Digital Dossier of Current Affairs

Staff College
Bengaluru
Table of Contents
Sr No. Topics Page No

1. RBI & Govt Policy 01
2. Forex and Treasury 23
3. Risk Management 43
4. CMRD/CRLD/Law 68
5. IT and Digital Banking 90
6. Agriculture 127
7. Miscellaneous 141
8. Banking Operation 172
Current Affairs(Banking & financial Sector)
Staff College Bengaluru
RBI and Govt Policy
Sr No. Topics Page No.

1. Banking Reforms Road Map for New India –EASE ―Responsive 1
and Responsible PSBs‖
2. Monetary Policy 4
3. Banks Board Bureau 8
4. Fiscal Policy 9
5. RBI Autonomy 15
6. RBI Reserves 20
Banking Reforms Road Map for New India –EASE

―Responsive and Responsible PSBs‖
Banking Reforms Road Map for New India –EASE ―Responsive and Responsible PS
The Government of India on 24th January 2018 has unveiled details of the bank
recapitalisation plan for Public Sector Banks (PSBs). The overarching framework for the
reforms agenda is ―Responsive and Responsible PSBs‖ accompanied by a strong reforms
package across six themes incorporating 30 action points.
The reform agenda is aimed at EASE – Enhanced Access and Service Excellence. It will
serve as roadmap for new India which makes banking business:
 Clean and Commercially Prudent Business

 Value for stakeholders
 Technology driven smart banking
 Banks with financial stability and improved governance
Reform Agenda:
The reform agenda is focusing on the below six themes:
1. Customer Responsiveness
2. Responsible Banking
3. Credit Off-take
4. UdyamiMitra for MSMEs
5. Deepening Financial Inclusion & Digitalisation
6. Ensuring outcomes – Governance/HR
Action Agenda
The reform plan consists of above mentioned six themes containing 30 action points as
described below:
Theme 1: Customer Responsiveness
1. Banking from comfort of home and mobile: The banking should be made hassle
free and easy. To address this, the government has proposed to promote digital,
integrated mobile apps for:
• Opening accounts and fixed deposits
• Nomination
• Sanction of overdraft facility
• Online loan application
• E-payments
2. Banking-plus services: The banks should provide other services like insurance
products and other investment options.
3. Simplification of forms: The forms used by banks to offer various services like
account opening, fixed deposits etc. should not be more than 2 pages.
4. Pleasing ambience of customer service area: To encourage cleanliness drive and
Swachh Bharat Abhiyan, the bank branches should provide access to clean toilets
and safe drinking water with good hygiene.
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5. Door-step banking: The banks should provide door-step banking for senior citizens
and Divyangjans to enable ease of access to banking services.
Theme 2: Responsible Banking
The Government want banks to be vigilant and responsible while doing riskier operation
like consortium finance, corporate loans etc. To achieve this, the government has
proposed following action points:
1. Clean consortium loans: The banks are required to minimize exposure to

consortium advances to 10% of total exposure and adopt Standard Operating
Procedure (SOP) for such finances.
2. Clean corporate lending: The bad corporate loan has been a reason of headache
for most of PSU banks. Therefore the banks should now follow rigorous due
diligence, ring-fence cash flows, approvals are tied up before disbursement of
corporate loan.
3. Clean post-sanction follow-up: To ensure proper end use of funds, post rigorous
post sanction follow-up in loans above Rs. 250 crore should be undertaken. This
includes specialised monitoring agencies and red flag breach of covenants.
4. Clear Risk Appetite Framework: The risk should be well perceived, factored in
and priced. The riskier operations should be priced appropriately.
5. Clear responsibilities: There must be strict segregation of pre-sanction and post-
sanction roles. The responsibilities must be clear and concise.
6. Stringent recovery follow-up: Establish SAM – migration of stressed assets
7. Differentiated Banking Strategy – (DBS): Each bank is different from each other in
its market segment, therefore there is need of having Differentiated Banking
Strategy (DBS) which includes:
• Leadership in market segments as per core competence
• There corporate exposure should not be more than 25% as per Bank‘s
approved DBS
• Achieve loan portfolio mix – Swap/sell loan assets
• The support for regulatory capital continues
8. Non-core assets: The banks need to monetise non-core assets.
9. Rationalise / Close / Consolidate: The banks should consider rationalise their
overseas branches and business units in order to reduce cost of operations.
Theme 3: Credit Off-take
 Capital will be pumped-in to enable credit off-take especially for MSMEs.
Theme 4: UdyamiMitra for MSMEs
1. Online Application Facility: The application for credit facilities by MSME must be
100% automated and decision making be tracked online.
2. Decision in 15 days: The proposal lodged on udyamimitra.com must be decided
within 15 days.
3. Enhanced working capital: The GST registered MSMEs may be provided enhanced
working capital as an incentive to get itself registered under GST system.
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4. More push: More push is given to MSME by providing more credit support via MUDRA
and Stand up India.
5. All PSBs: All Public Sector Banks will be registered on TReDS
6. Financing and Bill realisation: Financing Bills and its realisation be made easy for
MSMEs
7. Use of FinTech: The financial technology like Big data will be leveraged to analyse
through multiple data sources
Theme 5: Deepening Financial Inclusion & Digitalisation
1. Zero liability of customer on fraudulent digital transactions: The disputed

amount should be refund within 10 working days
2. Near-home banking: A banking unit within 5 km of every village
3. Mobile ATM: A mobile ATM in every under-served district
4. Massive expansion: A massive expansion of micro-insurance products like
PMSBY/PMJJBY
5. GIS-based mapping: All banking outlets will be mapped via GIS.
6. Ease of Financial Inclusion: Financial inclusion will be made easy via Jan Dhan
Darshak App and website findmybank.gov.in
Theme 6: Ensuring Compliance —Governance / HR
1. No interference of Government in commercial operations of banks

2. Strengthening and empowering the bank boards
3. Bank Boards to monitor public sector bank reforms agenda quarterly
4. Assign reforms Theme-wise to PSB Whole Time Directors(WTDs)
5. Boards to evaluate Whole Time Directors performance As part of KRAs
6. Incentivise & fast-track top performers through Performance Management Systems
7. Board-approved strategic vision and Business focus plan
Current scenario: PSBs reform Agenda

 IBA is monitoring the progress of implementation of PSB reform agenda and based on
that ranking of banks will be declared
 IBA has entrusted Boston Consulting Group (India) private limited (BCG) to conduct
customer and branch survey for all 21 PSBs
 BCG has on boarded reputed market research firm –IMRB for this exercise who will
be going on field to survey 2.5% of the branch network of each bank and survey 4-5
customers in these branches
 Corporate governance reforms 2.0 will start soon and include diversified board
structure, stronger board level committees, and robust performance management
system for employees.
 Finance ministry want to bring government stake up to 52% in PSBs
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Monetary Policy
Monetary policy refers to the use of monetary instruments under the control of the central
bank to regulate magnitudes such as interest rates, money supply and availability of credit
with a view to achieving the ultimate objective of economic policy.
Monetary policy refers to the policy of the central bank with regard to the use of
monetary instruments under its control to achieve the goals specified in the Act.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary
policy. This responsibility is explicitly mandated under the Reserve Bank of India Act,
1934.
The goal(s) of monetary policy
The primary objective of monetary policy is to maintain price stability while keeping in
mind the objective of growth. Price stability is a necessary precondition to sustainable
growth.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory
basis for the implementation of the flexible inflation targeting framework. Prior to the
amendment in the RBI Act in May 2016, the flexible inflation targeting framework was
governed by an Agreement on Monetary Policy Framework between the Government and
the Reserve Bank of India of February 20, 2015.
The amended RBI Act also provides for the inflation target to be set by the Government of
India, in consultation with the Reserve Bank, once in every five years. Accordingly, the
Central Government has notified in the Official Gazette 4 per cent Consumer Price Index
(CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with
the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
The Central Government notified the following as factors that constitute failure to achieve
the inflation target
a) The average inflation is more than the upper tolerance level of the inflation target for
any three consecutive quarters; or
(b) The average inflation is less than the lower tolerance level for any three consecutive
quarters.
The Monetary Policy Framework
The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to
operate the monetary policy framework of the country.
The framework aims at setting the policy (repo) rate based on an assessment of the
current and evolving macroeconomic situation; and modulation of liquidity conditions to
anchor money market rates at or around the repo rate. Repo rate changes transmit
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through the money market to the entire the financial system, which, in turn, influences
aggregate demand – a key determinant of inflation and growth.
Once the repo rate is announced, the operating framework designed by the Reserve Bank
envisages liquidity management on a day-to-day basis through appropriate actions, which
aim at anchoring the operating target – the weighted average call rate (WACR) – around
the repo rate.
The operating framework is fine-tuned and revised depending on the evolving financial
market and monetary conditions, while ensuring consistency with the monetary policy
stance. The liquidity management framework was last revised significantly in April 2016.
The Monetary Policy Process
Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member
monetary policy committee (MPC) to be constituted by the Central Government by
notification in the Official Gazette. Accordingly, the Central Government in September
2016 constituted the MPC as under:
1. Governor of the Reserve Bank of India – Chairperson, ex officio;
2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member,
ex officio;
3. One officer of the Reserve Bank of India to be nominated by the Central Board –
Member, ex officio;
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
5. Professor Pami Dua, Director, Delhi School of Economics – Member; and
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad –

Member.
(Members referred to at 4 to 6 above, will hold office for a period of four years or until
further orders, whichever is earlier.)
The MPC determines the policy interest rate required to achieve the inflation target. The
first meeting of the MPC was held on October 3 and 4, 2016 in the run up to the Fourth Bi-
monthly Monetary Policy Statement, 2016-17.
The Reserve Bank‘s Monetary Policy Department (MPD) assists the MPC in formulating the
monetary policy. Views of key stakeholders in the economy, and analytical work of the
Reserve Bank contribute to the process for arriving at the decision on the policy repo rate.
The Financial Markets Operations Department (FMOD) operationalizes the monetary policy,
mainly through day-to-day liquidity management operations. The Financial Markets
Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the
operating target of the weighted average call money rate (WACR).
Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary
policy with experts from monetary economics, central banking, financial markets and
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public finance advised the Reserve Bank on the stance of monetary policy. However, its
role was only advisory in nature. With the formation of MPC, the TAC on Monetary Policy
ceased to exist.
Instruments of Monetary Policy
There are several direct and indirect instruments that are used for implementing
monetary policy.
Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight
liquidity to banks against the collateral of government and other approved securities
under the liquidity adjustment facility (LAF).
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity,
on an overnight basis, from banks against the collateral of eligible government securities
under the LAF.
Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo
auctions. Progressively, the Reserve Bank has increased the proportion of liquidity
injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term
repo is to help develop the inter-bank term money market, which in turn can set market
based benchmarks for pricing of loans and deposits, and hence improve transmission of
monetary policy. The Reserve Bank also conducts variable interest rate reverse repo
auctions, as necessitated under the market conditions.
Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can
borrow additional amount of overnight money from the Reserve Bank by dipping into their
Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This
provides a safety valve against unanticipated liquidity shocks to the banking system.
Corridor: The MSF rate and reverse repo rate determine the corridor for the daily
movement in the weighted average call money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. The Bank Rate is published under Section 49 of the
Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the MSF rate changes alongside policy repo
rate changes.
Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain
with the Reserve Bank as a share of such per cent of its Net demand and time liabilities
(NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in
safe and liquid assets, such as, unencumbered government securities, cash and gold.
Changes in SLR often influence the availability of resources in the banking system for
lending to the private sector.
Open Market Operations (OMOs): These include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity, respectively.
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Market Stabilisation Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital
inflows is absorbed through sale of short-dated government securities and treasury bills.
The cash so mobilised is held in a separate government account with the Reserve Bank.
Open and Transparent Monetary Policy Making
Under the amended RBI Act, the monetary policy making is as under:
 The MPC is required to meet at least four times in a year.

 The quorum for the meeting of the MPC is four members.
 Each member of the MPC has one vote, and in the event of an equality of votes,
the Governor has a second or casting vote.
 The resolution adopted by the MPC is published after conclusion of every meeting
of the MPC in accordance with the provisions of Chapter III F of the Reserve Bank of
India Act, 1934.
 On the 14th day, the minutes of the proceedings of the MPC are published which
include:
o The resolution adopted by the MPC;
o The vote of each member on the resolution, ascribed to such member; and
o The statement of each member on the resolution adopted.
Once in every six months, the Reserve Bank is required to publish a document called the
Monetary Policy Report to explain:
a. the sources of inflation; and

b. The forecast of inflation for 6-18 months ahead.
Current scenario
 Present RBI Governor is having concerned about the growth. There is possibility of
change in stance from ―calibrated tightening‖ to ―neutral‘
 Inflation rate (December) has come down at 2.19% on the back of softening food
and fuel prices which is lowest in 18 months. Inflation excluding fuel and food
remains is 6%
 Though the headline inflation is less and policy decisions are guided by headline
inflation there is wide divergence in major component of inflation rate which
created dilemma for rate cut
 Major announcement from government for the rural economy is expected
 RBI will be taking into consideration the inflation rate and fiscal deficit due to this
year fiscal policy.
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Banks Board Bureau
Banks Board Bureau (BBB) is an autonomous body of the Government of India tasked to
improve the governance of Public Sector Banks, recommend selection of chiefs of
government owned banks and financial institutions and to help banks in developing
strategies and capital raising plans.
The BBB works as step towards governance reforms in Public Sector Banks (PSBs) as
recommended by P.J. Nayak Committee. In February 2016, the government approved the
proposal for setting up BBB and it started functioning from April 2016.
Bhanu Pratap Sharma is the new Chairman of the Mumbai based Bureau. It is housed in
RBI‘s Central Office in Mumbai.
The BBB was the part of Indradhanush Plan of government.
Functions of the Banks Board Bureau
• To be responsible for the selection and appointment of Board of Directors in PSBs

and FIs (Whole-time Directors and Non-Executive Chairman);
• To advise the Government on matters relating to appointments, confirmation or
extension of tenure and termination of services of the Board of Directors of the
above mentioned levels;
• To advise the Government on the desired structure at the Board level, and, for
senior management personnel, for each PSB and FI;
• To advise the Government on evolving suitable training and development
programmes for management personnel in PSBs/FIs; and
• To advise the Government on the formulation and enforcement of a code of
conduct and ethics for managerial personal in PSBs/FIs;
• To build a data bank containing data relating to the performance of PSBs/FIs, its
senior management and the Board of Directors and share the same with
Government;
• To help banks to develop a robust leadership succession plan for critical positions
that would arise in future through appropriate HR processes including performance
management systems.
• To help banks in terms of developing business strategies and capital raising plan
etc.
Current scenario
 Based on mandate given by Bank Board Bureau the IBA has appointed
 Egon Zehnder international private limited as a knowledge partner to
the BBB to design , implement, and institutionalise a flagship leadership
development strategy for PSBs in India
 Hay Consultants private limited (Korn Ferry Group) to assist the BBB to
assess the leadership competencies and potential capabilities of
personages appearing in the process for appointment as Whole-time
Directors of PSBs in India.
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Fiscal Policy
Fiscal policy is playing an important role on the economic and social front of a country.
Traditionally, fiscal policy in concerned with the determination of state income and
expenditure policy. But with the passage of time, the importance of fiscal policy has been
increasing continuously for attaining rapid economic growth.
Accordingly, it has included public borrowing‘ and deficit financing as a part of fiscal
policy of the country. An effective fiscal policy is composed of policy decisions relating to
entire financial structure of the government including tax revenue, public expenditures,
loans, transfers, debt management, budgetary deficit, etc. The policy also tries to attain
proper balance between these aforesaid units so as to achieve the best possible results in
terms of economic goals.
Harvey and Joanson, M., defined fiscal policy as ―changes in government expenditure and
taxation designed to influence the pattern and level of activity.‖ Otto Eckstein defined
fiscal policy as ―changes in taxes and expenditure which aim at short run goals of full
employment price level and stability.‖
Objectives of Fiscal Policy:
Following are some of the important objectives of fiscal policy adopted by the
Government of India:
1. To mobilise adequate resources for financing various programmes and projects

adopted for economic development.
2. To raise the rate of savings and investment for increasing the rate of capital
formation;
3. To promote necessary development in the private sector through fiscal incentive;
4. To arrange an optimum utilisation of resources;
5. To control the inflationary pressures in economy in order to attain economic
stability;
6. To remove poverty and unemployment;
7. To attain the growth of public sector for attaining the objective of socialistic
pattern of society;
8. To reduce regional disparities; and
9. To reduce the degree of inequality in the distribution of income and wealth.
In order to attain all these aforesaid objectives, the Government of India has been
formulating its fiscal policy incorporating the revenue, expenditure and public debt
components in a comprehensive manner.
Techniques of Fiscal Policy:
Following are the four important techniques of fiscal policy of India:
A. Policy of Taxation of Government of India:
A main objective of taxation policy in India includes:
a. Mobilisation of resources for financing economic development;
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b. Formation of capital by promoting saving and investment through time

deposits, investment in government bonds, in units, insurance etc.;
c. Attainment of equality in the distribution of income and wealth through the
imposition of progressive direct taxes; and
d. Attainment of price stability by adopting anti-inflationary taxation policy.
B. Public Expenditure Policy of Government of India:
Following are some of the important features of the policy of public expenditure
formulated by the Government of India:
a. Development of infrastructure: Development of infrastructural facilities which

include development of power projects, railways, road, transportation system,
bridges, dams, irrigation projects, hospitals, educational institutions etc.
involves huge expenditure by the Government as private investors are very
much reluctant to invest in these areas considering the low rate of profitability
and high risk involved in it.
b. Development of public enterprises: Development of heavy and basic industries
is very important for the development of underdeveloped country. But the
establishment of these industries involves huge investment and a considerable
proportion of risk. Naturally private sector cannot take the responsibility to
develop these industries. Development of these industries has become a
responsibility of the Government of India particularly since the introduction of
Industrial Policy, 1956. A significant portion of public expenditure has been
utilised for the establishment and improvement of these public enterprises.
c. Support to Private Sector: Providing necessary support to the private sector for
the establishment of industry and other projects is another important objective
of public expenditure policy formulated by the Government of India.
d. Social Welfare and Employment Programmes: Another important feature of
public expenditure policy pursued by the Government of India is its growing
involvement in attaining various social welfare programmes and also on
employment generation programmes.
C. Policy of Deficit Financing of Government of India:

Following the policy of deficit financing as introduced by J.M. Keynes, the
Government of India has been adopting the policy for financing its developmental
plans since its inception. The deficit financing in India indicates taking loan by the
Government from the Reserve Bank of India in the form of issuing fresh dose of
currency. Considering the low level of income, low rate of savings and capital
formation, the Government is taking recourse to deficit financing in increasing
proportion. Deficit financing is a kind of forced savings. Accordingly, Dr. V.K.R.V.
Rao observed, ―Deficit financing is the name of volume of those forced savings
which are the result of increase in prices during the period of the government
investment. Thus deficit financing helps the country by providing necessary funds
for meeting the requirements of economic growth but at the same time it also
create the problem of inflationary rise in prices. Thus the deficit financing must be
kept within the manageable limit.‖
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D. Public Debt Policy of the Government of India:

As the taxation has got its limit in a poor country like India due to poor taxable
capacity of the people, thus the Government is taking recourse to public debt for
financing its developmental expenditure. In the post-independence period, the Central
Government has been raising a good amount of public debt regularly in order to
mobilise a huge amount of resources for meeting its developmental expenditure. Total
public debt of the Central Government includes internal debt and external debt.
Internal Debt:
Internal debt indicates the amount of loan raised, by the Government from within the
country. The Government raises internal public debt from the open market by issuing
bonds and cash certificates and 15 years annuity certificates. The Government also
borrows for a temporary period from RBI (treasury bills issued by RBI) and also from
commercial banks.
External Debt:
As the internal debt is insufficient thus the Government is also collecting loan from
external sources, i.e., from abroad, in the form of foreign capital, technical knowhow
and capital goods. Accordingly, the Central Government is also borrowing from
international financing agencies for financing various developmental projects. These
agencies include World Bank, IMF, IDA, IFC etc. Moreover, the Government is also
collecting inter-governmental loans from various developed countries of the world for
financing its various infrastructural projects.
Shortcomings of Fiscal Policy in India:
Following are the major shortcomings of the fiscal policy of the country:
a. Instability: Fiscal policy of the country has failed to attain stability on various
fronts. Growing volume of deficit financing has created the problem of inflationary
rise in price level. Disequilibrium in its balance of payments has also affected the
external stability of the country.
b. Defective Tax Structure: Fiscal policy has also failed to provide a suitable tax
structure for the country. Tax structure has failed to raise the productivity of
direct taxes and the country has been relying much on indirect taxes. Therefore,
the tax structure has become burdensome to the poor.
c. Inflation: Fiscal policy of the country has failed to contain the inflationary rise in
price level. Increasing volume of public expenditure on non-developmental heads
and deficit financing has resulted in demand-pull inflation. Higher rate of indirect
taxation has also resulted in cost-push inflation. Moreover, the direct tax has failed
to check the growth of black money which is again aggravating the inflationary
spiral in the level of prices.
d. Negative Return of the Public Sector: The negative return on capital invested in
the public sector units has become a serious problem for the Government of India.
In-spite of having a huge total investment to the extent of Rs 4, 21,089 crore in
2007 on PSUs the return on investment has remained mostly negative or lower. In
order to maintain those PSUs, the Government has to keep huge amount of
budgetary provisions, thereby creating a huge drainage of scarce resources of the
country.
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e. Growing Inequality: Fiscal policy of the country has failed to contain the growing
inequality in the distribution of income and wealth throughout the country.
Growing trend of tax evasion has made the tax machinery ineffective for the
purpose. Growing reliance on indirect taxes has made the tax structure regressive.
Suggestions for Necessary Reforms in Fiscal Policy:
Following are some of the important measures suggested for necessary reforms of the
fiscal policy of the country:
a. Progressive Taxes: The tax structure of the country should try to infuse more
progressive elements so that it can put heavy burden on the rich and less burden
on the poor. Necessary amendments should be made in respect of irrigation tax,
sales tax, excise duty, land revenue, property taxes etc.
b. Agricultural Taxation: The tax net of the country should be extended to the
agricultural sector for rapping a huge amount of revenue from the rich
agriculturists.
c. Broad-based Tax Net: Tax net of the country should be broad-based so that it can
cover increasing number of population having the taxable capacity.
d. Checking Tax Evasion: Adequate measures be taken to check the problem of tax
evasion in the country. Tax laws should be made stricter for prosecuting the tax
evaders. Tax machinery should be made more efficient and honest to gear up its
operations. Tax rate should be reduced to encourage the growing trend of tax
compliance.
e. Increasing Reliance on Direct Taxes: Tax machinery of the country should attach
much more reliance on direct taxes instead of indirect taxes. Accordingly, the tax
machinery should try to introduce wealth tax, estate duty, gift tax, expenditure
tax etc.
f. Simplified Tax Structure: Tax structure and rules of the country should be
simplified so that it can encourage tax compliance among the people and it can
remove the unnecessary harassment of the tax payers.
g. Reduction of Non-Development Expenditure: The fiscal policy of the country should
try to reduce the non-developmental expenditure of the country. This would
reduce the volume of unproductive expenditure and can reduce the inflationary
impact of such expenditure.
h. Checking Black Money: The fiscal policy of the country should try to check the
problem of black money. In this direction schemes like VDIS should be repeated.
Tax rates should be reduced. Corruption and political interference should be
abolished. Smuggling and other nefarious activities should be checked.
i. Raising the Profitability of PSUs: The Government should try to restructure its
policy on public sector enterprises so that its efficiency and rate of return on
capital invested can be raised effectively. PSUs should be managed in rational
manner with least government interference and on commercial lines. Accordingly,
the policy of budgetary provisions for maintaining the PSUs should gradually be
eliminated.
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Highlights of Fiscal Policy 2019-20 (Vote on Account)
 All farmers affected by natural disasters to get 2% interest subvention

upfront for entire loan period
 Current account deficit for 2018/19 seen at 2.5% of GDP
 Farmers up to 2 hectare of land to come under PM Kisan scheme
 Government launches mega pension scheme for social security coverage of
unorganised labour
 Fiscal deficit for 2018/19 seen at 3.4% of GDP
 Recovered ₹ 3 lakh crore via bankruptcy code
 Bank of India, Bank of Maharashtra and Oriental Bank no more under RBI's
prompt corrective action
 Poor farmers to get ₹ 6,000 per year under PM Kisan scheme
 PM Kisan to transfer cash directly to farmers under PM Kisan scheme
 Poor farmers to get cash in three equal installments under PM Kisan scheme
 PM Kisan scheme for poor farmers to cost government₹ 75,000 crore FY20
 PM Kisan scheme for poor farmers to get ₹ 20,000 crore in FY19
 PM Kisan scheme to transfer cash directly to farmers' accounts
 PM Kisan scheme to start transfer of cash with effect from December 2018
 Government announces Rashriya Gokul Mission to support poor owning cows
 Rashriya Gokul Mission cow scheme to get ₹ 750 crore in the current year
 Central government to alone support PM Kisan scheme
 All farmers affected by natural disasters to get 2-5% interest subvention
 Gratuity cap doubled to ₹ 20 lakh
 Government to contribute equally in pension accounts under mega pension
scheme
 Unorganised labour to get ₹ 3,000 per month after age of 60 under mega
pension scheme
 Government to implement mega pension scheme for unorganised labour
from this year itself
 Mega pension scheme is for people with income up to₹ 15,000 per month
 PM mega pension scheme to benefit 10 crore people

 Total of 8 crore cooking gas cylinders to be distributed by next year under
PM Ujwala Yojna
 Government to contribute 14% under New Pension Scheme
 India is the second biggest hub for start-ups
 A National Programme for Artificial Intelligence covering 9 areas to be
promoted
 Government projects to source 25% material from SMEs, 3% from only
women-owned SMEs
 GEM platform to cover all public sector enterprises to promote local
industry, trade
 SME loans with ticket size of ₹ 1 crore to get 2% interest subvention
 Defence Budget crosses ₹ 3 lakh crore mark in FY20 Budget
 Budgetary support for railways for FY20 is ₹ 64,587 crore
 Railways' operating ratio seen at 96.2% in FY19, 95% in FY20
 North-east states to get 21% higher budget allocation at₹ 58,166 crore in
FY20
 Will set up 1 lakh digital villages in next 5 years
 JAN Dhan, Aadhar and mobile have been game changers
Page 13 of 185
 34 crore Jan Dhan bank accounts opened in last 5 years

 Single window clearance to be made available to Indian film makers
 TV: Railways FY20 capex seen at ₹ 1.58 lakh crore
 Direct tax collections estimated at ₹ 12 lakh crore in FY19
 Poised to become a $5 trillion economy in 5 years
 Aspire to become a $10 trillion economy in 8 years
 ₹ 1.3 lakh crore undisclosed income brought under tax net
 3,38,000 shell companies detected and their directors disqualified
 Average GST collection ₹ 97,100 crore
 Government lays out 10-year roadmap to improve ease of living
 Making India a pollution-free India in 10-year roadmap
 To lead world in transport and energy storage devices
 To bring down dependent on imports for energy needs
 Roadmap envisions people traveling in electric cars
 Tenth dimension of government's India 2030 vision is a healthy governance
 Fiscal deficit pegged at 3.4% of GDP for FY20
 Fifth dimension of government's India 2030 vision is clean rivers
 Government to scale up Sagarmala programme
 Seventh dimension of India 2030 is to lead in space programmes
 Eighth dimension of India 2030 is to grow food in environment friendly
manner
 Ninth dimension of India 2030 is a healthy India
 Tenth dimension of India 2030 programme is a comprehensive wellness
system
 FY20 total expenditure seen at ₹ 27.84 trillion rupees
 FY20 capital expenditure seen at ₹ 3,36,292 crore
 Central schemes to get ₹ 3,27,679 crore FY20
 National education mission to get ₹ 38,572 crore FY20
 Integrated child development scheme to get ₹ 27,584 crore FY20
 SC, ST welfare to get ₹ 76,800 crore FY20
 Salary earners, pensioners to get tax benefit
 Salary earners up to ₹ 5,00,000 annual income to get full tax rebate
 No income tax for income up to ₹ 5,00,000
 Salary earners of up to ₹ 6,50,000 income to not pay tax if they make tax
related investments
 Standard deduction to be raised from ₹ 40,000 to ₹ 50,000
 No tax if you own second house
 No TDS on post office savings up to ₹ 40,000
 No TDS on rental income up to ₹ 2,40,000 per year
 No tax on notional rent on second house
 Capital gains tax exemption under Section 54 raised to₹ 2 crore
 Tax on notional rent on unsold inventory to not be paid for 2 years
Page 14 of 185
RBI Autonomy
Reserve Bank of India, the central bank of the country is an autonomous organization
responsible for all the key monetary roles like monetary controls, money supply
regulation, foreign exchange, and apex lender to Government, a bankers‘ bank among
others. RBI was created and is governed with the RBI Act and as such is a statutory
autonomous entity.
Section 7 of the RBI Act:
In October 2018, the Ministry of Finance, Government of India moved to invoke Section 7
of the RBI Act. The Section 7 gives powers to the government to seek consultations with
RBI. If necessary, the Government may issue certain binding orders on RBI in public
interest. Despite keeping its existence in RBI Act, this section has never posed any threat
to RBI Autonomy earlier as it has never been invoked even during the times of Wars fought
with Pakistan and China; during the adverse balance of payment crisis or even during the
period of demonetization that happened on November 8, 2016.
The three letters under Section 7
These letters were sent by the Government of India to Reserve Bank of India for
consultation included the issues like Capital Adequacy Norms for Banks governed by RBI,
Liquidity Crisis, Credit to Micro, Small and Medium Enterprises (MSME), Corrective
measures for weak banks among others.
Promptly responding to these letters of GOI, the Reserve Bank of India remained firm on
its stance and did not commit for the changes as desired by the Government in its policy
and action plan.
The series of events after this communication let the problem aggravate and it is being
speculated that the autonomy of the apex Monetary Authority of India, RBI is at stake and
as a result the Head of RBI – Mr Urjit Patel stepped down. During all this controversy, Mr
Arun Jaitley, the Finance Minister of India has asserted that the Government respects the
RBI Autonomy and also feels it is necessary to maintain. Accordingly, the finance ministry
has not yet given direction to the RBI to follow the instructions issued by it while invoking
the Section 7 of RBI Act.
What is Section 7 of RBI Act 1934?
The Section 7 of RBI Act has three parts. The most relevant first part which has sparked
the tensions between RBI and the Government, states: ―The central government may from
time to time give such directions to the Bank (RBI) as it may, after consultation with the
governor of the bank, consider necessary in the public interest.‖
The Part two of the section 7 of RBI Act says, ―Subject to any such directions, the general
superintendence and direction of the affairs and business of the Bank shall be entrusted to
a central board of directors, which may exercise all powers and do all acts and things
which may be exercised or done by the Bank.‖
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Why the Need Felt by Government to Invoke Section 7?
The invocation of section 7 of RBI Act is considered very important for consultations as it
gives the Government the scope to issue directions as it finds fit to the Reserve Bank of
India.
It is also contemplated that the government might have drawn inspiration for using the
Section 7 from a recent judgment of the Hon‘ble High Court of Allahabad delivered in a
case filed by power producers against the RBI‘s February circular that mandates early
detection and time-bound resolution of stressed assets. The High Court had asked the
finance ministry to have consultations with the RBI within 15 days, under Section 7 of the
RBI Act 1934 to resolve the issue.
HC Asks Government Not to Issue Directives to RBI
In its order on August 28, the HC had asked the Govt. to refrain from issuing any directives
to RBI. The order said ―The central government, however, is not expected to issue any
directions, as contemplated under Section 7(1), indiscriminately or randomly. Such
directions are possible when there exists sufficient material in support.‖
RBI Conveyed it Position: Differs from Govt. Point of View
In its reply to the Ministry of Finance on the three letters, RBI has conveyed its position on
the need to retain the ―stringent‖ prompt corrective action (PCA) framework for stressed
banks and has stated that there is no liquidity crunch. The MoF, Government of India and
RBI have also differed on the issue of capital adequacy norms for banks.
The RBI has given the instructions that the banks should maintain capital-to-risk assets
ratio (CRAR), including capital-conservation buffer, at 11.5% — 1 percentage point higher
than Basel norms. Besides, the common equity tier (CET)-1 of banks is required to be at
least 5.5% of its risk-weighted assets — again 1 percentage point higher than the global
norms.
However, the ministry of Finance wants the stipulation aligned with the international
practices also, so that banks can lend more and add to economic growth.
Government Not Impounding RBI Autonomy: Key Points

 The Finance Minister Arun Jaitley has blamed the RBI for not doing enough to
control ―indiscriminate lending‖ by the public sector banks during 2008-14 period.
This has precipitated the balance-sheet problem of both the lenders and borrowers
under severe, seemingly inescapable stress
 On October 31, 2018 Government said that it respects the autonomy of the central
bank but it will ―have to be guided by public interest and the requirements of the
Indian economy‖
 As the Government wants to manage the fiscal situation, prop up investments &
consumption in the economy, ensure that the small businesses and trade as well as
people are not upset with the government in the run-up to the elections, the
government can insist on high transfer from RBI‘s ‗surplus‘ pool
Page 16 of 185
 Former chief economic adviser Arvind Subramanian had also suggested that the
central bank‘s ‗excess capital‘ could be redeployed to bolster the capital base of
state-owned banks
 The finance ministry has also sought changes to the ―stringent‖ prompt corrective
action (PCA) regime for stressed banks
 The Finance Ministry has suggested that the framework of corrective action be
aligned with best global practices to allow banks have room for growth
Views of RBI Dy. Governor Viral Acharya:
RBI Dy. Governor has criticized the move of the Government. Finding that government is
trying to sneak into the central bank‘s autonomous regulatory space, the Deputy Governor
of RBI, Viral Acharya has criticized the Government‘s move and has warned that it could
spur ―potentially catastrophic‖ consequences.
Delivering the AD Shroff memorial lecture, Acharya said governments that did not respect
their central banks' independence would sooner or later incur the wrath of financial
markets. The much discussed famous speech, ‗On the Importance of Independent
Regulatory Institution – The Case of the Central Bank‘, by Acharya reaches a host of
issues.
The content of the speech which confronts the Government on all the issues against its
move to undermine the autonomy of RBI has aroused unprecedented media response.
Acharya‘s speech reveals that he has also spoken for the restoration of RBI autonomy and
built a strong and positive case for RBI independence in three important areas — monetary
policy, debt management, and exchange rate management.
Acharya has pointed out that the breaking down of the RBI autonomy is associated with
the context of regulation of public sector banks, absence of rules of transfer of surpluses
from the RBI to government and recommendations to bypass the RBI‘s powers over
payment and settlement systems.
Since RBI performs several functions as a central bank like the role of monetary authority,
banker to the government, debt manager to the government, monopoly issuer of legal
tender currency, the custodian of payment systems and the regulator of banks, all these
functions are critical for growth, macroeconomic stability and financial stability.
Acharya has pointed out that RBI faces constraints in the regulatory framework as well as
in implementation of the regulatory decisions in the regulation of banks, particularly
public sector banks. These limitations are related to asset divestiture, replacement of
management and boards, licence revocation and resolution actions such as merger or
sales.
In another speech, on October 12, titled ‗Prompt Corrective Action: An Essential

Element of Financial Stability Framework‘ Acharya warned the Government against on
diluting the risk threshold set out by the RBI in various indicators.
While the RBI has insisted on Prompt Corrective Action (PCA) as a regulatory framework to
ensure a healthy banking system for long-term growth, macroeconomic stability and
financial stability, the Government, if it does not respect central bank independence will
Page 17 of 185
sooner or later incur wrath of financial markets, ignite economic fire and come to rue the
day they undermine the regulatory institutions.
Acharya said that the government's horizon of decision-making was rendered short, like
the duration of a T20 match, by several considerations.
RBI Autonomy at Stake: Experts‘ Views
The autonomy of the central bank has not been debated for the first time in the Indian
context. Governor after governor has raised this issue.
YV Reddy, former RBI Governor said, ―A central bank is not expected to be subordinate
to the government.‖ Adding further he said, ―My single objective is to protect the Indian
economy from the Government of India.‖ He also said, ―The jurisdiction of the RBI over
public sector banks, relative to private sector banks, has been restricted by law. The
exercise of regulatory authority is constrained in practice.‖
Former RBI Governor D Subbarao sarcastically commenting on Government‘s interference

in RBI working said, ―But thank God, the Reserve Bank exists.‖
Raghuram Rajan has also criticized the undue interference of the Government in RBI
working. He said ―India needs a strong and independent RBI to ensure macroeconomic
stability‖.
On the move of Government to belittle the autonomy of RBI, Dr Raguram Rajan has
pointed out, ―The RBI Governor, as the technocrat with responsibility for the nation‘s
economic risk management, is not simply another bureaucrat or regulator, and efforts to
belittle the position by bringing regulatory hierarchy are misguided and do not serve
national interest.‖
Experts feel that the RBI needs to maintain a strong balance sheet to perform its functions
effectively. The perception that the RBI capital is in excess of what generally other
central banks have is because of the amounts held in the currency and gold revaluation
account (which stood at `5.29 lakh crore on June 30, 2017). The gains arising out of
revaluation of foreign currency assets are notional and cannot be treated as free reserves
that could be transferred to the government.
In view of all the experts, the Government, as a political entity, needs advice which is in
the best interest of sustaining growth, maintaining macroeconomic stability and financial
stability. More than 80 years of RBI history is witness to the fact that the RBI is the right
organisation to advise the government in this regard. Let the government not treat the RBI
as its subordinate.
While the RBI frames the monetary policies in the long-term interest of the nation, the
government tends to believe that RBI will sing to its tunes as it has made the apex
appointments in the bank
The Government‘s priorities due to upcoming elections may change to deliver on

proclaimed manifestos of the past. The Government may need deliver on populist
alternatives as its manifesto could not delivered upon. But that cannot be the priority of
RBI.
Page 18 of 185
RBI should not be directly subjected to political time-pressures and the induced neglect of
the future. The government should stop using the RBI against the interests of the Nation
and let RBI do its jobs as per statutes, mandates, practises.
RBI and Government Interface: Instances of Support
RBI has put in place a rule-based ‗staggered surplus distribution policy‘ (SSDP) in FY18.
The central bank transferred `50,000 crore surplus in two instalments, `10,000 crore in
March 2018, to help the Centre tide over a tight fiscal crunch and the remaining amount in
August to reduce the impact of cyclicality in the RBI‘s economic capital levels on the
surplus transferable to the government.
Government should understand that RBI has to take the stressed banks out of the dilemma
by taking various measures. Acharya recently said that without the PCA imposition, some
banks would have witnessed even higher losses and required even higher taxpayer money
for re-capitalisation.
11 of the 21 public-sector banks are on the RBI‘s watchlist for battered financial
position. Under the PCA guidelines, stressed banks operate under some tough conditions.
The lenders are stopped from expanding their branch networks and need to maintain
higher provisions. They may be stopped from lending until they correct their finances.
RBI has also recently made public its dissent note on certain recommendations of a
government panel under the economic affairs secretary that opposed the idea of setting
up an independent regulator outside the central bank to deal with issues relating to
payments.
As regards monetary policy, the introduction of inflation targeting and constitution of the
Monetary Policy Committee (MPC) are examples of effective and efficient government and
central bank interface.
Abolition of automatic monetisation, implying RBI financing the deficit of the government
and the introduction of the Fiscal Responsibility and Budget Management (FRBM) Act
again is landmark decisions jointly taken by the RBI and the government, strengthening
the RBI independence.
The decision of the government to keep the desired exchange rate management with the
RBI is another example of strong and positive example for building central bank autonomy
Current scenario
 Former Governor Mr, Bimal Jalan is of the opinion that there should be
―decentralised system‖ in terms of implementing policies
 Administrative system needed to be more public oriented
 It is set up for public interest and should serve the public
Page 19 of 185
RBI Reserves
RBI has constituted a panel on economic capital framework. It will be headed by Ex-RBI
governor Bimal Jalan. The expert panel on RBI‘s economic capital framework has been
formed to address the issue of RBI reserves—one of the sticking points between the central
bank and the government.
What‘s the issue?

The government has been insisting that the central bank hand over its surplus reserves
amid a shortfall in revenue collections. Access to the funds will allow the government to
meet deficit targets, infuse capital into weak banks to boost lending and fund welfare
programmes.
Terms of reference:
 The panel will decide whether RBI is holding provisions, reserves and buffers in surplus
of the required levels.
 It would propose a suitable profits distribution policy taking into account all the likely
situations of the RBI, including the situations of holding more provisions than required
and the RBI holding less provision than required.
 The ECF committee will also suggest an adequate level of risk provisioning that the RBI
needs to maintain. That apart, any other related matter, including treatment of surplus
reserves created out of realized gains, will also come within the ambit of this
committee.
What is economic capital framework?
Economic capital framework refers to the risk capital required by the central bank while
taking into account different risks. The economic capital framework reflects the capital
that an institution requires or needs to hold as a counter against unforeseen risks or
events or losses in the future.
Why it needs a fix?
 Existing economic capital framework which governs the RBI‘s capital requirements and
terms for the transfer of its surplus to the government is based on a conservative
assessment of risk by the central bank and that a review of the framework would result
in excess capital being freed, which the RBI can then share with the government.
 The government believes that RBI is sitting on much higher reserves than it actually
needs to tide over financial emergencies that India may face. Some central banks
around the world (like US and UK) keep 13% to 14% of their assets as a reserve
compared to RBI’s 27% and some (like Russia) more than that.
 Economists in the past have argued for RBI releasing ‗extra‘ capital that can be put to
productive use by the government. The Malegam Committee estimated the excess (in
2013) at Rs 1.49 lakh crore.
What is the nature of the arrangement between the government and RBI on the
transfer of surplus or profits?
 Although RBI was promoted as a private shareholders‘ bank in 1935 with a paid up
capital of Rs 5 crore, the government nationalised it in January 1949, making the
sovereign its ―owner‖. What the central bank does, therefore, is transfer the ―surplus‖ —
that is, the excess of income over expenditure — to the government, in accordance with
Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.
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Does the RBI pay tax on these earnings or profits?

