 8 9 10

E D C D C D E B B B

11 12 13 14 15 16 17 18 19 20

A B C A D C E E A D

21 22 23 24 25 26 27 28 29 30

A C D D C A C B A A

31 32 33 34 35 36 37 38 39 40

B D C A A B A C C C

41 42

C B

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1. Barclays lays off 250 employees in India: as it has decided to refocus its operations from mass retail banking to mass affluent banking.The bank currently has over 5,000 employees in India. 2. RBI says Yes to Nokia mobile money transfer: RBI has permitted YES Bank to provide mobile money services in association with Nokia. 3. Food inflation inches down on base effect (29.4): The annual food price inflation, based on the wholesale price index (WPI), rose 16.61 per cent during the week ended April 17, slower than an annual rise of 17.65 per cent in the previous week. The monthly WPI had risen an annual 9.90 per cent in March, its fastest pace in 17 months, driven by high food and fuel prices. 4. SEBI seeks to move all ULIP cases to Supreme Court: though IRDA wanted to file a joint application under Section 90 of the Civil Procedure Code. 5. NSE defers gold ETF futures on regulatory wrangle: NSE has deferred its decision to introduce futures and options (F&O) trading in Gold ETF after the commodity market regulator Forward Markets Commission (FMC) raised an objection over regulatory purview. 6. Govt bans import of Chinese telecom equipment: including Huawei and ZTE. The Government had earlier banned import of Chinese handsets without IMEI number. The biggest gainers from the move could be European and American vendors that have been losing market share to aggressive Chinese equipment-makers. 7. Life insurers told to disclose agents' commission: IRDA has asked life insurance companies to spell out the commission paid to agents and the various charges to be collected from policyholders. The circular will take effect for sales that take place from July 1. 8. New bank wage agreement will give staff Rs 4,816 cr : Following this, banks' total wage bill will go up by 17.5 per cent. Besides hike in salary, employees (existing and retired) who had opted for Provident Fund, have been given the option to get pension benefit. The pension option was given subject to the condition that non-pension optees will bear the burden of pension cost to the extent of 2.8 times of their basic pay as of November 2007. 9. India open to using Tobin-type tax to curb capital inflows: Choice of instrument will be determined by context, says RBI Governor. 10. Lok Sabha approves demands for grants, appropriation Bills: The Lok Sabha on 27th April approved the demands for grants of various Central Ministries and departments after applying the guillotine. 11. Now, Portugal threatens to plunge EU into a new crisis: After Greece's debt problems over the past few months plunging the European Union into crisis, alongside the currency, now it is Portugal that poses a new threat to the 16-member euro zone. Though both nations do have budget deficits well above the EU's target of 3 per cent of GDP, Portugal's had 9.4 per cent in 2009 compared to 13.6 per cent recorded by Greece in 2009. 12. Refiners lose Rs 70,000 cr on fuel subsidies since 2004-05: Since 2004-05, IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum have cumulatively lost over Rs 70,000 crore on sale of petrol, diesel, kerosene and cooking gas. This is because, barring 2008-09, their losses have never been squared up in full.