•No. Its statute provides exemption from paying income-tax or any other tax, including
wealth tax.
Current Scenario :
 RBI's Reserves: The total reserves with the RBI stand at Rs 9.6 lakh crore, up from Rs
8.38 lakh crore in F17. The RBI reserves are divided under several heads. It holds
contingency fund worth Rs 2.32 lakh crore, up from Rs 2.28 lakh crore in FY17. Under
currency and gold revaluation account, the RBI holds Rs 6.92 lakh crore, up from 5.3
lakh crore in FY17. It has 0.23 lakh crore under asset development fund, same as in
FY17. Under investment revaluation account for rupee, it holds Rs 0.13 lakh crore,
down from Rs 0.57 lakh crore in FY17.
 The finance ministry wants the Reserve Bank of India (RBI) to transfer Rs 3.6 lakh
crore of its total ―reserves‖ of nearly Rs 9.6 lakh crore, which will go mainly to finance
the recapitalisation of public sector banks (PSBs).
 RBI reserves ratio - Study Analysis of the balance sheets of the central banks of 10
comparable economies shows that the RBI's reserves as a percentage of its balance
sheet is among the highest, a report by consultancy firm Quantum Advisors found.
However, the bulk of these reserves are notional and thus their value can only be
unlocked when the underlying assets are sold, the report added. This makes
transferring the excess reserves to the government all the more difficult.
 The analysis, which looked at the central banks of the BRICS countries, Fragile Five
nations and three developed economies, found that the RBI‘s reserves — which a
separate analysis shows was about ₹10.5 lakh crore — form 26.2% its balance sheet.
Only two central banks — those of South Africa and Russia — have a reserve ratio
higher than this. The other two BRICS nations, China and Brazil, have reserve ratios of
1.7% and 0.2%, respectively. ―On comparing their balance sheets, you do notice that
the RBI indeed has higher reserves,‖ the report said.
 Revaluation of assets: ―But… the bulk of those reserves are arising out of the
revaluation of its assets, i.e. over the years as the rupee depreciated against the U.S.
dollar, Great Britain Pound, euro etc., gold and foreign assets held by the RBI when
translated into the current rupee value, leads to an increase in its asset value.‖
 New study shows: India‘s central bank has insufficient capital, much less a surplus to
hand over to the government, a new study shows. Operating losses could push the RBI
to seek financial assistance from the government, compromising its autonomy, wrote
the authors, led by Amartya Lahiri, director at Mumbai-based think tank Centre for
Advanced Financial Research and Learning and a professor at the University of British
Columbia.
 The study, which covered balance sheets of 45 central banks, found the global average
capital to asset ratio -- net of revaluation capital -- was 6.56 percent. The level for
those in emerging economies was 6.96 percent, with the RBI‘s standing at 6.6 percent.
The paper‘s findings rekindle the debate on the Reserve Bank of India‘s autonomy, just
as a panel reviews how much funds the monetary authority should hold. (source
:Bloomberg dated 25.01.2019)
Page 21 of 185
Forex and Treasury

1. A Depreciated Rupee and Its Impact on Exports/Economy 23
2. Oil Prices Movement, An Impact on Economy 26
3. Crisis of the oil prices-There are Lessons for India 29
4. Developing Bond Market for Debt Financing and the 32
Future of Bond Market
5. Fall of Rupee and Factors influencing the Trend 36
6. PNB-the story of Fraud and Lessons 39
Page 22 of 185
A Depreciated Rupee and Its Impact

on Exports/Economy
India being a developing economy with high inflation, depreciation of the currency is quite
natural. Depreciation of rupee is good, so long as it is not volatile. A random depreciation
that we have seen in the last few months is bad and it has hurt the economy.
Right from the beginning of year 2013, the value of rupee has been depreciating. High
growth coupled with a market driven exchange rate bears well for the economy.
However, when growth falters and macroeconomic parameters start appearing vulnerable,
one of the first casualties is the exchange rate. Currently, there is no clarity on whether
we have seen the worst of the storm or it is just the beginning. The problems are
manifold.
Persistent high inflation and fiscal deficit, increasing subsidies, faltering exports and
slowing industrial production point towards an economy, which is moderating in growth.
Monetary policy has so far been ineffective in reversing the inflation trajectory. In this
weakened environment, the rupee has depreciated by close to 20% in the past few
months.
Effect of Rupee Depreciation on Economy
 Trade deficit will widen because of costlier imports, worsening the current Account
deficit.
 Spending on any kind of foreign exchange denominated spending will increase. Capital
inflow will slow or reverse.
 Spending on discretionary goods will increase
 Forex reserves could fall putting pressure on rupee.
 In case of weak demand companies may not be able to pass on higher inputs costs.
 The government and the RBI have issued a series of measures in recent days designed
to reduce the current account deficit and bolster the rupee, including increases in the
import duty on gold, the end of duty exemptions for flat screen televisions brought in
by airline passengers and restrictions on outward direct investment by Indian
companies and individuals.
 Exports are unable to leverage the weak rupee fast enough given the speed of its
descent. In fact many exporters are caught out because of fixed price contracts in
rupees wherein they cannot get the benefits of its rapid fall. The balance of payments
is tilting sharply against us.
 Global rating agencies may downgrade our rating, making international borrowing
difficult and even more expensive.
Reasons
 Oil price is one of the most important factors that put stress on the Indian rupee. India
is in the unhappy situation where it has to import a bulk of its oil requirements to
satisfy local demand, which is rising year-on-year. In international markets, prices of
oil are quoted in dollars. Therefore, as the domestic demand for oil increases or the
Page 23 of 185
price of oil increases in the international market, the demand for dollars also increases
to pay our suppliers from whom we import oil. This, increase in demand for dollar
weakens the rupee further.
 Consistently high inflation has resulted into Indian goods becoming expensive in the
global markets, thus making it less competitive, especially when compared to goods
from china. Thus, rupee may have hardly any support by way of higher exports. Lastly,
gold imports, another key reason why the deficit is high and rupee under pressure,
may not slow down in a hurry.
 The value of rupee follows the simple demand and supply rule of economics. If the
demand for the dollar in India is more than its supply, dollar appreciates and rupee
depreciates. Similarly, when the supply of dollars in India increases its demand, the
value of dollar decreases in terms of rupees.
 USA Fed has shown signs to end their stimulus. Hence, making the US dollar stronger
against the other currencies including the Indian rupee, at least in the short term.
 As per the data reported, FIIs (foreign institutional investors) are showing some
disinterest in Indian markets lately. Sluggish economy and recovery in stock markets of
developed economies like USA and Japan are believed to be the key reasons. Since FIIs
inflows have played important role in keeping rupee at current levels, an intense
selling activity by them does not augur well for the near term direction of the rupee.
Impact on International Trade
IT Sector: Top IT majors such as TCS, Infosys, Wipro and HCL derive their revenues from
software sales to world over, mostly to United States of America and European countries.
The rupee has depreciated more than 10% this fiscal year, will boost their margins, though
the extent of increase in revenue will vary across various companies. With price increase
from project costs not coming from the client side, a weak rupee will give much needed
relief to those companies.
Oil Marketing Companies: Rise in crude oil prices coupled with falling rupee has
increases the costs for all the OMCs like, Indian Oil Corporation, Hindustan Petroleum
Corporation, and Bharat Petroleum Corporation as India imports 80 percent of its oil
needs. Because of lack of pricing power, OMCs find themselves hit by the triplicate
problems of weak rupee, oil and politics. A weak rupee increases the effective import
cost of crude oil.
Auto Exports: For those companies who derive their revenue from exports it is a boon
and it is bane for those who import major parts of their components. As Maruti Suzuki one
of the auto major imports many components, they are facing pressure because of costlier
imports and more royalty outgo. For those companies like Hyundai, Ford, and Nissan who
are importing components and Exporting Cars, imports costs will be taken care of export
revenues.
Pharma Exports: Many Indian Pharma companies derive their revenue from Exports to
other countries. Sustained rupee depreciation will boost their export revenues and
realization. Most companies are hedging only portion of their export revenues thus
ensuring gains from the rupee depreciation flow to their revenues.
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Aviation Sector: This sector got affected because of both rising crude oil thereby
increase in Aviation Turbine Fuel (ATF) and airlines low cost pricing power. This resulted
in Jet airways posting a big loss in March 2018 year end and Indigo and Spicejet profit has
come down sharply. Both rising global ATF cost and a weak rupee adds to the airlines fuel
bill. With capacity additions, airlines could again lack pricing power to pass on cost
increases.
Other sectors: Other sectors like Ready Garments, Leather, and Seafood Exports benefit
from weak rupee which increases their profitability. At the same time the increase may
nullify the increase in raw materials and input costs.
Conclusion
The rupee‘s decline affects everyone in the economy because it feeds directly and
indirectly into general inflation, which is a continuing problem even as output growth
decelerates, and therefore hits common people hard. There are several ways in which the
falling rupee immediately has an inflationary impact, one of the most important of which
is the price of energy. Since the misguided decontrol of oil prices, it is not only the
globally traded price of fuel but also the exchange rate that determines domestic oil
prices. Going by the way the economies in the Euro zone and the USA have been behaving,
it would be naive to expect that the export earnings would be contributing significantly to
foreign exchange inflows in the near future. The govt should concentrate on correcting the
economic fundamentals. A better co-ordination with RBI is required rather than blame
game. Apart from all the political parties should come together in fixing the problem and
getting back the investors‘ confidence.
Page 25 of 185
Oil Prices Movement,

An Impact on Economy
The Indian economy is in for a rough ride, with rising oil prices set to continue weighing on
its already-weakened currency, widen its deficit, and affect its growth outlook. Oil is one
of the vital sources for meeting the energy requirement of any country. Higher crude oil
prices will adversely impact the twin deficits of current account and fiscal, which will
have spill over effects on monetary policy, consumption and investment India. Global
energy consultancy Wood Mackenzie forecast that India will overtake China as the world's
largest oil demand growth center by 2024.
Fuel prices:
Fuel prices primarily of petrol and diesel have been deregulated and are linked to the
international crude oil prices. With oil marketing companies raising petrol, diesel prices on
a daily basis. There are several industries and companies dealing in i.e. tyres, plastics,
chemicals, fertilizers, wax industries, refining, airline, paints, footwear, lubricants,
cement, logistics and construction materials for whom crude or its derivatives are major
inputs/costs will take a hit on their margins in case of high oil prices which use crude oil
and its by-products as raw material for their final products. Further high crude oil prices
lead to lower corporate profit margins due to rising input costs and accordingly impact
investment, among others.
Impact on Economy:
India, world's third-largest oil consumer after US and China, imports about 1,575 million
barrels of crude oil on an annualised basis and a dollar increase in oil prices would
increase the import bill by roughly $1.6 billion (Rs 10,000 crore) on an annual basis. India
relies more than 80 per cent on imports to meet its oil needs. Every dollar per barrel
change in crude oil prices impacts the import bill by Rs 823 crore ($0.13 billion). The same
is also the impact when currency exchange rate fluctuates by Re 1 per US dollar. The
continuous rise in crude oil prices is putting an end to the three-year-long low oil price
windfall, which allowed the government to hike excise duty by Rs 12 on petrol per litre
and Rs 13.77 on diesel since April 2014.
Impact of higher crude prices:
Rebounding oil prices — and India's unrelenting demand for it — will push up oil imports
and widen its current account deficit. If the rise can be attributed to demand-side factors,
it is not necessarily adverse for economic activity or financial markets. The higher crude
oil imports bill could be offset by higher oil and non-oil exports (and of course,
remittances). Similarly, better domestic economic activity could help meet fiscal deficit
targets. However, if oil prices are pushed up by supply factors, it would be concerning.
According to IMF, roughly 80% of the recent oil price increase was caused by deterioration
in supply conditions. Federal Reserve Bank of New York finds that less than two-fifth of
the rise in oil prices since the beginning of 2018 was on account of supply-side factors.
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These contrasting studies lead to uncertainty regarding the sustainability of higher crude
prices.
Not surprisingly then, the majority of the forecasts for oil price remain at $65-70/barrel.
An increase of 15-25% in oil prices in one year will impact the Indian economy in various
ways as under:
Impact on current account deficit:
As a rule of thumb, an increase in crude oil prices will lead to an adverse impact on
current account deficit. There are two opposite forces at work in current account deficit.
Higher oil prices will push the import bill higher; however, it will be partly offset by higher
oil exports and better remittances. The latter will materialize, since more than half of
India‘s remittances are reported to be channelled through the Gulf countries, which are
likely to witness better economic conditions with higher oil prices.
A widening trade deficit
Due to India's heavy reliance on imported oil and gas, the impact of rising world oil prices
has significantly increased the oil import bill. This is the key factor that is driving the
deterioration in India's trade position. More expensive oil will lead to a widening trade
deficit for India, which is a net importer of oil.
Impact on Forex Reserve:
India forex reserve is declining rapidly, it was highest around US$ 426.00 billion in month
of April 2018 which is declining continuously and has touched US $ 393.00 presently. A
challenging global environment has compelled the Reserve Bank of India (RBI) to intervene
aggressively this year to contain rupee depreciation the drawdown in foreign reserves has
been significant.
Impact on inflation:
With a weightage of only 2.4% in CPI, the adverse impact will entirely depend on the
extent to which higher crude oil prices are passed on to the consumers. It is difficult to
envisage a significant hike in retail fuel prices, and thus, the direct impact on CPI inflation
is likely to remain muted.
Overall, the windfall gains—in terms of lower subsidy and higher revenue for the
government, and lower imports—from lower crude prices are behind us.
Depreciation of Indian Rupees:
The INR (Indian rupee) is expected to continue to face depreciation pressures, reflecting
several factors including further US Fed rate hikes, India's widening current account
deficit, and negative global investor sentiment towards emerging markets currencies and
assets.
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Impact of lower oil prices:
India is having world‘s seventh-largest economy, was a key beneficiary of falling crude oil
prices between 2013 and 2015. An per an analysis, more than a year ago, had indicated
that almost the entire reduction of about 0.6% of the gross domestic product (GDP) in
India‘s fiscal deficit between FY14 and FY16 could be attributed to the sharp fall in crude
prices. Lower crude prices also contributed to the narrower current account deficit. The
biggest benefit of the fall in oil prices was evident in narrower twin deficits. Since the
pass-through of the fall in crude prices to retail consumers was limited (the government
retained a large part of the benefits by hiking excise duty on retail fuel products), the
direct impact on inflation—measured by consumer price index (CPI)—was muted.
Things, however, started reversing about two years ago and have gathered pace in the
past few months. As against an average price of $46.2/barrel for the Indian basket of
crude oil in FY16, it rose to $56.4/barrel in FY18 and averaged $65/barrel in the fourth
quarter of FY18. With the US‘ decision to walk away from the Iran nuclear deal and to re-
impose sanctions on Iran, upside risks to crude prices cannot be ruled out. It is then worth
understanding the impact of higher crude prices on the Indian economy.
Conclusion:
Steadily rising per capita consumption has cemented its position as one of the largest oil
importers in the world. This keeps the economy exposed to movements in global oil prices.
To counter the drag on growth, India needs to reduce its reliance on oil, but steadily rising
consumption in the country is not helping. India needs to lower its oil demand by opting
the alternative mode like solar energy, electric vehicle, wind energy, etc. In short, one
could conclude that higher crude prices will adversely affect the twin deficits—fiscal and
current account deficit—of the economy, which will have spill over impact on the
monetary policy, and consumption and investment behaviour in the economy
Page 28 of 185
Crisis of the oil prices-

There are Lessons for India
Oil being a finite resource it is not going to last forever. At the end of 2015, oil reserve to
production ratio stood at 50.7, means at current production rate oil would last about 51
years. Therefore, scientists are working overtime to explore alternate energy resources.
On the other hand, geoscientists are constantly working on finding out new sources of oil
and exploring unexplored reserves. Unconventional oil like tight oil and shale oil are
becoming techno-commercially feasible to produce and market. In fact, in the recent
times unconventional oil and gas sources significantly changed the dynamics of global oil &
gas trade. The consumption of crude oil in India has been continuously increasing since
2000. Now, prices are increasing gradually, the average price of crude oil in the year 2017-
--$50.84, 2018---$64.90, 2019-$50.87 and creating the fiscal stress and imbalance of
trade.
Lessons for India:
There is also the aspiration of bringing down import dependence by 10 per cent by 2022.
The road map includes promoting energy efficiency, demand substitution, tapping biofuels
and refinery process improvement.
 Tapping biofuels: India has repeatedly missed its target for ethanol-blended
petrol, owing to inadequate ethanol output in the country. Currently, the US is
laden with large stocks of the biofuel. Global prices of ethanol have dipped
considerably, from their highs six years back, as supplies boomed. India should buy
ethanol at government-determined prices from domestic sources and allow imports
of the differential amount needed to fulfil its ethanol blending mandate fully.
 Increasing the oil Production: Amidst the oil roil it would be pertinent to look at
domestic output. India‘s output of oil in 2017-18 dipped to 35.68 million tonnes—
the lowest in six years. It is difficult to survive a $2.5 trillion economy with rising
consumption and GDP afford to be dependent for 82 per cent of its needs on
imports.
 New technology and set targets for higher domestic production: The 12th Plan,
for instance, had set a target of 216 MMT for crude oil production between 2012
and 2017. Actual production was 186.06 MMT. It is not just crude oil; the target for
gas was 341 MMSCMD and the actual output was 173.88 MMSCMD—lower than the
previous plan period. The domestic production should be enhanced by adopting
latest technology.
Monitoring of Key Drivers of crude oil price and develop long term
strategies: There are various factors responsible for change in crude oil prices; India
must plan long term strategies keeping these factors under consideration. Some of the
major factors are discussed below:-
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 Demand - Supply dynamics: Upward or downward movement in oil price is mainly

due to supply from conventional oil fields. As a result, the oil price was exposed
to fluctuations.
 Growth of world economy: Growth in world economy impacts the prices of oil
directly or indirectly.
 Change in OPEC policy: OPEC nations are blessed with nearly one third of the
world production of crude oil. However, OPEC's share of global oil supply has
fallen, partly as a result of rising oil production from unconventional sources in the
United States and Canada as well as bio-fuel production. OPEC's policy has
meaningful impact on oil prices.
 Impact of geo-political events: Oil-producing countries have traditionally been
influenced by political instability. Often some of the OPEC countries have been the
cause of global geo-political disturbance.
 Appreciation of the US Dollar: Across the globe, oil is bought and sold in US
Dollars. Therefore, the US dollar getting stronger makes oil more expensive to buy
in countries outside the US. That, in turn, weakens worldwide demand and further
puts downward pressure on oil prices.
 Research and development: Presently India is facing energy insecure. India‘s main
sources of energy are coal, oil and gas which is 50% of the reservation of India‘s
own petroleum is very little. India is required put resources in research and
development to deal with this scarcity like discovery of gas in [Krishna-Godavari]
KG basin D-6 by Reliance Industries.
 On Iran oil crisis, India needs a long-term strategy: An oil shock will hurt even
more at a time when the global economy is staring at the prospect of a trade war,
inflation is worsening, and depreciating rupee are threatening to jeopardize
macroeconomic stability. Recent data from the petroleum ministry, oil imports
from Iran accounted for almost one-fourth of our total oil, while oil trade is
extremely crucial for Iran‘s economy, India also stands to gain from it. Price of oil
imports from Iran has always been less than that of Saudi Arabia since 2016-17. If
India were to stop its oil trade with Iran, it would face a double whammy: lose a
supplier of cheap oil and face even greater price because of the supply shock,
which Iran‘s exit from the global oil markets will create.
 Enhance Oil Reserve capacity: The country has been experiencing economic
growth of around 7% per annum since 2000, despite the 2008 economic crisis. The
country enjoys an abundance of traditional and non-traditional energy sources, but
these sources are insufficient to meet India‘s growing needs. India should
concentrate to enhance the capacity of oil reserve while oil prices are declining.
 Making electric vehicles work: India must develop its own technology and not seek
support from other countries, creating opportunity for increasing the share of
electric vehicles. The country should also stay put to the idea for as long as it takes
to solve the problem. India needs to invest heavily in the idea of developing
technology and using it on a large scale. This can be extended to a ―fuel-free day‖
at the national level to involve people by opting efficient electric vehicles.
 Increasing its nuclear power capacity: It is scheduled to rise to 9% of total energy
capacity in the next 25 years from its current 4.2% level. India has five nuclear
reactors, and is working to build 18 more by 2025. If this is achieved, the country
will have the highest amount of energy nuclear reactors in the world. The
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seriousness of India‘s energy requirements can be gleaned from the fact that over
56% of rural households receive no electricity.
 Driving on solar power: The solar mission can be coupled with electric-mobility
mission. The idea is to gradually start using solar energy to charge batteries of
these EVs. Around 3.7 million M&HCV-EVs will need approximately 2,000 million
units of electricity every day. Instead of supplying the same from 80 Gigawatt of
thermal plants, green energy from solar plants—total of 400 GW developed over the
next 10 years—can be used. Yearly M&HCV-EVs fleet additions (at about 5 per cent
of total) will need another 20 GW every year.
 Long-term contract for sustainable procurement: By 2032, over 91% of the
country‘s energy needs will need to be imported. Thus, in an effort to secure both
best prices and energy security, the country has concluded a number of short- and
long-term contracts at government level and, to a lesser extent, through private
companies. India‘s two immediate neighbours-Myanmar and Bangladesh have good
volume of natural gas reservation. According to India‘s Act Look (previously known
as look east policy), these two countries are strategically important for direct
access to South-East Asian countries. Not only this reason, had India aimed to
import natural gas from both Bangladesh and Myanmar is going on.
 Maintain Good relationship with Oil producing countries: India currently sourced
about 16% of its $125-billion worth of oil imports from African nations and the
government was keen to step up its oil diplomacy and increase the share to
between 20% and 25% in the short term, the official pointed out. Saudi Arabia is
one of the largest suppliers of oil to India, who is one of the top seven trading
partners and the fifth biggest investor in Saudi Arabia.
 Establishing the gas pipeline: India‘s pipeline project plans come in the backdrop
of the International North-South Transport Corridor. The proposed pipeline projects
include the Turkmenistan-Afghanistan- Pakistan-India (TAPI) gas pipeline, the Iran-
Pakistan-India pipeline, and crude and gas pipelines from Russia and Kazakhstan.
There are several projects in various stages of planning and discussions. They are
very important from the viewpoint of India‘s growing demand for energy and also
energy security.
Conclusion:
Oil price fluctuations are inevitable. Multiple factors contribute to fluctuations beyond
expectations of the producers, investors, and analysts. Some the important factors which
contributed to significant variation in oil prices include demand-supply dynamics, geo-
political events, and OPEC policy interventions. Large price fluctuations severely impact
oil trading nations. Surge in price is negatively impact oil importing nations and helps
exporting nations to strengthen their economic development. On the contrary decline in
oil prices favourably supports economic prosperity of importing nations and adversely
impact economic development of oil exporting nations. If price decline is sustained, it may
support growth and reduce inflationary and fiscal pressures in a large number of oil-
importing countries. India is country which is depend 70-80% oil import, strategies to deal
with the situation is mandatory to deal with the situation.
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Developing Bond Market for Debt

Financing and the Future of Bond Market
The bond market (also debt market or credit market) is a financial market where
participants can issue new debt, known as the primary market, or buy and
sell debt securities, known as the secondary market. This is usually in the form of bonds,
but it may include notes, bills, etc.,
Participants of the Bond Market
The participants of the bond market are nearly the same as the participants in other
financial markets. In bond markets, the participants are either buyers of funds (that is,
debt issuers) or sellers of funds (institutions). Participants include institutional investors,
traders, governments and individuals who purchase products provided by large
institutions. These projects may be in the form of pension funds, mutual funds and life
insurance, among many other product types.
Features of Debt Market
1. It is competitive in nature, as number of participants is large

2. Strong and safe market, as government securities are traded
3. Substantially low transaction cost relative to equity & money market
4. Volume of transaction is huge, relative to equity market
5. Heterogeneous in nature, as a result of different types of participants
Regulatory Bodies –
As debt market trade both government and corporate debt instruments, we have following
two regulators
1. RBI : It regulates and also facilitates the government bonds and other securities on
behalf of governments
2. SEBI: It regulates corporate bonds, both PSU (Public sector undertaking) and private
sector.
Types of Debt Instruments:
1. Government Securities
2. Corporate Bonds
3. Certificate of Deposit
4. Commercial Papers
Key components of bond market
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 Credit Quality: Credit quality is an indicator of the ability of the issuer of the bond
to pay back his obligation. The credit quality of bond is usually assessed by
independent rating agencies such as Standard & Poor's, Moody's in the U.S. and
CRISIL in India. Most large financial institutions also have their own internal rating
systems.
 Yield on Security: Yield on a bond is the implied interest offered by a bond over
its life, given its current market price.
 Current Yield: The interest rate divided by the current price of the bond is termed
as current yield. This is the nominal yield multiplied by the price.
 Maturity: Maturity indicates the life of the bond i.e. the time over which interest
flows will occur.
 Coupon Payments: Coupon payments are the cash flows that are offered by a
particular bond at fixed intervals. The coupon expressed as a percentage of the
face value of the bond gives the coupon rate.
 Difference between coupon rate and yield:The difference between coupon rate
and yield arises because the market price of a bond might be different from the
face value of the security. Since coupon payments are calculated on the face
value, the coupon rate is different from the implied yield.
Working of a Bond Market:
The borrowing organization promises to pay the bond back at an agreed-upon date. Until
then, the borrower makes agreed-upon interest payments to the bondholder. People hold
own bonds are also called creditors or debt holders. The debtor repays the principal,
called the face value, when the bond matures. Most bondholders resell them before they
mature at the end of the loan period. That's because there is a secondary market for
bonds. Bonds are either publicly traded on exchanges or sold privately between a broker
and the creditor. Since they can be resold, the value of a bond rises and falls until it
matures.
Advantages
Bonds pay off in two ways. First, you receive income through the interest payments. Of
course, if you hold the bond to maturity, you will get all your principal back. That's what
makes bonds so safe. You can't lose your investment unless the entity defaults.
Second, you can profit if you resell the bond at a higher price than you bought it.
Sometimes bond traders will bid up the price of the bond beyond its face value. That
would happen if the net present value of its interest payments and principal were higher
than alternative bond investments.
Like stocks, bonds can be packaged into a bond mutual fund. Many individual
investors prefer to let an experienced fund manager pick the best selection of bonds.
A bond fund can also reduce risk through diversification. This way, if one entity defaults
on its bonds, then only a small part of the investment is lost.
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Disadvantages
Over the long haul, bonds pay out a lower return on your investment than stocks. In that
case, you might not earn enough to outpace inflation. Investing only in bonds might not
enable you to save enough for retirement.
Companies can default on bonds. That's why you need to check the bondholder‘s S&P
ratings. Bonds and corporations rated BB, and worse are speculative. That means they
could quickly default. They must offer a much higher interest rate to attract buyers.
For many people, valuing bonds can be confusing. That's because bond yields move
inversely with bond values. In other words, the more demand there is for bonds, the lower
the yield. That seems counter-intuitive. Why would investors want bonds if the yields are
falling? because bonds seem safer than stocks.
Bond Valuation
Bond valuation is a technique for determining the theoretical fair value of a particular
bond. Bond valuation includes calculating the present value of the bond's future interest
payments, also known as its cash flow, and the bond's value upon maturity, also known as
its face value or par value. Because a bond's par value and interest payments are fixed, an
investor uses bond valuation to determine what rate of return is required for a bond
investment to be worthwhile.
At the time of issue of the bond, the interest rate and other conditions of the bond would
have been impacted by numerous factors, such as current market interest rates, the
length of the term and the creditworthiness of the issuer. These factors are likely to
change with time, so the market price of a bond will diverge after it is issued.
Corporate Bonds tend to rise in value when interest rates fall and they fall in value when
interest rates rise. Usually the larger the maturity, the greater is the degree of price
volatility.
(CRISIL year book on the debt market 2018)
Outstanding amount of various fixed-income securities
Type of Security Amount o/s as on March, 2018 (Rs crore)

Corporate Bond 2,742,259
Government Securities 5,323,091
SDLs 2,430,333
T-bills 385,283
CDs 185,732
CPs 372,577
Total 11,439,276
Source:RBI/SEBI/CCIL
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Future of Bond Market
 The system of auction introduced to sell the government securities.
 The introduction of Delivery versus Payment (DvP) system by the Reserve Bank of India to
nullify the risk of settlement in securities and assure the smooth functioning of the
securities delivery and payment.
 The computerization of the SGL.
 The launch of innovative products such as capital indexed bonds and zero coupon bonds
to attract more and more investors from the wider spectrum of the populace.
 Sophistication of the markets for bonds such as inflation indexed bonds.
 The development of the more and more primary dealers as creators of the Government of
India bonds market.
 The establishment of the a powerful regulatory system called the trade for trade system
by the Reserve Bank of India which stated that all deals are to be settled with bonds and
funds.
 A new segment called the Wholesale Debt Market (WDM) was established at the NSE to
report the trading volume of the Government of India bonds market.
 Issue of ad hoc treasury bills by the Government of India as a funding instrument was
abolished with the introduction of the Ways And Means agreement.
Conclusion:
As India looks towards a new economic push in the manufacturing sector financing via
corporate bond market becomes imperative. The need of the hour is structural reforms. As
an important measure the newly announced Bankruptcy Bill is a step in the right direction
further reforms are needed towards resolving contract and insolvency disputes in a time
bound manner. This bill clearly separates the insolvency resolution process from
liquidation. The Bill seeks to resolve the bankruptcy issues in a time bound manner.
Another important step that must be taken in order to propel the bond market in India is
to ensure that corporate bonds yield a higher market rate. The government must also
clear regulatory hurdles while setting up a robust secondary market for these bonds. It is
only with these steps that corporate bond market in India will thrive in India.
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Fall of Rupee and Factors influencing the

Trend
As per estimate 80% of the forex market trading, is done in US Dollar, the Euro and the
Japanese Yen currencies. So, it is a fact that in India also, majority of the forex
transactions are dominated by US Dollar Currency. The fluctuation in US Dollar Currency is
very wide.
Exchange rate of US Dollar is influenced by numerous fundamental and technical factors.

These factors include demand and supply of these currencies, capital account inflows and
outflows, current account inflows and outflows, economic performance, outlook for
inflation, interest rate differential, etc., Initially Indian rupee was pegged to a basket of
currencies dominated by the US Dollar. After external payment crisis in 1991 Reserve Bank
of India (RBI) implemented financial reforms from fixed exchange rate to market-based
exchange rate regime from 1993. Current Account convertibility was introduced in 1994.
The movement of US Dollar vs Indian Rupee is shown below
One USD equivalent of Indian Rupee is given below:
45.05 44.70 53.10 54.99 61.80 63.03 66.15 67.92 63.87 74.00
2005 2010 2011 2012 2013 2014 2015 2016 2017 2018
80
Rate
60
40
20
Rate
0
2005 2010 2011 2012 2013 2014 2015 2016 2017 2018
(Source: FEDAI Rates)
From the above history of US Dollar rates vs Indian rupee, you can find that there was a
major jump of 20% increase in the year 2011 then nearly 20% increase again in the year
2013. In further years there was increase and decrease of 10%. In the year 2018 US Dollar
has increased nearly 13% before starting its decline.
India is having negative trade balance always i.e., Imports are more than our Exports. In
Recent RBI Annual Report of 2017-18 we had negative trade balance of USD 160 bn.
Page 36 of 185
To withstand currency depreciation and sudden volatility in currency and to pay our oil
imports which account for 25 to 30% of our Import bill, Reserve Bank of India has started
building Forex reserves from apprx. US Dollar 275 bn in September 2013 to the peak level
of US Dollar 424 bn in March 2018. The present forex reserves as of 18 th
January 2019 stand at USD 396.68 bn, in which Foreign Currency Assets stands at USD
370.72 bn, Gold Reserves at USD 21.84 bn, SDRs at USD 1.46 bn, IMF Reserve Position at
USD 2.64 bn. Reserve Bank of India (RBI) is using strong Foreign Portfolio Investment (FPI)
to buy US dollars to shore up the reserves. In FY2014-15 it increased its reserves by USD 54
bn and in FY2017-18 it increased its reserves by USD 33 bn. It was possible because of
strong FPI inflows into our equity and Debt Market.
The rupee has declined more than 10% since the beginning of 2018 and FPI have already
withdrawn huge amount from Indian markets, is the reason that RBI is unable to add more
to its reserves.
Factors that affect the Rupee fall Vis a Vis US Dollar:
1. Position of USD in Global Market: Excellent performance of the US equities market

made investors more optimistic about the outlook of the US Economy. US Dollar Index has
gained immense strength because of good outlook of US Economy.
2. Trade Deficit: As per RBI Annual Report 2017-18 the Total imports stood at USD 469
bn and total exports stood at USD 309 bn resulting in Trade imbalance of USD 160 bn. This
widening trade imbalance has much effect on the movement of Exchange rate.
3. Outflows and inflows: Sudden increase in outflows and inflows of Foreign Direct
Investment (FDI), Foreign Portfolio Investment (FPI) and Foreign Institutional Investment
(FII) affects rupee dollar exchange rate adversely. Outflows from Foreign Portfolio
investors (FPI) during the calendar year i.e., net selling by foreign investors stood at
around USD 6 billion approx. Rs.42000 crores.
4. Crude Oil and Gold Imports: There is gradual increase of crude oil prices which
accounts for nearly 25 to 30% of our Import Bill. India had imported 213.93 million tonnes
(MT) of crude oil 2016-17 for USD 70.196 billion or Rs 4.7 lakh crore. For 2017-18, the
imports are pegged at 219.15 MT for USD 87.725 billion (Rs 5.65 lakh crore), according to
the latest data available from Oil Ministry's Petroleum Planning and Analysis Cell (PPAC).
India is the second largest importer of Gold in the world. In the year 2017-18 India has
imported 727 Tons of Gold. There is a projection that it will increase to 800 Tons in 2018-
19.
5. Escalating Trade War: The escalating Trade War between US and China in which US
started imposing antidumping duties on Chinese Goods and Turkish currency and debt
crisis 2018 where in high inflation, rising borrowing costs, excessive Current Account
deficit and foreign-currency debt made Turkish Lira plunging in value. These two incidents
made major impact rather depreciation of currencies of many countries including India in
2018.
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6. Speculation from Merchant Exporters and Importers: As INR rate depreciates against
US Dollar; Merchant Importers tend to buy more fearing a further appreciation will affect
them badly. Whereas Merchant Exporters may not sell with reason that Dollar rate may
increase further resulting in more fluctuation in the Exchange rate.
7. Interest Rate Differential: High real rate of interest generally attracts more Foreign
Institutional Investors (FII) to Indian Market. As Reserve Bank of India (RBI) decreases
policy rates due to slow-down in growth rate it has negative impact on FIIs. World‘s
leading Central Bank‘s rates are given below:
(Source Daily Thanthi dated 21.11.2018)
8. Repaying and Servicing of Foreign Debt: All the stake holders who borrowed Foreign
debt in India feel increased pressure in repaying and servicing their debt due to
unexpected increase in exchange rate. India‘s External Debt touched a peak of USD 529
billion in March 2018 as per a RBI release. More Indians borrowed from overseas Market
and NRIs parked more amounts in India. Commercial borrowing continues to be the largest
component of external debt with a share of 38.20%, followed by NRI Deposits 23.80% and
short term trade credits accounted for 19% of total debt.
Conclusion:
We have discussed some of the major factors affecting the exchange rate movement of
USD vs. INR. There are many other micro and macro factors which are also happening in
India and world over, affecting the exchange rate movement. The Exchange rate may
appreciate if a Crude Oil rate comes down and also Import of Gold is reduced.
Page 38 of 185
PNB-the story of Fraud and Lessons
Background Punjab National Bank fraud:

Fraud at Brady House, the epicenter of the fraud was PNB‘s Brady House branch. From
there, deputy manager Gokulnath Shetty for years issued fraudulent credit guarantees
(LOU/LOC) in favour of Modi firms over the SWIFT interbank messaging network.
Shetty joined the forex division at Brady House in April 2010. In March 2011, the branch
issued the first fake credit guarantees of $15.5 million to Modi‘s firms through SWIFT
messages, bypassing the internal banking system. Over the coming years, Shetty
authorized more than 1200 fraudulent credit guarantees, the report said.
As a mid-level employee, Shetty should only have been able to approve transactions of up
to 2.5 million rupees ($37,000) without sign-off from more senior officials. But he had
been given unlimited approval powers, the investigators said without explaining how this
happened. Under PNB policy, no officer should remain in the same office for more than
three years, but Shetty retired after serving in Brady House for seven years. Three transfer
orders were issued for him during his tenure, but he was never moved, the investigators
found.
Lack of integration:
Shetty escaped detection because he did not log his SWIFT transactions on the bank‘s
internal software—something he was supposed to do because the two systems were not
integrated. ―Only one activity would have nailed the whole act at the incipient stage.
Moreover, despite a massive missing paper trail, none of the senior inspection officers,
who conducted 10 visits between 2010 and 2017 to the branch, reported anything
―adverse‖, Modi and Choksi, both of whom left India before PNB filed its first police
complaint on 29 January, have denied any wrongdoing. Shetty‘s lawyer has said his client
is not guilty.
As the whole case revolves around the fraudulent issuance of Letter of Undertaking (LOU)/
Letter of Comfort (LOCs). Let‗s understand the concept of LOC/LOU and SWIFT
mechanism.
Letter of Undertaking (LOU)/ Letter of Comfort (LOC):

Particular Letter of Comfort (LOC) Letter of Undertaking(LOU)
Definition LOC in the banking parlance is referred to a A contract to perform the
document which is provided by a person, promise, or discharge the
typically an affiliate (such as the holding / liability, of a third person in
parent company) of the borrower (―LOC case of his default
Provider) assuring the financial soundness of
the borrower to repay its debt(s).
Use Between Branches or Partner Subsidiary Inter-Bank
Basel III Low Provisioning High Provisioning
Charges to Low High
Customer
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SWIFT (Society for Worldwide Interbank Financial Telecommunication):
SWIFT Codes, also known as Bank Identifier Codes (BIC) are unique identification codes
allocated to each bank. These codes are used when transferring money between banks,
especially for international wire transfers and for communication between banks. There is
a provision of so called maker, checker and verifier or authorizer of SWIFT messages.
Banks across the world use SWIFT a messaging network for securely transmitting
information and instructions for all financial transactions through a standardized system of
codes. The maker keys in the message in the system, the checker checks it and, at the
third stage, the verifier transmits it after he is convinced of its genuineness.
Used by more than 11,000 financial institutions worldwide in more than 200 countries.
Industry experts say more than 100 financial institutions in India are connected with SWIFT
today. SWIFT is a secure message carrier — its core role is to provide a secure transmission
channel so that Bank A knows that its message to Bank B goes only to Bank B.
Lessons to Learn:
To appreciate the sanctity of standard procedures and how their strict compliance possibly
could have averted the events that followed an analysis of the transactions is necessary.
 Integration of the swift with bank accounting software i.e. Finacle. The entire
swift message should be generated through finacle, so all transactions logs can be
scrutinized by auditors.
 Bank employees posted in forex exchange desk should be transferred as per bank
policy regularly with any dilution in compliance.
 Final verification of high value transactions should be verified by independent
officials through head office or back office.
 Two officials, the initiator and the confirmatory, authenticate the SWIFT messages,
which are at the center of the fraud. Both of them should satisfy themselves that
the transactions underlying the messages are genuine and carry necessary
authority. If the initiator logs in a fraudulent message, the confirming officer could
detect it since the correctness of the contents like the dates, amounts and names
are checked with the original vouchers or notes.
 A credit officer vested with necessary powers authorises messages pertaining to
letters of credit or undertaking, unless the initiating official himself has the
responsibility for credit function also, which is not the case here. Thus the onus on
the confirming official is no less.
 A branch level concurrent auditor normally verifies all or random transactions
depending on the volume, including SWIFT generated messages on a regular basis.
The SWIFT system stores all the data. This verification is crucial since SWIFT is not
interfaced with the core banking system.
 On the basis of the LOCs and LOUs, the overseas banks that negotiate the
documents or extend buyers credit, make claims on the issuing bank. Or they can
place the funds at the disposal of the customer‗s bank. An International Division of
the bank funds the Nostro (foreign exchange) accounts, after checking the
references. They even contact the issuing branch for confirmation, if the amount is
large.
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 For the debits raised in the Nostro accounts, the LOU issuing branches respond
either by recovering the amount from the customer or in case of his inability, by
debiting a special account at the branch. In these cases, the department or division
responsible for reconciliation, the branch officials, the auditors and the Zonal/HO
level credit functionaries keep a track and follow up for reimbursement from the
customer.
 Long outstanding entries are reported for review by the administrative heads and
even the Audit Committee periodically. How regularly and seriously this is done is
again remains a question.
 An important hint is that several queries, advices or reminders various levels of
control in the bank and all these communications will reach to many officials at
different levels. But at every level it got unnoticed. Amongst so many executives
receiving the messages or letters at least some one would be alerted, if something
is amiss, unless, in the unlikely event of every one sleeping, negligent or being
involved in perpetuation of a fraud.
 Technological Upgrade: The recent PNB BANK scam and banking security threats
are on the rise. Financial institutions should focus on using newer and updated
security technologies, such as certificate pinning, two-factor authentication,
digital token and innovative sign in methods.
 As per fintech experts, If blockchain technology was used for transactions and
accounting, the Rs 13000 crore fraud at PNB BANK, could have been prevented or
at least detected earlier.
 So, how can using blockchain technology prevent such fraudulent activities?
Blockchain is a digitally distributed ledger system that records an asset's movement
and ensures point-to-point tracking of information on transactions that can map its
journey. The fact that it is a distributed ledger, i.e., a decentralised system,
makes transacting on blockchain transparent. Decentralisation is one of the key
aspects of blockchain because no single authority has full control over it, there is
no central point of failure and the entire system operates in the state of consensus
making the transactions transparent. By storing data across its network, blockchain
eliminates the risks that come with data being held centrally.
 A few banks in India have already started testing the waters with blockchain. These
include ICICI Bank, South Indian Bank of India, State Bank of India and so on. The
use of blockchain is a significant step towards digitising trade. In the month of Nov
18, Reliance Industries Limited (RIL) and Tricon Energy executed a first of its kind
blockchain-based letter of credit (LC) transaction facilitated by HSBC India and ING
Bank Brussels. Using R3's Corda blockchain platform, the LC was issued by ING Bank
on behalf of the importer Tricon Energy (USA) with HSBC India acting as the
advisory bank for RIL.
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1. Prompt Corrective Action (PCA) and Bail out 43
2. Bank Consolidation, Merger & Acquisitions 51

3. Basel III Norms and Timelines 56
4. IL & FS Crisis-causes and its impact on Economy and Banks 59
5. Bank Recapitalization 62
6. Capital Conservation 65
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Prompt Corrective Action (PCA)

and Bail out
The idea of PCA was originated from mass failure of Banks/FIs across the globe after great
financial crisis during 1980-90, that crisis had severely impacted financial systems and
world economy. Since, failure of banks in general may have adverse impact on common
people and more particularly on depositors, therefore, RBI issued PCA (prompt corrective
action) framework in 2002, which was reviewed/revised twice & most recently in April 17.
Though it is widely publicised in negative light but the objective of the framework is to
restore the financial health of weak banks by postponing their riskier activities, improving
operational efficiency & focusing on conserving capital. To achieve these objectives, RBI
has devised four trigger points namely Capital, Asset quality, Leverage & Profitability of
banks to initiate corrective actions on banks which are weak and troubled. RBI may invoke
PCA depending upon performance against aforesaid trigger points (Please refer PCA matrix
below) and accordingly call for actions such as restrictions on branch expansion & dividend
distribution, capital infusion, restricted fresh lending, high provisioning, recruitment ban
and other actions.
Position of our bank vis-a-vis threshold defined in PCA framework is analysed as under:
PCA matrix - Areas, indicators and risk thresholds
Risk Risk Risk Our Bank‘s

Area Indicator Threshold Threshold Threshold Position
1 2 3 FY 18*
CRAR-
current CRAR - 11.50%

minimum RBI
prescription of < 10.25% but < 7.75% (No breach in
10.875% for FY >=7.75% but >=6.25% < 3.625%
any of
18 & 11.50% for threshold
Capital level)
FY 19
(Breach of
either CRAR
or CET 1 And/ Or
ratio to CET 1 – 7.60%
trigger PCA)
Common Equity
Tier 1 (No breach in
any of
threshold
current level)
< 6.75%
< 5.125% but
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minimum RBI but >=3.625%

prescription of
7.375% for FY >= 5.125%
18 & 8.00% for
FY 19
Breach of either
CRAR or CET 1
ratio to trigger
PCA
Net Non- 8.42%