F IN AN CI AL & GENER AL AWAR ENES S

13. Rangarajan to head panel on public expenditure: to suggest measures for efficient management of public expenditure. The committee has been set up by the Planning Commission. 14. Tax filing made easy with Saral-II: The Finance Ministry has come out with a format of income-tax return (ITR-I) for salaried taxpayers. An assessee with income from house property and/or having exempted capital gains can also file returns with Saral-II. 15. Govt working to reduce transaction costs for exporters: Mr Jyotiraditya Scindia. 16. Chirayu Amin made interim chief of IPL: The Board of Control for Cricket in India (BCCI) has appointed Mr Chirayu Amin as the interim Chairman of the Indian Premier League.He takes over from Mr Lalit Modi. 17. Govt issues 1.44 crore health insurance cards for BPL families: The Government has provided smart cards to 1.44 crore Below Poverty Line (BPL) families under the Rashtriya Swasthya Bima Yojana (RSBY). The Government has enacted the Unorganised Workers' Social Security Act in May 2009. The Act provides for registration of the unorganised workers to help in formulating social security schemes for particular occupations. 18. Punjab & Sind Bank plans IPO to raise Rs 400500 cr: PSB is the smallest public sector bank. 19. High minimum wages in Delhi push small industries out: Delhi Government has increased minimum wages by up to 49 per cent effective from February this year and are the highest in the country. 20. SEBI tightens norms to check misuse of ‘power of attorney' : The power of attorney executed in favour of stockbrokers will not permit them to transfer securities of clients for off market trades. It will also not permit brokers to transfer funds from the bank accounts of the client for trades executed by another stock broker. 21. Cane remunerative price for 2010-11 hiked 7.15% to Rs 139.12/quintal: The Centre has fixed the ‘fair and remunerative price' (FRP) of sugarcane for the ensuing 2010-11 sugar season (October-September) at Rs 139.12 a quintal. This marks a 7.15 per cent increase over the Rs 129.84 a quintal level for the current season. 22. SBI goes green, installs windmill for captive use: The windmill was inaugurated at Panapatti village, Pollachi Taluk, Tamil Nadu. SBI has installed 10 windmills with an aggregate capacity of 15 MW in Tamil Nadu, Maharashtra and Gujarat. 23. IIMK to create C.K. Prahalad endowment fund: The Indian Institute of Management, Kozhikode , is creating an endowment fund in the name Prof C.K. Prahalad, renowned management guru, who passed away recently. 24. Cabinet gives nod for capital infusion into PSBs: Union Cabinet has given nod to infuse Rs 15,000 crore in public sector banks (PSBs) during 2010-11. Indications are that Bank of Maharashtra, Central Bank of India, Dena Bank, and United Bank of India, among others, would benefit from this. 25. Gujarat golden jubilee celebrations : Gujarat will celebrate culmination of its year-long “Swarnim Gujarat” (Golden Gujarat) programmes on May 1 to mark the 50th year of its coming in to existence. 26. Life insurance sector posts 25% growth in new premium income: 50-60% of new biz premium will come from ULIPs.

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27. IndiaFirst Life launches group insurance business: IndiaFirst Life Insurance Company Ltd, a joint venture between Bank of Baroda, Andhra Bank and UK's Legal & General, has launched group insurance business. 28. NPAs of public sector banks rise in March-Dec '09: Net non-performing assets (NPAs) of public sector banks grew 23 per cent between March and December last year, as global economic downturn and drought conditions in the country affected asset quality. 29. Pvt sector banks must get RBI nod to raise funds via QIP: as allotments under QIP are on private placement basis. 30. RBI sounds caution on rising realty, stock prices: Property prices have run up by 20-30 per cent in the last few months. The domestic equity market registered an increase of 81% in prices. 31. Credit growth in 2009-10 surpasses RBI estimate of 16%: PSBs' lending grows 19.5%, private sector banks' by 11.7%. 32. Nathu La border trade to begin on May 3 : The fifth season of the Nathu La border trade between Sikkim and Tibet Autonomous Region (TAR) is scheduled to commence on May 3. It will go on till November 30. 33. Solar Mission to award projects based on tariff discounts: The Jawaharlal Nehru National Solar Mission –plans to add 1,300 MW of solar power in next three years, out of which 1,100 MW will be grid connected and 200 MW off-grid. By 2022, the aim is to install 20 million sq metres solar thermal collectors in the country and save about 7,500 MW power generation capacity. 34. MCX-SX steals a march on NSE in currency trades: Registers 30% rise in daily turnover since Feb. MCX-SX's market share in the currency futures segment averaged 56 per cent since February, up from the 50 per cent share prior to that. 35. NIIT varsity to offer MBA: The not-for-profit NIIT University has launched an MBA program. 36. Management guru C. K. Prahalad passes away: His Competing for the Future (1994), co-authored with Gary Hamel and printed in 14 languages, was among the best-selling business books that year. The Future of Competition (co-authored with Venkat Ramaswamy), was translated into 12 languages. 37. UCO Bank will take service to villages on 35 vans: To offer banking services in the “unbanked” villages of the country, UCO Bank plans to launch 35 mobile banking vans. The first such mobile branch was inaugurated in Deuli village in Murshidabad district of West Bengal by the Union Finance Minister, Mr Pranab Mukherjee. 38. Eco-rural tourism could boost village economy': According to a study by FICCI and YES Bank tourist spending on eco-rural tourism in India could capture as much as 5-8 per cent of total tourist expenditure. 39. Framework for mobile banking services approved: The Government has approved the framework for providing basic financial services through mobile phones. Individual banks may start implementation by July 31, 2010 and banks may complete the rollout by December 2011.The National Sample Survey data reveal that 51.4 per cent of nearly 89.3 million farmer households do not have access to any credit from institutional or non-institutional sources. Only 27 per cent of farm households are indebted to formal sources. Only 13 per cent are availing loans from the banks in the income bracket of less than Rs 50,000.