Asset performing >=6.0% but >=9.0% but <
>=12.0% (Threshold 1
Quality advances <9.0% 12.0%
(NNPA) ratio breached)
Negative ROA Negative Negative -1.07%

for two ROA for ROA for
(Negative
Return on consecutive three four
ROA for one
Profitability years consecutive consecutiv
assets (ROA) year
years e years
therefore, no
breach)
<=4.0% but < 3.5%

> = 3.5%
(leverage is 4.96%
Tier 1 Leverage (leverage is over 28.6
Leverage over 25 times times the
ratio
the Tier 1 Tier 1 (No breach in
capital) capital) threshold
level)
* Source: Annual report March 18
Important Developments under PCA framework
The RBI‘s PCA norm has been bone of contention between government and RBI and the
tension had touched peak with some public statements by govt. & RBI officials. In this
backdrop, MoF had called for meeting of banks under PCA and observed that credit flow to
Medium and Small Enterprises are affected after invocation of PCA on 11 PSBs. As a
remedial measure, GoI has proposed capital infusion based on assessment of banks based
on govt. defined parameters named as ‗EASE‘. Recently, government had requested RBI to
relax PCA norms citing the reasons as weak credit flow to needy sectors and ‗stringent‘
threshold levels. Further, Parliamentary committee set for review of RBI capital adequacy
norms has suggested to RBI to provide a coherent and positive road map for each of these
11 banks to come out of the stringent PCA norms. To diffuse the tension between govt and
Regulator, RBI had called board meeting, wide which it was decided that board for
Financial supervision (BFS) chaired by governor Shri Shaktikanta Das will examine the PCA
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framework. The Board met 10.01.19 and reviewed financial performance Q3 of PCA banks
and recovery plans submitted by banks, however it has indicated that it will wait to
examine audited results of banks on especially under capital & bad loan parameters before
taking final decision on lifting curb on some of the PCA Banks. Meanwhile govt. has infused
capital in some of PCA banks to help them to comply with Basel III capital norms, this
capital infusion will be beneficial for PCA banks to come out of PCA restriction.
Quick Facts About PCA Norms
 In USA, cumulative losses over US $75 billion due to failure of over 500 banks led to
Federal Deposit Insurance Corporation (FDIC) to formulate PCA framework for the
first time. RBI has prepared PCA norms in lines of FDIC‘s PCA framework. (Source:
SBI report)
 India is the only country that uses asset quality and negative return on assets (RoA)
as trigger for PCA Norms.
 The only private sector bank placed under RBI PCA norms is Dhanlakshmi Bank.
 PCA norm in India is not fully rule based but regulator discretion is also involved.
Bank of India is the bank, which was placed under PCA after high divergence in
reporting of NPA was observed during regulatory assessment/inspection.
 Non-PCA PSBs are our Bank, SBI, PNB, BoB, Canara Bank, Syndicate Bank, Andhra
Bank, Vijaya Bank, Indian Bank and Punjab & Sindh Bank.
 As per RBI circular, Breach of any risk threshold would result in invocation of PCA.
 One of the PCA framework parameter ‗Leverage‘ is being additionally monitored by
regulator. Tier 1 Leverage ratio is the percentage of the Tier-1 capital to the
exposure (on balance sheet+ OBS). In simple terms, if bank‘s exposure will be over
25 times of tier-1 capital, it will trigger Threshold-1.
 Breach of ‗Risk Threshold 3‘ of CET1 by a bank would identify a bank as a likely
candidate for resolution through tools like amalgamation, reconstruction, winding
up, etc.
 Share of PCA banks in advances and deposits as on March 31, 2018 was 18.5% and
20.8%, respectively
RBI actions on PCA Invocation
Prompt Corrective Action (or PCA) is early regulatory intervention and corrective measures
enforced on weak banks in a timely manner, so as to restore the financial health of banks
that are at risk by limiting deterioration in their health and preserving their capital levels.
To achieve this objective, PCA involves some restrictions on bank scope and expansion as
not doing so would lead to excessive risks on the balance-sheets of these banks. Some of
the measures are tabulated as under:
Threshold
Mandatory Actions Discretionary action
levels
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Risk  Restriction on dividend distribution/remittance Special Supervisory

Threshold 1 of profits. Interactions
 Promoters/owners/parent in the case of  Strategy related

foreign banks to bring in capital  Governance
related
 Capital related
Risk In addition to mandatory actions of Threshold 1,
 Credit risk
Threshold 2
x Restriction on branch expansion; domestic related
and/or overseas  Market risk
related
x Higher provisions as part of the coverage  HR related
regime  Profitability
related
 Operations
Risk In addition to mandatory actions of Threshold 1, related
Threshold 3  Any other
 Restriction on branch expansion; domestic
and/or overseas
 Restriction on management compensation and
directors‘ fees, as applicable
Banks under PCA norms
Bank PCA invocation date
United Bank of India February 2014
Indian Overseas Bank August 2015
Dhanlakshmi Bank November 2015
IDBI Bank May 2017
UCO Bank May 2017
Dena Bank May 2017
Central Bank of India June 2017
Bank of Maharashtra June 2017
Oriental Bank of Commerce October 2017
Corporation Bank December 2017
Bank of India December 2017
Allahabad Bank January 2018
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Positive Side of PCA norms
1. ‗Bitter tablet to subside fever‘
It alerts depositors/investors and other stakeholders of the bank to keep a watch on

developments such as RBI PCA announcement, Bank‘s financial performance etc. contrary
to the perception PCA has helped many PCA banks to conserve capital, improve their risk
management practices and financial performance.
2. ‘Prevention is always better than cure’
PCA norms are well considered accepted form of structured early intervention and
resolution that prevents the bank‘s problems to balloon and destablise the financial
system of the country; therefore it is deemed as to protect the interest of depositors and
prevents further capital erosion. RBI doesn‘t restricts on the retail deposit-taking activity
of any bank, banks can be advised under the revised framework as a cost reduction
measure to reduce or avoid altogether the high-cost bulk deposits and instead
concentrate most on their Current Account and Saving Account (CASA) deposit levels.
3. ‘A road that leads to Long awaited Banking reforms’

Some of recent RBI measures such as NPA recognition and Govt. IBC code are
supplementing long pending banking reforms. It is believed that there is no quick fix
solution to PSBs reforms but PCA framework has been one of the regulatory measures,
which has been successfully restricting PCA banks to postpone riskier lending/activities
thus preventing capital erosion. It is also argued that it is creating a platform of stability
for the bank, and in turn, setting the stage for structural interventions to be implemented
and pushed through. This measure has also reduced govt. capital infusion by preventing
further losses of PSBs under PCA.
PCA‘s Criticism
There is an assertion being made in media, industry body, govt. officials that imposition of
the PCA has starved the Indian economy of credit especially needy segment MSME. There is
little factual basis for this assertion, either for the overall economy or at sectoral level.
Most of the 11 PSBs have come under PCA framework only in the last one year (chart-1).
The growth in banks credit to industries including MSME has increased during this period.
The fact that Non PCA banks are taking on the burden from their peers under PCA to meet
the credit requirement.
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(Chart -1)
One of the criticisms the RBI has facing is that it‘s being too stringent in applying the
prompt corrective action (PCA) framework for banks. As per FY 18 results, At least four
more banks are breaching RBI risk thresholds-I, if RBI follows a strict rule-based approach.
These are Andhra Bank, Canara Bank, Punjab National Bank (PNB) and Union Bank of India,
each of which has breached the maximum permissible levels of 6% for net non-performing
advances as a percentage of total advances. Thus, it is observed that RBI has been
analyzing the bank‘s position on case to case basis not only by benchmarking their
financial parameters against PCA threshold level but also as per their supervisory
assessment in inspections/RBS etc.
In general, PCA restrictions are coming on the way of income generation of these banks as
they are losing market share in deposits and advances to Non PCA banks and private bank,
due to this Interest earning is impacted severely and there are limited avenues for
generation of non-interest income for these banks as very few banks are engaged into fee
based business. Further, MTM losses on their investment portfolio have also led to fall in
other income. It is also important to recognize that there is limited scope for rationalizing
operational expenses of PSBs apart from freezing fresh recruitment and stopping branch
expansion.
One of the criticisms which have gained ground is that the RBI hasn‘t been open to reason
about the need for greater liquidity, and there are calls for a greater say for the RBI
board. But RBI is looking the issue from regulators perspective therefore Govt. and RBI are
not in the same page. If media reports are to be believed, In recent RBI board meeting RBI
and government have shown flexibility in their approaches toward PCA norms, Capital
requirement norms etc.
How to bail out banks
Two biggest challenging parameters under PCA framework are NNPA and Capital, while
NPA position might not improve in next two quarters and government may not be able to
infuse capital as it has already breached its fiscal target of FY 19 in Oct -18 itself.
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Therefore, it is imperative upon Banks to introspect and improve their balance sheet with
highest priority at the cost of business growth.
RBI Dy. Governor Shri Viral Acharya has quoted that ‗The reason for examining the
performance of these banks over a long time period is to appreciate the fact that the
progress of banks under PCA cannot be judged over a relatively short time scale. The
longer the under-capitalisation and asset quality problems have festered, the more patient
one has to be during the rehabilitation process. There is no quick fix or overnight silver
bullet‘.
There seems to be no single solution or strategy which can apply to all PSBs under PCA,
while recent financial results (Half yearly) of PCA banks has been mix bag for some PCA
banks has been good but others have been slow in their progress toward improving
financial and rest did not improve at all one conclusion can be drawn upon is that It will
take time for these banks to come out of PCA framework.
Some of the options are deliberated as under:
Private capital
State-run banks can raise private capital, which will help share the government‘s burden.
But for that to happen, valuations should be fair and proper.
Sell Non-core assets
Almost all public sector banks have several non-core assets and a part or complete stake
sale in subsidiaries like insurance JVs, market-making divisions and foreign branches could
provide emergency capital.
Mergers
Often considered the default option, given that there is no need for the government to run
21 PSBs. However, the idea stopped in its tracks, as finding synergies is quite a challenge,
unlike merging SBI with associate banks. Nevertheless, the Centre began another
experiment to merge one relatively strong, but small bank (Vijaya Bank) with one sick and
weak bank (Dena Bank and Bank of Baroda). Perhaps, more could follow based on the
outcome of this three way merger.
ESOP options (for improving Tier-I capital)
Some of the PCA Bank‘s and a few Non PCA banks are in the raising capital under this
option recently to improve Tier-I capital. The govt. had allowed PSBs in March 17 to offer
stock options to their employee to raise core capital level, retain experienced employees
& offer better incentive. This is quite a favorable option given that shareholding structure
is not significantly altered and cost of raising such capital is lower than some of the option
viz raising Tier-1 complaint bonds, QIP & FPO.
Combinations of these may be employed depending upon position of PCA banks under
various parameters of PCA matrix but pre requisite must be sufficient recapitalization
of those banks which are improving under PCA norms or on the verge of slipping into
PCA framework.
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Our Bank‘s position
It is observed that our bank has only breached threshold level 1 under one parameter i.e.
NNPA ratio and as per relevant guidelines, RBI may invoke PCA if breach in any of
threshold observed as assessed by them based on Financial performance in FY 18 &
supervisory review process. In this context, principal risk factor is rising NPA, which has
peaked in FY 18 and the same is not specific to our bank but remains banking industry‘s
problem ever since RBI‘s withdrawal of dispensation available on standard restructured
advances. Most of bigger PSBs including our bank have significant exposure to
infrastructure sector, and is therefore affected by new RBI guidelines. It is further
observed that 11 out of 21 PSBs are under PCA, therefore we can increase quality
advances by way of loan takeover and improve our bargaining power on pricing of loans
and advances, which in turn will increase our NIM. Our bank has been implementing
structural reforms named as Vision 2020 which will enhance our performance in aforesaid
four parameters. In the last but not the least, key to success lies in NPA management as
the same will minimise loan loss provisioning which will improve profitability, ultimately
resulting into capital formation.
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Bank Consolidation, Merger &

Acquisitions
Brief Background
Consolidation is the practice, in business, of legally combining two or more organizations

into a single new one. Upon consolidation, the original organizations cease to exist and are
supplanted by a new entity. Essentially it is merger and acquisitions of many
smaller/bigger companies into few much larger new entity primarily motivated by desire
for economies of scale or reducing the competition or fragmentation.
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Mergers and acquisitions seems a name normally pronounced together but in reality two
words having two different meanings. Mergers on one hand are more on a positive side
whereas acquisitions are more of hostile nature. In simple terms, an acquisition is when
one company takes over or purchases another company while a merger is a consensual
situation wherein two companies agree to continue business operations and go forward as
a single new company.
Banking system is the bloodline of any economy and banks are trustees of public money.
Failure of a bank has more systemic implications than say, the failure of a manufacturing
company. Naturally, inspiration to bank consolidation in many countries came through
regulatory and governmental actions in public interest. Large scale recapitalisation has
also taken place in a number of countries including India to prevent failure of
banks/banking system.
Mergers and acquisitions are not an unknown happening in Indian Banking. In fact, there
were several cases of bank failures, mergers and acquisitions which were reported in pre-
independence period dating back to even early 19th Century. Proper regulation and
control of banks and intervention by the regulator in the event of a crisis came into being
with the passing of Banking Regulation Act in 1949. However, forced merger and
amalgamation as a tool to provide relief to ailing banks besides protecting public and
depositor confidence in banking system came into being only in 1960 when Section 45
inserted in BR Act. The first half of the sixties saw 45 forced mergers under section 45. In
the post nationalization period also a number of mergers and acquisitions took place, most
of them under Section 45. Interestingly, almost all of them were amalgamations of failed
private banks with one of the Public sector banks. We have seen some M&A as voluntary
efforts of banks. Merger of Times Bank with HDFC Bank was the first of such consolidations
after financial sector reforms ushered in 1991. Recently, Merger of IDFC Bank with NBFC
Capital First has started the new chapter in Banking M&A space.
PSBs merger idea was mooted in Narasimham Committee-II report 1998 as part of
structural banking sector reforms. The Committee recommended for merger of large
Indian banks to make them strong enough for supporting international trade. It
recommended a three tier banking structure in India through establishment of three large
banks with international presence, eight to ten national banks and a large number of
regional and local banks. The Committee recommended the use of mergers to build the
size and strength of operations for each bank. However, it cautioned that large banks
should merge only with banks of equivalent size and not with weaker banks, which should
be closed down if unable to revitalize themselves. There were strings of mergers in banks
of India during the late 90s and early 2000s, encouraged strongly by the GOI in line with
the Narasimham Committee's-II recommendations. However, the PSBs consolidation is now
receiving government impetus.
In 2014, P J Nayak panel had also recommended that the government should either merge
or merge PSBs.
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The beginning of PSBs consolidation
It is well known that the consolidation exercise of PSBs has moved to the front pages of
newspapers following their mounting non-performing assets (NPAs) and the pressures for
infusing additional capital faced by the government. In the process, there is a visible sense
of urgency to rush through a process that should have been spaced out in an orderly and
well-thought-out manner from the time it was mooted more than two decades ago. PSBs
roughly account for 70% of the industry but are fast losing their market share.
In 2017, The Department of financial services had informed PSBs about GoI decision to set
up a ministerial panel to facilitate consolidation in the public banking space. Further,
banks were told to undertake an internal exercise for the best match based on regional
balance, geographical reach, IT compatibility, financial burden and human resource
transition and come up with the merger idea for Finance minister headed alternative
mechanism (AM) set up for the purpose. One AM is satisfied than proposal is to be placed
in parliament for approval. Parliament has right to modify or reject the proposal.
In case of a merger between a public sector bank and a private bank too, parliamentary
approval is a must. Section 44A of Banking Regulation Act 1949 lays down the norms for
voluntary mergers and ―forced" mergers are done under Section 45 of the Act.
Why Bank merger and consolidation?
 PSBs in India are highly fragmented as compared to those of other economies.

According to a World Bank index, India has one of the world‘s most fragmented
banking industries, possibly next only to the U.S.
 The merger/consolidation may reduce government monitoring to few large
entities.
 Few strong banks may consume reduce capital drain thus lower govt. capital
infusion.
 The biggest advantage of merger and consolidation is the realization of benefits of
scale. Merger and consolidation of public sector banks will increase their asset size
and hence the capacity to finance larger projects. To take the example of SBI, it
will enter the list of top 50 global banks and could become one of the anchor banks
to finance large projects like the Dedicated Freight Corridor, renewable energy
projects etc. thereby reducing the dependency on foreign lenders or a consortium
of multiple banks.
 Reduction in duplication of activities and less unhealthy competition.
 India‘s GDP growth rate is set to overtake its northern neighbor this year. World-
class and world-size banks are a necessary catalyst in this process.
 Mergers will prevent erosion of capital and help banks meet higher requirements
under Basel-III norms.
What are the concerns regarding the PSBs merger and consolidation
 Weaker bank may have unhealthy impact on operations of the stronger bank after
the merger.
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 The strategy to ask healthy bank to take over weak bank is unlikely to solve the
bad loan crisis in banking.
 It may impede govt. goal of financial inclusion to reach the unbanked poor. During
post liberalization period after 1991, the merger of associate banks with SBI led to
closure of about 5000 branches in rural and remote areas. SBI‘s merger should
actually be viewed as an internal reorganization and not a classical merger
exercise.
 One of the foremost challenges in this process of banking consolidation is the
existing NPAs. Without injecting sufficient capital, the process of merger and
consolidation could lead to rerouting the problem of NPAs to the new consolidated
bank thereby harming its future prospects. The merger of Global Trust Bank with
Oriental Bank of Commerce in 2004 is an example of this.
 As per some experts India needs more banking competition than consolidation to
improve the banking services in the country.
 Existence of excessively large banks may also create significant moral hazard costs
for the entire system. A failure of a very large bank may have systemic
implications and therefore, there is a perception that large banks may be bailed
out during stress periods i.e. large banks become ‗too big to fail‘.
 Non-banking investments of identified PSBs in areas such as insurance, broking etc
would need to be critically evaluated, with a view to requiring the banks to either
exit from them, or offload the investment within a firm time frame. This may be
necessary before merger.
 Unless the government infuses capital in the combined entity, Acquirer bank will
face constraints in terms of growth.
 Complete Integration process of any merger takes almost 4-5 years to complete as
challenges of addressing the diverse pressure groups and human resource
rationalization, potential litigations take centre stage.
 Human resource and cultural issues apart, most mergers in the past haven‘t led to
improvement in profits.
 The real danger lies in proceeding to merge without adequate clarity about the
intended strategic goals and desired outcomes.
 A merger increases the concentration risk as the merged entity will end up holding
a larger exposure to stressed sectors.
Challenges in PSB merger & consolidation
Management: With the merger, the management will bear critical challenges with respect
to staff integration, rationalization of branches, cultural compatibility, IT integration. PSB
mergers might be more effective when the top brass is free from the unrelenting stress of
resolving NPAs so that they can focus on reaping the economic benefits opened by the
merger.
This overstaffing is also one of the key hurdles to the merger which management would
find quite daunting.
Employees: The whole process may face resistance from employee union, who are fearful
of job losses. Promotion aspect may be affected due to a reduction of seniority in the
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merged entity. Further, rationalisation of branches will lead to staff relocation, which
may cause dissatisfaction among employee.
Talent Shortage: For a merger or any other restructuring option, PSBs face the foremost
challenge of an acute talent deficit and absence of the right people in sufficient numbers.
Almost every PSB on the merger radar lacks talented personnel to effectively manage even
existing operations.
Is merger and consolidation right solution for problems in Banking?
Why do we need consolidation? Since financial stability is not threatened and depositors
are not running the risk of losing money (as long as the banks have government backing),
the logic for consolidation should be cutting cost and acquiring efficiency.
Undeniably, there are too many PSBs in India and consolidation is a good idea in theory.
However, merger should be done between adequately capitalized strong banks. It will be
crucial to ensure that such mergers don‘t end up creating an entity that is weaker than
the original pre-merger strong bank. Certainly merger and consolidation are one of the
way to manage the current banking crisis thus can‘t be ignored totally. But the trick lies in
managing the merger process prudently by identifying synergies and exploiting scale
efficiencies will be important.
Indeed, bank consolidation is the flavour of the season but the exercise of consolidating
PSBs should therefore be based on a sound analysis of every PSB, a granular analysis of its
assets and liabilities, sector-wise loan exposures, security back-up, common loans among
PSBs, etc. It simply isn't true that bigger banks are better. The Indian market itself has
seen several smaller private banks that have a higher valuation than their larger peers.
A key factor to consider is whether the merger of any two PSBs would result in substantial
value addition in the combined entity, or result in value diminution. Just the large size of
a combined balance sheet cannot be a conclusive indicator.
It is also worth asking as to whether PSB mergers would make better sense once there is
progress in resolving the current unconscionable levels of NPAs. As they say, the best
mergers get the timing right. Even in the case of the recent SBI mergers, SBI would
possibly have preferred doing the merger at a time when the NPAs has came down to
realistic levels, so as to strengthen its market image.
India needs to maintain a right balance between private and public sector ownership in
banking for quite some time. Even with 150 domestic commercial banks and the large
number of cooperative banks, only about 40% of adults have formal bank accounts, and
there are deep-rooted poverty issues and regional disparities to contend with. We need a
mix of efficiently run PSBs and aggressive private banks to serve both development goals
and social justice.
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Basel III Norms and Timelines

BRIEF INTRODUCTION
In 2008, the crisis in the US banking sector wreaked havoc throughout the world. After the
2008 financial crisis which led to wiping out of many renowned banks viz. Lehman Bros,
Bear Sterns etc. There was a need to update the BASEL II norms to reduce the risk in the
banking system further. Until BASEL III, the norms had only considered some of the risks
related to credit, the market, and operations. To meet these risks, banks were asked to
maintain a certain minimum level of capital and not lend all the money they receive from
deposits. This acts as a buffer during hard times. The BASEL III norms also consider
liquidity risks with introduction of two ratios namely Liquidity Coverage Ratio (LCR) & Net
Stable Funding Ratio (NSFR).
Basel III is the response to the deficiencies of Basel II, not as a replacement but a more
robust and deeper complement. It is a comprehensive set of reform measures, developed
by the Basel Committee on Banking Supervision (BCBS) to strengthen the regulation,
supervision and risk management of the banking sector.
When bank is exposed to more risk, bank needs larger safety buffer. The BASEL III norms
account for more risk in the system than earlier. As a result, it increases banks‘ minimum
capital requirements. Tier 1 capital – the main portion of the banks‘ capital, usually in the
form of equity shares – should amount to 7% of the banks‘ risks. So, if the bank has risky
assets worth Rs 100, it needs to have Tier 1 capital worth Rs 7. This capital can be easily
used to raise funds in times of troubles. Plus, banks also have to hold an additional buffer
of 2.5% of risky assets.
HOW BASEL III IS IS DIFFERENT FROM BASEL II?
 Introduction of Leverage and Liquidity Ratios

• Systematically Important Financial Institutions, there are three banks namely SBI,
ICICI Bank and HDFC identified as D-SIB
• Minimum levels of liquidity for internationally Active Banks (LCR& NSFR)
• Monitoring tools for maintaining Liquidity level
• More emphasis on Tier I capital
• Capital for Systematic Risk (CCB)
• Impact on proposal of Hybrid capital
CAPITAL REQUIREMENTS UNDER BASEL III
The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to
get all commercial banks BASEL III-compliant by March 2019.
SI Minimum Capital Requirements
Basel III
1. Common Equity Tier I (CET 1) (floor) 5.5%
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2. Additional Tier I (max) 1.5%
3. Minimum Tier I (1+2) 7%
4. Capital conservation Buffer (CCB) 2.5%
5. Tier I including CCB 9.5%
6. Tier II (max) 2%
7. Minimum Common Equity Tier 1 (1+4) 8%
8. Minimum total capital ratio 9%
Total capital ratio including CCB 11.5%
BASEL III LEVERAGE RATIO
This means a bank should have a minimum amount of loss-absorbing capital relative to
all of a bank‘s assets and off-balance sheet exposures regardless of risk weighting.
Bank‘s whose leverage ratio should not be below 4.5%.
WHY BASEL III LIQUIDITY RATIO
During subprime crisis well capitalized banks collapsed due to unavailability of liquidity or
very high cost of liquidity. Historically, it is liquidity risk which has failed banks more than
any other risk.
Capital is money that is invested in assets like equity or government bonds. This money,
therefore, is not readily available for day-to-day activities. Moreover, during a crisis, the
value of investments can fall suddenly like the 2008 financial crisis. This means, the
capital a bank holds can fall during times of need. This is why the BASEL III norms ask
banks to hold liquid money. This is measured by the Liquidity Coverage Ratio (LCR), a ratio
of the liquid money to total assets. This should equal the banks‘ net outflows during a 30-
day stress period.
NSFR RATIO
Quite recently, as per notification dated 29.11.18, RBI has decided to implement NSFR
guidelines with effective from 01 April 2020. Earlier in May 18 RBI issued final guidelines
on NSFR. In this guidelines, Liabilities or ASF VIZ Capital, demand, term assigned Weights
based on their constitution i.e. liquid assets have less hair-cuts whereas less liquid assets
have high hair-cuts, similarly RSF or assets are assigned weights/run off factor based on
their liquidity profile i.e. freely available assets are assigned zero run off and more riskier
assets are assigned higher RSF factor. Thus arriving at ratio which ensures that long term
asset creations are not largely financed by short term liabilities. I.e. ALM mismatches are
at acceptable level.
BASEL III CAPITAL REQUIREMENTS TRANSITION PERIOD
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MINIMUM REQUIREMENTS 31.3.14 31.3.15 31.3.16 31.3.17 31.3.18 31.3.19
COMMON EQUITY CAPITAL (CET) 4.50% 5.00% 5.50% 5.50% 5.50% 5.50%
CAPITAL CONSERVATION BUFFER 0% 0% 0.625% 1.25% 1.875% 2.50%

(CCB)
MINIMUM CET + CCB 4.50% 5.00% 6.125% 6.75% 7.375% 8.00%*
TIER I CAPITAL 6.00% 6.50% 7.00% 7.00% 7.00% 7.00%
TOTAL CAPITAL + CCB 9.00% 9.00% 9.625% 10.25% 10.875% 11.50%
* LAST TRANCHE OF 0.625% IS DEFERRED BY ONE YEAR I .E. 31.03.2020.
WHY RBI DEFERRED LAST TRANCHE OF CAPITAL CONSERVATION BUFFER (CCB)?
The Basel III also introduces a capital conservation buffer (CCB) of 2.5% of RWA over and
above the minimum capital requirement, raising the total capital requirement to 11.5% in
Basel III against 9.0% under Basel II. This buffer is intended to ensure that banks are able
to absorb losses without breaching the minimum capital requirement, and are able to
carry on business even in a downturn without deleveraging. While the buffer is not part of
the regulatory minimum; the level of the buffer will determine the dividend distributed to
shareholders and the bonus paid to staff.
PSBs are falling short of meeting Basel III capital norms especially in Tier-I and on-going
NPA crisis is eroding bank‘s Net worth rapidly; The Reserve Bank of India board has
extended implementation of last tranche of the CCB norm of 0.625 per cent of risk
weighted assets (RWA) by a year to 31 March 2020. This will reduce burden of capital
requirement under Basel III norms to already capital-starved PSBs and govt. capital
infusion constraints will also ease.
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IL & FS Crisis-causes and its impact

on Economy and Banks
About NBFCs
Non-Banking Finance Companies are those companies which provide banking services
without satisfying the legal definition of a bank and thus do not have a banking license.
They are incorporated under the Companies Act, 1956 and desirous of commencing the
business of non-banking financial institution as defined under the RBI Act, 1934. NBFCs are
not allowed to take deposits from the public, which keeps them outside the scope of
traditional oversight under banking regulations. NBFCs can provide banking services like
loans and credit facilities, retirement planning, money markets, underwriting, and merger
activities.
Infrastructure Leasing and Financial Services (IL&FS) is a major Non-Banking Finance

Company (NBFC) that lends for infrastructure projects.
What is the IL&FS crisis?
 IL&FS Company is listed as ―systemically important NBFC‖ by the RBI and hence it
is ―too big to fail‖. The inter-linkages between IL&FS and other financial entities
like banks, mutual funds, and infrastructure players are too strong and the
company would have taken down all of them with it if it were allowed to fail.
 Some of its subsidiaries defaulted on their loan repayments. Due to this, Credit
rating of IL&FS as a whole was sharply degraded. This led to Investors sold their
stocks in housing finance firms leading to stock market plunge.
 The first indication that something was wrong at IL&FS in June, when the company
defaulted on some inter-corporate deposits and commercial papers to the extent of
Rs 400 Crs. Subsequently, the IL&FS debt was downgraded to default risk by leading
rating agencies. IL&FS again defaulted on seven of its debt obligations in
September and this led to all-round mayhem in the markets.
Who owns IL&FS?
IL&FS has institutional shareholders including SBI, LIC, ORIX Corporation of Japan and Abu
Dhabi Investment Authority (ADIA). As on March 31, 2018, LIC and ORIX Corporation are
the largest shareholders in IL&FS with their stakeholding at 25.34 per cent and 23.54 per
cent, respectively. Other prominent shareholders include ADIA (12.56 per cent), HDFC
(9.02 per cent), CBI (7.67 per cent) and SBI (6.42 per cent).
What are the possible causes to this crisis?
 The major reason for the IL&FS failure is the asset-liability mismatch caused by
funding projects of 20-25 years payback period with relatively short-term funds of
only 8-10 years. In nutshell, IL&FS is a testimony to inefficient cash-flow
management and excessive leverage.
 The group with at least 24 direct subsidiaries, 135 indirect subsidiaries, six joint
ventures and four associate companies is sitting on a debt of about Rs 91,000 crore.
Of this, nearly Rs 60,000 crore of debt is at project level, including road, power
and water projects. The 2013 land acquisition law made many of its projects
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unviable. It is one major reason behind troubles of IL&FS is complications in land

acquisition. Further, Cost escalation also led to many incomplete projects. Lack of
timely action exacerbated the problems.
 Monitoring Gaps: IL&FS is a non-banking finance company (NBFC) regulated by
many regulators like RBI, SEBI, IRDA, National Housing Bank and Department of
Company Affairs depending on the type of services they offer. However, RBI does
not have all the information needed to understand risks to other financial firms
arising from its debt. Notably, Pension funds, provident funds, mutual funds, and
insurance companies hold the debt of IL&FS subsidiaries. But RBI does not regulate
these and hence will not have the full picture.
 Exceptionally high leverage and a complex corporate structure also possible
reason for disaster.
Major effects of this crisis
Liquidity stress in the Non-Banking Financial Institutions will spill over to the broader
economy mainly through the credit channel because NBFIs are a material provider of
credit for the economy, with outstanding loans/GDP at end March 2018 registering 13 per
cent versus banking system loans/GDP of 52 per cent.
 This crisis may slow down in credit growth provided by NBFIs, therefore may
dampen overall consumption and economic growth.
 The IL&FS default forced banks, mutual funds, and other fund providers to tighten
lending to NBFCs by rising borrowing costs. This has created a liquidity crisis (lack
of money flow) and is severely impacting the smaller NBFCs too. As the cost of
borrowing is rising for NBFCs.
 The perceived liquidity crunch will also impact the funding cost of Non-Banking
Financial Companies (NBFCs) and housing finance companies which rely on short-
term CPs and NCDs as their source of funds and impact their margins. Big names in
the NBFC space have lost significant market cap due to the events at IL&FS.
 The crisis has turned the situation in favour of commercial banks. The liquidity
crunch following the IL&FS crisis has pushed corporate borrowers away from the
bond markets, back to banks. Non-food credit of banks expected to rise in FY 19.
 Loss of employments in projects financed by IL&FS.
 NBFCs, which account for 16 percent of total institutional credit in India, are facing
a serious liquidity squeeze. Any credit squeeze on the part of NBFCs could dampen
the prospects of these industries and, in turn, the prospects of dependent
industries, such as steel and cement, for instance. That would have an adverse
effect on the country‘s overall economic growth.
 Most commercial banks faced with surging bad loans have been avoiding riskier
loans to SMEs, poor households and the self-employed, but are willing to indirectly
lend to NBFCs, which then re-lend that money to these neglected borrower
segments. This is how commercial banks and NBFCs are linked, and hence, any
trouble in the IL&FS/NBFCs may cause trouble in the whole banking and financial
sector.
 Effect on customers: Customers with good financials will continue to find sources
to borrow from. Customers with higher risk profiles, unstable cash flows etc. could
face some stress in getting funding as this market is largely catered to by NBFCs.
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Govt./RBI Rescue Plan
The government has moved National Company Law Tribunal (NCLT) today to supersede the
IL&FS board and change the company management. A rescue-plan similar to the Satyam
crisis is what the Centre may go for. It has proposed to appoint 10 nominee directors who
will report to the NCLT for relevant plans for the road ahead. Further, simplification of its
corporate structure would be the way forward.
RBI had incentivized bank lending to non-banking financial companies (NBFCs) by easing
liquidity norms and increasing the ceiling for lending to a single NBFC.
Both relaxations were available up to 31 December 2018.
What are the reforms needed?
 In 2012, the Financial Sector Legislative Reforms Commission suggested legislative

and architectural reforms for financial regulation. This included a body that would
monitor systemic risk. Presently, no supervisory institution is entrusted for dealing
with systemic risk across sectors.
 The 2016-17 Budget proposed the establishment of Financial Data and Management
Centre and subsequently, a draft bill was proposed. This would have the legal
powers to collect all regulatory data along with sectoral regulators. It would have
monitored the company (IL&FS) and decided whether it is systemically important
and would have stepped in before the firm defaulted. However, the opposition to
the legislation led to the withdrawal of the Bill.
 There is a need for a source that provides long-term finance for infrastructural
projects (high gestation period). The LIC and some insurance companies are the
only domestic sources but they too do not lend beyond 10 to 12 years.
 The Government and the RBI should come up with ways to deepen the debt
markets where infrastructural players can borrow long-term.
 This crisis has raised doubts in efficacy of rating assigned by big rating agencies,
pliant independent directors and unscrupulous auditors. Reform process must
regulate their role properly.
 A combination of strict disclosure norms, the IFRS accounting system and some
capping on debt-equity ratio can bring discipline in NBFCs. This will minimize the
risk of default and its contagion effect on the banking and financial sector.
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Bank Recapitalization
Recapitalisation of PSBs
In the case of Public Sector banks, recapitalization is injection of capital mainly through
equity investment by the government to financially strengthen them. Since the
government is the majority shareholder of PSBs, the responsibility of adding capital to
them falls on the shoulders of the government.
Recapitalisation was necessary because the PSBs are facing financial problems and they
need money in the context of rising bad debts. Similarly, they need funds to meet the
higher capital requirements under Basel III norms. Altogether, there are following three
sound reasons for recapitalization of PSBs.
1. Rising volume of bad assets has led to erosion of capital.

2. The Basel III capital norms require higher capital in banks. Banks are to comply with
these norms by 31st March 2019.
3. Expanding credit needs in the economy can be made only with higher capital.
The compelling need for large scale recapitalisation is the first factor ie., rising volume of
bad debts. Higher NPAs and very low asset quality including the problem of loss asset
requires replacing such funds by using money from the capital base. As per the 2017-18
trend, PSBs account for nearly 90 per cent of Gross Non-Performing Assets (GNPAs) of the
entire banking sector. According to the CAG Report, GNPAs of PSBs increased from Rs 2.27
lakh crore (31 March 2014) to Rs 6.83 lakh crore (provisional) as on 31 March 2017. This
has again estimated to be increased to Rs 9.5 lakh crores as on June 2018. So, the main
thrust of government‘s recapitalization effort is to tide over the bad debt problem of
PSBs.
In nutshell, The rise in advances, coupled with the stringent capital adequacy
requirements imposed by RBI in the wake of the Basel III norms, high levels of NPAs and
the poor performance of PSBs have led to significant capital erosion and requirements for
further capital—both for replenishment of the base eroded by NPAs and fresh ones for
giving loans.
Govt. Recapitalisation Efforts
 The Government has been making recapitalization by providing funds through the
budget in the past. A significant portion of the money obtained from disinvestment
was put into PSBs for recapitalisation. According to the Comptroller and Auditor
General‘s Report (2017), the government had infused Rs 1, 18,724 crore in PSBs
between 2008-09 to 2016-17.
 Second wave of recapitalization of Rs 2.11 lakh crores was announced by the
government on October 24, 2017 as part of ‗Indradhanush‘ scheme. The three modes
of fund mobilization under this recapitalization effort shall be budgetary allocation,
Market Borrowings by banks and recapitalization bonds issue by GoI.
 In December 2018, government announced additional Rs 41000 cores Recapitalisation
bond issue in the context of shortfall in bank‘s market borrowing and the rising need to
bank to save from RBI‘s PCA framework.
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 Remarkably, recapitalisation is backed by corrective or supportive measures by the

bank management and employees. For this, government is signing a triparty
memorandum of understanding with bank management and employee unions
Additional issue of recapitalisation bonds worth Rs 41000 crores declared in

December 2018
The additional recapitalisation bond-based fund infusion is expected to support banks in

four dimensions:
 Banks that need to meet minimum regulatory capital norms as per Basel III norms will
get funds.
 Better performing banks under Prompt Corrective Action (PCA) will be given capital to
meet 9 percent CRAR norm and 6 percent Net NPA requirement to help them come out
of PCA.
 Fund will also help Non-PCA banks which are close to red line to ensure they don‘t fall
into PCA.
 Funds will also help banks to avail regulatory capital for undergoing amalgamation.
As per the Basel III regulation followed in India, banks have to get capital conservation
buffer (additional) of 2.5% by March 2020 and recapitalization is the viable option to meet
the funds.
Since govt. is utilizing this mode of capital infusion in big way, it would be pertinent to
discuss the same underneath.
What are Recapitalisation bonds?
A government bond is an instrument to raise money from the market with a promise to pay
to repay the face value of the maturity date and a periodic interest. A bond issued for the
purpose of recapitalisation is called recapitalisation bonds.
How will Recapitalisation bonds work?
The government will issue recapitalisation bonds, which banks will subscribe and enter it
as an investment in their books. The banks will lend money to the government for
subscribing the bonds. This money raised by the government through these bonds will go
back to banks as capital. This will immediately strengthen the balance-sheet of the banks
and show capital-adequacy. Since the government is always solvent, the money lent to the
government for subscribing recap bonds is free from becoming a bad loan.
Will it have an impact on the fiscal deficit?
Since the government is not infusing money from the state coffers, it does not have an
immediate impact on the fiscal deficit. However, it also depends on how it is being
accounted in the books of the government.
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Way Forward
The recapitalisation exercise is linked to the performance of 21 PSBs in executing the 30-
point reforms agenda namely EASE (Enhanced Access and Service Excellence) chalked out
by the Centre.
The reform plan sets a goal of ‗Enhanced Access and Service Excellence (EASE)‘ and the six
pillars to achieve this include customer responsiveness, responsible banking, and credit off
take, PSBs as Udyami Mitra, deepening financial inclusion, and digitalisation and
developing personnel.
The government also said that it would hire an independent agency to conduct a survey of
the PSBs on the aspects of EASE to measure public perception about improvements in
access and service quality. The results of the survey would be made public each year.
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Capital Conservation
Introduction
As businesses are to be run on the ultimate business ethics of appropriation of profit as

well as loss, the role of capital is of seminal importance. Banks need to do business for
profit. How the profits are appropriated is a subsequent consideration. But if the business
is incurring loss or there is a propensity for loss, the business must sit up and see that the
loss is absorbed by capital.
Capital is of critical importance to banks. As a result, virtually all proposals to reform

regulation of financial institutions aim to conserve and optimize the amount and quality of
capital required.
Sources of capital can be either borrowed funds or owned funds. Within owned funds,
banks have three primary sources of funds:
• Equity Shares
• Preference Shares
• Retained profits.
Capital conservation is need of the hour mainly from three perspectives below:
• Compliance to Basel III capital norms
• Rising volume of bad assets requires higher provisioning
• Growth Capital, PCA norms have created opportunity for Non PCA banks to increase their
advance portfolio.
Bank‘s capital is bifurcated into two part namely Tier-I & Tier-II, While Tier-I capital
(going concern capital) is core capital of the bank thus supports growth and meant for
running the show. Whereas, Tier-II Capital (Gone concern capital) absorbs losses at the
time of insolvency.
Capital Conservation in context of Basel III
Basel III is different from earlier Basel norms as it recognizes systemic risk (crisis in
macroeconomic level) and idiosyncratic risk (Firm specific crisis) and provides for these
risks. These risks were highlighted from subprime crisis of 2008, wide which some of the
renowned banks failed and others were bail out of taxpayer money. Therefore, BCBS/RBI
had prescribed banks to create two types of buffer to counter these risks as well as
preserve capital to tide over macro-economic crisis, if the need arises.
Capital Conservation Buffer
Capital Conservation Buffer (CCB) is designed to ensure that banks build up capital buffers
during normal times, i.e. outside periods of stress, which can be drawn down as losses are
incurred during a stressed period. RBI proposed to introduce CCB of 2.50 per cent,
effective from March 2016, to be progressively achieved by March 2020.
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Countercyclical Capital Buffer
Countercyclical Capital Buffer (CCCB) is an extension of requirement of CCB. Normally

banks do shy away from lending during recessions. Instead of lending during such periods
of recessions to stimulate the economy, banks do concentrate on recovery which results in
a debilitating effect on the economy. The new imperative under Basel III requires banks to
hold higher capital during booms to enable them to not only absorb losses during
downturns but also sustain lending to support the economic growth. The CCCB as a
percentage ranges between 0 to 2.50 per cent.
Bank has adopted two main strategies for conserving capital as under:
Optimization of Risk Weighted Assets (RWA)
In our bank, we have been focusing RWA optimization by improving the quality of data and
reducing the data inaccuracies in the following areas.
1. Loan classification as committed or uncommitted
2. Collaterals and collateral recognition
3. Improper classification of guarantees (performance guarantee is wrongly classified as

financial guarantee, thus attracting more capital)
4. Non-reversal of expired guarantees
5. Draw-down schedule on Project Finance
6. Wrong input of approved financial collaterals
We can prevent leakage of capital if we monitor undrawn limits and manage the same at
lower level. In case of most of branches, 80% of RWA of branch is contributed by top 20
loan accounts, therefore Limit node maintenance or draw down to be closely monitored
for prevention of leakage of capital.
Focus on RAM (Retail, Agriculture & MSME) advances
We are witnessing gradual shift in business composition of our bank, Bank has been
consciously focusing on RAM (Retail, Agriculture & MSME) sector because these segments
are capital light advances i.e. RAM sector attracts lower risk weights toward minimum
capital requirement under credit risk in Basel II. So, more capital is available for further
profitable lending. Moreover, risk is quite diversified in RAM sector and MSE portfolio is
quite profitable segment compared to other segments.
For example, within RAM sectors, home loans contribute approx. 60% of the retail loans,
Bank makes effort to acquire higher margins from the customer in order to lower the LTV
(loan to value) ratio and reduce the Risk weighted assets. It is pertinent to mention that
Risk weight of housing loan upto Rs. 75 Lakh is only 35% subject to LTV below 80%.
Further, MSE advances are also covered by various guarantee schemes, which attract low
risk weights upto 20% so bank is not only tapping the profitable segment but also
committing less capital. In nutshell, bank has consciously adopted Capital Light Asset
Models for growth.
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CMRD/CRLD/Law
1. Insolvency and Bankruptcy Code 2016 68
2. Project Sashakt: 5 prong strategy on stressed asset resolution 74
3. Revised framework for resolution of stressed assets 75
4. The Problem of rising Non-Performing Assets in banking Sector in India 77
5. Asset Quality Management 80
6. Banking frauds: Effect on rising NPAs 82
7. Bad Bank 83
8. Fugitive Economic Offenders 86
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Insolvency and Bankruptcy Code