40. 3G spectrum price crosses Rs 5,000-cr mark: This is 45.5 per cent higher than the initial base price of Rs 3,500 crore fixed at the start of the auction. The Government is expecting to get over Rs 35,000 crore from the auction of both 3G and broadband spectrum. 41. Inflation has peaked: Basu: The Indian economy is likely to have grown by 8.6 per cent in the fourth quarter of 2009-10 as per Dr Kaushik Basu, Chief Economic Advisor to the Finance Ministry. 42. M&M to buy out Renault stake, make Logan on its own: Mahindra & Mahindra will buy out Renault's 49 per cent stake in the five-year-old joint venture which produces the Logan at Nashik. In the process, Mahindra Renault will now become a wholly-owned arm of M&M. 43. Reliance Ind picks stake in logistics firm Deccan 360: 44. India-made cryogenic engine fails to lift GSLVD3: The launch of the GSLV-D3 rocket, which featured for the first time an indigenously built cryogenic engine, failed. The GSLV-D3 rocket cost about Rs 180 crore and the satellite, Rs 150 crore. 45. Inflation rate edges towards the double-digit: The year-on-year wholesale price inflation edged up to 9.9 per cent in March from the previous month's annual rise of 9.89 per cent. 46. 1,793 visas-on-arrival in Jan-March: During the first three months of the calendar year, 1,793 visa-onarrival were granted to tourists from five countries. The Government launched the visa-on-arrival scheme for citizens of Singapore, New Zealand, Japan, Luxembourg and Finland in January this year on a pilot basis. 47. Dumping duty on Chinese vehicle parts: The definitive anti-dumping duty is for five years and imposed with effect from June 15, 2009. 48. President inaugurates tourist village in Gangtok: The village is Khangchendzonga tourist village. 49. India poised for double-digit growth in 4 years: According to Mr Basu, growth is likely to witness 8.5 per cent growth this fiscal. Savings pattern in India, which stood at 13 per cent of its national income up to 196869, now stands at 32.5 per cent. 50. Govt objective is to achieve inclusive growth: Pranab: The Finance Minister, Mr Pranab Mukherjee, inaugurated the 5,000th branch of Punjab National Bank at Chittaranjan Park in the Capital. He also declared the completion of the implementation of 100 per cent core banking solutions in all the six sponsored regional rural banks with 1,408 branches. 51. ‘Clean' hydel project work to begin on April 17: in Vadakara Taluk of Kozhikode district. The project is envisaged under the Clean Development Mechanism (CDM) scheme of United Nations Framework Convention on Climate Change (UNFCCC). 52. Life insurers can seek nod for IPO after five years of biz : Life insurance companies that have completed five years of operations can apply for permission to go public, according to the norms for initial public offerings finalised by the Insurance Regulatory and Development Authority. 53. Export duty slapped on cotton: The Government has imposed export duty of Rs 2,500 a tonne on raw cotton and 3 per cent of the free-on-board value of cotton waste. The duty comes into effect from April 9. 54. Row brews over ULIPs: The Securities and Exchange Board of India has said that its order banning sale of ULIPs will continue to be applicable for new schemes launched by insurance companies after April 9, the date of its previous order.

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55. Ceiling for outstanding under MSS at Rs 50,000 cr RBI has set the ceiling for the outstanding under the Market Stabilisation Scheme (MSS), for the fiscal year 2010-11 at Rs 50,000 crore. This ceiling will be reviewed when the outstandings reach the threshold limit of Rs 35,000 crore. The current MSS outstanding balance (face value) is Rs 2,737 crore which is due for redemption during the fiscal year 2010-11. 56. Nabard net operating surplus rises 9% : In FY2010, refinance provided by the development bank for crop loans was up by 44 per cent to Rs 24,216 crore (Rs 16,803 crore). 57. Nabard to assist 10 lakh small farmers using selfhelp group model: The development bank, will organise joint liability groups (JLGs) comprising 7-10 farmers in the small and marginal category. 58. Feb industrial growth up 15% led by capital goods: February marks the fourth consecutive month of double-digit industrial growth. The cumulative growth for the April-February period works out to 10.1 per cent, as against 3 per cent for the corresponding 11 months of 2008-09. 59. IDFC sees pvt sector adding 50,000 MW capacity in 3 years: In the next three years, 50-60 per cent growth in generating capacity is expected. More than a third of the total generating capacity at the end of the next three years will come from the private sector. 60. Coke to fund Chennai lake revival in water recharge effort: Hindustan Coca-Cola Beverages Pvt Ltd (HCCB) has launched a project to rejuvenate the 1,000-acre Nemam Lake in Tiruvallur district, near Chennai. It has committed more than $1 million for the purpose. 61. PF money can be parked in corporate bonds: The Employees Provident Fund Organisation (EPFO) will be able to invest its funds in corporate bonds of joint sector companies where the Government has a minimum 26 per cent stake.Till now EPFO funds were mainly parked in Government securities and bonds of companies in which Government had over 51 per cent stake. 62. Ambit of CAG mandate may be widened: Auditing of public-private partnership ventures, NGOs under active consideration: Pranab. Currently, the CAG, has no automatic legal mandate to audit PPP companies even as substantial Plan funds are being spent through this channel. A similar situation prevails in the case of NGOs. 63. Domestic sales of Automobiles industry register 26% rise in 2009-10: The strong sales have made India the second fastest growing market after China (42 per cent), followed by Germany (23 per cent). 64. EU to work with India on climate change: to achieve specific and substantial outcome at the yearend UN climate change conference at Cancun in Mexico. 65. Quarterly realty price index can be compiled from loan data: RBI : Data obtained directly from banks and housing finance companies are considered to be more reliable source of information for monitoring real estate prices. An RBI appointed expert group has also recommended that real estate price index should be compiled in quarterly intervals to capture property price movements on a more frequent basis. 66. Reliance in $1.7-b deal with Atlas Energy to tap gas in US : Gets 40% stake in shale gas acreage in Pennsylvania. 67. Agri-insurance cover for farmers significantly low: Only about 40-50 per cent of the loanee farmers get the crop insurance cover from banks. One reason,

for the low coverage of loanee farmers, is the exclusion of certain crops from the scheme. Among the agricultural items that are not notified under the NAIS are vegetables, horticulture, mango, banana, papaya and beetle leafs. 68. Euro dives on Greece crisis: Greece's woes have derailed the euro, the single currency crashing from the neighbourhood of $1.5 to $1.3 as the crisis dragged on without resolution. 69. Govt scheme payouts may be routed only through banks: As an incentive to banks, the Government may provide them a transaction fee of up to two per cent of the payments. The move is also aimed at bringing more transparency to the Government schemes.The schemes/programmes that would be covered in this plan would include the Mahatma Gandhi National Rural Employment Guarantee (or MGNREGA with a Central outlay of over Rs 40,000 crore), the proposed direct fertiliser subsidy (of around Rs 50,000 crore), old age pension, social security payments, insurance scheme for below poverty line people, other rural development programmes and State government schemes. 70. SAIL FPO, stake sale to fetch Rs 16,000 crore: Steel Authority of India Ltd is set to shed 10 per cent of government equity in the company. The Government's share will go down to 69 per cent from 85.82 per cent now. This is the first divestment in the current fiscal. 71. Geithner lauds India's financial inclusion initiatives: The US Treasury Secretary, Mr Timothy Geithner, lauded India's effectiveness in extending the reach of the financial sector to people without access to banking. 72. GIC Re wants insurers to underwrite risk more prudently: The reinsurance agency, GIC Re has decided to follow a sliding rate of commission from the April renewals. The ceding commissions paid to the general insurers by GIC Re will be linked to the claims experience of these companies. 73. SEBI cuts listing time to 12 days after IPO: SEBI has made it mandatory for companies to list shares within 12 days (instead of 22 days) after the closure of a public issue. This would be applicable to public issues opening on or after May 1. 74. Award for State grameena bank: Nabard has conferred the State-level award for best performance under ‘Highest share of SHG business to overall business' to Karnataka Vikas Grameena Bank (KVGB) for 2008-09. 75. Rupee rises to 18-month high on strong foreign fund flows: The rupee closed at 44.44, on 5th April a level last seen in 18 months ago, in September 2008. 76. Govt buildings to be Green rated: Government has decided that all new Central Government and PSU buildings will meet requirements of at least three star rating under GRIHA (Green Rating for Integrated Habitat Assessment). ADaRSH, an independent platform for building professionals, developers and Government officials has also been launched. 77. Key drivers in economic recovery: Less developed nations will be the key drivers in the projected recovery of the world economy when, according to the WTO estimate, the growth of the world trade will be 9.5 per cent. Developed nations will grow 7.5 per cent and the rest of the world, 11 per cent. 78. IIM-C hikes fee by 50%: Indian Institute of Management, Calcutta (IIM-C), has announced a 50 per cent hike in fee for its two-year Post Graduate