2016
The following are some of the key concepts in the Insolvency and Bankruptcy Code
2016
Insolvency: Insolvency is failure of a Company or LLP to pay due amount of Rs.1 lac or
above. In case of Individual or partnership the amount is Rs.1000/- or above
Bankruptcy: Bankruptcy is the legal declaration of Insolvency by adjucating authority
(Court or Tribunal)
Insolvency and Bankruptcy code (IBC) 2016 is a new consolidated law relating to
reorganization/restructuring, insolvency and winding up/dissolution of companies,
partnership firms and individuals, brought into force by Govt. w.e.f. 1st Dec‘2016, IBC is
a law which provides legal rights to banks and other creditors and it is apart from legal
rights available exclusively to banks under DRT and SARFAESI Act. Banks can use IBC as one
more tool and leverage to recover dues from borrowers. IBC is divided into five (5) parts
containing seven (7) chapters, 255 sections and 11 schedules extensively covering
insolvency, liquidation of corporate and bankruptcy of individuals.
Who Can Initiate the Insolvency Resolution Process: The creditors can initiate an IRP
(Insolvency Resolution Process) at NCLT. These creditors can be financial creditor (banks),
Operational creditor (input, service provider) and corporate creditors. The corporate
debtor, its shareholder or employees may also initiate voluntary insolvency proceeding.
Four Pillars under IBC-2016:
1. IBBI (Insolvency and Bankruptcy Board of India)

2. NCLT and NCLAT
3. Information Utilities
4. Insolvency Resolution Professionals
1. Insolvency and Bankruptcy Board of India (IBBI)
• IBC as part of resolution of debt or liquidation of the distressed companies creates

a professional body IBBI, which will license and regulate professionals desirous of
practicing as Insolvency Resolution Professionals/Liquidator of companies.
• IBBI has since been constituted by Government of India and started functioning. It
maintains list of professionals who have been given license to practice as
Insolvency Resolution Professionals/liquidator.
• While making application before NCLT for insolvency resolution process, Bank may
choose anybody licensed by IBBI to practice as Insolvency Resolution
Professional/liquidator and seek his/her/their appointment by the NCLT for
insolvency resolution/liquidation
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2. NCLT & NCLAT
NCLT have been constituted with effect from 1st June 2016.These are adjucating
authority to take decision on cases referred to them.NCLT will look into cases
relating to companies and LLPs and DRT will take up the cases relating to individual
and partnerships.
• Government of India has set up 11 NCLT benches across the major metros. NCLT
are located at present in New Delhi, Ahmadabad, Allahabad, Bangalore,
Chandigarh, Chennai, Hyderabad, Kolkata and Mumbai. More benches are likely to
be announced by the Government.
• NCLT is similar to Courts and will hear and adjudicate all the cases under
Companies Act, 2013 as well as under IBC. Appeals against the orders of NCLT will
be entertained by NCLAT. Against the orders of NCLAT, we have to approach
Supreme Court.
3. Information Utilities:
These are the entities that collect, collate and disseminate information to facilitate
resolution process.NeSL (National e Governance Services Ltd) is the first IUs in
India.
4. IRP (Insolvency Resolution Professional):
These are professional who fulfill the eligibility criteria under IBC-2016, they
prepare Insolvency Resolution Plan and take over management of a company under
Insolvency Resolution Process on interim basis. Entire process of insolvency and
liquidation will be managed by professionals known as Insolvency Resolution
Professional (IRP). IRPs are licensed by Insolvency and Bankruptcy Board of India
(IBBI), a government regulatory Body set up under IBC. IRPs are subject to
supervision of NCLT (National Company Law
Tribunal) and NCLAT (National Company Law Appellate Tribunal) with respect to
Specific cases of insolvency and liquidation handled by them and subject to code of
conduct prescribed by IBBI. IBC with particular reference to insolvency and
liquidation Companies provide for two step system for recovery of dues from the
companies.
First step is Insolvency Resolution Process and final step is liquidation of the
company. In the event of default in repayment of dues of Rs. 1 lac or more by the
corporate borrower, bank can file an application before NCLT for insolvency
resolution process. Similarly, insolvency resolution process can be started by any
other creditor including sundry/trade creditors if the default of the company is Rs.1
lac or more.
Process flow in Corporate Insolvency Resolution Process
1. Firstly, Bank will have to file an application before NCLT for initiating Insolvency
Resolution Process, if there is a default in repayment of dues by the company.
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2. At the time of filing application, Bank will have to furnish details/proof of

default by the company and recommend the name of a licensed Insolvency
Resolution Profession (IRP) to act as an interim resolution professional. IRPs are
licensed by IBBI and website contains names and addresses of licensed IRPs.
3. Branches/controlling office may choose any IRP for the work after negotiating
fee for services.
4. If NCLT is satisfied that default has occurred and the application of the Bank is
complete in all respects it will admit the application and appoint the IRP
recommended by the Bank. Simultaneously NCLT will make a public announcement
declaring moratorium for period of 180 days extendable by another 90 days. Once
moratorium is declared by NCLT, Bank or any other creditor cannot take action
under SARFAESIA or file suits/cases for recovery of dues in any court/DRT etc. Even
SARFAESIA action is also required to be stopped by Bank, if already taken.
5. Immediately after appointment Insolvency Resolution Professional (IRP) will

assume charge and will take control of the management of affairs of the company
and is required to preserve and protect the value of property and manage the
company as going concern.
6. Collect all the information relating to assets, finances and operations of the
corporate debtor for determining financial position of the company
7. Appoint committee of creditors (both secured and unsecured lenders). Decisions

of committee of creditors will be based on majority of 66% by value.
8. Will act as per the directions of committee of creditors in all matters of running
the company.
9. Will seek Resolution Plan from the Bank or creditor who had filed the
application before NCLT for Insolvency Resolution Process, study the same, discuss
with the company and place the same before committee of creditors for approval.
10. Resolution Plan involves strategy/plan for running the company, repayment of
dues of creditors including sundry/trade creditors and other matters such that if
the plan succeeds, bank will get back its dues and company will be revived and
becomes solvent.
11. The Resolution plan in order to be valid requires approval of 66% and above of
both secured and unsecured creditors. Sundry and trade creditors are not part of
creditors‘ committee and do not have right to vote in the Resolution plan.
12. Once the resolution plan is approved by the committee of creditors, then the
plan will be placed before NCLT for approval and once NCLT approves the
resolution plan, it will be implemented by the Insolvency Resolution Professional.
13. Resolution Plan once approved by NCLT, it will become binding on all the
creditors, employees, shareholders and other stake holders of the company.
Effectively, during the implementation of resolution plan, none of the stake
holders can take action inconsistent with the approved resolution plan.
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14. If resolution plan is unsuccessful or the company contravenes the provisions of

resolution plan, then NCLT will pass orders liquidating the company.
15. Once the liquidation order is passed then, liquidator will be appointed by
NCLT, who will take control of the company and sell the assets and distribute the
sale proceeds to the creditors. Once the distribution of proceeds is complete the
company will dissolved and will be dead as a legal entity.
Process of Liquidation:
A corporate debtor may be put into liquidation in the following scenarios:
1. When majority of the creditors committee (>66%) decides to liquidate the

corporate debtor.
2. Creditor committee does not approve a resolution plan within 180days with
addition to another 90 days
3. The NCLT reject resolution plan submitted to it
4. The debtor contravenes the agreed resolution plan.
When NCLT passing the order of liquidation a moratorium is imposed on the pending legal
proceedings against the corporate debtor and on the asset of debtor.
Powers and duties of liquidator:
 Receive and verify claims of all creditors

 Take control and custody of all the assets, property, effects and actionable
claims of the corporate debtor
 Evaluate the assets and property of the company in liquidation in the manner
specified by IBBI and prepare a report
 Protect the assets and run the business till the assets are sold.
 Distribute the sale proceeds of assets amongst the creditors and stake holders
as per IBC to satisfy the claims of the creditors against the Company
Waterfall Mechanism: This is the order of priority for distribution of proceeds of

liquidation
1. Costs and fee of Insolvency Professional and the liquidator will be first paid out
of sale proceeds of assets;
2. Secondly, workmen dues for period of 2 years preceding the date of order of
liquidation and debts payable to secured creditors will be paid in equal
proportions. However, this rule will not apply if the secured creditor did not
surrender the security to the liquidator and chooses proceed under SARFAESI and
realize the security.
3. Thirdly, wages and dues of employees (other than workmen) unpaid for
preceding 1 year will be paid.
4. Fourthly, debts payable to unsecured creditors
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5. Fifthly government and tax dues in equal proportion with dues of unpaid secured
creditors
6. Sixthly any other remaining debts and dues
7. Seventhly preference shareholders, if any, and;
8. Lastly equity share holders
Major amendment in IBC(06.06.2018):
1. MSME with special dispensation – it does not disqualify the promoters to bid for
his enterprise under CIRP if the enterprise is not a wilful defaulter.
2. Withdrawal of CIRP only with approval of the CoC with 90% of voting
3. Withdrawal permissible only before publication of notice of EOI
4. The voting threshold has been brought down to 66% from 75%
5. Voting threshold for routine decision under CIRP has been reduced to 51%
Section 29A:
A person shall not be eligible to submit a Resolution Plan if such person is a connected
person.
A connected person is a person who is:
A promoter or in the management or control of Resolution applicant
A promoter or in the management or control of the business during the

implementation of Resolution Plan
A holding company, subsidiary company, associate company or related party of

promoter during implementation of Resolution Plan.
Provisioning for loans referred to NCLT:
 There will be no change in the asset classification norms and income recognition
norms in respect of the cases referred to NCLT. However minimum provisions
required to be maintained against those accounts against which resolution
proceedings are initiated under the IBC would be higher of the following:
 50% provision for secured exposure of the outstanding balance plus 100%
for the unsecured exposure.
 Provisions required to be maintained as per the extant asset

classification norms.
 The accounts in respect of whom the AA under the IBC passes liquidation order,
shall attract 100% provision on an immediate basis.
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 In respect of accounts that have already been classified as NPA as on the date of
IBC filing, the said provisions will be applicable from the date of filing. In respect
of Standard Accounts, the above provisioning norms will be effective from the date
of admission of the application for initiating corporate insolvency.
RBI list:
RBI released 1st list on June 2017 for 12 a/cs and 2nd list on August 2017 with 28 a/cs.
Our bank having 11 a/cs in 1st list and 18 a/cs in 2nd list of RBI with exposure of
Rs.12200cr.
Some of the major Accounts under RBI List:
S. No 1st list of RBI 2nd list of RBI
1 Essar Steel Videocon industries
2 ABG Shipyard Uttam galva steel
3 Bhusan Power Jaiswal Neco
4 Bhusan steel Jaiprakash associated
5 Alok Industries Asian color coated
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Project Sashakt: 5 prong strategy on stressed

asset resolution
Project Sashakt aims to strengthen the credit capacity, credit culture and credit portfolio
of Public Sector banks.
 An independent Asset Management Company would be set up to focus on asset turn

around, job creation and protection.
 The independent body would be aligned with Insolvency and Bankruptcy Code (IBC)
process and IBC laws.
 The committee has set a five-prong strategy towards resolution of stressed assets.
'SASHAKT' stands for strengthening and the whole objective was to strengthen the
credit capacity, credit culture and portfolio of public sector banks,"
 The AMC will be set up by state-run banks for resolution of loans above Rs 500
crore.
 An alternative investment fund (AIF)-based resolution approach for loans above Rs.
500 crores, under which an AIF would raise funds from institutional investors.
Banks, too, will have an option to participate, if they wish to participate in the
upside.
 Banks should create a focused vertical for management of stressed assets for
priority resolution of SMEs with loans up to Rs. 50 crore.
 For loans ranging between Rs 50 to 500 crores, a Bank Led Resolution Approach
(BLRA) has been recommended, wherein financial institutions will enter into an
inter-creditor agreement to authorise the lead bank to implement a resolution plan
in 180 days.
 In case the lead bank is unable to complete the resolution process within 180 days,
the asset would go to the National Company Law Tribunal (NCLT).
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Revised framework for resolution

of stressed assets
RBI FRAMEWORK FOR STRESSED ASSETS
(RBI/2017-18/131 dated 12.2.2018)
• Replaces the existing schemes like:
– Framework for Revitalizing Distressed Assets

– CDR
– Flexible Structuring (5:25)
– SDR
– S4A
– JLF Mechanism
• Considerations under the framework on which stress is laid
– Early identification and reporting of stress

– Immediate implementation of resolution plan (As defined in the Framework)
– Compliance of implementation conditions
– Adhering to timelines for Large Accounts to be referred to IBC 2016
– Prudential Norms on the classification of assets
• Other guidelines :
– Norms applicable to restructuring

– Financial difficulty defined
– Rating parameters defined
Key Highlights of the Framework
 Repealed all earlier restructuring schemes(CDR,SDR,JLF,S4A)
 All Lenders to develop board approved policies for resolution of stressed asset
under the framework
 Aggregate exposure is greater than Rs.2000cr, RP to be finalized within 180 days

from Reference date.
 In case of change in ownership, section 29A of the IBC to be adhered
 Independent credit evaluation by credit rating agencies introduced
 If implementation of RP fails during specified period lender to take borrower to the

IBC
A. Early Identification and Reporting of Stress

• Lenders to identify incipient stress in loan accounts immediately on default.
• Stress assets are to be classified as Special Mention Accounts(SMA) as per following

categories:
SMA Sub-Categories Basis for classification-Principal or interest payment or any
other amount wholly or partly overdue between
SMA-0 1-30 days
SMA-1 31-60 days

SMA-2 61-90 days
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• Lenders shall report credit information, including classification of an account as

SMA to Central Repository of Information on Large Credits (CRILC)
• Applicable for Aggregate Exposure of Rs. 50 million (5 Crores) and above.
• The CRILC-Main Report is required to be submitted on a monthly basis, effective

from April 1st, 2018.
• In addition, the lenders shall report to CRILC, all borrower entities in default on a
weekly basis, at the close of business on every Friday, or the preceding working
day if Friday happens to be a holiday.
Central Repository of Information on Large Credits
The lenders shall report credit information to Central Repository of information on large
credits. AE of a borrower entity is Rs.5.00 cr and above
Resolution plans involving restructuring/change in ownership in case of large accounts (AE

of lender more than Rs.100 cr.) shall require Independent Credit Evaluation (ICE) of the
residual debt, by credit rating agencies(CRA) as authorized by RBI for this purpose.
 Accounts with exposure of Rs.5.00 cr. or more shall require 2 ICE, rest one ICE.
 RPs with credit opinion ratings of more than RP4 or better for the residual debt from
one or two CRAs, shall be considered for implementation.
 CRAs to be engaged and their fees to be paid by lenders
 If ICE obtained from more than required CRAs, all such ICE opinions shall be RP4 or
better for the RP to be considered for implementation.
 ICE requirement shall be applicable to restructuring of all the large accounts

implemented from February12,2018,even if restructuring is carried out before the
reference date.
Time lines applicable:
 All such accounts with aggregate exposure of the lenders at Rs.2000 cr and above, as
on March 1,2018
 Accounts where resolution may have been initiated under any of the existing scheme
 Accounts classified as restructured standard assets which are currently in respective

specified periods.
 For the accounts with aggregate exposure between Rs.100 cr and Rs.2000 cr, RBI
proposes to announce reference date for implementation of RP over a period of two
years.
 These timelines are not applicable to accounts for which specified instructions have
already been issued by RBI under IBC.
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The Problem of Rising Non-performing Assets in

Banking Sector in India
Introduction
The growth of the economy depends upon the efficiency and stability of the banking
sector. The most important factor which measures the health of the banking industry is
the size of NPAs. Non-Performing assets have direct impact on the financial performance
of banks i.e. their profitability. It denotes the efficiency with which a bank is optimizing
its total resources and therefore, serving an index to the degree of asset utilization and
managerial effectiveness. NPAs affects the profitability of the banks in terms of rising cost
of capital, increasing risk perception thereby affecting liquidity position of banks. Banks
need to effectively control their NPAs in order to increase their profitability and
efficiency.
The Narasimham Committee (1991) on ―Financial System Reforms‖ introduced the concept
of non-performing assets. The status on non-performing assets constitutes the best
indicator of judging the health of the banking industry. The problem of NPAs is linked with
the lending procedure of banks as these are an inevitable burden on the banks. A bank
gives out money upfront and earns income over a time on the promise of a borrower to
repay. When loans are not repaid, the bank loses both its income stream, as well as its
capital. Lending is always accompanied by the credit risk arising out of the borrower‘s
default in repaying the money*.The major problem today faced by all the commercial
banks is the increasing risk of non-performing assets, which poses challenge to their
ultimate survival. The NPAs have been classified under four categories:
1. Standard Assets: A standard asset is a performing asset. Standard assets generate
continuous income and repayments as and when they fall due. Such assets carry a
normal risk and are not NPAs in the real sense.
2. Sub-standard Assets: All those assets which are considered as non-performing for a
period of 12 months.
3. Doubtful Assets: Those assets which are considered as non-performing for period
of more than 12 months.
4. Loss Assets: All those assets which cannot be recovered and security value is either
Zero or less than 10% of the ledger outstanding.
These assets are identified by the Central Bank or by the auditors.
The efficiency of the banks is also reflected by the level of return on its assets which is
deteriorated by the presence of NPAs in the balance sheet of the banks. Therefore, this
paper examines the issue of NPAs in the context of scheduled commercial banks in both
public and private sector. One of the drivers of growth and financial stability is the level
of NPAs in the banking sector.
In the year 1992, the Government of India introduced a number of reforms to deal with
the problem of growing NPAs in banking sector. The major steps includes; introduction of
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Debt Recovery Tribunals, Securitization Act 2002, Lok-Adalats, Compromise Settlement

Scheme and introduction of Credit Information Bureau.
Causes for NPAs

A robust banking sector is the backbone of the economy; therefore to improve the health
of the banking system we must look into account all the likely causes which can hinder its
smooth performance. No doubt, NPAs are a menace to the efficient working of the overall
banking industry. In order to reduce the problem of NPAs that banks can work efficiently,
we must first be aware of all the reasons which cause problem of bad loans. The causes
are divided into three categories, one related with respect to the internal functioning of
banks, second are the causes accountable to borrowers. It has been observed that the
large borrowers are the biggest defaulters in the bank. The top 30 NPAs of PSBs were
found to account for 40.2 percent of their GNPAs [2] Apart from these, there are some
macro-economic causes which affect the whole industry and cause changes in NPAs.
Causes for rising NPAs in Causes accountable to Other causes

banks in India Causes borrower
accountable to banks
Poor credit appraisal Longer gestation time Fast changing technology
mechanism
Wrong selection of borrowers Mismanagement of funds Political warfare
Lack of trained staff Wrong selection of projects Taxation laws
Inflexible attitude Diversion of funds Credit policies
No delegation of authority Lack of quality control Government policies
Lack of proper follow-up by Rising expenses Increase in factor cost
the banks
Weak-post- credit appraisal Poor choice of location Changes in consumer tastes
system and preferences
Inefficient management of Inadequate attention to Recession in the market
lending facilities research and development
Visible Impact of NPAs on banks
NPAs directly affect the profitability of the banks. Below mentioned are the ways through
which banks profitability is affected:
(i) Liquidity position: NPAs affects the liquidity position of the banks, thereby creating a
mis-match between assets and liability and force the banks to raise resources at high cost.
(ii) Undermine bank‘s image: High level of NPAs shadows the image of banks both in
domestic and global markets. This ultimately leads to lower profitability.
(iii) Effect on funding: Increasing level of NPAs in banks results in scarcity of funds in the
Indian capital market as there will be only few banking institutions who will lend money.
(iv)Higher cost of capital: It shall result in increasing the cost of capital as banks will now
have to keep aside more funds for the smooth working of its operations.
(v) High risk: NPAs will affect the risk-bearing capacity of the banks.
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(vi)Effect on income: NPAs will reduce the net interest income of the banks as interest is
not charged to these accounts.
(vii) Declining productivity: It will also cost in terms of time, money and manpower which
will ultimately results in declining profitability, since the staff is primarily engaged with
preparing papers for filing law cases to recover principal amount and interest rather than
devoting time for planning mobilization of funds.
(viii) Effect on ROI and profitability: It reduces the earning capacity of the assets thereby
negatively affect the ROI. All NPAs need to be prudentially provided for which shall have a
direct impact on the profitability of the banks.
(ix) Ultimate burden on society: It will ultimately affect the consumers who now will
have to fetch out more money for paying higher interest.
Suggestions to reduce NPAs in banks
(i) Overhauling of existing credit appraisal and monitoring systems
(ii) Regular follow-up of customers by the banks to ensure that there is no diversion of
funds.
(iii) Review of all loan accounts at designated interval.
(iv) Proper training in the field in innovative methods of monitoring and recovery.
(v) Persistent use of Recovery tools, both legal and Non-legal
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Asset Quality Management

While India keeps developing its financial systems with initiatives like Digital India and has
remained stable financially, the concern of rising levels of non-performing assets (NPAs)
still persists.
As per RBI Stability report, Asset Quality should flow in the following way to improve the
efficiency of the Banks.
RBI believes and warns that in a severe stress situation, quite a handsome number of
banks will suffer from a credit shock, which will directly affect their profitability.
In such an alarming situation, financial institutions must focus on the following 3 factors to
control and manage their asset quality:
1. Credit Flow
There must be significant efforts in improving the credit flow.
2. Large borrowers
Large borrowers account for greater portion of gross loans and advances. The limits that
can be made available to the Large Borrowal accounts needs to be rationalized
3. Credit Discipline
Asset quality is one of the most critical areas in determining the overall condition of a
bank. The primary factor affecting overall asset quality is the quality of the loan portfolio
and the credit administration program.
The following points are the indicative list of all possible factors that may influence
asset quality:
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 The adequacy of underwriting standards, soundness of credit administration

practices, and appropriateness of risk identification practices
 The level, distribution, severity, and trend of problem, classified, non-accrual,
restructured, delinquent, and nonperforming assets for both on- and off-balance
sheet transactions.
 The adequacy of the ALL and other asset valuation reserves.
 The credit risk arising from or reduced by off-balance sheet transactions, such as
unfunded commitments, credit derivatives, commercial and standby letters of
credit, and lines of credit.
 The diversification and quality of the loan and investment portfolios.
 The extent of securities underwriting activities and exposure to counter-parties in
trading activities.
 The existence of asset concentrations.
 The adequacy of loan and investment policies, procedures, and practices
 The ability of management to properly administer its assets, including the timely
identification and collection of problem assets.
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Banking Frauds: and effect on

Rising NPAs
Government empowers PSU banks to seek lookout circulars against wilful defaulters:
In a bid to prevent big economic offenders like Vijay Mallya and Nirav Modi from fleeing
the country, the government has empowered PSU banks to request Look Out Circulars
(LOCs) against wilful defaulters and fraudsters, officials said on Sunday.
The Home Ministry has also authorised the Serious Fraud Investigation Office (SFIO), a
statutory corporate fraud investigation agency, to request LOCs if it feels the suspect may
escape from India. The ministry issued two circulars recently, authorising Chairman-cum-
Managing Directors or chief executive officers of public sector banks and the SFIO to
request designated authorities to issue LOCs against any wilful defaulter or fraudster if
they think the person may flee the country.
The CMDs and CEOs of PSU banks can now ask the Home Ministry, Ministry of External
Affairs, Customs and Income Tax Departments, Directorate of Revenue Intelligence, CBI,
regional passport officers and police to issue an LOC to alert immigration check posts to
stop anyone leaving India, a home ministry official said. The SFIO and PSU banks can
initiate the process if they suspect that the defaulter may leave the country to escape the
law, the official said.
Earlier, investigating agencies would request LOCs in cognizable offences under the IPC or
other laws in case the accused evaded arrest or did not appear before court despite
issuance of non-bailable warrants and other coercive measures and there was a likelihood
of the accused leaving the country to escape arrest.
An LOC is valid for a year unless its duration is specified. The govt's fresh move came
after three high-profile escapes involving liquor baron Vijay Mallya and diamantaires Nirav
Modi and Mehul Choksi rocked the country, inviting embarrassment for the government.
Mallya left India on March 2, 2016 after defaulting on loan amounting to Rs 9,000 crore he
had taken for his now-defunct Kingfisher Airlines. Jewellery designer Modi and his uncle
Choksi, managing director of Gitanjali Gems Ltd, fled the country in January 2018. They
are accused of cheating the Punjab National Bank to the tune of Rs 13,000 crore. The
government had brought the Fugitive Economic Offenders Act, empowering the
authorities to attach and confiscate the proceeds of crime and properties of economic
offenders, like bank fraudsters or loan defaulters who fled the country. The law is aimed
at quickly recovering losses to the exchequer or PSBs in cases of frauds.
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Bad Bank
Bad bank or PARA (Public Sector Asset Rehabilitation Agency) was proposed in Economic
Survey 2016-17. Bad Bank is an institution which specializes in loan resolution process, so
that banking system is free to focus on core banking solutions.
Moving away from the decentralized approach of presently existing schemes, PARA is a
centralised resolution of NPA crisis.
Need for PARA
According to Economic Survey, need for PARA arises because:
 Early resolution so that Funds for creation of new credit can be used
 Wilful Defaulters cannot escape because of non-coordination in Joint Lenders‘
Forum Large Defaulters comprise more value of NPAs, as 50 top defaulters account
for 71% of NPAs. Therefore, PARA, with focus on top cases can lead to faster
recovery
 PARA with its mandate on time-bound resolution may be better equipped with
decision making capabilities, in comparison to bank management, who feared CVC
and CAG enquiry on debt write-offs.
 ARCs have not been successful, as they have bought only 5% of NPAs, according to
ES 2016-17
 Without PARA, banks have resorted to refinancing, which leads to delaying the
cases.
This further leads to lack of credit and investment in the economy.
 PARA helps to enhance investment in banks and improves credit ratings, so that
Indian firms have access to cheap global credit.
Working of Bad Bank
Issues with PARA:

 Accusations of favouritism against the decision-making body
 Independence and Professionalism will be compromised if government has a
 majority stake
 Persistent Scrutiny from government investigative agencies like CVC and CAG
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 Lack of Political will to implement the steps recommended by PARA

 Establishing prices of stressed advances is a time consuming and debatable issue
 Cleaned balance sheets may lead banks to lend more freely
 Huge capital is required for recapitalisation
 Setup is time consuming process
Solutions suggested ( by Economic Survey 2016 -17)
 Autonomy of PARA
 Permanency of AQR (Asset Quality Review)
 Professional Staffing of PARA, both from private and public sector
Way Forward
Economic Survey has proposed 4 steps with the name of 4Rs for resolution of NPA
crisis.4Rs refer to Recognition, Recapitalization, Resolution, and Reform.
 Recognition – Banks must value their assets accurately as far as possible
 Re-capitalisation – Banks‘ capital position must be safeguarded via infusions of
equity
 Resolution– The underlying stressed assets in the corporate sector must be sold or
rehabilitated
 Reform –future incentives for the Private Sector and corporates must be set-right
to avoid a repetition of the problem
The Economic Survey 2014-15 had proposed a 4-D prescription to the Indian banking
Sector, which is hobbled by policy constraints, which create double financial repression,
and by structural factors, impede competition. The four Ds include:
 De-regulation– addressing the statutory liquidity ratio (SLR) and priority sector
lending (PSL)
 Differentiation – within the public-sector banks in relation to recapitalisation,
shrinking balance sheets, and ownership
 Diversification – of source of funding within and outside banking
 Disinterring – by improving exit mechanisms
Also, there are certain short-term measures to improve the situation

 Reform Insolvency and Bankruptcy Code keeping the current challenges in mind
 Take steps to discourage wilful defaulters and provide adequate support to
officials acting against them. For eg. Fugitive Economic Offenders Bill
 Amend Prevention of Corruption Act to shield bankers and professionals from
Investigative witch-hunts
Why Bad Bank idea could not materialize so far?
SHOW ME THE MONEY:
 Where will the money come from? NPAs in the books of PSU banks alone stand at Rs
8.9 lakh crore. Even if half (Rs 4.5 lakh Crore) of the loan is sold to a government
ARC at one-fourth the consideration (Rs 1.25 lakh crore), New Delhi will have to
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pump in Rs 1 lakh crore (90% of the consideration amount) to acquire the assets,
show back-of-the envelope calculations.
 To be sure, details on the new bad bank, its structure and funding sources are not
known yet.
 Some others question the need for something new when the existing infrastructure
is not being utilized fully. There are enough ARCs doing the same kind of job. To
put scarce capital in another entity, which will do a similar kind of job, does not
look like such a good idea.
 ―For example, public sector banks are sitting on thousands of crores of real estate.
They can use this to enhance their capital by pooling in their assets in a Real
Estate Investment Trust (REIT) which could easily yield them 8 to 9% per annum
besides saving them a capital charge.
 Next is the question on talent: If all bad loans are transferred, it is about the size
of SBI which has nearly 2.75 lakh staff. In a country where even resolution
professionals are beaten up, how do the staffs of the bad bank resolve or recover?
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Fugitive Economic offenders:

Background:
There have been several instances of economic offenders fleeing the jurisdiction of Indian
courts, anticipating the commencement, or during the pendency, of criminal proceedings.
The absence of such offenders from Indian courts has several deleterious consequences -
first, it hampers investigation in criminal cases; second, it wastes precious time of courts
of law, third, it undermines the rule of law in India. Further, most such cases of economic
offences involve non-repayment of bank loans thereby worsening the financial health of
the banking sector in India. The existing civil and criminal provisions in law are not
entirely adequate to deal with the severity of the problem. It is, therefore, felt necessary
to provide an effective, expeditious and constitutionally permissible deterrent to ensure
that such actions are curbed.
Principle:
The act adopts the principle of non-conviction-based asset confiscation for corruption-
related cases are enabled under provisions of United Nations Convention against
Corruption (ratified by India in 2011).
Objectives:
A act to provide for measures to deter fugitive economic offenders from evading the
process of law in India by staying outside the jurisdiction of Indian courts, to preserve the
sanctity of the rule of law in India and for matters connected therewith or incidental
thereto. The act would help in laying down measures to deter economic offenders from
evading the process of Indian law by remaining outside the jurisdiction of Indian courts.
Salient features of the Act:

1. Application before the Special Court for a declaration that an individual is a fugitive
economic offender;
2. Attachment of the property of a fugitive economic offender;
3. Issue of a notice by the Special Court to the individual alleged to be a fugitive
economic offender;
4. Confiscation of the property of an individual declared as a fugitive economic offender
resulting from the proceeds of crime;
5. Confiscation of other property belonging to such offender in India and abroad,
including benami property;
6. Disentitlement of the fugitive economic offender from defending any civil claim; and
7. An Administrator will be appointed to manage and dispose of the confiscated property
under the Act.
If at any point of time in the course of the proceeding prior to the declaration, however,
the alleged Fugitive Economic Offender returns to India and submits to the appropriate
jurisdictional Court, proceedings under the proposed Act would cease by law. All
necessary constitutional safeguards in terms of providing hearing to the person through
counsel, allowing him time to file a reply, serving notice of summons to him, whether in
India or abroad and appeal to the High Court have been provided for. Further, provision
has been made for appointment of an Administrator to manage and dispose of the
property in compliance with the provisions of law.
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Implementation strategy and targets:

In order to address the lacunae in the present laws and lay down measures to deter
economic offenders from evading the process of Indian law by remaining outside the
jurisdiction of Indian courts, the Act is being proposed. The Act makes provisions for a
Court ('Special Court' under the Prevention of Money-laundering Act, 2002) to declare a
person as a Fugitive Economic Offender. A Fugitive Economic Offender is a person against
whom an arrest warrant has been issued in respect of a scheduled offence and who has
left India so as to avoid criminal prosecution, or being abroad, refuses to return to India to
face criminal prosecution. A scheduled offence refers to a list of economic offences
contained in the Schedule to this Act. Further, in order to ensure that Courts are not over-
burdened with such cases, only those cases where the total value involved in such
offences is 100 crore rupees or more, is within the purview of this Act.
Impact:
The Act is expected to re-establish the rule of law with respect to the fugitive economic
offenders as they would be forced to return to India to face trial for scheduled offences.
This would also help the banks and other financial institutions to achieve higher recovery
from financial defaults committed by such fugitive economic offenders, improving the
financial health of such institutions.
It is expected that the special forum to be created for expeditious confiscation of the
proceeds of crime, in India or abroad, would coerce the fugitive to return to India to
submit to the jurisdiction of Courts in India to face the law in respect of scheduled
offences.
Concerns and Challenges:

Disposal of confiscated assets had not been easy, especially at a price sufficient to recoup
losses or pay off all creditors. Also, how far will the threat of confiscation of property be a
serious deterrent to the offender is highly uncertain?
Under the present, act confiscation is not limited to the proceeds of crime. It further
extends to any asset owned by an offender, including benami property. Such clauses are
liable for legal challenge, especially if there are third party interests and doubts about
real ownership.
Diplomatic efforts on to bring back 'high-value' economic offenders:

Hectic diplomatic parleys have been mounted by the Indian government to get some "high
value" economic offenders from West Indies amidst reports that a long-haul aircraft of Air
India is being readied to bring them back.
India does not have a mission in St John's, the capital of Antigua and Barbuda – the country
where diamantaire Mehul Choksi has acquired citizenship. India also does not have an
extradition treaty with Antigua.
The operation to bring back "high-value" economic offenders from the West Indies is likely
to be concluded by Tuesday (January 29), sources had indicated on Saturday.
The mission involving a long-haul Air India jet, which has been pulled out of the fleet, will
carry a team of investigating officers tasked to get hold of the fugitives. The number of
"assets" being targeted is not yet known, though both Choksi and Mehta have taken
citizenship in the Caribbeans.
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The officials are tight-lipped but are on stand-by. Elaborate security arrangements have
been put in place. Mehta became a citizen of St Kitts and Nevis some years ago, while
Choksi took Antigua and Barbuda citizenship recently. These islands provide visa-free
travel to 132 countries. Both St. Kitts and Antigua have airfields that can accommodate
wide-body aircraft. It is not clear if they would be picked from one location or multiple
destinations. The lack of extradition treaties has made these islands a safe haven for
India's uber rich. Other countries such as Grenada, St Lucia and Dominica also have similar
citizenship by investment programmes. Dominica and St Lucia give citizenship and a valid
passport for just $100,000 (over Rs 70 lakh), which is chump change for ultra-rich Indians
on the run.
Vijay Mallya becomes first person to be declared a 'fugitive economic offender' under
new law
A special court in Mumbai declared absconding liquor baron Vijay Mallya a fugitive
economic offender (FEO) on a plea of the Enforcement Directorate.
Mallya has become the first businessman to be declared EFO under the provisions of the
new Fugitive Economic Offenders Act which came into existence in August last year. The
ED had requested the Prevention of Money Laundering Act (PMLA) court that Mallya, who is
currently in the UK, be declared a fugitive and his properties be confiscated and brought
under the control of the Union government as per the provisions of the new FEO Act.
Fugitive economic offender is any individual against whom warrants for arrest is issued for
his involvement in select economic offences involving amount of at least Rs 100 crore or
more and has left India so as to avoid criminal prosecution.
What is the fugitive law?

The law gives the government power to attach all the assets of a person who‘s been
declared a fugitive and not just those acquired from the proceeds of criminal activity. This
will also include benami assets. The government will also establish an international
cooperative mechanism later to attach even the foreign assets of those declared fugitives.
A court can declare a person a fugitive based on whether any of the offences listed in the
law have been committed. Currently, under the Prevention of Money Laundering Act, the
Enforcement Directorate provisionally attaches property acquired from the proceeds of
crime and gets unencumbered right only after conviction. The process is usually a long-
drawn one administrator will be appointed to manage and dispose of confiscated property
under the fugitive Bill.
Parliament passed Fugitive Economic Offenders Bill on July 19th 2018

"This bill is an effective, expeditious and constitutional way to stop these offenders from
running away. Legislative changes or a new law must be in place to confiscate the assets
of such absconders till they don't present themselves before the courts.
Once a person is declared offender, his property will be confiscated, managed and
disposed off adding that the attachment of properties would be done in a time-bound
manner and effectively.
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IT and Digital Banking

1. Artificial Intelligence 90
Concept of Future Banking, Digital Banking, or Virtual

2. 98
Banking and impact of technology on banking sector jobs
3. Role of robots in Customer Service 101
4. Crypto Currency 107
5. Block Chain Technology 111
Cashless India: Leveraging Possibilities and Facing Security

6. 116
Challenges in the Mobile Space
7. Digital Banking & Cyber Security 118
8. Big Data in Baking –You should know 120
9. Social Media & its Role for Banks 122
10. Forensic Audit 124
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Artificial Intelligence
What is Artificial Intelligence?
The term ―artificial intelligence‖ dates back to 1956 and belongs to a Stanford researcher
John McCarthy, who coined the term and defined the key mission of AI as a sub-field of
computer science. In computer science, Artificial intelligence (AI), sometimes called
machine intelligence, is intelligence demonstrated by machines, in contrast to the natural
intelligence displayed by humans and other animals. Computer science defines AI research
as the study of "intelligent agents": any device that perceives its environment and takes
actions that maximize its chance of successfully achieving its goals. Artificial intelligence
is a branch of computer science that aims to create intelligent machines. It has become an
essential part of the technology industry.
Research associated with artificial intelligence is highly technical and specialized. The
core problems of artificial intelligence include programming computers for certain traits
such as:
Ability to
Problem
Knowledge Reasoning Perception Learning Planning manipulate and
solving
move objects
There are certain things a machine/computer program must be capable of to be

considered AI.
 First, it should be able to mimic human thought process and behavior. Second, it should
act in a human-like way—intelligent, rational, and ethical.
 It is worth mentioning that the AI concept relates both to Weak AI and General AI that has
cognitive functions
Types of AI
Artificial Narrow Intelligence

Artificial Narrow Intelligence (ANI) also known as ―Weak‖ AI is the AI that exists in our
world today. Narrow AI is AI that is programmed to perform a single task — whether it‘s
checking the weather, being able to play chess, or analyzing raw data to write journalistic
reports. Every sort of machine intelligence that surrounds us today is Narrow AI. Google
Assistant, Google Translate, Siri and other natural language processing tools are examples
of Narrow AI. They lack the self-awareness, consciousness, and genuine intelligence to
match human intelligence. In other words, they can‘t think for themselves. Even
something as complex as a self-driving car is considered Weak AI, except that a self-
driving car is made up of multiple ANI systems.
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The Benefits of Narrow AI
Though we refer to existing AI and intelligent machines as ―weak‖ AI, we shouldn‘t take it
for granted. Narrow AI by itself is a great feat in human innovation and intelligence. ANI
systems are able to process data and complete tasks at a significantly quicker pace than
any human being can, which has enabled us to improve our overall productivity,
efficiency, and quality of life. ANI systems like IBM‘s Watson, for example, is able to
harness the power of AI to assist doctors to make data-driven decisions, making healthcare
better, quicker, and safer.
Artificial General Intelligence
Artificial General intelligence or ―Strong‖ AI refers to machines that exhibit human

intelligence. In other words, AGI can that a human being can. Currently, machines are
able to process data faster than we can. But as human beings, we have the ability to think
abstractly, strategize, and tap into our thoughts and memories to make informed decisions
or come up with creative ideas. This type of intelligence makes us superior to machines,
but it‘s hard to define because it‘s primarily driven by our ability to be sentient creatures.
Therefore, it‘s something that is very difficult to replicate in machines.
Artificial Super Intelligence
Artificial Super Intelligence (ASI) will surpass human intelligence in all aspects — from
creativity, to general wisdom, to problem-solving. Machines will be capable of exhibiting
intelligence that we haven‘t seen in the brightest amongst us. This is the type of AI that
many people are worried about, and the type of AI that people like Elon Musk think will
lead to the extinction of the human race.
Types of AI based on functionalities
1. Reactive Machines: This is one of the basic forms of AI. It doesn‘t have past memory and
cannot use past information to information for the future actions. Example:- IBM chess
program that beat Garry Kasparov in the 1990s.
2. Limited Memory: AI systems can use past experiences to inform future decisions. Some of
the decision-making functions in self-driving cars have been designed this way.
Observations used to inform actions happening in the not so distant future, such as a car
that has changed lanes. These observations are not stored permanently and also Apple‘s
Chatbot Siri.
3. Theory of Mind: This type of AI should be able to understand people‘s emotion, belief,
thoughts, and expectations and be able to interact socially Even though a lot of
improvements are there in this field this kind of AI is not complete yet.
4. Self-awareness: An AI that has its own conscious, super intelligent, self-awareness and
sentient (In simple words a complete human being). Of course, this kind of bot also
doesn‘t exist and if achieved it will be one of the milestones in the field of AI.
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Learning graph of AI
Is AI and Automation same?
Automation has a single purpose: To let machines perform repetitive, monotonous tasks.
This frees up time for humans to focus on more important tasks that require the personal
touch. The end result is a more efficient, cost-effective business and a more productive
workforce.
But through AI we are able to create technologies that ably mimic what a human can say,
think and do.
Difference between Machine Learning and Deep Learning
It is important for organizations to clearly understand the difference between machine

learning and deep learning. By definition, machine learning is a concept in which
algorithms parse the data, learn from it, and then apply the same to make informed
decisions. A simple example would be of Netflix, which uses an algorithm to learn about
your preferences and present you with the choices that you may like to watch. Deep
learning was inspired by the structure and function of the brain, namely the
interconnecting of many neurons. Neural Networks are algorithms that mimic the
biological structure of the brain. Deep Learning is basically Machine Learning on steroids.
There are multiple layers to process features, and generally, each layer extracts some
piece of valuable information. For example, one neural net could process images for
steering a self-driving car. Each layer would process something different, like, for
example, the first could be detecting edges for the sides of the road. Another layer could
be detecting the lane lines in the image, and another possibly other cars.
The Present Trend
• Smart Phones
• Smart Cars and Drones
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• Social Media Feeds