Latest Banking & Financial Awareness: MAY 2010

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Programmes (PGP) to Rs 13.5 lakh from the present Rs nine lakh. 79. Ministry rules out extending rural job scheme to export sector: The Commerce Ministry has rejected a proposal to extend the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) to the export sector. 80. SBI customers can get complaints redressed with ‘SMS Unhappy': So far, the bank has received 7,865 unhappy messages (complaints), out of which 6,990 have been resolved. 81. Population count begins: The President, Ms Pratibha Patil, on 1st April kicked off the decennial census operation and preparation of the first ever national population register. 82. India can be back to 9% growth by 2012: PM: As per PM, India can get back to 9 per cent growth by the end of the Eleventh Plan (2007-12). PM has asked Planning Commission to explore the feasibility of achieving 10 per cent inclusive growth in the Twelfth Plan (2012-17) because of favourable factors like high domestic savings rate (around 35 per cent of GDP), domestic investment rate (around 37 per cent), a highly entrepreneurial private sector and a critical mass of quality human resource. 83. Right to Education Act comes into force: with effect from 1st April. An estimated 92 lakh children, who have either dropped out of schools or have never been to any educational institution, will get elementary education as it will be binding on the part of local and State Governments to ensure that all children in the six to 14 years age group get schooling. Private educational institutions will also be required to reserve 25 per cent seats for children from weaker sections. The Finance Commission has provided Rs 25,000 crore to the States for the implementation of the Act. The Centre and States have agreed to share the funds required for implementation in the ratio of 55:45. 84. External debt up 12% in April-Dec: India's external debt as of end-December 2009 had risen by 11.9 per cent to $251.4 billion. 85. SEBI extends KYC deadline to June 30: The earlier deadline was March 31, 2010. SEBI had in December last year asked that clients trading in the derivatives segment of the stock market submit documentary evidence of their annual income or their net worth to their brokers. 86. NRI deposits surge 64% in April-Dec: which were at $3.474 billion. Private transfer receipts, comprising mainly remittances from Indians working overseas, increased to $40.8 billion from $37.1 billion in the corresponding period last year. 87. Rupee gains against euro too: In the last three months, rupee has appreciated 3.5 per cent against the dollar. In the same period, the Indian currency gained 10 per cent against the euro. TYPES OF TAXAION
1. Advalorem Tax: Advalorem tax is a kind of indirect tax n which goods are taxed by their values. In the case of advolorem tax, the tax amount is calculated as the proportion of the price of the goods. Value added Tax (VAT) is an advolorem Tax. Regressive Tax: It is a tax which rates of taxation falls with an increase in income. In regressive taxation incidence falls more on people having lower incomes than that of those having higher incomes. Progressive taxation: Taxation that takes a larger proportion of a taxpayer’s income the higher the income is.

1.

2. 3.

4. 5. 6. 7. 8. 9. 10.

11. 12. 13. 14. 15. 16.

17.

18.

19.

2.

3.

20.