• Music and Media Streaming Services
• Video Games
• Online Ads Network
• Navigation and Travel
• Banking and Finance
• Security and Surveillance
How Big Data impacts AI
There are 5 key aspects of computing that mark the rise of Big Data analytics in the
technology world. These are the same reasons why Big Data is a critical enabler for AI
implementation.
Exponential increase in computational power
Computer processors have seen exponential growth in computing speeds in recent years.
Millions of data sets can be now processed in nanoseconds. In addition to sequential
computing capabilities through CPUs (Central Processing Units), devices also have parallel
computing GPUs (Graphics Processing Units). It is now possible to process large amounts of
data in ―real-time‖ and derive trends and rules for machine learning in AI applications.
Availability of low-cost and highly reliable large-scale memory devices
Efficient storage and retrieval of big data is now possible, using memory devices such as
DRAMs (Dynamic RAM. Data doesn‘t have to be centralized and stored within a single
computer‘s memory any more. Cloud-based distributed data storage infrastructure allows
parallel processing of big data. The results of these large-scale computations are used to
build the AI knowledge space.
Machine learning from actual data sets, not just sample data
In the nascent years of AI, machines had to ―learn‖ new behavior from limited sample
data sets, using a hypothesis-based approach of data analysis. But with Big Data, you don‘t
rely on samples anymore – you can use the actual data itself, available all the time.
Voice and image processing algorithms
Natural language processing, or understanding and learning from human communication, is

a key requirement for true AI. But human voice data sets are voluminous, with scores of
languages and dialects. Big data analysis enables breakdown of these data sets to identify
words and phrases.
Open-source programming languages and platforms
If you can store your entire data set in a single computer, then AI data models can use
simple programming languages like Python or R, which are excellent for statistical data
analysis. But for commercial scale operations, companies might use big data management
platforms such as Hadoop.
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Banking on AI
Fraud Detection: Anomaly detection can be used to increase the accuracy of credit card
fraud detection and anti-money laundering.
Customer Support and Helpdesk: Humanoid Chatbot interfaces can be used to increase
efficiency and reduce cost for customer interactions.
Risk Management: Tailored products can be offered to clients by looking at historical data,
doing risk analysis, and eliminating human errors from hand-crafted models.
Security: Suspicious behaviour, logs analysis, and spurious emails can be tracked down to
prevent and possibly predict security breaches.
Digitization and automation in back-office processing: Capturing documents data using

OCR and then using machine learning/AI to generate insights from the text data can
greatly cut down back-office processing times.
Wealth management for masses: Personalized portfolios can be managed by Bot Advisors
for clients by taking into account lifestyle, appetite for risk, expected returns on
investment, etc.
ATMs: Image/face recognition using real-time camera images and advanced AI techniques
such as deep learning can be used at ATMs to detect and prevent frauds/crimes.
A.I in Indian Banks
• City Union Bank launched India‘s first banking robot Lakshmi which is powered by AI in Nov
2016.
• ICICI deployed Software Robots in its over 200 business processes in 2016.
• HDFC launched Intelligent Robotic Assistant (IRA) in one of its Mumbai branches.
• India‟s first mobile-only digital bank DIGI Bank by DBS Bank
• Chatbot (a computer programme that simulates human conversation through AI) launched
by few banks.
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A.I Already Transforming Banking Industry
Customer service automation
As natural language processing technology evolves, consumers find it increasingly difficult

to distinguish between a voice bot and a human customer service representative.
Personalization
By utilizing machine learning to integrate and analyze information from multiple, discrete
databases to form a 360-degree customer view, banks are better positioned to personalize
products, services and interactions based on the behavior of individual clients.
Security
A growing number of banks are utilizing biometric data, like fingerprints, to replace or
augment passwords and other forms of client verification. As facial recognition and other
biometric authentication techniques become more sophisticated and secure, they are
poised to become increasingly commonplace.
Process Optimization
One of the most promising applications of AI in banking comes from automating high-
volume, low-value processes. In one example, reported by McKinsey, JPMorgan began
using bots to process internal IT requests, including employees' attempts to reset their
work passwords.
Pattern recognition and fraud prevention
The ability of AI to sift through massive amounts of data and identify patterns that might
elude human observers is one of its greatest strengths. One area where this capacity is
particularly relevant is in fraud prevention.
Making the Most of AI
There are several ways AI can be used in the banking industry. Here are some examples.
To Detect Fraud: AI is capable of detecting fraudulent activity in real time and identifying
the next pattern of suspicious behavior.
To Meet Regulatory Requirements: Technology can be used to ensure that regulatory

requirements are met and data is maintained with real-time monitoring. This makes it
easier to catch any irregularities in advance.
To Improve the Client Experience: AI enables individuals to leverage useful and extensive
knowledge as regards client behavior, for example, and thereby make faster, smarter
decisions.
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To Deepen Client Engagement: AI helps create personalized and intelligent products and
services, thanks to new functionalities, more intuitive interactions (using speech
recognition, for example), and advisory abilities like personal financial management.
To Execute Investment Strategies: Financial advisors‘ work is also evolving. Machines will
attend to executing and maintaining investment strategies crafted over time by the
advisors to build models. Advisors will then communicate the information obtained with
their clients.
To Facilitate Data Processing: Although many strategic leaders draw strength from their
keen intuition, hard work and years of industry experience, much of this insight is simply
gleaned from a deeper understanding of historically difficult and costly to process data. AI
will facilitate and accelerate this process. It will soon be able to help humans push back
their processing limitations.
Future Scope of Artificial Intelligence

Breakthrough in Science
The scope of AI in science is the largest. Recently ‗Eve‘ was in the news for discovering
that an ingredient found commonly in toothpaste, is capable of curing Malaria. Here the
subject in appreciation ‗Eve‘ is not a human scientist, rather a Robot created by a team of
scientists at the Universities of Manchester, Aberystwyth, and Cambridge. AI will be able
to create science, not merely do science as evidenced by the Robot Scientist, Eve.
Automation using AI for drug discovery is a field that is rapidly growing, mainly because
machines work faster than humans.
Cyber Security
The future application of AI in cyber security will ensure in curbing hackers. The incidence
of cybercrime is an issue that has been escalating through the years. It costs enterprises in
term of brand image as well as material cost. Credit card fraudery is one of the most
prevalent cybercrimes. Despite there being detection techniques, they still prove to be
ineffective in curbing hackers. AI can bring a remarkable change to this. Novel AI
techniques like Recurrent Neural Networks can detect fraudery in initial stages itself. This
fraud detection system will be able to scan thousands of transactions instantly and
predict/ classify them into buckets. RNN can save a lot of time as it focuses on cases
where there is a high probability for fraud.
Face Recognition
Authenticating personal content is not the only use of facial recognition. Governments and
security forces make use of this feature to track down criminals and identify citizens. In
the future, facial recognition can go beyond physical structure to emotional analysis. For
example, it might become possible to detect whether a person is stressed or angry.
Data Analysis
One of the ways AI will benefit business is in the field of Data Analysis. AI would be able to
perceive patterns in data that humans cannot. This enables businesses to target the right
customers for the product. An example of this is the partnership between IBM and Wal
Mart.
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Transport
AI-guided transport will no longer be confined to the pages of sci-fi literature. Self- driving
cars have already populated the market; however, a driver is required at the wheels for
safety purposes. With Google, Uber and General Motors trying to establish them at the top
in this market, it will not be long before driverless vehicles become a reality. Machine
Learning will be crucial in ensuring that these Automated Vehicles operate smoothly and
efficiently.
Various Jobs
The reach of AI is also expected to blanket jobs that are risky or health-hazardous like
bomb diffusion and welding.
Emotion Bots
The possibility of emotional bots might become a reality in the future.
Marketing & Advertising
The application of AI in sales and marketing seems a definite, considering the fact that
marketing professionals leave no stone unturned to benefit their business. AI can increase
the efficiency of sales and marketing organization. The focus will be on improving
conversion rates and sales. Personalized advertising, knowledge of customers and their
behavior gleamed through facial recognition can generate more revenue.
How can AI be dangerous?
Most researchers agree that a super intelligent AI is unlikely to exhibit human emotions
like love or hate, and that there is no reason to expect AI to become intentionally
benevolent or malevolent. Instead, when considering how AI might become a risk, experts
think two scenarios most likely:
The AI is programmed to do something devastating: Autonomous weapons are artificial

intelligence systems that are programmed to kill. In the hands of the wrong person, these
weapons could easily cause mass casualties. Moreover, an AI arms race could inadvertently
lead to an AI war that also results in mass casualties. To avoid being thwarted by the
enemy, these weapons would be designed to be extremely difficult to simply ―turn off,‖
so humans could plausibly lose control of such a situation. This risk is one that‘s present
even with narrow AI, but grows as levels of AI intelligence and autonomy increase.
The AI is programmed to do something beneficial, but it develops a destructive method

for achieving its goal: This can happen whenever we fail to fully align the AI‘s goals with
ours, which is strikingly difficult. If you ask an obedient intelligent car to take you to the
airport as fast as possible, it might get you there chased by helicopters and covered in
vomit, doing not what you wanted but literally what you asked for. If a super intelligent
system is tasked with a ambitious geo engineering project, it might wreak havoc with
our ecosystem as a side effect, and view human attempts to stop it as a threat to be met.
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Concept of Future Banking, Digital Banking, or

Virtual Banking and impact of technology on
banking sector jobs
New Banking Technologies in the Next 5 Years (According to Go Banking):
New technology in banking is already transforming the financial sector, and the traditional
banking landscape is set to rapidly change in the next five years. Safety features, such as
advanced cryptography and biometrics, will help protect against bank scams, and remote
applications will make it easier than ever to do your banking without visiting a branch —
but if you do, the experience is likely to be much more customer-friendly.
Here‘s a look at the how banking technology will change data sharing and the way money
is handled.
1. Blockchain Technology
2. Upgraded ATMs
4. Apple Store-Style Experience
5. Automated Financial Services Employees
6. Mobile and Digital Banking
7. Partnerships
8. Wearable
Overall, consumer behavior and smart device trends are steering banking technology
advances in the direction of convenience. An increasing number of remote technologies
will allow you to interact with your bank right from the palm of your hand. And from your
email inbox to visiting an actual branch, you can expect to encounter a whole new
customer experience, perhaps even sooner than you think.
New Banking Technologies in the Next 5 Years (According to Money Control):
From experimentation of use cases on the Block chain technology, Artificial Intelligence
(AI) and Machine Learning to bolstering operations through Bots and RPA (robotic process
automation), the industry is today geared to embrace challenges and opportunities of the
future.
Strategic blending technology with processes for real-time business impact is expected
with the following:
1. Data Analytics, Machine Learning and Voice
2. Next Gen Chatbots
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3. Analytics of Things and Alternate Lending
4. Robotic Process Automation and Operationally Agile Institutions
5. Open Banking and Fintech Partnerships
6. Digital Convergence of Fintechs, Ecommerce and Banks
7. Smart Cities and Block Chains
8. Cyber Security and Biometrics
9. Impetus to Digital Acceptance
10. Banks will Create In-house Technology Teams
Also, hiring and training is moving towards building Deep-tech skills and understanding
emerging technologies. Robotic Process Automations call for up-skilling of human capital
and movement of repetitive jobs to intellectually stimulating ones.
Five Innovation Trends That Will Define Banking in 2019 (As per Financial Brand)
The global banking sector is becoming both more strategically focused and technologically
advanced to respond to consumer expectations while trying to defend market share
against an increasing array of competitors. A great deal of emphasis is being placed on
digitizing core business processes and reassessing organizational structures and internal
talent to be better prepared for the future of banking. This transformation illustrates the
increasing desire to become a ‗digital bank‘.
1. Serving a Segment of One
2. Expansion of Open Banking
3. Commitment to Physical Delivery
4. AI-Driven Predictive Banking
5. Payments Everywhere
Innovating for Tomorrow
To be able to compete and grow where margins are thin, competition is fierce, regulations
are changing and technology has an increasing impact, financial institutions must place
innovation as a top priority. Organizational cultures must be shifted to support innovations
that will impact increasingly outdated business models. Banks and credit unions must also
anticipate consumer needs and innovate in ways that will prioritize the most effective mix
of capabilities, processes and people.
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Technological shifts and the Banking Sector
With changing technology comes the need to adapt and evolve. How have our banks kept
pace with the improving way of work, and at what cost?
State Bank of India, for example, has claimed that there could be significant job cuts due
to technological spending this year. SBI Chairman Rajnish Kumar in a report said that the
public sector bank is likely to end the fiscal year with a smaller workforce than what it
began the year with. Kumar said, ―When you have such a vast and diverse client base as
SBI, the need for the human interface will always be there. But, if you ask me, it
(employee count) was 278,000 at the beginning of this year, will it remain 278,000? It is
unlikely.‖ A closer look reveals two major factors driving this change within the banking
sector today.
The changing nature of work
An Economic times report noted that in the duration of one year between September
2016 and September 2017, HDFC Bank‘s workforce dipped from 95,002 to 86,543. The
bank claimed that the September 2016 figure was a peak and the bank had cut its
workforce in later quarters. Additionally, in September this year, Yes Bank reportedly let
go around 2,500 people, which accounted for more than 10 percent of its workforce.
Although the banks cited reasons such as redundancies, poor performance and the result
of digitization, technological change has been a strong driver of such change.
What is key here to notes is that there has been a gradual shift in the nature of work
within the Indian banking industry. The transition from people-driven processes to
machines controlled ones in the past few years. The technological development, which has
made banking easier, has also led to a slowdown in the hiring of staff at banks. ―Although
there have been hiring, the nature of skill sets required is changing with a lot more focus
on the front-end talent‖ the report noted.
Evolving consumer preference
On the demand side, consumer preferences have also been evolving. To remain
competitive, financial services organizations are slowly realising and adapting to the fact
that the customer base they serve is also going through a major shift in terms of buying
behaviors and preferences, much of which is being driven by the digital technology
revolution.
Source (People matters)
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Role of robots in Customer Service
In China, numerous companies are trialing lower-tech versions of the same concept,
combining biometric identifiers (facial recognition, or walking gait) with mobile payments
to enable customers to buy items without a human cashier. Elsewhere across the country,
restaurants have experimented with robot wait staff, and train stations are serviced by
robot attendants.
The impact of automation on customer experience
The advent of automated grocery stores and now, bank branches has been hailed as
revolutionary by many. And with so many of our everyday activities like shopping or
banking already carried out online, without the need for human interaction, the idea of
doing the same thing in a physical branch isn‘t too hard for customers to adapt to.
Automation isn‘t all bad news for customer experience. But it comes with a few double-
edged swords, most notably around privacy and security, and efficiency and empathy.
Data collection, privacy and security
Using interconnected, automated systems in place of people has significant implications

for both privacy and security. A system like Amazon Go has the opportunity to collect vast
amounts of behavioral data on Amazon‘s consumers
―For the first time ever, Amazon Go means consumers will waive their right to privacy
while shopping in person. From what we put back on the shelf to the route we take while
walking around the store – this information is all up for grabs.‖
And with large-scale cyber security breaches increasingly making headlines, the potential
consequences of a breach could be even more catastrophic, and damaging to consumer
trust.
Efficiency versus emotional connection
Customers like a seamless, efficient brand experience, particularly when it comes to

tedious tasks like grocery shopping and banking. Automation certainly promises to deliver,
allowing customers to do what they need to and get out without too much forced brand
interaction.
And what of the impact on brand reputation? Robots might have a reduced capacity for
making mistakes, but do they make good brand ambassadors?
That might depend on what kind of impression brands want to leave on the customer. If
it‘s important to your brand to appear forward-thinking and innovative, by all means staff
your branches with robot representatives. But if your brand is one that prides itself on
having a human touch, you‘ll probably want to give them a miss.
Source (econsultancy)
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IS ROBOTICS THE FUTURE OF BANKING AND FINANCE?
The Role of Robotics
The recent development in global banking trends, adapted by the Indian BFI sector, is the
integration of Robotics in their software arsenal. The features of automation, as
mentioned above, could be categorized under Preliminary Software Robotics due to its
striking ability to simplify physical, in-branch transactions across.
Innovation Centres
Innovation centre is another important conception of this technological revolution. Being

fairly new, this concept has been incorporated almost everywhere within and beyond the
BFI sector, globally. It represents a specialized section of an organization that works
toward continual growth and development as per the requirements of the organization.
Technology at the Management Level
A recognizable evolution can also be perceived in the attitude of the management, where
numerous associations have begun considering non-conventional ways to approach an
issue. Such organizations focus on providing enhanced customer experience, while at the
same time, contemplating progress.
Technology at the Consumer Level
Consumers, while slightly more assured against cybercrime, demand higher transparency
in all financial transactions. They are evidently, and crucially, more aware of the latest
trends in technology and the services provided by the forerunners in any sector. A
consumer no longer relies on a single source or requires a limited set of features to invest
in a specific bank. Increasing emphasis is laid on the features delivered by the service
provider instead of merely relying on the marketed products.
It can, therefore, be safely assumed that technology, especially robotics, constitute a

significant component of the Indian BFSI sector, given its reassurance of refined and
extended customer satisfaction, operational digitization reducing cyber risks, and
transaction transparency for improved customer-relations.
ROBOTICS IN BANKING
How are Robots Used in Banking?
Robots are already an essential component of the banking industry whether you see them
or not. They operate on smartphones to create a more efficient mobile banking
experience. More obviously, they take customers straight into a sci-fi novel and even
provide in-person service at branches. Robotics is shaping the future of the industry for
financial reasons as well as customer demand.
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What is Robotic Process Automation in Banking?
RPA allows for efficient, repeated processes and data collection while AI can interpret
that data and change behavior as a result. In banking, these systems can help with
reviewing financial documents and cut down on human error.
People commonly hear these types of automation referred to as bots. Bank of NY Mellon
Corp. is investing heavily in this technology, rolling out more than 200 bots to handle tasks
such as transferring funds. As a result, BNY Mellon reported an 88 percent improvement in
processing time and its funds transfer bot saved the company $300,000 alone.
Which Banks are making the Most of Robotic Technology?
Major Banks such as Bank of America, Citibank and the Bank of Tokyo are using robotics to
provide superior service and security. Bank of America‘s big push into Artificial
Intelligence (AI) is Erica, a chatbot that provides financial guidance using predictive
analytics and cognitive messaging. The Bank of Tokyo‘s robots work in branches and
communicate in 19 languages utilizing a camera and microphone. Meanwhile, Citibank
harnesses the power of robotics to keep money safe through machine learning and
detecting fraudulent charges based on spending history.
The Consumer Benefits of Robotics in the Banking Sector
Robotic process automation helps eliminate many of the primary concerns that consumers
have around the banking sector. Robots do not need sleep and customers benefit from
24/7 customer service including the ability to transfer funds and troubleshoot issues.
Robotics in the financial sector can resolve in issue without a customer ever having to set
foot in a branch or talk on the phone. For example, chatbots can act as a virtual assistant
and help customers to reset their passwords. Robo-advisors are even sophisticated enough
to help customers make selections for their investment portfolios.
Source (yodlee)
What is Robotic Process Automation?
As the push to go increasingly digital and do more with available resources intensifies the
need for companies to empower their workers through technology increases. RPA is at the
forefront of human-computer technology and provides players in the financial services
industry with a virtual workforce that is ruled based and is set up to connect with your
company‘s systems in the same way as your existing users. With robotics, you automate
and build an automation platform for your front office, back office and support functions.
How robots are changing the face of banking
 Robotics process automation can bring notable time and cost efficiency improve
productivity and operational improvements to financial institutions
 The application of robotics in financial services is gathering pace but most banks are
still in the early stages of adoption
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For the past years, investment into the robotics sector has risen rapidly.
Robots for novel customer service

Robots come with unique advantages – they are time and cost efficient, improve
productivity, deliver superior results, and can work without rest over repetitive tasks.
When enabled with cognitive computing, artificial intelligence (AI), and machine learning
capabilities, robots can be trained to operate autonomously.
For example, Bank of Tokyo- Mitsubishi UFJ (MUFG) introduced Nao, a 58-centimetre (1ft
11)-tall, 5.4 kg robot developed by Aldebaran Robotics – a France-based subsidiary of
Japanese telecom and internet giant SoftBank. It can recognise 19 spoken languages,
interact and communicate with customers in branches, and provide response to queries.
SoftBank also developed Pepper, which is being used by Mizuho Financial Group and
Emirates NBD. It has an interactive tablet that helps augment communication with users.
Meanwhile, chatbots, which are AI-enabled virtual assistants that communicate via text
rather than speech, are gaining traction in the market.
Robotics process automation (RPA) brings unique efficiencies in financial services

The need to introduce new cost efficiencies, improve digitization and faster transactions
have forced banks to rapidly explore the use of robotics in processes. RPA, as defined by
the Institute of Robotics Process Automation (IRPA) allows company employees to
configure computer software or a ‗robot‘ to capture and interpret existing applications to
process transactions, manipulate data, trigger responses, and communicate with other
digital systems.
Rising application across financial sector

High volume, manually intensive, and prone to risks and human errors processes are prime
candidates for RPA.
For example, ANZ is using RPA in processing payroll, account payable, mortgage
procession, and human resource (HR) functions. ICICI Bank, meanwhile,uses RPA to
perform over one million banking transactions in back-end operations per day, reducing
response time by 60% and improving accuracy. These software robots are deployed in over
200 business process functions of the bank across retail banking, agri-banking, trade and
forex, treasury, and HR.
Likewise, Barclays Bank implements RPA across a wide range of processes such as fraud
detection, risk monitoring, account receivables processing, and loan application. Piraeus
Bank Romania has implemented a RPA solution in assessing retail credit and preventing
fraud by connecting with 15 applications. The typically long and arduous process (retail
credit fraud prevention) that takes around 45 minutes was automated and reduced to only
around 20 minutes.
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Banks need to scale adoption
Many banks are still in the early stages of adopting robotics and are yet to scale it across
different processes, facing a number of challenges.
There is also a perception the robots will lead to staff attrition but the truth is that
robots replace humans in dull processes and empower the same human to do high value
processes.
What is next?
Clearly, the role played by robots is increasing and expected to gather pace, although RPA
is still in the early adoption phase in the financial services sector. Yet, this technology is
expected to evolve and scale in the next years, although there are still existing gaps
between humans and robots, which will continue to drive future developments. The true
benefits of RPA can achieved through greater deployment towards end-to-end automation
in banks. They should first implement process reengineering to change the inefficient
processes and workflows before applying RPA.
Source (The Asian banker)
So, what exactly is RPA?
Organizations typically use several labour-intensive processes that are high-volume and
highly transactional. Examples are insurance companies or bank that process thousands or
even millions of customer claims or account opening forms every day.
This requires someone at the provider end to go through these forms and input data into
IT systems, a process that is repetitive and rule-based.
The benefits of successful RPA are many – cost savings, freeing up staff for work that
requires a higher skill-set, improving customer experience and the bottom-line etc. RPA
also helps companies operate with very few people or when there is a shortage of labour.
The Indian scenario for RPA
The Indian market for RPA is broadly segmented into:
Large IT services organizations who are leveraging RPA to reduce costs of delivery and
passing the benefits to their clients; Captives of global companies that have grown by
offering data-centric process management activities and now have to reduce costs to
ensure cost structures are optimal and Indian corporates that are still at the RPA POC
(proof-of-concept) stage. Indian companies are expected to see large-scale adoption of
RPA
Driving change
early adopters of RPA globally, as well as, in India, have been banking and financial
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services, telecom and the healthcare sectors. So, what will it take for India to position the
country front and centre of the RPA opportunity?
Educational institutes that are churning out hundreds of thousands of engineering

graduates must urgently re-think their curriculum based on ―future skills‖.
Job creation
given automation is intrinsic to RPA; there is concern about potential job losses especially
in areas and processes involving lower-end tasks. This is where RPA providers and the
industry can play a leadership role in providing the right guidance as the industry evolves.
Source (The Economic Times)
Some Use Cases from the Banking Industry
Most banks have already embarked on RPA journeys and experienced better business
outcomes. Here are some examples from the industry.
1. ATM testing
2. Processing unit
3. Transaction processing and sweep operations
4. Account opening process
Conclusion
Banks can benefit tremendously from a virtual workforce that can cost effectively
transform the backend without interfering with the underlying infrastructure. This in turn
will translate into faster processes, efficiency gains, and quicker time-to-market.
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Crypto Currency
What is Crypto Currency?
A crypto currency is a digital or virtual currency designed to work as a medium of

exchange. It uses cryptography to secure and verify transactions as well as to control the
creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are
limited entries in a database that no one can change unless specific conditions are
fulfilled.
In early 2009, an anonymous programmer or a group of programmers under an alias Satoshi

Nakamoto introduced Bitcoin. Satoshi described it as a ‗peer-to-peer electronic cash
system.‘ It is completely decentralized, meaning there are no servers involved and no
central controlling authority. The concept closely resembles peer-to-peer networks for file
sharing.
One of the most important problems that any payment network has to solve is double-
spending. It is a fraudulent technique of spending the same amount twice. The traditional
solution was a trusted third party - a central server - that kept records of the balances and
transactions. However, this method always entailed an authority basically in control of
your funds and with all your personal details on hand.
In a decentralized network like Bitcoin, every single participant needs to do this job. This
is done via the Blockchain - a public ledger of all transaction that ever happened within
the network, available to everyone. Therefore, everyone in the network can see every
account‘s balance.
Every transaction is a file that consists of the sender‘s and recipient‘s public keys (wallet
addresses) and the amount of coins transferred. The transaction also needs to be signed
off by the sender with their private key. All of this is just basic cryptography. Eventually,
the transaction is broadcasted in the network, but it needs to be confirmed first.
Within a cryptocurrency network, only miners can confirm transactions by solving a

cryptographic puzzle. They take transactions, mark them as legitimate and spread them
across the network. Afterwards, every node of the network adds it to its database. Once
the transaction is confirmed it becomes unforgeable and irreversible and a miner receives
a reward, plus the transaction fees.
Essentially, any cryptocurrency network is based on the absolute consensus of all the
participants regarding the legitimacy of balances and transactions. If nodes of the network
disagree on a single balance, the system would basically break. However, there are a lot
of rules pre-built and programmed into the network that prevents this from happening.
Cryptocurrencies are so called because the consensus-keeping process is ensured with

strong cryptography. This, along with aforementioned factors, makes third parties and
blind trust as a concept completely redundant.
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Sebi sends officials overseas to study cryptocurrencies, initial coin offering

Markets regulator Sebi has sent its officials to foreign countries to study initial coin
offerings and cryptocurrencies, a move that will help in understanding of the systems and
mechanisms. Cryptocurrencies are digital units in which encryption techniques are used
for trading and these 'currencies' operate independently of a central bank, while initial
coin offerings are equivalents of initial public offerings in stock markets.
The regulator has organised study tours to Japan' Financial Services Agency; the UK's
Financial Conduct Authority, and Swiss Financial Market Supervisory Authority, "to study
initial coin offerings and cryptocurrencies," Sebi said in its in annual report for 2017-18.
The study tours "help engage with the international regulators and gain deeper
understanding of the systems and mechanisms". Besides, Sebi hosted a number of
international organisations including regulatory bodies and business and ministerial
delegations in the past fiscal. "These meetings foster deeper levels of cooperation,
facilitate a better understanding of the Indian securities market and facilitate further
collaboration with visiting institutions," the Securities and Exchange Board of India (Sebi)
noted.
The government has already constituted an inter-disciplinary committee chaired by,

Subhash Chandra Garg, secretary in the department of economic affairs, to examine the
existing framework with regard to virtual currencies.
Other members of the panel include Sebi chairman Ajay Tyagi and Reserve Bank of India
deputy governor B P Kanungo. The committee is yet to submit its report.
Earlier in July, RBI had told the Supreme Court that allowing dealings in cryptocurrencies
like Bitcoins would encourage illegal transactions and it has already issued a circular
prohibiting the use of these virtual currencies.
A cryptocurrency is difficult to counterfeit because of security features. Many
cryptocurrencies are decentralized systems based on blockchain technology, a distributed
ledger enforced by a disparate network of computers. A defining feature of a
cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any
central authority, rendering it theoretically immune to government interference or
manipulation.
The first blockchain-based cryptocurrency was Bitcoin, which still remains the most
popular and most valuable. Today, there are thousands of alternate cryptocurrencies with
various functions or specifications. Some of these are clones of Bitcoin while others are
forks, or new cryptocurrencies that split off from an already existing one.
BREAKING DOWN Cryptocurrency
Cryptocurrencies are systems that allow for the secure payments of online transactions
that are denominated in terms of a virtual "token," representing ledger entries internal to
the system itself. "Crypto" refers to the fact that various encryption algorithms and
cryptographic techniques, such as elliptical curve encryption, public-private key pairs, and
hashing functions, are employed.
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Cryptocurrency Benefits and Drawbacks
Cryptocurrencies hold the promise of making it easier to transfer funds directly between
two parties in a transaction, without the need for a trusted third party such as a bank or
credit card company; these transfers are facilitated through the use of public keys and
private keys for security purposes. In modern cryptocurrency systems, a user's "wallet," or
account address, has the public key, and the private key is used to sign transactions. Fund
transfers are done with minimal processing fees, allowing users to avoid the steep fees
charged by most banks and financial institutions for wire transfers.
At the same time, there is no central authority, government, or corporation that has
access to your funds or your personal information.
The semi-anonymous nature of crypto currency transactions makes them well-suited for a
host of nefarious activities, such as money laundering and tax evasion. However, crypto
currency advocates often value the anonymity highly. Some crypto currencies are more
private than others. Bit coin, for instance, is a relatively poor choice for conducting illegal
business online, and forensic analysis of bit coin transactions has led authorities to arrest
and prosecute criminals.
Since prices are based on supply and demand, the rate at which a crypto currency can be
exchanged for another currency can fluctuate widely. However, plenty of research has
been undertaken to identify the fundamental price drivers of crypto currencies. Bit coin
has indeed experienced some rapid surges and collapses in value.
Crypto currencies are thus considered by some economists to be a short-lived fad or

speculative bubble. There is concern especially that the currency units, such as bitcoins,
are not rooted in any material goods. Some research has identified that the cost of
producing a bitcoin, which takes an increasingly large amount of energy, is directly
related to its market price.
Crypto currencies' block chains are secure, but other aspects of a crypto currency
ecosystem are not immune to the threat of hacking. In Bit coin‘s almost 10-year history,
several online exchanges have been the subject of hacking and theft, sometimes with
millions of dollars worth of 'coins' stolen. Still, many observers look at crypto currencies as
hope that a currency can exist that preserves value, facilitates exchange, is more
transportable than hard metals, and is outside the influence of central banks and
governments.
Source (Investopedia)
Cryptocurrency Mining
Cryptocurrency mining, or cryptomining, is a process in which transactions for various

forms of cryptocurrency are verified and added to the blockchain digital ledger. Also
known as cryptocoin mining, altcoin mining, or Bitcoin mining (for the most popular form
of cryptocurrency, Bitcoin), cryptocurrency mining has increased both as a topic and
activity as cryptocurrency usage itself has grown exponentially in the last few years.
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Each time a cryptocurrency transaction is made, a cryptocurrency miner is responsible for

ensuring the authenticity of information and updating the blockchain with the transaction.
The mining process itself involves competing with other cryptominers to solve complicated
mathematical problems with cryptographic hash functions that are associated with a block
containing the transaction data.
The result of ―bitcoin mining‖ is twofold. First, when computers solve these complex math
problems on the bitcoin network, they produce new bitcoin, not unlike when a mining
operation extracts gold from the ground. And second, by solving computational math
problems, bitcoin miners make the bitcoin payment network trustworthy and secure, by
verifying its transaction information.
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is
backed by millions of computers across the world called ―miners.‖ This network of
computers performs the same function as the Federal Reserve, Visa, and Mastercard, but
with a few key differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners
record transactions and check their accuracy. Unlike those central authorities, however,
bitcoin miners are spread out across the world and record transaction data in a public list
that can be accessed by anyone, even you.
Source (Webopedia)
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Blockchain Technology
What is Blockchain Technology?
By allowing digital information to be distributed but not copied, Blockchain technology

created the backbone of a new type of internet. Originally devised for the digital
currency, Bitcoin, (Buy Bitcoin) the tech community is now finding other potential uses for
the technology.
Bitcoin has been called ―digital gold,‖ and for a good reason. To date, the total value of
the currency is close to $112 billion US. And Blockchain can make other types of digital
value. Like the internet (or your car), you don‘t need to know how the blockchain works to
use it. However, having a basic knowledge of these new technology shows why it‘s
considered revolutionary.
―The blockchain is an incorruptible digital ledger of economic transactions that can be

programmed to record not just financial transactions but virtually everything of value.‖
Picture a spreadsheet that is duplicated thousands of times across a network of

computers. Then imagine that this network is designed to regularly update this
spreadsheet and you have a basic understanding of the blockchain.
Information held on a blockchain exists as a shared — and continually reconciled —

database. This is a way of using the network that has obvious benefits. The blockchain
database isn‘t stored in any single location, meaning the records it keeps are truly public
and easily verifiable. No centralized version of this information exists for a hacker to
corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone
on the internet.
A network of so-called computing ―nodes‖ makes up the blockchain. Together they create
a powerful second-level network, a wholly different vision for how the internet can
function.
Every node is an ―administrator‖ of the blockchain, and joins the network voluntarily (in
this sense, the network is decentralized). However, each one has an incentive for
participating in the network: the chance of winning Bitcoins.
Nodes are said to be ―mining‖ Bitcoin, but the term is something of a misnomer. In fact,
each one is competing to win Bitcoins by solving computational puzzles.
Who will use the blockchain?
As web infrastructure, you don‘t need to know about the blockchain for it to be useful in
your life.
Currently, finance offers the strongest use cases for the technology. International
remittances, for instance. The blockchain potentially cuts out the middleman for these
types of transactions. Personal computing became accessible to the general public with
the invention of the Graphical User Interface (GUI), which took the form of a ―desktop‖.
Similarly, the most common GUI devised for the blockchain are the so-called ―wallet‖
applications, which people use to buy things with Bitcoin, and store it along with other
crypto currencies. The Blockchain & Enhanced security
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By storing data across its network, the blockchain eliminates the risks that come with data
being held centrally.
Its network lacks centralized points of vulnerability that computer hackers can exploit.
Today‘s internet has security problems that are familiar to everyone. We all rely on the
―username/password‖ system to protect our identity and assets online. Blockchain
security methods use encryption technology.
The bases for this are the so-called public and private ―keys‖. A ―public key‖ (a long,
randomly-generated string of numbers) is a users‘ address on the blockchain. Bitcoins sent
across the network gets recorded as belonging to that address. The ―private key‖ is like a
password that gives its owner access to their Bitcoin or other digital assets. Store your
data on the blockchain and it is incorruptible. This is true, although protecting your digital
assets will also require safeguarding of your private key by printing it out, creating what‘s
referred to as a paper wallet.
Use of Block Chain Technology in Banking
Smart contracts
Distributed ledgers enable the coding of simple contracts that will execute when specified
conditions are met. At the technology‘s current level of development, smart contracts can
be programmed to perform simple functions. For instance, a derivative could be paid out
when a financial instrument meets certain benchmark, with the use of blockchain
technology.
File storage
Decentralizing file storage on the internet brings clear benefits. Distributing data
throughout the network protects files from getting hacked or lost.
AML and KYC

Anti-money laundering (AML) and know your customer (KYC) practices have a strong
potential for being adapted to the blockchain. Currently, financial institutions must
perform a labour intensive multi-step process for each new customer. KYC costs could be
reduced through cross-institution client verification, and at the same time increase
monitoring and analysis effectiveness.
Banks in India, whether public or private are actively implementing the blockchain
technology in its process to improve the customer experience and further simplify it. Till
now, you have only heard about leading private and public banks of India investing and
developing use cases for implementing the blockchain technology.
Now, a much smaller and lesser-known Indian public sector bank, Syndicate Bank will be
creating private blockchain for ATM reconciliation. Syndicate Bank will now keep ATM
machines on the block to alert customers in Nano-seconds. Explaining the use of
blockchain for ATM reconciliation, Managing Director Mrutyunjay Mahapatra, said
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“Say you are a Syndicate Bank customer taking money out of say a Syndicate Bank or ICICI
Bank ATM. If say you tried to withdraw Rs 10,000 and you get a message saying your
account has been debited, but cash has not been dispensed – what do you do?”
The normal procedure is to call the customer‟s bank, report the incident. And then wait
for 4-5 working days, as the bank checks its systems to verify if the transaction has
occurred or not and then reverse the amount. Meanwhile, it‟s five days of tension for
you. But in a blockchain model that need not be the case.
When the ATM becomes a block in a series of transactions, the system would immediately
check the opening balance for the day, run through all the transactions that took place
since then, and if there is more money in the ATM than what the digital transactions
noted, that means it‟s obvious your money has not been dispensed. “So our system will
immediately alert you – „Your attempt to withdraw Rs 10,000 has failed as cash was not
dispensed. The amount will be reversed back to the account within 2 working days.”
Syndicate Bank believes that it will help them to reduce the reconciliation time from
current five days to two working days. Banks in India are increasing their investments in
the blockchain technology and are also leading the hiring spree for professionals with
blockchain experience.
New RBI unit to track block chain and AI: (Economic Times: 27.08.2018)
RBI has formed a new unit within the central bank to beef up its own intellectual capital
in the face of emerging technologies like crypto currency, block chain and artificial
intelligence.
This new unit will research and possibly draft rules and supervise new emerging
technologies in the future.
ICICI, Kotak, Axis among 11 to launch blockchain-linked funding for SMEs: (Economic
Times: 28.01.2019)
ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Axis Bank are among the consortium of
11 big lenders, called Blockchain Infrastructure Company (BIC) set to launch the country‘s
first block chain linked funding for SMEs, an initiative that is set to transform the face of
lending to default prone tiny firms.
The idea of having such an organization is to remove any communication hurdle among the
different banks. A block chain network can only thrive if the entire ecosystem is working
in synergy through a single network.
In the first phase, the banks will set up a live network for supply chain vendors from across
the country to register themselves and digitize their records.
All these supply chain players, banks, logistics partners, customs, etc have different
technological platforms and technical competence, a common blockchain network
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harmonises the requirements and lets everyone see the flow of the trade on a single
platform.
Bankers are hoping a new industry wide blockchain based system will help them reduce
cost and deepen their credit catchment area by getting more SMEs into the formal credit
system. A network promoted by large lenders is likely to become the nodal blockchain
system.
Blockchain developments in India
– State Bank of India (SBI), the country‘s largest bank, said that it will be deploying a
smart contract for KYC solution over the blockchain. This will be deployed over BankChain,
a community of Indian and foreign banks which are developing blockchain solutions,
BankChain was started in February by SBI and other members include ICICI Bank, YES Bank,
DCB Bank, Kotak Bank among others. It has 29 members at the moment.
State Bank of India (SBI) will go in for full-fledged deployment of blockchain in its
reconciliation, remittances and trade finance operations in FY19, a senior executive at the
bank said. The move is expected to lower the costs associated with the three functions by
about 40-50%. Mrutyunjay Mahapatra, deputy managing director and chief information
officer at SBI, told FE that while it will take some time to evolve a system-wide framework
for deployment of blockchain in banking, initial adoption of the technology will happen at
the level of individual banks. ―Quick wins will be internal deployments like we are doing in
the case of India-Nepal payments, where the entire corridor is on blockchain. Similarly,
we are also doing trade finance between India and Sri Lanka, and that we are trying to put
on blockchain. Some transaction banking we are trying to put in blockchain. So (there
have been) smaller experiments which can be scaled up in large organisations, especially
large banks,‖ he said.
– YES Bank is using a smart contract developed by fintech startup Cateina Technologies on
a blockchain which will allow Bajaj Electricals to process disbursement of funds and
discounting to its vendors. It added that it has put in place a detailed roadmap on
commercializing blockchain-based banking solutions in India and is exploring use cases for
implementation towards ‗Letter of Credit‘ and Documentary Collections, Foreign
Remittances and Partnering with Correspondent Banks for Trade Finance among others.
– In October last year, ICICI Bank created a blockchain application and piloted transactions
on its blockchain network in partnership with Emirates NBD, a banking group in the Middle
East. In ICICI Bank, the first transaction on the blockchain was executed to showcase
confirmation of import of shredded steel melting scrap by a Mumbai-based export-import
firm from a Dubai-based supplier.
: ICICI Bank, India‘s largest private sector bank by consolidated assets, announces that it
has successfully on-boarded over 250 corporates on its blockchain platform for domestic &
international trade finance, the most by any bank in India. With this, leading Indian
corporates, including ones from the ‗S&P BSE 100 Index‘, are now undertaking domestic /
international trade finance transactions on the Bank‘s custom-made blockchain platform.
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This initiative marks another milestone in the Bank‘s pioneering role to promote
blockchain in the banking industry in the country. In August 2016, ICICI Bank became the
first bank in the country and among the first few globally to successfully undertake pilot
transactions in international trade finance and remittance in partnership with Emirates
NBD.
Since then, more than 250 corporates, including the country‘s leading companies have
signed up on the Bank‘s blockchain application to experience a more time and cost
efficient and secure way of undertaking domestic & international trade transactions. The
usage of blockchain technology simplifies the paper-intensive trade finance process by
bringing counterparties on the same platform, enabling decision making in almost real
time. It brings in the improved convenience of accurate and quick transactions,
eliminating the need to wait for courier of paper documents across cities / countries and
verification through trade intermediaries. This is in contrast to the current process
wherein counterparties await the receipt of lengthy paper trails to initiate domestic /
international trade finance transactions.
Leading Indian corporates from ‗S&P BSE 100 Index‘ have undertaken trade finance
transactions of various types through ICICI Bank‘s blockchain platform for trade finance.
These include cross-border remittance for salary payment to employees of a group
company of an organization, domestic vendor payments in another city and payments for
raw materials to a domestic channel partner among many others.
Infosys sets up blockchain based trade finance network with 7 Indian Banks:
India‘s Infosys Ltd has formed a blockchain-based trade finance network with seven
private-sector banks, to increase security and efficiency in the banking sector while also
broadening its product offering.
India‘s second-biggest software services exporter, whose Finacle software powers the core
functions of the majority of Indian lenders, is in talks to sign up more domestic and
foreign banks to the network, senior company executives told Reuters on Wednesday.
Blockchain technology allows all stages of transactions to be securely shared between
network members, as opposed to each bank working independently which is more
expensive and increases the chance of error.
Just days earlier, HSBC Holdings PLC said it had performed the world‘s first trade finance
transaction using a shared blockchain platform, in a push to boost efficiency in the multi-
trillion-dollar trade finance segment.
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Cashless India: Leveraging Possibilities and

Facing Security Challenges in the Mobile Space
What is a cashless economy?
A system where no physical cash is in circulation is a cashless system. Payments are made
through credit and debit cards, bank electronic fund transfers or virtual wallets.
Benefits:
 Reduction of Cost related to printing, storing and transportation.