Closed Economy - An economy having no economic relations with the rest of the world i.e. it doesn’t have trade, financial or investment relations with other countries. Open Economy : An economy having economic relations with the rest of the world, i.e. it has trade, financial and investment relations with other countries. National Income : It refers to the money value of all goods and services produced within the domestic territory of a country plus net factor Income from abroad in a year. Per capita income : It refers to the average income of a resident of a country and is calculated by dividing the national income by the population of the country. Gross Domestic Product (GDP) : It is the money value of all final goods and services produced in the domestic territory of country in a year. Net Domestic Product : obtained by reducing consumption of fixed capital (depreciation) from the GDP. Gross National Product (GNP) : It is calculated by adding net factor income from abroad (NFIA) to GDP. Law of Demand: It states that other things being equal, more of a commodity is demanded at a lower price and less of it at a higher price. Elasticity of Demand : It is the responsiveness of a demand to a change in a any factor of demand. Factors affecting elasticity of Demand : (a) Nature of Commodity (b) Availability of substitute goods (c) Share in the total expenditure (d) Diverse uses of the commodity (e) Consumer’s behaviour etc. Supply curve: A graph of the relationship between the price of a good and the amount supplied at different prices Consumer surplus: The difference between what a consumer would be willing to pay for a good or service and what that consumer actually has to pay. Sunk costs: When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed. Marginal Cost : It is the addition to the total cost as a result of unit increase in production. Propensity to Consume: The relationship between change in income and the resultant change in consumption. Fiscal Measures : Measures to correct excess /deficient demand thorugh budget proposals of government are called fiscal measures. These include tax changes, increase /reduction in government expenditure etc. Fiscal Policy: Fiscal policy is that part of government economic policy which deals with taxation, expenditure, borrowing, and the management of public debt in the economy. Fiscal deficit is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure Budget Deficit: Budget may take a shape of deficit when the public revenue falls short to public expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue. The government meets this deficit by way of printing net currency or by borrowing. Primary Deficit: Fiscal Deficit minus Borrowings.

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21. Inflation: A situation of a steady and sustained rise in general prices is usually known as inflation. Inflation is a state in which the value of money is falling i.e. prices are rising. 22. Cost-push Inflation: It arises due to an increase in production cost. Such type of inflation is caused by three factors: (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of heavy taxation. 23. Deflation: Deflation is the reverse case of inflation. Deflation is that state of falling prices which occurs at that time when the output of goods and services increases more rapidly than the volume of money in the economy. In the deflation the general price level falls and the value of money rises. 24. Recession: A period of slow or negative economic growth, usually accompanied by rising unemployment. 25. Stagnation: A prolonged recession, but not as severe as a depression. 26. Disinflation: A fall in the rate of inflation. This means a slower increase in prices but not a fall in prices. 27. Depression: A prolonged recession in economic activity. The textbook definition of a recession is two consecutive quarters of declining outpur. A depression is an even deeper and more prolonged slump. 28. Duopoly: A market structure in which two producers of a commodity compete with each other. 29. Monopoly A market situation in which a product that does not have close substitutes is being produced and sold by a single seller. 30. Perfect competition A market situation characterized by the existence of very many buyers and sellers of homogeneous goods or services with perfect knowledge and free entry so that no single buyer or seller can influence the price of the good or service. 31. Buyer's market: A market in which supply seems plentiful and prices seem low; the opposite of a seller's market. 32. Tax haven: A country or designated zone that has low or no taxes, 33. Tax avoidance: A legal action designed to reduce or eliminate the taxes that one owes. 34. Tax evasion: An illegal strategy to decrease tax burden by underreporting income, overstating deductions, or using illegal tax shelters. 35. Monetary policy: The regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. 36. HDI: HDI (Human Development Index) is a composite index measuring average achievement in three basic dimensions of human life-a long and healthy life, knowledge and a decent standard of living. 37. Engel’s Law: This law was formulated by Ernst Engel. This law states that, with given taste and preference, the portion of income spend on food diminishes as income increases. According to this law, smaller a person’s income, the greater the proportion of it that he will spend on food and vice versa. 38. Giffin Goods: Giffin goods have the positive relationship between price and quantity demanded and as a result demand curve of Giffin goods slopes upward from left to right. 39. Gresham’s Law: Bad money (if not limited in quantity) drives good money out circulation 40. Laffer Curve: It represents relationship between total tax revenue and corresponding tax rates. 41. Lorenz Curve: The Lorenz curve is a graphical representation of the cumulative distribution function of

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a probability distribution. This curve shows the degree of inequalities of a frequency distribution in a graphical manner. Pareto efficiency: A situation in which nobody can be made better off without making somebody else worse off. Pigou effect: A fall in the price level increases the real value of people’s savings making them feel wealthier and thus causing them to spend more. This increase in demand can lead to higher employment Okun’s Law: A relationship between an economy's GDP gap and the actual unemployment rate. The relationship is represented by a ratio of 1 to 2.5. Okun found that an annual 2.5% increase in the rate of real growth above the trend growth results in a 1% decrease in the rate of unemployment. Philips Curve: Inflation and unemployment have a stable and inverse relationship. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. Say’s Law: Supply creates its own demand. Real exchange rate: An exchange rate that has been adjusted to take account of any difference in the rate of inflation in the two countries whose currency is being exchanged. Real interest rate: The interest rate less the rate of inflation. Tick: The minimum price change possible in a financial marketplace. Tiger economies: The fast-growing developing economies of Asia. Tobin tax: A proposal to reduce speculative crossborder flows of capital by levying a small tax on foreign exchange transactions. Predatory pricing: Charging low prices now so you can charge much higher prices later. PPP: Purchase Power Parity is the exchange rate that equates the price of a basket of identical traded goods and services in two countries. Bubble: When the price of an asset rises far higher than can be explained by fundamentals. Bull: An investor who expects the price of a particular security to rise; the opposite of a bear. Contagion: The domino effect, such as when economic problems in one country spread to another Crowding out: When the state does something it may discourage, or crowd out, private-sector attempts to do the same thing. At times, excessive Government borrowing has been blamed for low private-sector borrowing. Currency board: A means by which some countries try to defend their currency from speculative attack. A country that introduces a currency board commits itself to converting its domestic currency on demand at a fixed exchange rate. Currency peg: When a Government announces that the exchange rate of its currency is fixed against another currency or currencies. Dumping: Selling something for less than the cost of producing it. Fiscal drag: is the tendency of revenue from taxation to rise as a share of GDP in a growing economy. Fiscal neutrality: When the net effect of taxation and public spending is neutral, neither stimulating nor dampening demand Hard currency: A hard currency is expected to retain its value, or even benefit from appreciation, against softer currencies.

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GOVERNMENT SECURITIES MARKET IN INDIA 1. 1. 2. What is a Government Security? A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free or gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certifi cates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities. Treasury Bills (T-bills) Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills. Payments for the Tbills purchased are made on the following Friday. The 91 day T-bills are auctioned on every Wednesday. The T-bills of 182-days and 364-days tenure are auctioned on alternate Wednesdays. T-bills of 364-days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 day T-bills are auctioned on the Wednesday prior to non-reporting Fridays. Dated Government Securities Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years. The Public Debt Office (PDO) of the Reserve Bank acts as the registry / depository of Government securities and deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon securities. The nomenclature of a typical dated fixed coupon Government security contains following features coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017 would mean : Coupon: 7.49% paid on face value; Name of Issuer : Government of India; Date of Issue : April 16, 2007; Maturity : April 16, 2017; Coupon Payment Dates : Half-yearly (October16 and April 16) every year; Minimum Amount of issue/ sale : Rs.10,000. In case there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the month attached as suffix in the nomenclature. For example, 6.05% GS 2019 FEB,

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would mean that Government security having a coupon of 6.05% that mature in February 2019 along with the other security with the same coupon, namely, 6.05% 2019, which is maturing in June 2019. If the coupon payment date falls on a Sunday or a holiday, the coupon payment is made on the next working day. However, if the maturity date falls on a Sunday or a holiday, the redemption proceeds are paid on the previous working day itself. Dated securities of both, Government of India and State Governments, are issued by the Reserve Bank through auctions. The Reserve Bank announces the auctions a week in advance. Instruments Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life of the bond. Most government bonds are issued as fixed rate bonds. Floating Rate Bonds – Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. Floating Rate Bonds were first issued in September 1995 in India. Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to the face value. The Government of India issued such securities in the nineties. It has not issued zero coupon bond after that. Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997. These bonds matured in 2002. Bonds with Call/ Put Options – Bonds can also be issued with features of optionality where the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. Special Securities - In addition to Treasury Bills and dated securities issued by the Government of India under the market borrowing programme, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc., as compensation to these companies in lieu of cash subsidies. These securities are usually long dated securities carrying coupon with a spread of about 20-25 basis points over the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities but are eligible as collateral for market repo transactions. The beneficiary oil marketing companies may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising cash. STRIPS: are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the 8.24% GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash flows are traded separately as independent securities in the secondary market. (Source: RBI Website)