 Reduction in Risk associated with loss of cash due to burglary.
 Convenient and 24*7 availability.
 Easy tracking of the expenditure done.
 Helps government in reducing corruption and increasing tax base by reducing evasion.
 Containment of parallel economy by reducing black money.
 Helps in Financial Inclusion.
 Helps create a win-win situation for consumer and seller as reduced cost can be given
as discounts and cash backs
Yes, India is ready for a cashless economy.
 Every 82 out of 100 citizen has a phone

 Significant reduction in call and data rates and Price of Smart phone.
 Dedicated govt support eg. Demonetization, Direct Benefit Transfer, BHIM.
o No charges for UPI transaction upto Rs 2000
o Campaigns run by Govt for encouraging cashless transaction. Eg Digidhan, Cash back
schemes for BHIM users
 Launch of NUUP platform (*99#) service for citizens having only Basic phones
 Demonetization led surge in Digital banking acceptance
o Increased impetus to e-wallet services. According to a report ―Securing the cashless
economy‖, by PWC, India witnessed
o 3X increase in the download of a leading mobile wallet app within 2 days of the
demonetization announcement.
o 1 million: Number of newly saved credit and debit cards within two days of
demonetization announcement.
o 100%: Day-on-day growth in customer enrolment with leading mobile wallets after
demonetization.
o 30%: Increase in app usage and 50% increase in the download of wallets backed by
leading banks.
 The smart phone revolution has led to the emergence of e-commerce, m-commerce
and other services, including app-based cab aggregators, who encourage digital
payments for use of various services. The value added services such as cash back, bill
payment facilities, loyalty points, rewards and ease of use have resulted in surge of
such digital platforms. These developments have given rise to a modern payment
model.
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Hurdles in making India a cashless economy

 Huge rural population with no computer literacy and mobile phones.
 High percentage (About 90%) of the Indian labour market is informal who work on
daily wage which is cash dependent on cash due to daily wage.
 High percentage (90%) of cash transaction as it gives anonymity thereby helping tax
evasion.
 Security is another big concern regarding cashless transactions. Indians are wary of
digital modes due to cyber security incidents such as phishing, scanning, website
intrusions, defacements and virus code.
 Though several companies have come up with inexpensive smart phones still they
are not affordable for most of the people in the country
Let‘s take a look at how other countries are leveraging mobile to create cashless
economies.
Kenya
Kenya‘s M-Pesa, a mobile banking service, allows customers of the mobile phone operator
Safaricom to hold cash balances that are recorded on their SIM cards. Cash may be
deposited or withdrawn from M-Pesa accounts at Safaricom retail outlets located
throughout the country, and they may be transferred electronically from person to person
as well as used to pay bills
M-Pesa statistics are incredible, Economist Intelligent Unit reports that the transactions
that flow through M-Pesa amount to 60% of the country‘s GDP!
China
Alipay is a third-party online payment platform that was launched in China in 2004 by
Alibaba Group. It is supported by Alibaba, Taobao, Tmall, and an increasing number of
independent online stores.
According to an analyst research report, Alipay has the biggest market share in China with
400 million users.
Security Challenges for Cashless Transactions
There are a number of vulnerabilities in mobile cashless transactions that can be exploited
by hackers and result in the denial or theft of services for consumers, as well as the loss of
revenue, brand reputation, and customer base for vendors.
 Insecure Public Wi-fi as they can easily be monitored for the activities done
through them
 Malicious app available in store which if installed compromises the security
 Absence of Multifactor Authentication in many sites results in data breach
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Digital Banking & Cyber Security
Cyber security has been of great importance in the financial sector. It becomes all the
more necessary since the very foundation of banking lies in nurturing trust and credibility.
Some reasons why cyber security is important in banking and why everyone should be
careful -
 Data breaches can cause a reputational loss, which can effect the business.
 Banks can incur penalties from regulator
 Consumer can lose time and money
 Consumer data is sensitive
Understanding the nature of threats

 Customers must remember that banks will never use e-mail or phone calls as a channel
of communication to request for sensitive information. If one receives such e-mails
allegedly from the bank, it must be reported immediately to
antiphising.ciso@unionbankofindia.com
 To prevent oneself from phishing attacks, one must get accustomed with bank's
security measures. If there has been a change in security measures or website design,
banks will usually send out notices to their customers to inform them of the change in
and such changes will never be done overnight. If one finds that the website‘s
authentication process looks different from what it used to be, they should check the
website for other details by which they can verify its authenticity.
 A customer should also, if possible, refrain from accessing their banking information on
a public or shared computer because there are several spyware in the market designed
to steal sensitive information by recording key strokes. Even while accessing the
banking website on one‘s own computer, one must always log off and clear the cache
on the browser regularly to remove any transactional records.
Current Security Measures

 Use of 2 factor authentication by banks which includes Vbv or/and OTP for
completing an transaction.
 Banking websites also implement encryption at multiple levels to ensure that data
moving through the network cannot be deciphered by a third party.
 Many banks also allow their customers to set financial limits to the funds that may
be transferred through online funds transfer as a contingency measure to minimize
losses in the unfortunate event of a compromised account.
 SMS‘ are sent to the account holder for every transaction carried out, along with an
alert if a transaction for an amount beyond the set limit has been initiated.
 Use of security question is many sites to avoid denial of service attacks.
Recent Trends
 Implementation of 3 factor authentication : In three-factor authentication, in addition
to furnishing their regular password and an OTP that appears on their token or mobile
phone, users will be asked to present something that they possess, which would
irrefutably prove their identity. This third factor could be captured using either an
application that is installed on the customers‘ smartphones or an inbuilt feature or
capability of the device.
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Some examples of the third factor include fingerprint reading, retinal scanning, and
voice recognition. There are other possibilities of biometric authentication as well,
such as capturing words spoken by customers through their phone and matching them
against a previously authenticated sample of voice that exists in the bank‘s records, or
asking them to take a photograph or retinal scan with their smartphone‘s camera and
send it to the bank for approval and authorization.
Conclusion
Sooner or later, every authentication present today will make way for more sophisticated
ones. While multi-factor authentication looks like a fool proof solution under the current
circumstances, it is also true that this will not deter an attacker completely, but simply
slow them down. The implementation of security technology is not a one-time effort with
a guarantee of a lifetime. It is an initiative that calls for constant continuous improvement
because what looks like cutting-edge today will be standard fare tomorrow and obsolete a
few years later.
Page 119 of 185

Big Data in Banking You Should Know

The volume of data generated and handled in the banking and financial sector is
enormous. Barring those instances wherein you receive cash from an ATM or submit
physical forms at your branch, customer interactions with banks have become mostly
online. Thanks to big data analytics, as the number of electronic records grows, financial
services are actively using it to store data, derive business insights and improve
scalability.
The innovative use of technology in the design and delivery of financial services and
products has led to Fintech (financial technology) altogether. Today fintech applications
include making online transactions and providing better solutions for investment
management.
FinTech: Harnessing Big Data in Banking
Accenture released a recent report that confirmed that investment in FinTech was more
than $12 billion in early 2015, worldwide. Following the Great Recession of 2008 that
drastically affected banks across the world, big data analytics has enjoyed a newfound
popularity in the financial sector. When banks began to digitize processes, they also
needed to ensure means to analyse massive data with technologies like Hadoop and RDBMS
(relational database management systems).
In the banking landscape today, as customers are increasingly gravitating towards online
modes of banking, traditional banking methods are under the threat of becoming obsolete.
Top 5 Advantages of Big Data in Banking
1. Efficient Risk Management to Prevent Errors and Frauds, identification of dubious

transaction to efficiently curb money laundering and funding of anti-social activitites.
2. Provides Personalized Banking Solutions to Customers by understanding customer

behavior based on the inputs received from their investment patterns, shopping trends,
motivation to invest and personal or financial backgrounds.
3. Easier Filing of Regulatory Compliances: BI tools can help analyze and keep track of all
the regulatory requirements by going through each individual application from the
customers for accurate validation.
4. Boosts Overall Performance
With performance analytics, employee performance can be assessed whether or not they
have achieved the monthly/quarterly/yearly targets. Based on the figures derived from
current sales of employees, big data analytics can determine ways to help them scale
better. Even banking services as a whole can be checked to know what works and what
doesn‘t.
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5. Effective Customer Feedback Analysis: Big Data tools can aid in sifting through high
volumes of data and respond to each of them adequately and swiftly
In this data driven world, Data Analytics has become vital in the decision making processes
in the Banking and Financial Services Industry. In Investment banking, volume as well as
the velocity of data has become very important factors. Big Data Analytics comes into
picture in cases like this when the sheer volume and size of the data is beyond the
capability of traditional databases to collect.
Some Examples of successful use of Big Data Analysis by Banks
For example, in October 2106, Lloyds Banking Group had become the first European bank
to implement Pindrop‘s PhoneprintingTM technology for detecting fraud. Their technology
used AI to create an ‗audio fingerprint‘ of every call by analyzing over 1300 unique call
features – such as location, background noise, number history and call type – the o
highlight unusual activity, and identify potential fraud. It cracks down on tactics like
caller ID spoofing, voice distortion and social engineering without any need for customers
to provide additional information. Subsequently, Lloyds Banking Group went on to win the
Gold Award for ‗best risk and fraud management programme‘ at the European Contact
Centre & Customer Service Awards 2017.
Danske Bank uses its in-house start-up, advanced analytics to evaluate customer behavior
and determine preferences, as well as to better identify fraud while reducing false
positives. JPMorgan Chase also developed a proprietary Machine Learning algorithm called
Contract Intelligence or COiN for analyzing various documentations and extracting
important information from them.
Ultimately, banks that don‘t evolve and ride the big data wave will not only get left
behind but also become obsolete. Adopting Big Data analytics and other hi-tech tools to
transform existing banking sector will play a significant role in determining the longevity
of banks in the digital age.
Page 121 of 185

Social Media and its Role for Banks
Social media marketing for banks has rapidly moved from primarily social tool to an
important solution necessary for driving relationships with consumers. With opportunities
for banks, credit unions, and lenders to connect and build relationships with consumers
outside of the sales process, social media helps modern financial services to truly
understand consumers to benefit targeting, advertising, compliance, customer service,
and user experience.
While any use of social media marketing for banks must revolve primarily around ROI, any
financial institution can now use social platforms ranging from Facebook to Instagram to
offer real help and support to their customers, driving intangible value in terms of
customer loyalty and retention.
Here are 5 ways banks can use social media in 2019:
1. Increasing Touch points
Social media increases connections, building on touch-points so that consumers can see
and interact with their bank or potential bank multiple times a month, week, or even day
which helps in building relationship.
2. Building Leads
63% of mass affluent consumers are actively looking at financial solutions (not necessarily
banks) on social media and failing to take the opportunity to make a pitch is a missed
opportunity. Using tools like limited time offers, special rates, introductions, and
personalized solutions through chat-bots to create a sense of exclusivity and
personalization – which helps in marketing without tarnishing relationship with the
consumer.
3. Sharing Data and Value
Offering industry insights and valuable information in a way that helps to build trust
among the customer for the brand. Integrate social media and banking by breaking basic
finance tips into palatable and shareable Facebook videos or Instagram photos, creating
overviews of market shifts, creating helpful content delineating loan options, or otherwise
adding value to the customer‘s experience.
More importantly, while these tools help to build customer loyalty, they can also help you
to increase product awareness and drive sales.
4. Using Emotional Targeting
One of the most common reasons customers switch banks isn‘t rates, it‘s emotions. While
that‘s often anger or irritation regarding customer service, being able to connect with
consumer‘s emotions gives an advantage over competitors.
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Social media also allows to target ads and posts more specifically. For example, Facebook
and Instagram ads allow to target based on location, age, gender, career, education, and
interests, allowing you to greatly fine-tune what you are saying to the audience who most
needs to hear it.
5. Omnichannel Experience
Most customers interact with your bank through multiple channels, social network banking
is one out of many channels. They should have the same experience, customer service,
and even customer service representatives across channels.
Social media is a valuable tool for banks, who can use it to drive customer relationships,
building tangible and intangible value. Social media marketing for banks is still evolving,
but it is helping banks to be more personal, to build closer relationships with customers,
and to offer more targeted products and services than ever before.
Page 123 of 185

Forensic Audit
What is a Forensic Audit?
A forensic audit is an examination and evaluation of a firm's or individual's financial

information for use as evidence in court. A forensic audit can be conducted in order to
prosecute a party for fraud, embezzlement or other financial claims. In addition, an audit
may be conducted to determine negligence or even to determine how much spousal or
child support an individual will have to pay.
Importance of IT Forensic Techniques to Organizations
Network Fraud
 Companies now highly reliant on networks

 Networks increasingly vulnerable to attacks
 Viruses, Trojans, Root kits can add backdoors
 Social Engineering including Phishing and Pharming
 Confidential and proprietary information can be compromised
 Can create a corporate liability
Security Challenges
 Technology expanding and becoming more sophisticated

 Processes evolving and integrating with technologies
 People under trained
 Policies out-dated
 Organizations at risk
 Auditors often do not look for fraud
 Prosecution requires evidence
 Value of IT assets growing
Forensic Audit Needs
 Build a digital audit trail

 Collect ―usable‖ courtroom electronic evidence
 Trace an unauthorized system user
 Recommend or review security policies
 Understand computer fraud techniques
 Analyse and valuate incurred losses
 Understand information collected from various computer logs
 Be familiar with the Internet, web servers, firewalls, attack methodology, security
procedures & penetration testing
Requirements for Evidence
Computer logs
 Must not be modifiable
 Must be complete
 Appropriate retention rule
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Problems with Digital Investigation
 Timing essential – electronic evidence volatile

 NEVER work directly on the evidence
 Skills needed to recover deleted data or encrypted data
Digital Forensic Investigation
A process that uses science and technology to examine digital objects and that develops
and tests theories, which can be entered into a court of law, to answer questions about
events that occurred. IT Forensic Techniques are used to capture and analyse electronic
data and develop theories.
Forensic Software Tools are used for
 Data imaging
 Data recovery
 Data integrity
 Data extraction
 Forensic Analysis
 Monitoring
End-to-End Forensic Analysis
 Primary evidence must always be corroborated by at least one other piece of

relevant primary evidence to be considered a valid part of the evidence chain.
Evidence that does not fit this description, but does serve to corroborate some
other piece of evidence without itself being corroborated, is considered to be
secondary evidence.
 Exception: the first piece of evidence in the chain from the Identification layer
Page 125 of 185

Agriculture
Sr No Topics Page No.
1. Doubling Farmers Income 127

2. E-Technology in the aid of the farmers 130
3. NABARD Amendment Bill 2017 133
4. Protected cultivation 134
5. Understanding Subsidies- their Impacts 135
6. Value Chain Financing 138
Page 126 of 185

Doubling Farmers Income
It is apparent that income earned by a farmer from agriculture is crucial to address

agrarian distress (Chand 2016) and promote farmers welfare. In this background, the goal
set to double farmers' income by 2022-23 is central to promote farmers welfare, reduce
agrarian distress and bring parity between income of farmers and those working in non-
agricultural professions.
The concept and timeframe
Clarity on the following points is important to assess the possibility of doubling the income
of the farmers. The substantive points are:
 What is the period and targeted year for doubling the farm income;
 What is to be doubled, is it output, value added or income earned by farmers from
agricultural activities;
 Whether nominal income is to be doubled or real income is to be doubled; and
 Whether the targeted income includes only income derived from agricultural
activities or would it also include income of farmers from other sources.
It is obvious that the targeted year to double the current income of the farmers or income
for the agricultural year 2015-16 is by agricultural year 2022-23, which is seven years away
from the base year 2015-16. And, if anything is to be doubled by the year 2022-23, it will
require an annual growth rate of 10.4 per cent.
If technology, input prices, wages and labour use could result in per unit cost savings then
famers' income would rise at a much higher rate than the output. In nominal terms, the
output became 2.65 times while farmers' income tripled in the seven years period.
Therefore, doubling of farmers' income should not be viewed as same as doubling of farm
output. It is obvious that if inflation in agricultural prices is high, farmer‘s income in
nominal terms will double in a much shorter period. In a situation where non-agricultural
prices do not rise, or, rise at a very small rate, the growth in farmers' income at real
prices tends to be almost the same as in nominal prices. The government's intention seems
to be to double the income of farmers from farming in real terms.
It is pertinent to mention that the latest data on number of cultivators is available only up
to the year 2011-12. Therefore, while calculating per cultivator income, it is assumed that
farm workers would continue their withdrawal from agriculture at the rate observed
during 2004-05 to 2011-12. Presently, per cultivator income has been estimated as Rs 1,
20,193 at current market prices.
Sources of Growth in Farmers' Income
Doubling real income of farmers till 2022-23 over the base year of 2015-16, requires
annual growth of 10.41 per cent in farmer‘s income. This implies that the on-going and
previously achieved rate of growth in farm income has to be sharply accelerated.
Therefore, strong measures will be needed to harness all possible sources of growth in
farmers' income within as well as outside agriculture sector.
The major sources of growth operating within agriculture sector are:
1. improvement in productivity
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2. resource use efficiency or saving in cost of production
3. increase in cropping intensity
4. diversification towards high value crops
The sources outside agriculture include:
1. shifting cultivators from farm to non-farm occupations, and

2. Improvement in terms of trade for farmers or real prices received by
farmers.
Strategy for Improving Farmers' Income
The sources of growth in output and income can be put in four categories.
1. Development initiatives including infrastructure
2. Technology
3. Policies and
4. Institutional mechanisms
Roadmap and Action Plan
The quantitative framework for doubling farmer‘s income has identified seven sources of
growth. These are:
1. Increase in productivity of crops
2. Increase in production of livestock
3. Improvement in efficiency of input use (cost saving)
4. Increase in crop intensity
5. Diversification towards high value crops
6. Improved price realization by farmers
7. Shift of cultivators to non-farm jobs
Conclusion
The low level of farmer‘s income and year to year fluctuations in it are a major source of
agrarian distress. This distress is spreading and getting severe over time impacting almost
half of the population of the country that is dependent on farming for livelihood.
Persistent low level of farmer‘s income can also cause serious adverse effect on the future
of agriculture in the country. To secure future of agriculture and to improve livelihood of
half of India's population, adequate attention needs to be given to improve the welfare of
farmers and raise agricultural income. Achieving this goal will reduce persistent disparity
between farm and non-farm income, alleviate agrarian distress, promote inclusive growth
and infuse dynamism in the agriculture sector. Respectable income in farm sector will also
attract youth towards farming profession and ease the pressure on non-farm jobs, which
are not growing as per the expectations.
Doubling farmer‘s income by 2022 is quite challenging but it is needed and is attainable.
Three pronged strategy focused on (i) development initiatives, (ii) technology and (iii)
policy reforms in agriculture is needed to double farmer‘s income.
Research institutes should come with technological breakthroughs for shifting production
frontiers and raising efficiency in use of inputs. Evidence is growing about scope of
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agronomic practices like precision farming to raise production and income of farmers
substantially. Similarly, modern machinery such as laser land leveller, precision seeder
and planter, and practices like SRI (system of rice intensification), direct seeded rice, zero
tillage, raised bed plantation and ridge plantation allow technically highly efficient
farming. However, these technologies developed by the public sector have very poor
marketability. They require strong extension for the adoption by farmers. R&D institutions
should also include in their packages grassroots level innovations and traditional practices
which are resilient, Sustainable and income enhancing.
ICAR and SAUs should develop models of farming system for different types of
socioeconomic and bio physical settings combining all their technologies in a package with
focus on farm income. This would involve combining technology and best practices
covering production, protection and post-harvest value addition for each sub systems with
other sub systems like crop sequences, crop mix, livestock, horticulture, forestry. Such
shift requires interdisciplinary approach to develop on knowledge of all disciplines.
About one third of the increase in farmers' income is easily attainable through better price
realization, efficient post-harvest management, competitive value chains and adoption of
allied activities. This requires comprehensive reforms in market, land lease and raising of
trees on private land. Agriculture has suffered due to absence of modern capital and
modern knowledge. There is a need to liberalise agriculture to attract responsible private
investments in production and market. Similarly, FPOs and FPCs can play big role in
promoting small farm business. Ensuring MSP alone for farm produce through competitive
market or government intervention will result in sizeable increase in farmers' income in
many states.
Most of the development initiatives and policies for agriculture are implemented by the
States. States invest much more than the outlay by the Centre on many development
activities, like irrigation. Progress of various reforms related to market and land lease are
also State subjects. Therefore, it is essential to mobilise States and UTs to own and
achieve the goal of doubling farmers' income. If concerted and well-coordinated efforts
are made by the Centre and all the States and UTs, the Country can achieve the goal of
doubling farmers' income by the year 2022
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E-Technology in the aid of the farmers
Information technology or e-technology can be of huge benefit to the agricultural sector.

It can be helpful both directly and indirectly. Direct role is to enhance agricultural
productivity. One such mechanism is precision farming, which is mostly common in the
developed countries. It is a capital intensive form of farming in which large tracts of land
have to be utilized. Some of the technology used in this form of farming is: remote sensing
satellite technology, theories of agronomy and soil science. But this facility is less suitable
for India, where agriculture is largely a source of livelihood for the poorest strata; capital
intensive development by the government involves huge cost of maintenance that the
exchequer cannot afford currently. IT indirectly allows the farmers to gather quality
information so that they can make timely and informed decisions while carrying out
agriculture and allied activities. Till now conventional source of information is available
with farmers in less remote villages and they are in timely need of reliable source of
information. Recently WTO efforts on agriculture have also necessitated the extensive use
of technology in agriculture. It has started deregulating the sector to a great extent and
any form uncompetitive regulation can affect India‘s popularity as a foundation nation of
WTO as well as its economic credibility among the members. Some of the steps in e-
technology that need to be taken care of:
Awareness database: This is a mechanism by which the rules and regulations of WTO are
simplified. The language used in the provisions of WTO involves a large number of
technical jargons, beyond the capacity of interpretation of ordinary agriculturists. So this
database will interpret these provisions in a simple and unambiguous form to help all
stakeholders understand the implications of WTO norms on Indian agriculture.
Decision support system for farmers: The WTO stipulations on export subsidies can
improve the quality of farm products. But this benefit cannot be reaped if traditional
methods of information dissemination and farming continue. Rather, there is a
requirement of proper SWOT that has been used currently by only big business houses.
System allowing collective benefits: In order to exploit the export potentials provide by
WTO norms there is a need to have huge size of landholdings. In fact, precision farming is
possible through this. But in Indian villages landholding is divided into many small parts.
So, the farmers need to be organized in cooperative alliances. The major hindrance to this
is geographical barriers which can be done away with through virtual settings like disposal
of agricultural produce at attractive prices through online portal.
Value additions: One of WTO‘s main focuses has been value addition to agriculture as a
means of reform. Therefore, farmers in India should be equipped to add more value to the
agricultural output. It can be done by integrating the industries, aqua culture units, farms
etc. through information technology.
Monitoring: This is required to maintain strong vigilance on external shocks in the

economy related to export of agricultural products. A system will be required to monitor
the international market status, international supply, demand, political disruptions etc.
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Constraints of effective dissemination: Some of major setbacks in bringing e-technology

to rural areas are:
Unorganized development: In case of implementation of every scheme, a delay and half-

hearted development takes place in the rural areas. This scheme is no exception to it.
Long back initiatives had been made to introduce IT services to the agricultural
community. But there is a lot of red-tapism and duplication of efforts. There is a lack of
coordination mechanism that will help in reaching the services to the grass root level in
the villages
User-friendliness: For the success of this scheme, the rural population has to be
comfortable with the new developments. Graphic based presentation is important for
enhancing this. Local language-India has a variety of local languages with several regional
dialects. So, creating an exhaustive database of languages is a tedious task. There is a
need to employ language experts from every area to develop this database, but getting
such experts is again a difficult task given the size of the country. Electricity is the basic
requirement for e-technology. But due to frequent power cuts it is difficult to achieve at
present. There is still no strong scheme for ensuring 24/7 electricity supply in all remote
villages
E-Agricultural initiatives: E-technology in agriculture cannot be regarded solely as an

initiative under the Digital India campaign; similar steps although at a small level were
taken up earlier also. Some of the initiatives taken by the government to introduce e-
technology in agriculture are:
Agriculture Marketing Information Network (AGMARKNET):
The Union Ministry of Agriculture had launched this scheme as early as in the year 2000.
The objective was to link the 7000 agricultural wholesale markets of India with the
Agricultural Marketing Boards and Directorates of the states through a website. This would
assist in exchange of effective information. The portal is brought out by the National
Informatics Centre (NIC) and provides information regarding following: generation and
transmission of prices, arrival of commodity from the agricultural produce markets
Agricultural Technology Management Agency (ATMA)
It may be referred to as a group of people who are involved in agricultural activities and
are interested in sustainable development of agriculture in the districts. It takes the
responsibility of technology dissemination in the districts.
National Mission on Agricultural Extension and Technology (NMAET)
This was implemented during the 12th Plan period. It has four sub missions which are
related to: agricultural mechanization, plant protection and plant quarantine, agricultural
extension and seed and planting material. Its main aims include extensive and interactive
methods of dissemination of information, using ICT, popularizing the modern and
appropriate technologies, strengthening institutions that promote mechanization, making
available quality seeds etc.
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Voice Krishi Vigyan Kendra
It is an extension of the Krishi Vigyan Kendra (KVK) by greater emphasis on the aspect of e-
technology. The voice KVKs are group of advisors who remain connected through mobile
and internet technologies. Two parties interact through the means of this technology. It is
done through the agropedia platform that facilitates interaction through amplification i.e.
either one person talking to many or many to one person and persistence i.e. storing the
messages sent and allowing them to be retrieved, monitoring the developments and other
facilities of electronic storage and semantic technology.
Agropedia
It is an initiative by ICAR to use social networking technology to spread agricultural

information.
Sanchar Shakti Scheme
It was launched in 2009 by the Universal Service Obligation Fund (USOF) in the form of a
wireless broadband scheme. Its main target is to help the women self-help group members
who are involved in agricultural activities in rural areas. It is a kind of Mobile Value Added
Services (VAS) that provides customized information related to the diverse activities to
these women through easier accessibility and effective assimilation.
M-Kisan SMS Portal
It enables the organizations of the central and state governments relating to agriculture
and allied sectors to provide information or advisories or services to the farmers through
the method of text message or SMS in the native language of the farmers.
National Agriculture Market
This project was announced under the budget of 2014-15 and is actually a pet project of
under the Digital India Campaign. It was launched on 14th April 2016 in a phased manner.
Its aim is to set up a pan-India electronic trading portal to link the existing APMCs and
other market yards for creating unified national market for all agricultural commodities. It
has a physical market behind this virtual market. The process of implementation is still
going on, with the first phase connecting 250 mandis across eight states. It is a joint
initiative by the Agri-Tech Infrastructure Fund (ATIF), Department of Agriculture and
Cooperation (DAC) and the Ministry of Agriculture. The facilities will be disseminated
through the Small Farmers Agribusiness Consortium (SFAC). The Central government will
bear the cost of software as well pay Rs 30 lakhs per mandi per market for the required
infrastructure development. By opening this portal for trading, the farmers have access to
the national markets, giving more options for sale. It also helps the bulk buyers, exporters
etc. to participate directly in trading at the local mandis and get the required produce
without having to involve intermediaries. It will also promote scientific storage and
movement of the agriculture goods.
Page 132 of 185

NABARD Amendment Bill 2017

Parliament has passed the National bank for Agriculture and Rural Development
(Amendment) Bill, 2017 with the approval of Rajya Sabha. Lok Sabha already had passed
the bill in August 2017. The Bill seeks to amend National Bank for Agriculture and Rural
Development (NABARD) Act, 1981. The Act establishes NABARD for providing and
regulating facilities like credit for agriculture and industrial development in the rural
areas.
Key features of the Bill
Increase in Capital of NABARD: The Bill allows Union Government to increase capital of
NABARD from Rs. 5000 crore to Rs. 30000 crore. Further, it allows Union Government to
increase the capital more than Rs. 30000 crore in consultations with the Reserve Bank of
India, if necessary.
Transfer of the RBI‘s share to Union government: The Bill provides that Union
Government alone must hold at least 51% capital share of NABARD. Further, it transfers
share capital held by RBI valued at Rs. 20 crore to Union Government. Currently RBI holds
0.4% of paid-up capital of NABARD and remaining 99.6% is held by Union Government and
this causes conflict in RBI‘s role as banking regulator and shareholder in NABARD.
Adds Micro, Small and Medium enterprises (MSME) terms: The Bill replaces terms ‗small-
scale industry‘ and ‗industry in tiny and decentralized sector‘ with terms ‗micro
enterprise‘, ‗small enterprise‘ and ‗medium enterprise‘ as defined in MSME Development
Act, 2006. Further, it allows NABARD to provide financial assistance to Banks if they
provide loans to the MSMEs.
Consistency with the companies Act, 2013: The Bill substitutes references to provisions
of the Companies Act, 1956 with references to the Companies Act, 2013. It includes
provisions dealing with definition of a government company and qualifications of auditors.
Page 133 of 185

Protected Cultivation
Several components have been introduced in the latest green revolution crop production
technologies, so that it results in high yield crop production of improved variety. In
agriculture sector, the use of new agro-chemicals and intensive crop cultivation
techniques are adopted to boost the production. But for the past few years, periodical
unabated explosion of white flies and other pests have emerged as direct disease
transmitters and crop damagers in different regions of the world and have made
agriculture less remunerative and highly risk prone. Without using any crop protection
product or technique, the crop yields may be declined drastically. The entire effort of
farmers and agriculture experts will be of no use in absence of crop protection techniques.
Protected Cultivation Technology:

It can be defined as cropping technique wherein the micro climate surrounding the plant
body is controlled partially/fully as per the requirement of the plant species grown during
their period of growth. With the advancement in agriculture various types of protected
cultivation practices suitable for a specific type of agro-climatic zone have emerged.
Protective Structures:
1. Net houses: Used to reduce adverse effect of scorching sun and rains in vegetables,
ornamentals and herbs.
2. Plastic low tunnels: Used to raise early nurseries of vegetables and flowering annuals.
3. Green houses: These are framed structure covered with a transparent material in
which crops could be grown under controlled environment.
4. Glass house: Used as a glazing material in the green house. Glass house are fitted with
the help of wooden or metal frame. High initial cost, difficulty in construction and
frequent damage of glass panels by strong winds has limited its uses in both the
regions. The variation in temperature between outside and inside conditions is 20-25°C
Conclusion:
The green house technology is still in its preliminary stage in India and concerted efforts
are required from all concerned agencies to bring it at par with global standards.
Economically viable and technologically feasible green-house technology suitable for the
Indian agro-climatic and geographical conditions is needed at the earliest. The future
needs for improving this technology are:
1. Standardizing proper design of construction of poly houses including cost effective and
indigenously available cladding and glazing material.
2. Computerized control system maximize returns it includes time base/volume
base/sensor based irrigation system, opening and closing of ventilators and side wall
roll up curtains, CO2 generators, pH, ppm level of elements in irrigation water etc. as
required to the plant.
3. Developing cost effective agro-techniques for growing of different vegetable crops in
different types of polyhouses and lowering energy costs of the green house
environment management.
4. Major research activities on growing of vegetables under protected covers should be
launched by ICAR and SAU‘s
Page 134 of 185

Understanding Subsidies-
their Impacts
Forensic
Subsidies are one of the essential attributes of any welfare state. India, at independence
was left with uphill task of socio-economic development. Markets were almost
nonexistence, masses lived in poverty and illiteracy, we were not producing enough food
to satiate hunger of masses, and life expectancy was just 32 years. Given such
circumstances, founding fathers of democratic India rightly envisaged Indian state to be a
welfare state. However, 70 years down the line only few problems have abated, while new
ones cropped up and poverty still stubbornly remains a pressing problem. In this context,
latest economic survey rightly points out that despite spending as high as 3.77 lakh crore
rupees annually on subsidies there is no ‗transformational impact‘ on standard of living of
masses. While subsidies have helped some poor people to do firefighting in life, main
allegation on a subsidy economy is that, through subsidies, money meant for poorest is
appropriated by richer sections of the society due to mis-targeting and leakages.
Subsidies and its opportunity costs
Subsidies are that part of government expenditure that is ‗consumed‘ by beneficiaries. We

have Tax to GDP ratio of around 17.7%. (Center plus states) With this amount government
has to provide for interest payments of its debt, expenses for its humongous
administration, defence of the country, devolution to states and panchayats,
developmental work, infrastructure and for subsidies. In 2013, total expenditure by
government was 13.8% of GDP. Out of this revenue expenditure (consumption) was 12.1%
of GDP, leaving just 1.7% of GDP for Capital expenditure (investments). Out of this
revenue expenditure, non-plan expenditure was 9.5% of GDP. It goes without saying that it
is in interest of nation to minimize this consumption part of expenditure and increase
allocation to capital expenditure which stood at just 1.7% of GDP. Interest payments
cannot be reduces unless there is higher growth in the economy. Pensions are ballooning
as there is consistent increase in life expectancy across demographic spectrum of India.
Grants to states are also expected to go up given government‘s commitment towards
federalism. In all this, there is significant scope of reduction in subsidies as they are
infested rampantly with problem of mis-targeting and leakage. This can be easily grasped
from the fact that just shifting to cash transfers in distribution of subsidized LPG is
expected to save annually Rs 15000 crore for the exchequer.
Some subsidies led distortion in India:
1. Energy- Groundwater nexus – Agriculture sector is perhaps having most justifiable

claim on subsidized inputs given the dismal situation of the farmers in the country. On
these lines, water and electricity for agricultural use are heavily subsidized by state
governments. Again, politics seeped into this economic cause and most governments
have failed to ensure rational and sustainable use of subsidized water and electricity.
Owing to this, in large parts of India, groundwater is being extracted indiscriminately
as electric pump consume electricity that is almost free of cost. This has led to
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dramatic fall in groundwater levels. Wells have gone dry at numerous places. Water
extracted from deep earth often gets contaminated by arsenic mineral. This, together
with erratic monsoon due to climate change, has pushed rural India in deep distress.
2. Subsidized fertilizers – Nutrient Based Subsidy was introduced in 2010 with objective
to promote balanced use of fertilizers and to limit fertilizer subsidy of the
government. Idea was to fix subsidy as per nutrients (in per Kg ) in the fertilizer and
leave the determination of price to suppliers. Presently Urea is not covered under the
scheme due to political compulsions. Consequently subsidized price of Urea remained
stagnant even when real costs of production have risen significantly. On the other hand
Potassium and Phosphorous are covered under the scheme and a fixed subsidy as per
content of nutrients is given to suppliers and they change Maximum Retail Price as per
market signals. Secondary and Micronutrients are also covered under the scheme. (In
short urea is still controlled and P,K, are decontrolled)
Also, due to excessive use of fertilizers groundwater is also getting polluted and
chemical bioaccumulation problem is impacting health of people.
Apart from Urea, farmer is not even getting benefit due from NBS in case of subsidized
potassium and phosphorus. Subsidy is provided to manufacturers, who in turn are
responsible to pass this subsidy to farmers in form of reduced retail prices. Rather,
manufacturers have increased their prices forming a cartel and have usurped subsidy
meant for farmers. It‘s only now that Ministry of Chemicals and Fertilizers has undertaken
review of prices charged by registered manufacturers. It has plans to penalize and cancel
registration wrongdoers.
3. Cultivation of wheat, Rice and sugarcane at cost of pulses, horticulture crops and
coarse but nutritious grains –
Consumption patterns in India are shifting rapidly from calorie rich diet to protein and
vitamin rich one. Despite this, protein based diet in India is abnormally expensive. Main
source of protein for Indian masses is pulses. Last whole year there was clamour on the
issue of sky rocketing prices of pulses. India‘s subsidy regime had its hand behind this
problem. Pulses are most suitable to be grown in areas of Maharashtra and Madhya
Pradesh, yet large parts of these areas are under cultivation of sugarcane. Sugarcane due
to high ‗fair and remunerative price‘ is being sown in these areas. This create two
problems – one, it deprives Indians of their source of protein; two, these areas are water
deficit and sugarcane is water guzzling crop. This crop is sucking scarce water rapidly and
when monsoon failed again this time, mainly in Marathwada; farmer had no way to
escape. Ironically, pulses are water efficient crops with capacity to rejuvenate soil by
process of nitrogen fixing and farmer chooses crop like sugarcane which later proves to be
a gross liability for him. Sugarcane is suitable to be grown in areas of Bihar and Bengal
given abundant water, but it is not due to lack of electricity and irrigation. Similar is the
case for cultivation of Wheat and Rice. These two crops yield much larger quantity (about
5 times) per acre/hectare than crops like pulses. Higher MSP for pulses is not so high to
make whole value of produce more remunerative for farmer. So he prefers conventional
grains. This has led to huge stockpile of wheat and rice (40-50 million tons) in government
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inventory which decays and is carried forward at cost of Rs 5/ year. On the other hand,
India has to import more than 25% of its consumption of pulses.
5. Agricultural Finance: Farmers are entitled to pre- harvest loan at 7% interest rate.
They are allowed further 3% subvention in case of timely payment. Farmers can also
take loan for post-harvest time against negotiable warehouse receipt. Economic survey
notes three discrepancies in this subsidy. One, trend indicates that amount for a single
loan is increasing for most of these subsidized loans. This means that more subsidies
are going in favour of rich farmers. Two, extension of subsidized credit is concentrated
in last three months of the financial year, which indicates that reluctant banks
otherwise unable to meet priority sector lending targets, desperately disburse loans to
reach target at the end only. It is unlikely that this way credit will reach to desirable
party. Third, agriculture credit is getting concentrated on peripheries of urban areas,
which means that money is being diverted to non-agricultural use.
6. Food inflation: India till couple of years back witnessed spiralling double digit inflation
driven by expensive food, even when world was reeling under deflation. This distortion
is mainly due to increasing input costs to farmer coupled with persistent increase in
Minimum Selling Price declared by government. This forces government‘s agency FCI to
procure food grains in open ended manner. As a result, government ends up procuring
25-33% of total food grains production in the country. Apart from this, about 33% of
food grains are captively consumed by farmers. All this leaves just 33%-45% of total
food grains for open market. This. At times, culminates in an absurd situation, where
there is shortage of grains in open market which push prices upward and millions of
tons of grains stored in FCI godowns.
Subsidies are meant for poor people and they shall ensure equitable redistribution of
resource. When India grew in first decade of millennium at average rate of 7.5% it was
found that this growth was jobless and unsustainable. India‘s economy faced supply side
constraints, which didn‘t increase productivity as compared to GDP. RBI had to then
control spiraling inflation by steep hikes in interest rates. Rationalization of subsidy
regime will improve markets in India which will then attract more investment. This in
short, can turn the wheel of a virtuous economy which creates more employment and
attacks poverty at its roots.
Page 137 of 185

Value Chain Financing

An agricultural value chain (AVC consists of a series of activities that add value to a final
agricultural product, beginning with the production, continuing with the processing and
ending with the marketing and sale to the customers. It is commodity specific and area
specific such as milk value chain in Gujarat or Onion Value chain in Nasik.
Value chain financing (VCF) is an approach to identify financing needs and financing gaps
throughout the chain, finance providers and ways to improve access to financing. VCF
takes a systemic viewpoint, looking at the health of the entire system viz., collective set
of actors, processes and markets of the chain as opposed to creditworthiness of an
individual lender-borrower within the system.
In the traditional forms of agri-finance, such as trade credit or bank finance, the financing
is mostly asset based and ―one size fits all‖ and the risks associated with farming are
mostly transferred to farmers; whereas in a value chain approach, it is mostly cash flow
and contract based and the risks associated with farming is leveraged between various
payers in the value chain.
Agriculture is a value chain strategy based on Michael Porter‘s value chain analysis and
cluster development. It encourages investments in the economic activities in the upstream
(research and development, certified seeds, better agronomic practices), midstream
(grading, sorting, processing) and downstream (packaging, food safety, traceability,
branding)
Agriculture is a value chain strategy based on Michael Porter‘s value chain analysis and
cluster development. It encourages investments in the economic activities in the upstream
(research and development, certified seeds, better agronomic practices), midstream
(grading, sorting, processing) and downstream (packaging, food safety, traceability,
branding) segments of the value chain.
The inter-dependent linkages of the chain and the security of a market-driven demand for
the final product can provide suppliers, producers, processors and marketing companies
with more secure access to procurement and sale of products.
Benefits of agriculture value chain financing are: reduces costs of transactions, reduces
risks of doing business (for bankers, farmers and other VC players) and improves access to
finance as well as other services.
Once a financial institution establishes the market-oriented logic for an investment, it

leverages pre-existing relationships and information between value chain actors to assess
risks and more effectively evaluates an individual‘s ability to service a loan. It helps in
achieving economies of scale and reducing overhead costs.
There are different models of agricultural value chain development. The AVC may be
driven by the producer (such as small farmers associations), the buyer (processors,
exporters or traders), a facilitator (such as an NGO or government organization), or an
integrated model (led by a supermarket or multinational).
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Numerous financial instruments are used in financing value chains such as those based on
the commodity or accounts receivable or fixed assets etc. These include various trade
finance instruments, warehouse receipts, factoring, etc. and risk mitigation products such
as forward contracts, guarantee, insurances etc.
Agricultural value chain financing (AVCF), which promotes specialization and enhances
productivity and investments and the application of modern technology, also supports the
increasing transformation and commercialization of agriculture to tap into the growing
global agri-business market.
Page 139 of 185


1. GDP growth Rate and Economy Development Indian Story and Future 141
Prospects
2. GST reforms, GST rates in general and its impact on Indian Economy 143
3. Bullet Train an Present Need of India 147
4. Make in India-Vis a Vis India a Manufacturing hub 149
5. Demonetization-effect on Economy in Short run and long run 154
6. Chinese goods-threat to indian Economy 157
7. The Mudra Bank 161
8. RAM: the growth engine 166
Page 140 of 185

GDP Growth Rate and Economy Development-

Indian story and Future prospects
Concept of GDP:
The gross domestic product (GDP) is one of the primary indicators used to gauge the
health of a country's economy. It represents the total value of all goods and services
produced over a specific time period, often referred to as the size of the economy. While
quarterly growth rates are a periodic measure of how the economy is faring, annual GDP
figures are often considered the benchmark for the size of the economy. There are
actually two types of GDPs that economists use to measure a country's economy. Nominal
GDP refers to a country's economic output without an inflation adjustment, while Real
GDP is equal to the economic output adjusted for the effects of inflation. Economists will
look at negative GDP growth to determine whether an economy is in a recession.
GDP Growth Rate: Real gross domestic product (GDP) growth rate from 2012 to 2018 &
projection up to 2022 (compared to the previous year)
Indian Story & Future Prospects: After the 1991 economic liberalization, India achieved
6-7% average GDP growth annually. Since 2014 with the exception of 2017, India's economy
has been the world's fastest growing major economy, surpassing China.
The long-term growth prospective of the Indian economy is positive due to its young
population, corresponding low dependency ratio, healthy savings and investment rates,
and increasing integration into the global economy. India topped the World Bank's growth
outlook for the first time in fiscal year 2015–16, during which the economy grew 7.6%.
India has one of the fastest growing service sectors in the world with an annual growth
rate above 9% since 2001, which contributed to 57% of GDP in 2012–13. India has become a
major exporter of IT services, Business Process Outsourcing (BPO) services, and software
services with $154 billion revenue in FY 2017. This is the fastest-growing part of the
economy. The IT industry continues to be the largest private-sector employer in India.
India is the third-largest start-up hub in the world with over 3,100 technology start-ups in
2014–15. The agricultural sector is the largest employer in India's economy but contributes
to a declining share of its GDP (17% in 2013–14). India ranks second worldwide in farm
output. The industry (manufacturing) sector has held a steady share of its economic
contribution (26% of GDP in 2013–14). The Indian automobile industry is one of the largest
in the world with an annual production of 21.48 million vehicles (mostly two and three-
wheelers) in 2013–14. India had $600 billion worth of retail market in 2015 and one of
world's fastest growing e-commerce markets.
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India's gross domestic product (GDP) is expected to reach US$ 6 trillion by FY27 (as against
USD 2.6 trillion for 2017) and achieve upper-middle income status on the back of
digitization, globalization, favorable demographics, and reforms.
India's revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by
2019, owing to Government of India's measures to strengthen infrastructure and reforms
like demonetization and Goods and Services Tax (GST).
India is also focusing on renewable sources to generate energy. It is planning to achieve 40
per cent of its energy from non-fossil sources by 2030 which is currently 30 per cent and
also have plans to increase its renewable energy capacity from existing 75 GW to 175 GW
by 2022.
India is expected to be the third largest consumer economy as its consumption may triple
to US$ 4 trillion by 2025, owing to shift in consumer behavior and expenditure pattern,
according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to
become the second largest economy in terms of purchasing power parity (PPP) by the year
2040.
New back series GDP data
By recalibrating data of past years using 2011-12 as the base year instead of 2004-05, the
Central Statistics Office (CSO) has now estimated that India's GDP grew by a much slower
8.5% in FY11 against a previously estimated peak of 10.3%. The average growth for the
UPA years after the back series revision for FY06 to FY12 declines to 6.82% from 7.75%
earlier. Significantly that's well below the 7.35% growth posted during the four years of
the Modi government.
"A complex exercise has been carried out by the Ministry of Statistics and Programme
Implementation to update the National Accounts Series. The new series has made
significant methodological improvements," Niti Aayog Vice-Chairman Rajiv Kumar said. He
added that the New Series, with its supporting back series, is "internationally comparable
and in sync with UN Standard National Account". It's worth mentioning here that the
government had moved to a new base year of 2011-12 from the earlier 2004-05 for
national accounts in January 2015.
Page 142 of 185