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The mortgage created by deposit of title deeds is called: Equitable Mortgage Right of foreclosure is available in which type of mortgage?: Mortgage by conditional sale What is nature of Banker’s lien? : It is implied pledge because Banker can dispose of the goods after notice to the borrower Shares are pledged with bank as security for a Bank Guarantee by a borrower. Bank Guarantee stands expired. Whether a temporary overdraft availed by the borrower which is overdue can be got adjusted by selling the shares held as security for issue of guarantee?: Yes because the shares were deposited in the ordinary course of business. An account is opened in the name of A. Later on depositor adds name of another person B with instructions Either or survivor. Subsequently A dies. Claim is put up by a third party as legal heirs of A. To whom the money is payable?: Amount will be payable to Survivor. How much maximum educational loan can be sanctioned for study abroad to be classified under Priority sector: Rs. 20 lakhs. Who is called testamentary guardian?: A guardian appointed by Will of the deceased. Committee on Financial Inclusion was headed by: Dr C Rangarajan Committee on Willful Defaulters was headed by: Sh. SS Kohli Committee on E.F.T. was headed by: Ms. Shere In which situation, relationship of agency is not terminated between principal & agent?: When agent is declared Bankrupt. What is Sans Recourse Endorsement?: An endorsement in which endorser excludes his liability. There is a joint account in the name of A & B with instructions Either or Survivor. Income Tax attachment order is received in the name of B. Whether joint account will be attached?: 50% of the balance will be attachable Stamping of Promissory notes is done as per which act?: Indian Stamp Act Which of the following is Intangible Assets (i) Stock (ii) Book debt more than 6 month old (iii) Goodwill: Ans Goodwill. Which is the biggest foreign bank in India? : Standard Chartered Which ratio is given more importance while appraising a term loan?: Debt Service Coverage Ratio A borrower has been sanctioned regular bills discounting limit. While discounting bills, which bills will not be discounted ?: Bills for purchase of fixed assets What is white Plastic?: Counterfeit card (Credit or Debit card) Who can change the terms & conditions of LC with the consent of all? : Opening Bank/ Issuing Bank Who is responsible for verifying the correctness of documents under L/C? : Negotiating Bank Charge of hypothecation on the assets of the Co. is called : Floating or Equitable charge. A locker holder has given power of attorney to operate the locker. The power of attorney holder comes with a request to surrender the locker?: Request can not be acceded to.

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Whether minor can endorse bills?: Yes. As per section 26 of N I Act, minor can endorse and bind all others except himself. An Illiterate person who is the payee of a cheque puts his thumb impression instead of signature for purpose of endorsement. Whether endorsement is regular? Yes, if is attested. Committee on Corporate Governance in banks was headed by : A.S. Ganguly On the request of a valuable customer, who has sufficient balance in the account, a cheque drawn on his account is marked good for payment. Subsequently the customer withdraws the amount in cash & cheque which was marked good payment was dishonoured. Whether bank is liable?: Yes Bank is liable for payment. As per Goiporia Committee, returned cheques should be delivered to the depositor within: 24 hours What is the maximum limit of housing loan that can be sanctioned for coverage under priority sector in rural areas?: Rs 20 lakhs. Why banks do not allow advance against partly paid shares? : These shares represent a Contingent Liability and therefore such advance prohibited by RBI. While allowing advance against LIC policy, which value is taken into consideration?: Surrender Value Nomination has been made in the deposit account. After the death of account holder, both nominee and legal heirs approaches for payment. What should the bank do? : Bank is fully discharged on making payment to nominee. Up to what amount processing fees is not levied in Priority Sector Advances?: Rs.25000 Which is not a direct agricultural advance?: Major Irrigation What is the maximum no. of earned leaves that an employee can accumulate?: 240 days What is CDR?: Corporate Debt Restructuring What is FCNR(B)?: Foreign Currency NonResident (Banks) What is DICGC?: Deposit Insurance and Credit Guarantee Corporation Who can be a nominee in a deposit account?: Any Individual including minor. Which type of LC is preferred by an exporter?: Irrevocable/Confirmed LC The drawer of a cheque has countermanded the payment of a cheque. What reason would you mention in the returning memo?: Payment countermanded by drawer. A Garnishee order has been served on your branch. The customer also has an account in another branch of your bank. Whether Garnishee order be applicable on account with other branch also?: NO, it will apply only to our branch. You receive Garnishee order on account of A. You find that certain cheques deposited by A have been sent for collection. Whether the garnishee order would apply on these cheques sent for collection? No because Garnishee order is applicable only on funds available with the bank at the time of receipt of Garnishee order. Which cost is recovered at Break Even Point? : Total Cost i.e. both fixed and variable cost. Why do banks prefer bill financing?: These are short term and self liquidating.

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