GST reforms, GST rates in general and its Impact on

Indian Economy
GST REFORMS:
The GST Goods and Services Tax implemented on 1 July 2017, is one of the biggest tax
reform in India after Independence. It is a Destination based single indirect tax system
that has replaced the age old tax system of India.
From its formation to its implementation it faced many revisions and rollbacks. Earlier
there was a plethora of taxes like VAT, Excise, Custom, Octroi, sales, service. GST has
brought all of them under a single roof and has reduced their cascading effect. The
implementation of E-way bill under GST has made the movement of goods smoother and
has reduced transportation time and cost.
The implementation of GST faced many challenges. Its architecture having too many tax
slabs, the term SGST, CGST and IGST, too many exemptions, anomalies made the term
GST more complex for many people. Migration and adoption of the entire new ecosystem
became a teething trouble for people. However frequent policy changes and regular
counselling done by GST Committee reduced the compliance burden of people and tried to
ease their transition pain.
This is a consumption based tax which means the tax should be received by the state in
which the goods or services are consumed and not by the state in which such goods are
manufactured.
GST is composed of three types of taxes and those are CGST, SGST/UTGST, and IGST and
which are determined by the movement of the goods or service i.e. Intra-State movement
or Interstate movement.
Many economists and experts have predicted that the GST bill will boost up the economy
in long run but we see some short-term impact on the economy too. India is a collective
economy where each state has its own set of rules for them. This makes the growth of the
country slow, causes difficulties for the businesses and higher possibilities of tax evasion
and corruption. Further as the previous tax system was complex so small businesses used
to ignore it. To make the tax payment process simpler and create a win-win environment
for both viz. government as well as businesses, and to reduce the corruption, GST bill has
been introduced in India.
GST Rates in General:
GST has been structured in a way that essential services and food items are placed in the
lower tax brackets, while luxury services and products have been placed in the higher tax
bracket.
The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%,
12%, 18% and 28% under GST. This is aside the tax on gold that is kept at 3% and rough
precious and semi-precious stones that are placed at a special rate of 0.25% under GST.
Goods and services tax is continuously upgraded by the GST council for better results for
the proper implementation.
Impact of GST on Indian Economy
GST is a game-changing reform for the Indian Economy and the various factors that have
impacted Indian economy are:
Page 143 of 185

1. Increased competitiveness: The retail price of the manufactured goods and services
in India reveals that the total tax component is around 25-30% of the cost of the
product. After implementation of GST, the prices have gone down, as the burden
of paying taxes has been reduced to the final consumer of such goods and services.
There is a scope to increase production, hence, competition increases.
2. Simple Tax Structure: Calculation of taxes under GST is simpler. Instead of multiple
taxation under different stages of supply chain, GST is a one single tax. This saves
money and time.
3. Economic Union of India: There is freedom of transportation of goods and services
from one state to another after GST. Goods can be easily transported all over the
country, which is a benefit to all businesses. This encourages increase in
production and for businesses to focus on PAN-India operations.
4. Uniform Tax Regime GST: being a single tax, it has made it easier for the taxpayer
to pay taxes uniformly. Previously, there used to be multiple taxes at every stage
of supply chain, where the taxpayer would get confused, which a disadvantage.
5. Greater Tax Revenues: a simpler tax structure can bring about greater compliance,
this increases the number of tax payers and in turn the tax revenues collected for
the government. By simplifying structures, GST would encourage compliance,
which is also expected to widen the tax base.
6. Increase in Exports: There has been a fall in the cost of production in the domestic
market after the introduction of GST, which is a positive influence to increase the
competitiveness towards the international market.
7. Increase in Tax Payers: The Economic Survey 2018 reported that the number of
indirect tax payers has gone up by 50 per cent and direct tax payers, by 1.8
million, after demonetisation and GST. In addition, GST will help formalise the
economy and have a positive spill over effect on income tax compliance.
As against the positive impacts as enumerated above, people on the other side speaks
about the negative impacts of GST mentioned as under:
Increased costs: The disruptions caused increased both the compliance cost for tax
payers and administrative costs for the government. Inability to process refunds of
exporters hurt their short-term prospects, particularly in labour-intensive sectors
like textiles and leather. The roll out of the technology platform, the Goods and
Services Tax Network (GSTN), was also not smooth.
Since the tax burden has gone up after the implementation of the GST, it resulted
in increased working capital requirement. Besides increased cost, there have been
delays in input tax credit to exporters. ―In such a situation, scarcity of credit will
push people to delay or avoid taxes by dealing more in cash,‖.
GST target are not being met, mainly on account of tax evasion. Even Central
Board of Indirect Taxes and Customs (CBIC) member John Joseph was reported as
saying by news agency PTI that despite the electronic way or e-way bill mechanism
there has been rampant evasion and there is a need to increase compliance.
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Impact of GST on Different Sectors

1. Consumer Goods & Services: The GST rates for the FMCG industry is set at 18-
20%. While most are happy with the introduction of GST, the ones who are heavily
affected are opposed.
2. Transportation: The rates for cabs have been lowered to 5% and for air travel
also. So, this is a welcome move for those in this sector.
3. Entertainment & Hospitality Sector: This sector was affected as this sector falls in
the 28% category. Movie tickets, hotel rates will now be costlier.
4. Financial Products and Services: the financial services such as funds and
insurances, (Non-Banking Financial Company) are most impacted.
5. Start-Ups: GST has a positive influence towards start-ups. It had got both
advantages and disadvantages for start-ups.
6. Inflation and Economic Activity GST is an Inflationary measure. However, the rise
in the tax rate on services to 18% is expected to raise inflation.
7. Stock Transfer Post the introduction of GST, tax is levied on branch transfers and
input tax can be claimed later.
8. Export of Goods & Services: At all stages of the supply chain there is no tax, post
GST. Moreover, the availability of input credits is welcomed.
9. Gold and Gold Jewellery Prices Post GST the tax rate was set to 18% initially then
brought down to 5% tax rate
10. Rent: Since the implementation of GST the exemption limit for renting out
commercial property is Rs. 20 lakhs and there is not GST on house rent.
11. SEZ: Under GST regime, SEZ‘s have benefitted from a zero-tax rate.
12. Affordable Housing Purchase of houses is non-taxable; however under construction
house will carry a GST tax rate. The GST rates for homes purchased under CLSS,
EWS, LIG, and MIG1/11 will be 8%, after deducting cost of land. However, those
don‘t qualify CLSS, etc., will have to pay 12% GST on constructed houses.
13. Real Estate Sector: With the introduction of GST this sector is becoming more
transparent.
14. Logistics: The rate pre-GST was above 26% and post the implementation of GST
there was reduction to 18-21%, which was good news for the sector.
15. Manufacturing Industry: GST, demands businesses to set-up mechanism for
meeting the requirements of GST. Therefore, once the companies adapt the
requirements, the compliance costs will go down drastically.
16. Automobile Industry: GST absorbed indirect tax regime, which attracted several
duties and taxes on the sale of vehicles and spares and accessories.
17. Chemical Industry: Implementation of GST is believed to be positive to the
chemical industry, especially in the long term.
18. Tobacco Industry: The new GST rates are less than the combined taxes during pre-
GST regime.
19. Stainless Steel Industry: GST had made a very good impact on steel industry. After
issuing new tax rates, it has become more favourable to steel industry. The GST
rate for primary steel industries is imposed at 18%, which is helpful for them to
grow.
20. Textile Industry: Despite some changes under the GST regime, the textile sector
benefitted with the implementation of the regime.
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21. Coal Sector: After the GST implementation, the coal transportation rates have
done down to 5% through trains, and thus the logistics costs has been decreased.
22. Power Sector: Overall impact of GST on power sector is positive. Domestic coal is
in the 5% tax slab. The impact of GST will be positive for the electrical and the
lighting sectors as the rate is now 18%.
23. Exports: In the pre-GST tax system, import of the goods carried several import
duties, however, after GST; IGST has replaced the indirect taxes that were earlier
imposed on import of goods and services.
24. Domestic appliances and Electrical Machinery: There is not a huge impact in this
industry as the new GST rates around 25%, which is similar to the rates pre-GST.
25. Hospitality Industry: This is another industry that has benefited as the previous tax
regime levied up to 27% tax. Post GST, the tax rates have been reduced.
26. Aviation Sector: The industry has mixed feelings about the introduction of GST,
especially the GST rates for airline fuel.
27. Pharmaceutical Industry: This industry will see an increase in costs after GST
implementation as the cost of medicines will rise by 2.3% in the 12% bracket and
medicines with 5% will see no increase in MRP.
28. Cement Industry: GST will not affect this industry drastically, the tax rates
imposed will get absorbed in the cost of cement production.
29. Digital Advertising Industry: This industry which is fast growing is a cheaper
method for companies as GST will have less effect in this sector, as compared to
traditional marketing.
30. Handicraft Sector: One of the largest sector of the country, which is most affected
by GST. Therefore, GST is not welcomed by the artisans.
31. Alcohol Industry: There is no GST on alcohol; instead there is an increase in the
price of alcohol. Price of a beer is going to raise by 15% and wine and other hard
drinks will be increasing by 4%.
Page 146 of 185

Bullet Train and Present Need of India
India is a rapidly developing economy with numerous developmental needs. A major

component of India‘s developmental plan is the up gradation of current rail networks as
well as the development of new high speed rail corridors popularly known as bullet trains.
The Mumbai – Ahmedabad High Speed Rail project, is a visionary project by the NDA
Government which will herald a new era of safety, speed and service for the people, and
help Indian Railways become an international leader in scale, speed and skill.
New technology has not always been adopted easily, and has at most times seen
resistance. However, history shows us that new technology and advancements are highly
beneficial for the country. For example, we see that naysayers had also criticised the start
of the Rajdhani Trains in 1968. Even the chairman of the railway board opposed it; such
things keep India backward. But today, they are the trains that everyone wishes to travel
in.
Another example of when people thought India was not ready for new technology was
when the mobile phone was introduced into the market. At the time it was considered to
be elitist and expensive with a phone call costing Rs. 16 per min. But today India has the
2nd largest market for mobile phones in the world with almost every Indian owning a
mobile.
Similarly, the Bullet Train project will also help Indian Railways revolutionise every
passenger‘s journey. Here‘s how this project will help the nation and Railways grow in
many ways:
A Low Cost Project
The bullet train project not only adds to the rail networks in terms of transport
capabilities but also adds to the growth capabilities of the country. The project is funded
by a loan on terms which tantamount to a grant. The Ministry of Railways has been given
Rs. 88,000 crores as a soft loan from the Japanese government which will help Railways to
kick off the process. The minuscule interest rate of 0.1% and the repayment time of 50
years is economically advantageous to our economy. Repayment of loan is to begin after
15 years of receiving the loan.
Promoting Make in India Vision
As per the agreement, the project has ‗Make in India‘ & ‗Transfer of technology‘
objectives. This is how it will add fuel to the Government‘s ‗Make in India‘ mission.
The Make in India objective will ensure that most of the amount invested in this project
would be spent and utilized within India.
Working With a Cutting Edge Technology
Active interactions are already taking place between the industries of India and Japan.
The country is getting a cutting-edge technology for the high-speed train project. Here‘s
how the 50 years old Shinkansen Technology by Japan will uplift the project:
The train delay record of Shinkansen is less than a minute with zero fatality. The project
is set to provide reliable and comfortable service with high standards of safety.
Technology regarding disaster predictions and preventions will also be acquired. New
technologies in ballast-less tracks, under sea tunnels etc. will be developed, and we will
work towards proliferating these across Railways. Therefore, with the presence and
availability of this technology, India will leapfrog to the cutting edge of latest train
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developments with passengers able to reach their destination in 2 hours as against the
current 7-8 hours by train.
Helping India‘s Economic Growth

The Bullet Train project will also help the nation boost its economic growth by:
Manufacturing in India, will give a boost to job creation and exporting to the world. Total
12 stations, 4 stations in Maharashtra & 8 in Gujarat, will emerge as economic
powerhouses powered by easy travel. Long run costs are also expected to fall through the
advantages gained by economies of scale further developing our network.
Creating More Jobs
It will create employment opportunities both in the Short Run and Medium Run and
generate employment for about 20,000 workers during the construction phase. High Speed
Rail Training Institute being developed at Vadodara would train 4000 workers resulting in
standards that are on par with Japan. 300 young officials of Indian Railways are being
trained in Japan to give them exposure in High Speed Track Technology. It will create a
highly skilled and capable work force in the long run. The development of the New
Shinkansen Technology by Japan will ensure more growth opportunities.
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MAKE IN INDIA vis-a-vis India a Manufacturing Hub

Topic Background:
With a vision and mission to put Indian Economy on the wheel of high growth, Government
launched the ―Make in India‖ campaign. The project aims to attract businesses from
around the world to invest and manufacture in India.
The vision of the campaign is to make India a global hub for the manufacturing of goods
ranging from cars to software, satellites to submarines, paper to power and a lot more.
Make In India: Concept
Make in India is a major new national program of the Government of India designed to
facilitate investment, foster innovation, enhance skill development, protect intellectual
property and build best in class manufacturing infrastructure in the country. The primary
objective of this initiative is to attract investments from across the globe and strengthen
India‘s manufacturing sector. It is being led by the Department of Industrial Policy and
Promotion (DIPP), Ministry of Commerce and Industry, Government of India. The Make in
India program is very important for the economic growth of India as it aims at utilizing the
existing Indian talent base, creating additional employment opportunities and empowering
secondary and tertiary sector. The program also aims at improving India‘s rank on the Ease
of Doing Business index by eliminating the unnecessary laws and regulations, making
bureaucratic processes easier, making the government more transparent, responsive and
accountable.
―I want to tell the people of the whole world: Come, make in India. Come and
manufacture in India. Go and sell in any country of the world, but manufacture here. We
have skill, talent, discipline and the desire to do something. We want to give the world an
opportunity that come make in India,‖ Prime Minister of India, Mr Narendra Modi said
while introducing the programme in his maiden Independence Day speech from the
ramparts of the Red Fort on August 15, 2014. The initiative was formally introduced on
September 25, 2014 by Govt. at Vigyan Bhawan, New Delhi, in the presence of business
giants from India.
The focus of Make in India program is on 25 sectors. These include: automobiles, aviation,
chemicals, IT & BPM, pharmaceuticals, construction, defence manufacturing, electrical
machinery, food processing, textiles and garments, ports, leather, media and
entertainment, wellness, mining, tourism and hospitality, railways, automobile
components, renewable energy, biotechnology, space, thermal power, roads and highways
and electronics systems. As per the current policy, 100% Foreign Direct Investment (FDI) is
permitted in all 25 sectors, except for Space industry (74%), Defence industry (49%) and
Media of India (26%).
The dedicated website for this initiative (www.makeinindia.com) not only showcases the
25 sectors but also puts focus on the live projects like industrial corridors and policies in
the area of foreign direct investment, national manufacturing, intellectual property and
new initiatives. The Investor Facilitation Cell is an integral part of this website, which
aims at providing all information/data analysis to investors across sectors.
Because of initiatives taken under make in India combined with other initiatives by the
end of 2017, India rose 42 places on Ease of doing business index, 32 places World
Economic Forum's Global Competitiveness Index, and 19 notches in the Logistics
Performance Index. And moving forward India has recorded a jump of 23 positions against
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its rank of 100 in 2017 to be placed now at 77 th rank among 190 countries assessed by the
World Bank.
Make in India-key facts
 ―Make in India‖ is a realistic project which aims to increase the contribution of
manufacturing in GDP to 25% from 16% as of now.
 With the launch of ‗Make in India‘ campaign, India has already marked its presence
as one of the fastest growing economies of the world.
 India is having the favourable demographic dividends for the next 2-3 decades and
the cost of the manpower is less as compared to the other developed countries.
 India is a house of strong and responsible business houses operating with credibility
and professionalism. These business houses have big contribution into the
development of the Indian economy.
 India has a strong consumer market and is going to expand in the coming years.
 The strong technical and engineering capabilities backed by top-notch scientific
and technical institutes are an added advantage to boost this campaign.
India A Manufacturing Hub

India has followed a peculiar growth story over the years. While China focused on cheap,
high volume commodity production, India has seen high growth in the services sector. The
new government has begun its term hitting the right notes with the Prime Minister
personally putting his weight behind the "Make in India" campaign.
Right from creating a single window facility for addressing investor concerns, identifying
key manufacturing sectors, to creating a common platform to unite state governments,
bureaucracy and corporate leaders; the government seems serious in its intent to elevate
India's "ease of doing business" rank internationally. Overhauling complex compliance
procedures and reforming archaic labour laws will put an end to institutionalised
corruption and encourage entrepreneurship. Easing the FDI norms in construction, rail
infrastructure and defence should only be the beginning of a series of positive signals.
India is blessed with a large labour pool and admirable levels of judicial transparency. It
can leverage its territorial position to play a critical role in the global supply chains.
Doubling up as a potential high consumption market can keep demand fluctuations in
check as well as save up on the logistics costs. And if it can internally strengthen on three
fronts: cost (cheaper labour), quality (high skilled workforce), and supply chain (robust
infrastructure), India has started its journey to became a manufacturing hub and can call
itself the next global Manufacturing hub in future.
Small Bank a threat
Concept of Small Finance Bank
The concept of Small Finance Bank (SFB) in India was introduced in the Union Budget
2014–15 to achieve the objective of greater financial inclusion.
Small Finance Banks are required to meet certain additional requirements applicable
specifically to institutions that are licensed as SFB by the Reserve Bank of India. Some of
the typical features are:
1. SFBs are required to open at least 25% of its branches in unbanked rural areas.
2. These banks are required to extend at least 75% of their Adjusted Net Bank Credit
(ANBC) to priority sector. Priority sector includes Agriculture, MSMEs, Export
Credit, Housing, Education, and Social Infrastructure and Renewable energy.
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3. At least 50% of their loan portfolio should constitute loans and advances of up to
Rs. 25 lakhs.
Concept of SFBs has been introduced to provide supply of credit to small business units,
small and marginal farmers and unorganised sector entities in India. Some prominent SFBs
which have begun operations are AU Small Finance Bank, Ujjivan Small Finance Bank and
Equitas Small Finance Bank.
They were set up with the twin objectives of providing an institutional mechanism for
promoting rural and semi urban savings and for providing credit for viable economic
activities in the local areas
 They are established as public limited companies in the private sector
 They are promoted either by individuals , corporate, trusts or societies
 The minimum paid up capital of such banks will be Rs.5 crores
 The promoter‘s contribution should be at least Rs. 2 crores
 Local area banks can operate and open their branches in a maximum of three
geographically contiguous districts.
 They are governed by the provisions of Reserve Bank of India act 1934, Banking
Regulation act 1949 and other relevant statutes.
How it will change current financial system:
The move of giving licenses to small financial banks as well as payment banks will be the
major step towards pushing financial inclusion in the country. The main target for both
types of banks will be small businesses and low-income household by providing them
financial services at low transaction cost. It is uneconomical for banks to open branches in
every village, but with mobile phones which have wider penetration can provide low-cost
platform for taking banking services to every citizen. It will include people who mainly
transact in cash to take their first step into banking system and also accelerate India‘s
journey as a cashless economy.
Cost of banking will come down due to competition from payment banks and small banks.
Currently, private banks like ICICI, HDFC, Axis, etc. are making huge profits by collecting
funds at lower costs from savings accounts & current accounts (CASA deposits account for
40% of bank deposits) and lending it to small borrowers at higher rates. But payment banks
and small finance banks get big chunk from this by providing higher interest rate on
deposits and giving credit (small finance banks only) at lower rates. This will increase
competition and lower-income group and small businesses will be benefitted the most.
For customers, the real attraction will not be higher interest rates, but the convenience of
carrying out banking transactions at fingertips. Also, as payment banks will mainly have
government as a borrower, there is very less chances of defaults. Government is also get
benefitted as a borrower, as payment banks will expand access to cheap funds. As
payment banks can only invest in short-term government bonds, government can borrow
more at cheap rates.
We can also eliminate black money from large part of financial system by reducing cash
transaction and encouraging people for use of e-money. This is achievable within 5-10
years with investment in financial literacy and educating rural citizens, especially women.
Payment bank will reduce dependency on cash and will increase m-commerce, as mobile
wallets will be used as payment option. It will also transform our subsidy and social
welfare schemes. With the troika of Aadhaar card, Jan Dhan Yojana and payment banks
will enable government to provide direct subsidy.
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Today, there is a large unmet need for those at the bottom of the pyramid not just to
have a bank account but also to get loan to run their small businesses and get out of
poverty. Various models of rural and cooperative banks have failed to deliver these. But
organizations that are selected for small financial banks have successfully done this job of
giving small loans and know their borrowers‘ needs. So they have high chances of success.
Small financial banks will extend formal financial access to small enterprises that are
currently dependent on high-cost unorganized sector lending. According to RBI estimates
90 percent of small enterprises do not have access to formal financial institutions. So it
will be a huge step towards full financial inclusion.
Commercial banks mainly funds large and medium industries or give loans for home,
education or vehicle purposes. But it is very difficult for diamond cutting units or
restaurants or any other small enterprises to get working capital funding. Small financial
banks can fill this gap. RBI expects them to be high technology and low cost operators,
which also bring new innovations in the industry.
How it will affect Commercial Banks: Whether it is threat?
The customer base of commercial banks might reduce due to shift of savings account
money into payment bank account. So low cost deposits of banks might reduce drastically.
Due to such a shift, commercial banks‘ regular fee incomes like – cash transfers, cheques
withdrawals, fee for making demand drafts or ATM transactions, etc. might reduce.
Currently, commercial banks have to park 19.5% of their deposits as Statutory Liquidity
Ratio (SLR). This gives the government ready market for borrowings but it encourages lazy
banking. But as payment banks will have to invest 75% of their deposits in G-sec and they
become large and successful, it can also reduce Statutory Liquidity Ratio (SLR) burden on
commercial banks.
But commercial banks‘ major advantage over payment banks is that they can provide
services and technologies same as payment banks but payment banks cannot provide all
the services provided by commercial banks. Also major banks have already invested
heavily in their technological infrastructure so they can provide similar services. But
payment banks are major threat to cooperative bank and small public sector banks. So
they will have to adopt fast or else they will lose their business.
Conclusion:
Inclusion of both payment banks and small finance bank will mark biggest revolution after
the nationalization of banks in the Indian banking section. It will make banking more
competitive and more inclusive for both borrowers and depositors thus making banking
more affordable to the common man. They are not a threat to Public Sector Banks. On the
contrary they may be beneficial to the banking sector in the long run.
Policy on regulation of E-commerce sector

As we all know, in the last couple of years, e-commerce transactions are on increase. The
size of Indian economy will be $1 trillion by 2022. This necessitates a policy as well as
coordination among various wings of the government. Thus government has come up with
a policy which will make an attempt to create a one-stop shop for norms and regulations
under which online retailers will be covered.
The key provisions of this policy are:
 Large e-commerce firms should phase out discounts within 2 years.
 E- Commerce firms have to store consumer data in India. Firms will be given two
years to comply
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 Independence e-commerce regulator will deal with consumer complaints,

compliance with FDI caps
 Proposes tax sops to encourage data localisation and grant infra status to data
centres
 49% FDI proposed under inventory model for firms to sell locally-produces goods on
their online platform. Control of such firms will remain with Indians.
 Bulk purchases of branded goods by related party sellers which lead to price
distortions in a marketplace will be prohibited.
 To provide a forum for consumers, task force has suggested setting up of Central
Consumer Protection Authority (CCPA).
 It is necessary that the foreign e-commerce firms should be brought on a level
playing field with Indian firms. To do so, foreign firms should be made to follow
same rules for payment systems.
 Greater regulatory scrutiny has been recommended for mergers and acquisitions
that may distort competition. The Competition Commission of India has been asked
to undertake such exercises. This is significant due to the recent acquisition of
Flipkart by US retail major Walmart.
 It suggests that a separate wing should be set up in Enforcement Directorate to
handle grievances related to guidelines for foreign investment in e-commerce
 Currently, large numbers of payments are made by COD (Cash on Delivery) option.
Task force has suggested to create a fraud intelligence mechanism which would use
artificial intelligence-based authentication systems, for early detection of frauds.
It definitely benefits the Indian Companies. They will get following advantages:
 It will help large companies build a viable business rather than just depending on
discounts.
 Many MSMEs will get a better chance to go online.
 It will enable better negotiations on multilateral issues with WTO
 In long run, supports the Make in India initiative
 Having a regulator, e-consumer courts may better address complaints about online
financial frauds.
 Creates level playing field for India companies
Page 153 of 185

Demonetization – Effect on the Economy in the

short run and long run
Reserve Bank of India‘s (RBI‘s) confirmation that most demonetized notes were returned
to the central bank finally confirms the long-held suspicion that the unilateral executive
decision to ban specified notes not only failed in its stated objective of flushing out hidden
wealth but also ended up causing some damage to the economy. The RBI annual report for
2017-18, released on Wednesday, shows that almost all the banned banknotes, or 99.3% of
the notes withdrawn, were returned to the central bank.
On November 8, 2016, all 500 Rupee and 1,000 Rupee notes1 were made invalid—
amounting to 15.44 trillion Rupees, or 86% of notes and coins in circulation and 12% of
India‘s total money supply. The cash that was rendered invalid was replaced with new
500- and 2,000-Rupee notes, but these were not circulated in full immediately.
The purpose:
• Bring income and wealth into the banking system, where it can be more easily
monitored and, if necessary, taxed;
• Help move the population into the digital economy; and,
• Eliminate fraudulent currency, which is often used by terrorist groups.
All economic agents were given a limited time window to deposit their existing notes with
banks and replace those with new notes. This created a huge pressure on the banking
system, marked by lengthening queues outside banks for about two months.
The sudden decision had a two-fold impact on the Indian economy: an aggregate demand
shock by reducing the supply of money, and, an aggregate supply shock by constraining
availability of cash as a critical input for specified economic activities, such as purchase of
inputs in the agriculture sector. Growth slowed down to a four-year low of 6.7%.
Kavita Chacko, senior economist with Care ratings agency, says: ―Demonetization led to
disruptions in economic and industrial activity. The lower domestic GDP growth in the past
two years is largely on account of demonetization and GST implementation led
turbulence."
At the same time, RBI data indicates that the desired effect of a substantial reduction in
frequency of cash transactions remains largely unfulfilled.
Immediately after demonetization (November-December 2016), sales of consumer

durables and appliances slipped by 40%. The effect of demonetization was more
pronounced in Tier-II towns and beyond, generally referred to as up-country markets. The
impact on the durables and appliances segment was palpable as this market still operates
80% on cash.
Schemes encouraging digital payments, special discount offers, and promotions did not
ease demonetization‘s impact on consumer durables market.
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That year, companies in the sector were expecting a 30% growth on improved household
income, backed by a good monsoon and the 7th Pay Commission. But that did not
materialize.
The after-effects have also taken some time to feed through the system. In its latest
Article IV Consultation report on India, released in August 2018, the International
Monetary Fund (IMF) has said: ―The impact on growth appears to have been more severe
and longer-lasting than anticipated at the time of the 2017 Article IV Consultation with a
disproportionate impact on the informal sector."
The negative impact of demonetization was felt across the all segments of economy,
especially agriculture and industry. The worst impacted were segments that relied on
high-volume cash transaction, such as organized and unorganized retail. The impact was
felt at both the firm level as well as at the consumer level. The IMF report quoted above
also states that the disruption caused by cash shortages dampened consumer and business
sentiments, leading to a decline in high-frequency consumption and production indicators,
such as sales of two-wheelers and cement output, respectively.
How Successful?
The Reserve Bank of India has stated that 99% of the currency that had previously been
taken out of circulation has now been replaced by the new currency series. This suggests
that the informal economy is vigorously trying to reassert itself. Nevertheless:
• Tax receipts were up 16.9% year-on-year in February 2017 i.e. 24% increase in
the number of tax receipts filed. In addition, the number of suspicious
transactions reported in the banking system rose to 473,000 in Fiscal Year (FY)
2017, up from 106,000 in FY 2016, a possible source of future tax revenue.5
• Digital and credit card payments were up by 46% and 65%, respectively, in the
year to March 2017.
• Anecdotal evidence suggests that demonetization did reduce the activities of
violent groups operating in the region for a period.
What about the economy?
GDP growth has decelerated over the last four quarters, from 7.9% growth in Q2 2016 to
5.7% in Q2 2017. By comparison, most of the rest of the world began to see a pick-up in Q3
2016.
The Centre for Monitoring Indian Economy (CMIE), a private forecaster, estimates that 1.5
million jobs were lost between January and April 2017, as the employment level fell to
405 million people.
The Purchasing Managers‘ Indices for India indicate that sentiment bounced back quite
quickly after demonetization but has been a bit volatile since.
Was it worth it?
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It created too much economic disruption, particularly for the rural poor who operate only
in the cash economy, and not enough gain. However, demonetization needs to be seen in
the context of a wider program of reforms in India which are significant in terms of the
nation‘s economy, society and real estate sector. These include:
• The Goods and Services Tax (GST), or the national sales tax: Goods will be able to
be transported throughout India without negotiating state by state sales tax
systems. This will benefit to economic efficiency in general and the logistics sector
in particular.
• The Real Estate Regulation and Development Act (RERA): Will provide a framework
for comprehensive regulation of all phases of the real estate development process
at the national and state levels to improve market transparency.
• Exemption of Dividend Distribution Tax on special-purpose vehicles in 2016: This
opens the way for expansion of the Real Estate Investment Trust (REIT) sector in
India, bringing more professional real estate management and a more diversified
set of real estate investment opportunities.
• Infrastructure status for affordable housing along with other tax reliefs and
development incentives under the Pradhan Mantri Awas Yojana (PMAY) scheme.
In addition, the government is about to announce details of a large fiscal stimulus to boost
growth. At 69%, India has a debt-to-GDP ratio that is about the same as Germany‘s, so
India has plenty of ability to spend to support the process of change.
Page 156 of 185

Chinese goods- threat to Indian Economy.

―Chinese imports have thrown a spanner in the wheel of India‘s economic progress per se,
and the industrial sector in particular,‖ the parliamentary standing committee on
commerce voiced in its report tabled last week. Beginning with hard numbers that
establishes its basic premise of huge and constantly growing Sino-Indian trade imbalance,
the report dwells on the boiling debate on the market economy status to China, echoing a
similar line of thought implicit in the US-initiated trade war.
Identifying the problem of costly capital in India vis-à-vis China, it suggests product
specific strategies for improving the trade balance, underlining the accountability of
pertinent institutions, including the Directorate General for Anti-Dumping and Allied
Duties and the Risk Management Division of the Central Board of Indirect taxes and
Customs.
The committee found that Chinese manufacturers were re-routing their products through
the markets of other countries that India has Free Trade Agreements (FTA) with.
Straddling the South East Asia, underdeveloped members of ASEAN have served as hubs for
Chinese exporters to circumvent anti-dumping and countervailing duties, it says. It has
recommended a relook at the Least Developed Countries (LDC) arrangements and joint
verification/ certification mechanism with the partner countries.
The report has also expressed skepticism about India's ongoing negotiations with these
nation and China, among others for the Regional Comprehensive Economic Partnership
(RCEP) agreement. It expressed hope that India might offer to reduce its tariffs by 74-86
per cent of all goods. The unscrupulous imports from China are also on account of influx of
under-invoiced Chinese goods, goods brought in through mis-declaration and outright
smuggling, it says.
These illegalities have its share of adverse effect on domestic industry, the report
declared. In April to December 2017-18, as many as 1,127 cases of smuggling have been
registered by India, recovering more than Rs 5.4 billion worth of Chinese goods.
However, it also calls for measures such as encouraging people to buy Indian products,
popularizing ‗Swadeshi apnaea‘ (consume domestic goods) and generate positive public
opinion about Indian goods, which, trade experts say, contribute little to revive domestic
industry.
The big picture

16.6%: Chinese share in India‘s imports grew from 11.6 per cent in 2013-14 to 16.6 per cent in
2017-18. This came as a result of Chinese imports growing at a staggering 20 per cent in 2017-18,
compared to 9 per cent growth four years ago. India exports grew by 9.8 per cent in 2017-18.
$50 bn : In a decade to 2017-18, India‘s exports to China rose by $2.5 billion. In the same period,
China‘s imports in India rose by $50 billion. India registered a trade deficit of $157 billion in
2017-18.5%: Chinese government gives an effective rebate of 17 per cent to its exporter
companies.
This, the committee says, results in Chinese goods being 5-6 per cent cheaper than their Indian
counterparts, making it lucrative for Indian importers.
Page 157 of 185

9%: On account of costlier energy, finance and logistics, Indian goods are costlier by about 9 per
cent in the global market. Chinese industry gets loans at 6 per cent, compared to 11-14 per cent
in India. Logistics costs are 1 per cent of the business in China, compared to 3 per cent in India.
294: Of the 803 licenses provided by the Bureau of Indian Standards (BIS) to foreign
manufacturers selling in India under the Foreign Manufacturer Certification Scheme (FMCS), 294
licenses for 55 products have been granted to Chinese manufacturers.
A similar scheme has also provided 9,274 registrations for information technology and electronics
products. Of this, 5857, 0r 64 per cent, registrations have been granted to Chinese
manufacturers.
8%: Despite the fact that 75-80 per cent of Chinese steel products are covered under anti-
dumping duty, their imports have increased 8 per cent in 2017-18.
Sectors that have been impacted
Industry Key number and how badly it hurts Recommendations
1,200%: In the life-saving drugs
category, the dependence on Chinese
imports is as much as 90 per cent. As
much as 75% of the APIs (Active
Pharmaceutical Ingredients) used in the
Revive India‘s fermentation-based
Pharmaceuticals formulations of essential drugs in the
API capability.
National List of Essential Medicines
(NLEM) are sourced from China. China
has increased the prices of bulk drugs
11-fold, or 1,200 per cent, during last
two years.
90%: Chinese solar imports form 90% of
the India‘s market share directly or
indirectly through their offshore Domestic industry must pursue
companies across South East Asia. innovation that will help in further
Further, its dumping prices in India are reduction in price per unit. Anti-
Solar
lower than that of the price at which dumping duty may be levied in a
they sell in Japan, Europe or the US. differential manner to facilitate
Under the Special Incentive Package level pegging for domestic industry.
Scheme, no domestic manufacturer has
got any capital subsidy till now.
35%: Cheap Chinese imports have
resulted in 35 per cent closure of power
Need to look at the LDC
looms in Surat and Bhiwandi, the report
arrangements wherein imports
notes. It fires a salvo at the GST
from LDCs are fully exempt.
structure, stating that taxing synthetic
Textile Increase the customs duty on
fibers at 18 per cent, yarns at 12 per
garment imports. Modernize the
cent and fabrics at 5 per cent has
power loom and handloom sector
caused unintended benefit to China
for mass production with quality.
resulting in increased imports of fabric
from there.
Toys 85%: About 85-90 per cent of toy market Issue quality control order (QCO) for
Page 158 of 185

space is commanded by Chinese toys and ensure toxic and cheap

products, the report says. It has quality Chinese toys do not enter
affected 50 per cent of the domestic the country. Import of finished toy
toy industry. Low-priced Chinese toys products from China be banned
are either mass-produced or are rejects
from other countries and are diverted
to Indian sub-continent/ Africa.
Further, Chinese toys are toxic in high
proportion, it says.
58%: Bicycle imports from China saw a
rise of 58 per cent in volume and 47 per
cent in value in April to October 2017
over the previous year. Further, under- Carry out detailed analysis of the
invoiced bicycles constitute 85% per customs data in order to unravel
cent of the total bicycle imports from the modus operandi of the
Bicycles
China in 2017-18. Apart from affecting unscrupulous importers involved
bicycle manufacturers, it is gradually and curb the entry of under-valued
killing the unorganized industry of small Chinese bicycles into the country.
bicycle parts manufacturers who
provide employment to many skilled
and unskilled workers.
Source: Impact of Chinese Goods on Indian Industry, 145th report of Parliamentary standing
committee on commerce
In Favour: -
 India is importing Chinese goods in large amounts. These products are cheaper than
Indian ones, which is a threat to Indian manufacturers.
 China-Pakistan Economic corridor passes through India‘s territory, without the permission
of India.
 China is maintaining good relations with India‘s neighbours to isolate India. For
example, China is developing its rail and roadways to Tibet and Nepal under Sino-Nepal
friendship treaty, which pose as security threat to India.
 India has border disputes with China at Arunachala Pradesh, Aksai Chin and Sikkim.
China‘s aggressiveness is causing a lot of trouble to India as well as Indians living in these
disputed areas.
 China is devaluing its currency. It is a threat to not just India but many other countries,
which are importing Chinese goods. Because with less costs, Indian traders are more
likely to increase their imports leading to reduction of prices, i.e. deflation.
 Chinese software professionals are biggest competition to Indian software professionals
working in Foreign countries, especially in USA and Europe.
 China is turning into competition to India in exporting some goods to other countries.
Recently China has started exporting its manufacturing goods to United Kingdom by train
to reduce its cost of export and gave a tough competition to India.
 With its good ties with Pakistan, China can cause any kind of damage to India by funding
nuclear tests and terrorist groups there.
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 China is opposing India‘s entry into NSG (Nuclear Suppliers Group), though many other
countries are in favour of India.
 China is being aggressive in its operations in the Indian ocean, which is a potential threat
to India‘s security.
Against: -
 Amid globalization, every influential country tries to become superpower. So, to sustain
in this competition, it is inevitable for China to be aggressive towards its competitive
countries.
 Though there are few disputes, both India and China are maintaining good diplomatic
relations.
 These days manufacturers of India are giving tough competition to Chinese goods. ‗Make
in India‘ project also helps in this issue.
 Though there are security threats, India is in a good position to defend itself. With good
ties and agreements with Russia and France, India is strengthening its Defence sector.
Conclusion: -
China is acting as a threat to India sometimes, but India is able to defend herself.
Though there are disputes between India and China, these two neighbours are maintaining
good diplomatic relations. There are bilateral trade relations and joint ventures too
between India and China.
As the factory to the world, China helps the average Indian consumer fill her shopping
cart. Yet, the Made-in-China label often causes the nose to wrinkle when the product is
weighed on the fulcrum of durability. Therefore, it might come as a major surprise to auto
buyers in India that vital components in their cars and bikes – the most durable and
expensive consumer products sold – have their origins in our giant northern neighbour that
now sells more automobiles than the USA.
Page 160 of 185

The Mudra Bank

Pradhan Mantri MUDRA Yojana (PMMY)
Pradhan Mantri MUDRA Yojana (PMMY) is a scheme launched by the Hon‘ble Prime Minister
on April 8, 2015 for providing loans upto 10 lakhs to the non-corporate, non-farm
small/micro enterprises. These loans are classified as MUDRA loans under PMMY. These
loans are given by Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs
and NBFCs. The borrower can approach any of the lending institutions mentioned above or
can apply online through this portal. Under the aegis of PMMY, MUDRA has created three
products namely 'Shishu', 'Kishore' and 'Tarun' to signify the stage of growth / development
and funding needs of the beneficiary micro unit / entrepreneur and also provide a
reference point for the next phase of graduation / growth.
Ease of Doing Business and Ranking of India

In a big boost for NDA government, India climbed another 23 points in the World Bank‘s
ease of doing business index to 77th place, becoming the top ranked country in South Asia
for the first time and third among the BRICS. In the last two years the country has climbed
53 notches, a performance matched in the past only by Bhutan. The biggest gain was in
construction permit where India climbed 129 ranks to 52nd place on the back of targeted
government effort to remove hurdles. The details were revealed in World Bank‘s Doing
Business Report which is an assessment of business regulation across 190 economies.
Further, India now ranks in the top 25 in the world on three indicators- getting electricity,
getting credit and protecting minority investors, department of industrial policy and
promotion said on Wednesday. The doing business report ranks countries on the basis of
distance to frontier (DTF), a score that shows the gap of an economy to the global.
The World Bank has recognized India as one of the top improvers for the year. This year,
India features among the report‘s list of top 10 improvers for the second year in a row.
India is the one of only nine countries around the world and only one in BRICS to feature in
this list.
The six reforms recognized in this year‘s report are starting a business, getting electricity,
dealing with construction permits, getting credit, paying taxes and trading across borders.
In dealing with construction permits, India has implemented an online single window
system, introduced deemed approvals and reduced the cost for obtaining these permits. In
the electricity sector, the time taken for obtaining a new connection has reduced from
105 to 55 days.
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The World Bank released its latest Doing Business Report (DBR, 2019) today in New
Delhi. India has recorded a jump of 23 positions against its rank of 100 in 2017 to be
placed now at 77thrank among 190 countries assessed by the World Bank. India‘s leap of
23 ranks in the Ease of Doing Business ranking is significant considering that last year
India had improved its rank by 30 places, a rare feat for any large and diverse country of
the size of India. As a result of continued efforts by the Government, India has improved
its rank by 53 positions in last two years and 65 positions in last four years.
The Doing Business assessment provides objective measures of business regulations and
their enforcement across 190 economies on ten parameters affecting a business through
its life cycle. The DBR ranks countries on the basis of Distance to Frontier (DTF), a score
that shows the gap of an economy to the global best practice. This year, India‘s DTF
score improved to 67.23 from 60.76 in the previous year.
India has improved its rank in 6 out of 10 indicators and has moved closer to
international best practices (Distance to Frontier score) on 7 out of the 10 indicators.
But, the most dramatic improvements have been registered in the indicators related to
'Construction Permits' and trading across Borders'. In grant of construction permits,
India's rank improved from 181 in 2017 to 52 in 2018, an improvement of 129 ranks in a
single year. In 'Trading across Borders', India's rank improved by 66 positions moving
from 146 in 2017 to 80 in 2018. The changes in six indicators where India improved its
rank are as follows:
S. No. Indicator 2017 2018 Change
1 Construction Permits 181 52 +129
2 Trading Across Borders 146 80 +66
3 Starting a Business 156 137 +19
4 Getting Credit 29 22 +7
5 Getting Electricity 29 24 +5
6 Enforcing Contracts 164 163 +1
Overall rank 100 77 +23
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The important features of India's performance this year are:
 The World Bank has recognized India as one of the top improvers for the year.
 This is the second consecutive year for which India has been recognized as one of
the top improvers.
 India is the first BRICS and South Asian country to be recognized as top improvers in
consecutive years.
 India has recorded the highest improvement in two years by any large country since
2011 in the Doing business assessment by improving its rank by 53 positions.
 As a result of continued performance, India is now placed at first position among
South Asian countries as against 6th in 2014.
Indicator wise highlights of India‘s performance are:
A. Construction Permits –
a. Procedures reduced from 37 to 20 in Mumbai and from 24 to 16 in Delhi

b. Time reduced from 128.5 to 99 days in Mumbai and from 157.5 to 91 days in
Delhi
c. Building quality control index improved from 12 to 14 in Mumbai and 11 to
14 in Delhi
d. Cost of obtaining construction permits reduced from 23.2 percent to 5.4
percent
e. DTF score improved from 38.80 to 73.81
B. Trading Across Borders –
a. Changes in time and cost are as follows:
b. Robust Risk Management System has reduced inspections significantly

c. e-Sanchi allows traders to file all documents electronically
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d. Time and cost to export reduced through the introduction of electronic

self-sealing of container at the factory
C. Starting a Business -
a. Access to Credit
b. Rank improved from 29 to 22
c. DTF improved from 75 to 80
d. Strength of legal rights index improved from 8 to 9
e. Secured creditors will now be repaid first during business liquidation hence
given priority over other claims
D .Access to Electricity
a. Procedures reduced from 5 to 3 in Delhi and 5 to 4 in Mumbai

b. DTF improved from 85.21 to 89.15
Improvements have taken place due to the commitment of the Government to carry out
comprehensive and complex reforms, supported by the bureaucracy which has changed
its mind-set from a regulator to a facilitator. The Government has undertaken an
extensive exercise of stakeholder consultations to understand challenges of the industry,
government process re-engineering to provide simplified and streamlined processes to
create a more conducive business environment in the country. As a result of continued
efforts, India's rank has improved as follows:
Year 2014 2016 2017 2018
Overall rank 142 130 100 77
DTF 53.97 56.05 60.76 67.23
The eight indicators in which India has improved its rank over last four years:
S.
Indicator 2014 2018 Change
No.
1 Construction Permits 184 52 +132
2 Getting Electricity 137 24 +113
3 Trading across Borders 126 80 +46
4 Paying Taxes 156 121 +35
5 Resolving Insolvency 137 108 +29
6 Enforcing Contracts 186 163 +23
7 Starting a Business 158 137 +21
8 Getting Credit 36 22 +14
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Implementation of reforms required coordination within various Ministries and

government agencies:
a. DIPP prepared reform action plan based on global best practices, with support of
World Bank‘s expert team
b. Identification of nodal Departments and constitution of Task Force for each
indicator. DIPP sensitizing Departments and worked with them for reform
implementation
c. Development of a Communication Plan for Dissemination of reforms to users and
other stakeholders, to generate awareness and receive feedback.
i. DIPP engaged expert agencies to receive regular industry feedback

on reforms
ii. Consulted stakeholders frequently to understand the gaps in reform
implementation
iii. Created WhatsApp groups to share reforms and address concerns of
users
iv. Conducted focused group discussions and one-to-one meetings with
users
v. Ran twitter Polls and conducted live Twitter chat sessions to gauge
user perception
d. Identified corrective measures based on feedback received

e. Regular review of reforms and removing bottlenecks in implementation
f. Indian delegation visited World Bank multiple times to explain the reforms
implemented and understand areas for improvement
Banks, already swamped with large corporate bad loans, are now facing a new threat.
The first quarter results of this fiscal year have opened a can of new worms: retail,
agriculture and MSME (micro, small and medium sector enterprise) bad loans.
After the Reserve Bank of India‘s regulatory dispensation of three months post
demonetization and the farm loan waivers announced in five states, banks witnessed
defaults emerging from these new segments.
Over 30 banks, which have already reported their first quarter earnings, have recorded an
increase of nearly Rs 45,000 crore in their gross non-performing assets (NPAs).
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RAM: The growth Engine

―Retail is the only book which is growing so banks will continue to lend in the secured
retail i.e. mortgage loans or other home loans. But under the garb of retail loans, public
sector banks (PSBs) have extended walk-in loans to a lot of SMEs. There is a difference in
the way they approach loans (as compared to private banks). Here is the need to go on the
ground and assess the inventory or equipment they are building. So, there could be some
lacunae we suspect. So, it needs to be seen, how much will it help the PSBs to move
beyond their core strengths,‖ Abhishek Bhattacharya, Director, Financial Institutions at
India Ratings and Research.
Country‘s biggest bank State Bank of India (SBI), during its results announcement on
Friday, said that Rs 17,886 crore out of the Rs 24,249 crore worth of loans that slipped
into the bad loan category during the quarter were from the retail, agriculture and SME
segments.
It explained that about 40 percent of these slippages came from the bank‘s agriculture
loan book while 35 percent came from SME loans and 14 percent came from low-risk
housing loans.
In cases where a borrowers‘ farm loan had slipped into the NPA category, repayments on
home loans became overdue as well, the bank‘s management said in a post results
conference call.
Some part of this will be recovered after states make good on payments due for waived
farm loans, said SBI‘s Rajneesh Kumar, Managing Director of the national banking group.
"We should get about Rs 3,000 crore from states within two months for payments against
the farm loan waivers. We are certain that the slippages can be cleared," Kumar said. He
added that the bad loans in the SME segment grew because of the Reserve Bank's 90-day
relief given to small borrowers for repayments to tide over the cash crunch that followed
demonetization announced on November 8, 2016.
At the end of the June quarter, SBI reported its total bad loans at Rs 1.88 lakh crore,
accounting for nearly 10 percent of the bank‘s total loan book. Of this, 18 percent of its
corporate loan book turned into NPA. The NPAs from SME and agriculture segment stood at
12 percent and 9 percent, respectively.
Similarly, Bank of Baroda said of nearly Rs 4,200 crore slippages, Rs 868 crore came from
agriculture, Rs 1,050 crore came from MSME and Rs 369 crore came from retail portfolio.
The total slippages of the three portfolios is more than the corporate slippages at Rs 1909
crore.
Bhattacharya also said that private sector banks have more rational growth. "Most of their
lending, say about 60-70 percent is to their own customers or have other relationships
with their banks. PSBs as long as they are doing mortgages are fine, but growth slightly
beyond their comfort looks difficult. Though there are no red flags in the private bank‘s
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growth in PSBs is slightly higher than our comfort zone...However, there may not be a
retail bubble."
Among top private sector banks, HDFC Bank and Axis Bank also saw a rise in agriculture
loans with HDFC Bank‘s 60 percent and half of Axis Bank‘s rise in its incremental NPAs
coming from the agriculture sector.
Other public sector banks including Union Bank of India, UCO Bank and new private section
lenders such as Bandhan Bank and Ujjain Small Finance Bank also reported delinquencies
in their loan repayments resulting in higher NPAs due to the farm waivers.
In addition, SBI has also got cautious in its lending to the Ola and Uber cab drivers due to
their lowering income and hence increase in defaults.
In retail loans, Bhattacharya added that there is risk adjusted pricing, as typically in
personal and credit card loans, they have 5-6 percent secured loss priced in. So, despite a
spike in delinquencies, the margins may not contract as much.
The MSME sector contributes significantly to manufacturing output, employment and

exports of the country. However, SMEs in India are also facing a number of challenges.
Worldwide, the micros, small and medium enterprises (MSMEs) have been accepted as the
engine of economic growth and for promoting equitable development. The major
advantage of the sector is its employment potential at low capital cost. The labour
intensity of the MSME sector is much higher than that of the large enterprises. MSMEs
constitute over 90 per cent of total enterprises in most economies and are credited with
generating the highest rates of employment growth and account for a major share of
industrial production and exports.
According to a report by International Finance Corporation (IFC) that conducted a study of

132 countries, there are about 125 million MSMEs worth an estimated 85 million in
emerging economies. MSMEs are the largest employment generators globally, with MSMEs
in high-income economies employing at least 45 per cent of the workforce.
In India too, MSMEs play a pivotal role in the overall industrial economy of the country. As
per available statistics (4th Census of MSME Sector), this sector employs an estimated 59.7
million persons spread over 26.1 million enterprises. In terms of value, the MSME sector
accounts for about 45 per cent of the manufacturing output and around 40 per cent of the
total export of the country.
Currently, the MSME sector in India is broadly classified into manufacturing and those
engaged in rendering services. These are further classified into micro, small and medium
enterprises based on their investments in plant and machinery or equipment.
The MSME sector, being one of the prominent sectors of the economy, contributes
significantly to the country‘s industrial production, exports, and employment. It also plays
an important role in socio-economic development of the country by supporting
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industrialization in rural and backward areas with a lower capital base. The MSME sector‘s
progress facilitates entrepreneurship development, which in turn assists in wealth creation
and achieving inclusive economic growth.
There are over 6,000 products ranging from traditional to high-tech items, which are being
manufactured by MSMEs in the country. The breakup is as follows: food products and
beverages (14.26 per cent), wearing apparel (13.67 per cent), fabricated metal products
(8.96 per cent), repairs and maintenance of personal and household goods, retail trade
(8.46 per cent), textiles (6.78 per cent), furniture (6.36 per cent), machinery and
equipment (4.66 per cent), other non-metallic mineral products (3.77 per cent), repairs
and maintenance of motor vehicles, retail sale of automotive fuel, personal and household
goods retail trade (3.72 per cent), wood and wood products (3.53 per cent) and others
(25.85 per cent).
It is well known that the MSME sector provides maximum opportunities for both self-
employment and jobs, outside agriculture sector. In recent years the MSME sector has
consistently registered a higher growth rate compared to the overall industrial sector.
With its agility and dynamism, the sector has shown admirable innovativeness and
adaptability to survive the recent economic downturn and recession.
CHALLENGES TO SMEs
The MSME sector contributes significantly to manufacturing output, employment and

exports of the country. Despite their high enthusiasm and inherent capabilities to grow,
however, SMEs in India are also facing a number of problems like sub-optimal scale of
operation, technological obsolescence, supply chain inefficiencies, increasing domestic
and global competition, fund shortages, change in manufacturing strategies and turbulent
and uncertain market scenarios. To survive with such issues and compete with large and
global enterprises, SMEs need to adopt innovative approaches in their operations. SMEs
that are innovative, inventive, international in their business outlook, have a strong
technological base, competitive spirit and a willingness to restructure themselves can
withstand the present challenges and come out successfully to contribute 22 per cent to
GDP.
Access to adequate credit
Despite several measures adopted by the Government and the Reserve Bank of India,
availability of credit continues to remain the key hurdle in the growth and investment of
the MSME sector. Though there are several sources available for financing, few problems
related to each of the sources make it difficult to get credit on affordable terms. The
main reason for bank credit is its risk perception about the MSME sector owing to lack of
collateral and high transaction cost involved in loan proposal.
According to statistical data released by 4th census of MSME, only 5.16 per cent of total
MSMEs, both registered and unregistered, have availed of finance through institutional
sources. Further, 2.05 per cent of the enterprises have taken finance via non-institutional
sources, majority of them, i.e., 92.73 per cent belong to no finance or self-finance
category. Hence, proactive measures are required to be taken to enhance credit from
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banks, especially to unbanked population, to divest traditional ownership of family

business and methodological infusion of equity to achieve the broad-based growth. The
merchant banker must be considered a partner or intermediary, who is going to take the
SME through, right from the preparation of the offer document.
Absence of equity capital is also hindering the growth. Though private equity is most
suitable for MSME, fiscal and regulatory barrier as well as global financial turmoil has dried
up the finances from this source.
In September 2012, the National Stock Exchange (NSE) launched its SME platform named
‗Emerge‘. In about a year, four companies have listed on the platform. ―The NSE is not
really looking at the size of the turnover. It ranges from 200 million to 1.5 billion and
the fund rising can be as little as 100 million. But what we are looking at in NSE is good
quality businesses, good quality companies and good management teams coming on
board,‖ says Khatib Shah, Chief Manager-SME, National Stock Exchange of India.
The effort is to build credibility on the platform, bring confidence into the investors that
the companies which get listed on the NSE platform may be small but that does not mean
that they are not good companies or they‘re going to run away with your money. ―We are
doing our bit to ensure quality, further ensuring that there is good diligence done before
we take the company on board‖, add Shah.
Inadequate infrastructure
The availability of quality infrastructure is essential for increasing production, bringing

down the cost, achieving economies of scale and resultant synergy. MSME sector can be
divided into clusters consisting of old artisans at one end and industrialized enterprises at
the other. These are either situated in rural areas of the country or older industrial
estates. The state of basic infrastructure in rural areas such as roads, power or water is
inadequate to support the growth of the sector. In addition, inadequate market
infrastructure, retail shops, e-commerce, and technological infrastructure in the form of
R&D center testing lab, tool rooms, etc., act as a barrier for them to become a globally
competitive. Hence, there is need of infrastructure development in the MSME sector,
inclusive of all sorts of basic and supporting infrastructure facilities as well as upgrading
the existing infrastructure.
Skilled labor
MSMEs‘ role in terms of employment creation is eminent, yet, entrepreneurs in the sector
complain of having labour shortage. There is insufficient number of vocational training
institutes. The available network of industrial development institutes and information &
communication technologies (ICT) not only lack adequate amenities but also fail to
provide placements. There is a need to have many more training programmers. Typically,
in SMEs, a few people play a critical role. These organizations have to pass on the work
systematically to the successors through proper training. The National Policy on Skill
Development has set a target of skilling 500 million people by 2022, and it is hoped that
the needs of the SME sector will also be met.
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Technology constraint
If one were to really hold a mirror to what‘s happening today than it would not be far
from the truth to say that Indian SMEs suffer from problems of suboptimal scales of
operations and technology obsolescence.
In India, the MSME sector is mainly lab or intensive and there is also availability of cheap
labor. However, technology has its role to play in achieving economies of scale, improving
quality and prevailing over labour shortage. Use of appropriate technology in the
manufacturing process will bring down production costs and improve productivity. The
current globalization, which is characterized by innovation and competition, makes it
inevitable for MSMEs to equip themselves with new technology. Business automation is the
key to growth and success.
Many SMEs are not even aware of the possibilities of technology. ―Technology tools that
were available only to big boys, including ERPs and CRMs, are readily available now for
SMEs. This change has happened due to something called cloud computing,‖ says Lakshmi
Narayan Rao, CTO, Technology Services, and HP India.
Marketing
Marketing is one of the weak areas in the MSME sector, having major issues mainly due to
unavailability of finance and lack of awareness. The sector still needs to learn the best of
global marketing practices. This is evident from the fact that mere 1 per cent of the total
MSMEs are exporting units. There are a few MSME owners who are using web and social
media tools to promote brands, create related communities, and conducting surveys,
however, the result of such a campaign is largely focused on enhancing sales rather than
improving customer loyalty or gaining market insights. Hence, the major challenge for the
MSME sector today is to update and act upon the changes in marketing dynamics arising
out of globalization and technological upgradation in every sphere of marketing, brand
building, after sale service, and building clientele.
CONCLUSION
Despite less capital and high absorption of manpower, the sector has contributed to rural
industrialization and employment generation. With government support and constant
endeavor to resolve the challenges of marketing, capital and technology, the sector will
continue to play a substantial role in the Indian economy.
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Banking Operations
1. Amendments in Negotiable Instruments Act 2017 and its Effect in 172

Banking
2. Indian Accounting Standards [Ind As] system of accounting and its 174
impacts on banking
3. Control of Black Money-Bank‘s Role 178
4. Corruption and Slow Down of Indian Economy 180
Page 171 of 185

Amendments in Negotiable Instruments Act

2017 and its Effect in Banking
Introduction
The Lok Sabha has passed Negotiable Instruments (Amendment) Act on July 23, 2018. The
amendment introduces a new provision, Section 143A in the Act, which gives power to the
Court to order payment of interim compensation by the drawer of the cheque to the
complainant. As per this provision, interim compensation not exceeding 20% of the cheque
amount can be ordered to be paid in cases where the accused does not plead guilty in a
summary trial or summons case. The interim compensation has to paid within a period of
60 days of the order. It can be recovered in the manner of recovery of fine as provided in
Section 421 of the Code of Criminal Procedure. The provision further states that the
interim compensation so received has to be returned by the complainant along with
interest at bank rates as prescribed by the Reserve Bank of India, if the accused is
acquitted after trial.
The amendment also introduces Section 148 in the Act, empowering the appellate court to
direct deposit of a minimum of 20% of the cheque amount in appeal by the drawer against
conviction, within a period of sixty days. This amount can be released to the complainant
and has to be returned to the accused if the appeal is allowed. According to the statement
of objects and reasons, the amendment is introduced ―with a view to address the issue of
undue delay in final resolution of cheque dishonour cases so as to provide relief to payees
of dishonoured cheques and to discourage frivolous and unnecessary litigation which would
save time and money‖.
Key Features:
 Section 143A has been inserted which essentially empowers the court trying the
offence under Section 138 of the Act, to direct the drawer of the cheque to pay
interim compensation to the Payee in situations of a summary trial or summons case
wherein the drawer pleads to be "not guilty". This new provision seeks to cap interim
compensation to 20% of the cheque amount.
 Another provision introduced as Section 148 specifies that in case the drawer files an
appeal against his/her conviction, the Appellate court has the power to direct the
drawer to deposit a minimum amount of 20% of the fine or compensation that was
awarded by the Trial court. The Appellate Court may direct to release the amount
deposited by the appellant to the complainant at any time during the pendency of the
appeal. This amount shall be in addition to the compensation paid at the trial stage.
 The interim compensation at the trial as well as the deposit amount at the appellate
stage (as the case may be) shall be paid within 60 days from the date of the order by
the court trying the offence or the appeal. The concerned court may further extend
this period by an additional time of 30 days' subject to the sufficient reasons being
shown.
 In case of acquittal of the drawer/ appellant by the Trial Court or the Appellate Court,
(as the case may be) the payee/complainant shall be directed to repay the interim
compensation or amount deposited (as maybe applicable), to the drawer/appellant
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along with such interest as may be fixed by Reserve Bank of India at the beginning of
the relevant financial year. This amount shall be repaid within 60 days of the court's
order and this period may be further extended by another 30 days' subject to sufficient
reasons being shown.
Effects in banking system
This law comes with a promise to solve and aid in not only the SPEEDY DISPOSAL OF
THE pending cases pertaining to complaints under 138, but also to bring a sanctity to
the system by seeking to clamp down on defaults in payments. It clarifies the legal
position as to jurisdiction and also seeks to keep up with the modern banking system.
Conclusion
 The present Amendment is aimed to reduce the pendency ratio of cheque bounce
cases and appears to be a step taken towards improvement in the current scenario.
The amended provisions could pave the way towards enhancing the trade and
commerce industry and allowing various lending institutions to promote and stimulate
finances in the economy. It is also likely to strengthen the credibility of issued cheques
which will largely contribute towards building business relations.
 At the same time, it cannot be ignored that although the amended provisions are likely
to bring in better efficacy and credibility of cheques drawn, yet the offence is still
being categorized as a bailable offence with a maximum imprisonment of 2 years, if
convicted. This, in our opinion may call for further introspection and more stringent
provisions.
 However, the essence of the amended provisions which is drawn towards faster
disposal may come out as a boon to the present system. Although the applicability of
the amended provisions - whether prospective or retrospective, is not categorically
specified, yet it appears that the nature of the same are more procedural in nature,
considering the fact that the existing rights, obligations, duties of either party existing
at the time of commission of offence, is not altered or effected vide the amended
provisions. With the settled position that procedural laws are retrospective in nature
unless otherwise intended or specified, the amended provisions, which essentially
intends to boost the present manner of implementation of the existing rights and
duties of the parties at the time of commission of offence, would also have
retrospective application. Considering such a view, the pending litigations in addition
to the future ones may also get an impetus and a wave of relief to the genuine party.
 To sum up, we can say that although the Amendment Act is not without challenges yet
it largely appears to cater to its objective of expediting the disposal of cases and also
bringing wave of relief to the genuine holder of bounced cheques.
It is indeed a good attempt by the Legislature to provide some solace to the recipients
of cheques, who get stuck in the long-drawn litigation battles effecting the credibility
of the cheques (especially post-dated cheques) in their commercial activities. Although
the percentage of interim compensation to be awarded is low, it is good to see that
the Government has finally been able to address the problems faced by holders of
cheques.
Page 173 of 185

Indian Accounting Standards [Ind As] system of

accounting and its impacts on banking
Introduction
Ind AS stands for Indian Accounting Standards and is converged standards for IFRS
(International Financial Reporting Standards). To ensure that India converge globally
accepted standards, IFRS, Ind AS were adopted by the country and was made mandatory
for selected companies with a net worth of Rs. 500 crore or more.
Scheduled Commercial Banks (SCBs), excluding Regional Rural Banks (RRBs), were required
to implement Indian Accounting Standards (Ind AS) from April 1, 2018 vide RBI Circular
dated 11.02.2016.
According to the initial plan, ministry of corporate affairs was to implement Ind AS for
banks, insurance companies and NBFCs from 1 April 2018 onwards. In April 2018, RBI
deferred the implementation of Indian Accounting Standards by one year for banks. Now,
2019-20 would be the first year of Ind AS with 2018-19 as the comparative year for banks.
Also, Ind AS implementation date has been deferred for insurance companies by two
years.
Beneficiaries of Convergence
1. The Investors: The investor will be benefited as the information made available to him
is more reliable, relevant, timely and most importantly the information will be
comparable across different legal framework. It develops better understanding and
confidence among them.
2. The professionals: The professional, both in practice and in employment will get
benefits as they will be able to provide their services in various part of the world, as few
years after everybody will follow the same reporting standards.
3. The corporate world: The Indian corporate world reputation and relationship with
international finance community will elevate because of achievement of higher level of
consistency between reporting structure and requirements, better access to international
markets, improving confidence among the international investors.
4. Benefit to economy: If an economy has adopted the policy of globalization and

liberalization, the convergence with IFRSs in increasingly required. The convergence
increases the confidence of all people.
Opportunities from IFRS‘s Convergence
1. International Opportunity: Indian CAs can take their professional abilities and deep
knowledge anywhere around the world.
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2. Potential Demand of Valuation Experts: As per the IFRSs assets and liabilities are to be
recognized at fair values. This fair valuation will require valuers. This is one new area that
can be explored by CAs.
3. Appointment in Companies as IFRS specialist: Companies would be working along the

teams of experts and consultants. CAs would be required for interpreting the various
complex issues and preparing financial statements according to the standards. The banking
industry in India which is most affected by the implementation of IFRSs will also require
these professionals as this industry will have to prepare its financial statements as per the
new standards.
4. The persons with expertise in international accounting standards will also have an edge
over others in educational institutes which are running certificate diplomas and training
programmes in this area.
5. Continuing Professional Education: Intensive IFRS training needs to be imparted to key

management personnel of companies. ICAI has taken steps in this regard.
Arguments for and Against the Convergence of International Accounting Standards
1. Arguments for the convergence are
 Renewed clarity
 Possible simplification
 Transparency
 Comparability between different countries on accounting and financial reporting
 An increase of capital flow and international investments, which will further reduce
interest rates and lead to economic growth for a specific nation and the firms with
which the country conducts business. Timeliness and the availability of uniform
information to all concerned stakeholders will also conceptually make for a smoother
and more time-efficient process.
2. Arguments against accounting standards convergence are
 The unwillingness of the different nations involved in the process to collaborate based
on different cultures, ethics, standards, beliefs, types of economies.
 The time it will take to implement a new system of accounting rules and standards
Challenges in convergence with IFRS
In spite of lot of benefits enjoyed by several people, Implementation of IFRS is not a cup
of tea for each country. There are several impediments & practical challenges for the
adoption of IFRS.
1. Significant costs of convergence: Each country‘s accountants, regulators, faculty,

students & auditors must learn IFRS. There should be relevant text books for learning.
There should be proper infrastructure facilities also.
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2. Legal & regulatory requirements: The national accounting body has to coordinate with
the rules and regulations of statutory regulators.
3. Special auditing challenges: All business entities in the country have to meet certain
requirements with the companies act.
4. Level of preparedness: It is imperative to Indian corporate to improve their

preparedness for IFRS adoption within deadlines.
5. Educating investors: It is a very challenging task to education over populated country

where still illiteracy is more 50% and uneducation is more than 90%.
6. Conceptual differences: The differences between IFRS and Indian Accounting Standard
may produce certain hurdles in implementation of IFRS. E.g., present value and fair value
measurement and recognition are different.
7. Training: Proper training in the form of international seminars, conferences and

workshops must be provided to educate professionals. But due to dead line, it is very short
period to educate through education and training.
8. Problem of co-operation: The success of the convergence effort in India depends on

cooperation received by ICAI from the government, regulators, tax authorities, courts
&tribunals.
9. Shortage of resources: Adoption of IFRS by approximately 6000 listed companies would

result in a significant demand for IFRS resources.
10. Taxation: IFRS convergence would affect most of the items in the financial statements
and consequently the tax liabilities would also undergo a change.
Ind As effect on banking
Credit risk assessment is part of all businesses. All entity has credit risk system based on
its credit risk function and the risk it perceives. Under Indian GAAP [Generally Acceptable
Accounting Principles], credit loss provisioning is mainly based on past trends and
judgment of the entity and it is rule based for banks and NBFCs. Implementation of
expected credit losses (ECL) under Ind AS 109 ―Financial Instruments‖ will be a significant
change to the financial reporting of entities, especially for banks and NBFCs. This may
have a significant impact on equity and will certainly increase charge to the profit or loss
account.
Why should provisions be based on expected losses from the moment a loan is
initiated?
One answer is that loan pricing may not reflect the risks because of transitory market
conditions. If past experience and sound modeling suggest that credit risks are not fully
reflected in loan pricing decisions, prudent risk management would suggest supplementing
market signals with additional evidence. Secondly, the need to maintain adequate capital
Page 176 of 185

(or rebuild deficient capital) is less likely to bind banks' decisions in good times than in
bad, creating a bias to lend freely during upswings. Forward-looking provisioning
essentially brings the capital cost of a lending decision forward in time, restoring (to some
extent) the incentive value of capital for marginal lending decisions, even in times when
the capital buffer itself is not a binding constraint.
Application of ECL has all pervasive effect as it will influence many stakeholders like
investors, regulators, analysts and even audit methodology for auditors. An expected
credit loss approach will depend mainly on the quality and availability of credit risk data.
A lack of historical credit risk data will make application of Ind AS 109 more challenging.
Entity need to develop the information system which should be capable of getting this
information‘s. This Standard requires classifying its financial assets portfolio into stages
based on significant increase in the credit risk. Entities are required to continuously
monitor credit risk and accordingly ensure proper classification of financial assets into
specified stages, since accrual of interest and provisioning is directly linked with stage
movement. Incorrect classification may have significant consequences.
Charanjit Attra, Partner, Financial Accounting Advisory Services (FAAS), EY India, said:
―The extension of one year would help banks set up their IT infrastructure to meet the
requirements of Ind AS, particularly for the computation of the expected credit loss. Banks
should use this period to build robust processes for Ind AS adjustments ‖
Attra said the implementation of Ind AS for banks was expected to make the results more
comparable globally.
However, the extension of one year would give more time to the banks for making proper
processes for implementing the complex changes under Ind AS.
Ashish Gupta, Director, Grant Thornton Advisory Private Limited, said that the deferment
of Ind AS provides banks with more time to move their financial reporting processes that
would have been significantly impacted due to Ind AS 109.
While this deferment could be a relief for banks and give them more time to move to
global practices such as expected credit-loss model, it would certainly reduce the
comparability of Indian banks‘ performance vis-à-vis global peers, said accounting experts.
Some banks, who are really struggling for capital, would have a larger hit on their net
worth because of higher provisioning requirements under expected credit loss (ECL)
model, which was offset by a positive investment portfolio with the yields going lower.
Therefore, to an extent, the impact has been negated but still there are some banks that
will have larger impact on capital.
For those banks which are harder hit, due to an Ind AS or expected credit loss (ECL)
provisioning impact, there is a risk of their capital getting wiped out to the extent of 50 to
60%. Other banks may not face this kind of large impact but ECL will definitely impact
capital. That needs to be weighed in and it needs to be seen whether these banks are
ready from a capital perspective.
Page 177 of 185

Control of Black Money-Bank‘s Role

In India, black money is funds earned on the black market, on which income and other
taxes have not been paid. Also, the unaccounted money that is concealed from the tax
administrator is called black money. The black money is accumulated by the criminals,
smugglers, hoarders, tax-evaders and other anti-social elements of the society.
Black money is a socioeconomic evil. The existence of rapidly growing black money in our
economy has grave and disastrous consequences. The major effects of black money in the
economy are:
1. Growth of economic dualism,

2. Under-estimation of the true size of the economy,
3. Tax evasion, thereby loss of revenue to Government,
4. Undermining equity,
5. Widening Gap between the Rich and Poor,
6. Lavish Consumption Spending,
7. Distortion of Production Pattern,
8. Distribution of Scarce Resources,
9. Deterioration of General Moral Standards of the Society,
10. Effects on Production
Banks can implement the following checks to control Black Money Circulation.
1. Follow KYC-AML guidelines strictly

2. Follow ‗One person One Customer ID‘ rule
3. Cash transaction limit can be fixed for each customer-
(a) Rs.20,000 per transaction
(b) Rs.50,000 per day
(c) Rs.200,000 per month
(d) Rs.12,00,000 per annum
All the above-mentioned conditions must be satisfied for each account. However,
in case of more than one account in the same name and style, the ceiling
stipulated as above will apply for the transactions in all the accounts (of the
party) put together.
If any of the above-stated limits is breached, TDS at 10% can be deducted for all
subsequent transactions and remitted to CBDT Account.
4. In case of running accounts (other than SB), Folio charges are now levied to
discourage large number of transactions and to recover at least a part of the cost
of each transaction. In addition, Minimum Balance charges and Cheque Book
charges are levied. However, these charges may be done away with and instead,
charges may be levied for each transaction.
5. Where the total number of transactions in an S.B. Account exceeds 75 in a Quarter,
that account has to be necessarily converted to Current Account in the succeeding
Quarter. However, a Current Account once opened/converted thus cannot be
reconverted to Savings Bank Account, even if the number of transactions in a
particular quarter is less than 75.
Page 178 of 185

6. All transactions of following types must automatically be reported to Head Office,

RBI and CBDT [Central Board of Direct Taxation] then and there.
(a) Any single transaction exceeding Rs.10 lakhs in S.B. accounts and Rs.25 Lakhs
in Current accounts.
(b) Any account having an annual turnover (credits summation) of Rs.1 Crore and
above
(c) Any loan account or a group of loan accounts of a party with an aggregate
liability of Rs.1 Crore at any point of time
(d) Credit Card spends exceeding Rs.1 Lakh per month
(e) Properties (mortgaged to banks for whatever purpose) with a value of Rs. 1
Crore and above
(f) Any Foreign Currency transaction of value exceeding Rs.10 Lakhs
(g) Where the inward/outward foreign remittances of a party exceeds Rs.10
Crores per year.
7. Supportive measures like launching public/staff awareness initiatives,

strengthening of whistle blower laws etc to be done.
In banks the role of training system is significant in awareness creation among

staff.
Other steps
 Systematic reforms needed to be implemented in vulnerable sectors of the

economy like gold trading, real estate sector, equity trading market, mining
permits, bullion and non-profit organisations etc.
 Complicated compliance, high transactions costs, opaque paperwork, Old and
complicated laws etc make these sectors vulnerable for parking unaccounted
money.
 Financial auditors of companies have to be made more accountable for distortions
and lapses
 Public support for reforms and compliance are necessary for long term solution to
black money.
 Tax amnesty is an opportunity for a particular group of taxpayers to disclose
incomplete or unreported information about previous tax periods
 Double taxation is the levying of tax by two or more countries/states on the same
amount of income. Usually, this double taxation is dealt with by signing treaties
between nations. India has a Double Taxation Avoidance Agreement with 88
countries, out of which 85 are already into force.
Page 179 of 185

Corruption and Slow Down of Indian Economy

Introduction
Corruption is the abuse of public resources or public power for personal gain. Corruption
Watch is concerned with any such abuse by anyone at any level of government or in
business. It also means disregard for morality, integrity, character, and duty. It also means
disregard for honour, right, and justice.
Examples of public resources:

 Money, goods, vehicles, buildings and any other resources that belong to the
government
 Pension funds and medical aid funds
 Trade union money and resources
 Lottery money
 Donations to charities
Common forms of corruption:

 A business individual pays a bribe to a government official in order to be given a
government contract or license
 The use of government-owned resources, such as motor vehicles, for private purposes
 A government official takes advantage of his or her position to favour a family
member or business associate for a job or tender contract. This is commonly called
nepotism
 A police officer solicits a bribe or a member of the public offers one in order to
escape lawful punishment
How Corruption Affects Emerging Economies

Economies that are afflicted by a high level of corruption which involves the misuse of
power in the form of money or authority to achieve certain goals in illegal, dishonest or
unfair ways are not capable of prospering as fully as those with a low level of corruption.
Corrupted economies are just not able to function properly because corruption prevents
the natural laws of the economy from functioning freely. As a result, corruption in a
nation's political and economic operations causes its entire society to suffer.
According to the World Bank, the average income in countries with a high level of
corruption is about a third of that of countries with a low level of corruption. Also, the
infant mortality rate in such countries is about three times higher and the literacy rate is
25% lower. No country has been able to completely eliminate corruption, but studies show
that the level of corruption in countries with emerging market economies is much higher
than it is in developed countries.
1. Corruption Causes Artificially High Prices for Low Quality Products and Services
Corruption in the way deals are made, contracts are awarded, or economic operations are
carried out, leads to monopolies or oligopolies in the economy. Those business owners who
can use their connections or money to bribe government officials can manipulate policies
and market mechanisms to ensure they are the sole provider of goods or services in the
market. Monopolists, because they do not have to compete against alternative providers,
tend to keep their prices high and are not compelled to improve the quality of goods or
Page 180 of 185

services they provide by market forces that would have been in operation if they
had significant competition.
Embedded in those high prices are also the illegal costs of the corrupt transactions that
were necessary to create such a monopoly. If, for example, a home construction company
had to pay bribes to officials to be granted licenses for operations, these costs incurred
will, of course, be reflected in artificially high housing prices.
2. Resources are Inefficiently Allocated

In best practice, companies choose their suppliers via tender processes (requests for
tender or requests for proposal), which serve as mechanisms to enable the selection of
suppliers offering the best combination of price and quality. This ensures the efficient
allocation of resources. In corrupted economies the companies that otherwise would not
be qualified to win the tenders are often awarded projects as a result of unfair or illegal
tenders (e.g. tenders that involve kickbacks). This results in excessive expenditure in the
execution of projects, and substandard or failed projects, leading to overall inefficiency in
the use of resources. Public procurement is perhaps most vulnerable to fraud and
corruption due to the large size of financial flows involved. It‘s estimated that in most
countries, public procurement constitutes between 15% and 30% of Gross Domestic Product
(GDP).
3. Economies Have Uneven Distribution of Wealth

Corrupted economies are characterized by a disproportionately small middle class and
significant divergence between the living standards of the upper class and lower
class. Because most of the country's capital is aggregated in the hands of oligarchs or
persons who back corrupted public officials, most of the created wealth also flows to
these individuals. Small businesses are not widely spread and are usually discouraged
because they face unfair competition and illegal pressures by large companies who are
connected with government officials.
4. Low Stimulus for Technology Advancement

Because little confidence can be placed in the legal system of corrupted economies in
which legal judgments can be rigged, potential innovators cannot be certain their
invention will be protected by patents and not copied by those who know they can get
away with it by bribing the authorities. There is thus a disincentive for innovation, and as
a result emerging countries are usually the importers of technology, because such
technology is not created within their own societies.
5. A Shadow Economy Exists (Shadow Market)

Small businesses in corrupt countries tend to avoid having their businesses officially
registered with tax authorities to avoid taxation. As a result, the income generated by
many businesses exists outside the official economy, and thus are not subject to state
taxation or included in the calculation of the country's GDP. Another negative of
shadow businesses is they usually pay their employees lower wages than the minimum
amount designated by the government and they do not provide acceptable working
conditions, including appropriate health insurance benefits, for employees.
Page 181 of 185

6. Low Attractiveness for Foreign Investors and International Trade

Corruption is one of the disincentives for foreign investment. Investors who seek a
fair, competitive business environment will avoid investing in countries where there is a
high level of corruption. Studies show a direct link between the level of corruption in a
country and measurements of the competitiveness of its business environment.
7. Education and Healthcare are Low Quality

A working paper of the International Monetary Fund (IMF) shows corruption has an adverse
impact on the quality of education and healthcare provided in countries with emerging
economies. Corruption increases the cost of education in countries where bribery and
connections play an important role in the recruitment and promotion of teachers. As a
result, the quality of education decreases. Also, corruption in the designation of
healthcare providers and recruitment of personnel, as well as the procurement of medical
supplies and equipment, in emerging economies results in inadequate healthcare
treatment and a substandard, or restricted, medical supply, lowering the overall quality of
healthcare.
The Bottom Line

Many countries with emerging economies suffer from a high level of corruption that slows
their overall development. The entire society is affected as a result of the inefficient
allocation of resources, the presence of a shadow economy, and low-quality education and
healthcare. Corruption thus makes these societies worse off and lowers the living
standards of most of their populations.
Corruption and Indian Economy

Corruption affects us all. It threatens sustainable economic development, ethical values
and justice; it destabilizes our society and endangers the rule of law. It undermines the
institutions and values of our democracy. But because public policies and public resources
are largely beneficial to poor people, it is they who suffer the harmful effects of
corruption most grievously.
To be dependent on the government for housing, healthcare, education, security and

welfare, makes the poor most vulnerable to corruption since it stalls service delivery.
Delays in infrastructure development, poor building quality and layers of additional costs
are all consequences of corruption.
Many acts of corruption deprive our citizens of their constitutional and their human rights.
Economic implications
Corruption and international perceptions of corruption has been damaging to the country‘s
reputation and has created obstacles to local and foreign direct investment, flows to the
stock market, global competitiveness, economic growth and has ultimately distorted the
development and upliftment of our people.
Public money is for government services and projects. Taxes collected, bonds issued,
income from government investments and other means of financing government
Page 182 of 185

expenditure are meant for social grants, education, hospitals, roads, the supply of power
and water and to ensure the personal security of our citizens.
Corruption and bad management practices eat into the nation‘s wealth, channelling
money away from such projects and the very people most dependent on government for
support.
Countless studies around the world show how corruption can interrupt investment, restrict
trade, reduce economic growth and distort the facts and figures associated with
government expenditure. But the most alarming studies are the ones directly linking
corruption in certain countries to increasing levels of poverty and income inequality.
Because corruption creates fiscal distortions and redirects money allocated to income
grants, eligibility for housing or pensions and weakens service delivery, it is usually the
poor who suffer most. Income inequality has increased in most countries experiencing high
levels of corruption.
How to end corruption?

1. The first step in bringing an end to corruption starts with you: ―Obey the law and
encourage those around you to do the same‖.
2. Steps to encourage all citizens to be a responsible and honest citizen, and to

undertake to: ―neither pay nor take bribes; obey the law and encourage others
around me to obey the law and to treat public resources respectfully; neither abuse
any public money entrusted to my care, nor any position I hold as a public servant;
act with integrity in all my dealings with government; and always remember that
public resources are intended for the benefit of the public, not for private gain‖.
3. If you have suspicions that some form of corruption is taking place, you should report
it to an appropriate authority. This will certainly create a fear psychosis among those
who are in favour of corruption.
4. Also, strict laws to be made to punish those who found guilty after the court trials.
5. There should be a number of crime-fighting organisations and non-governmental

organisations people can turn to with your suspicions, like the police or the Public
Protector or the Open Democracy Advice Centre.
6. It is not just up to individuals to take action. Companies too can help combat
corruption. All businesses should develop anti-corruption policies and guidelines.
Education and training for all employees about corruption and how to avoid or report
it should be part of any induction programme.
7. Businesses can establish whistle-blowing hotlines and internal audit procedures. They
should ensure all employees, and particularly any involved in tender and procurement
programmes, are aware of the law and their roles and responsibilities to obey it (and
possible criminal charges if they do not).
Page 183 of 185

Summary
If we want a corruption free country then we need to root out corruption from its very
depth. So that it may not raise its head up again. Though it seems very difficult to control
corruption, it is not impossible. It is not only the responsibility of the government but ours
too. We can eliminate corruption from the joint efforts of all Indians.
We must have a high principle to follow so that we may be Role Models for the coming
generation. Let us take the pledge to create a society free from corruption. That will be
our highest achievement as human beings.
―A Corrupt Person has a Price but an Honest Person has Values‖
Page 184 of 185

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Staff College

Sr No. Topics Page No

RBI and Govt Policy

Sr No. Topics Page No.

3. Banks Board Bureau 8

Banking Reforms Road Map for New India –EASE

 Clean and Commercially Prudent Business

The reform agenda is focusing on the below six themes:

Theme 1: Customer Responsiveness

Theme 2: Responsible Banking

1. Clean consortium loans: The banks are required to minimize exposure to

Theme 3: Credit Off-take

 Capital will be pumped-in to enable credit off-take especially for MSMEs.

Theme 4: UdyamiMitra for MSMEs

Theme 5: Deepening Financial Inclusion & Digitalisation

1. Zero liability of customer on fraudulent digital transactions: The disputed

Theme 6: Ensuring Compliance —Governance / HR

1. No interference of Government in commercial operations of banks

Current scenario: PSBs reform Agenda

The goal(s) of monetary policy

The Monetary Policy Framework

The Monetary Policy Process

1. Governor of the Reserve Bank of India – Chairperson, ex officio;

4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;

5. Professor Pami Dua, Director, Delhi School of Economics – Member; and

6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad –

Instruments of Monetary Policy

Open and Transparent Monetary Policy Making

 The MPC is required to meet at least four times in a year.

a. the sources of inflation; and

Banks Board Bureau

The BBB was the part of Indradhanush Plan of government.

Functions of the Banks Board Bureau

• To be responsible for the selection and appointment of Board of Directors in PSBs

Objectives of Fiscal Policy:

1. To mobilise adequate resources for financing various programmes and projects

Techniques of Fiscal Policy:

Following are the four important techniques of fiscal policy of India:

A. Policy of Taxation of Government of India:

A main objective of taxation policy in India includes:

a. Mobilisation of resources for financing economic development;

b. Formation of capital by promoting saving and investment through time

B. Public Expenditure Policy of Government of India:

a. Development of infrastructure: Development of infrastructural facilities which

C. Policy of Deficit Financing of Government of India:

D. Public Debt Policy of the Government of India:

Shortcomings of Fiscal Policy in India:

Suggestions for Necessary Reforms in Fiscal Policy:

Highlights of Fiscal Policy 2019-20 (Vote on Account)

 All farmers affected by natural disasters to get 2% interest subvention

 PM mega pension scheme to benefit 10 crore people

 34 crore Jan Dhan bank accounts opened in last 5 years

Section 7 of the RBI Act:

The three letters under Section 7

What is Section 7 of RBI Act 1934?

Why the Need Felt by Government to Invoke Section 7?

HC Asks Government Not to Issue Directives to RBI

RBI Conveyed it Position: Differs from Govt. Point of View

Government Not Impounding RBI Autonomy: Key Points

In another speech, on October 12, titled ‗Prompt Corrective Action: An Essential

RBI Autonomy at Stake: Experts‘ Views

Former RBI Governor D Subbarao sarcastically commenting on Government‘s interference

The Government‘s priorities due to upcoming elections may change to deliver on

RBI and Government Interface: Instances of Support