Chapter 1 - Indian Banking Industry

History of Nationalization

The Reserve Bank of India (RBI) was nationalized with effect from January 1, 1949, on the basis of Reserve
Bank of India (Transfer to Public Ownership) Act, 1948.
The Central government entered the banking business with the nationalization of the Imperial Bank of
India in 1955 (60% stake bought by RBI), and renamed State Bank of India (SBI) under State Bank of India
Act, 1955. In 2008, government acquired RBI's stake in SBI to remove any conflict of interest, because RBI is
the banking regulatory authority.
The 7 other state banks became the subsidiaries of SBI, after being nationalized on 1959, under State Bank
of India (Subsidiary Banks) Act, 1959. Currently 2 SBI subsidiaries are merged, making total 5 SBI associate
banks.
The major nationalization took place in July 19, 1969 under former PM Smt. Indira Gandhi, under Bank
Nationalization Act, 1969. 14 major banks were nationalized at that time, making 84 % of total
branches coming under government control. However, on February 10, 1970, the Supreme Court held the
Act void on the grounds that it was discriminatory against the 14 banks and that the compensation proposed
to be paid was not fair compensation.

A fresh Ordinance was issued on February 14, which was later replaced by Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970.
The next nationalization process took place in 1980, making 6 other banks nationalized. 91 % of total
branches came under government control, through Banking Companies (Acquisition and transfer of
Undertakings) Ordinance, 1980.

Which banks are Nationalized Banks?

This is a debated topic. If we consider the definition of Nationalized banks, then the criteria is - the bank need to be
a private bank prior nationalization. This criteria is satisfied by RBI, SBI, SBI associates and all other banks that
are nationalized in 1969 and 1980 (total 14 + 6 - 1 = 19, '-1' because New Bank of India is merged with Punjab
National Bank in 1993).

But it is better not to call RBI, SBI, or SBI associates as a Nationalized Banks. Because, they draw power from
different Acts, like -

RBI - Reserve Bank of India (Transfer to Public Ownership) Act, 1948

SBI - State Bank of India Act, 1955
SBI Associates - State Bank of India (Subsidiary Banks) Act, 1959

Banks that are nationalized in 1969 and 1980 draw power from Banking Companies (Acquisition and transfer of
Undertakings) Act of 1969 and 1980, are known as Nationalized Bank.

These total 19 banks are designated as Nationalized Banks by RBI

MUDRA Bank
According to Budget 2015-16, the union government will set up Micro Units Development and Refinance Agency
(MUDRA) Bank with a capital of Rs. 20,000 crore to finance the micro-finance sector of India, under Pradhan Mantri
Mudra Yojana.
Responsibility of MUDRA bank

Laying down policy guidelines for MSME financing business

Registration and regulation of MFI entities
Accreditation / rating of MFI entities
Formulating and running a credit guarantee scheme for providing guarantees to the loans which are being
extended to micro-enterprises
Creating a good architecture of last mile credit delivery to micro business under the scheme of Pradhan
Mantri Mudra Yojana, etc.

Priority Sector Lending

Finance Ministry also directed that MSME loans would be treated as Priority Sector Lending (PSL) and
a separate sub-limit of 7.5 % in PSL is being created for the Micro Enterprises.

Small and Payment Bank

Small Bank
Capital Requirements -The minimum paid-up capital is Rs. 100 crore
1. Provision of savings facilities to under-served and un-served sections of the population

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

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

Small Savings accounts

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

Activities of Payment Banks -

1. They can accept Demand Deposits, but will initially be restricted to hold a maximum balance of Rs.
1,00,000 per individual customer
2. Issuance of ATM / Debit Cards, but they cannot issue Credit Cards
3. Payments and remittance services through various channels
4. They can act as Business Correspondents (BC) of another bank (following RBI guidelines)
5. Distribution of non-risk sharing simple financial products, like Mutual Funds (MF) units
and insurance products, etc.
6. They cannot undertake lending activities (means cannot disburse loans)
Capital Requirements -
The minimum paid-up capital is Rs. 100 crore.

Deposit Insurance - DICGC

All the banks operating in Indian territory (with some exceptions) are covered under the deposit insurance facility
provided by Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully owned subsidiary of RBI. It
established on July 15, 1978 with Deposit Insurance and Credit Guarantee Corporation Act, 1961.

DICGC insures all bank deposits (including saving, current, fixed, recurring) up to a maximum limit of Rs. 1
lakh (principal with interest).

Banks insured under DICGC

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

Currently approx. 2,130 banks are insured by DICGC.

Not covered under DICGC

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

Insurance coverage
DICGC protects bank deposits that are payable in India, including savings, current, fixed, recurring, etc. except the
following deposits -

Foreign government deposits

Central and state government deposits
Inter-bank deposits, etc.

Note that this insurance is aimed to cover individual customer deposits or small business with maximum cover up
to Rs. 1 lakh. Therefore the above exceptions are justified.

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

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

When DICGC is liable to pay

If a bank goes into liquidation (fails)

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

Pradhan Mantri Jan-Dhan Yojana (PMJDY)

Deposits attract interests (you will get interest on your account balance)
Accidental Insurance cover of Rs. 1 lakh
Life Insurance cover of Rs. 30,000
After satisfactory operation of the PMDJY account for 6 months period, an Overdraft (OD) facility will be
permitted, upto Rs. 5,000 (only one account per household, preferably female account holder of that
household)
Beneficiaries of governmental schemes (like LPG subsidy, etc.) will get Direct Benefit Transfer (DBT) in
these accounts (subsidy amount will be directly credited to your bank account)
Access to Pension, Insurance products
Easy transfer of money across India (remittances)
No minimum balance criteria (unless you avail cheque book facility)
RuPay Debit Card will be provided

Note that RuPay Debit Card must be used at least once in 45 days. Total 13.6804 crore PMJDY accounts has been
opened in India (as on Feb 28,2015). PMJDY scheme of government recently recognized by Guinness Book of World
Record for most bank accounts opened (approx 1.8 crore) in 1 week (during August 23 - 29, 2014)

Lending Money - Cash Credit and Overdraft

a. CASH CREDIT (CC) ACCOUNT This account is the primary method in which banks lend money against
the security of commodities and debt. It runs like a current account except that the money that can
be withdrawn is not restricted to the amount deposited in the account. Instead, the account holder is permitted
to withdraw a certain sum called limit or credit facility in excess of the amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of Demand Deposits of the banks.

b. OVERDRAFT (OD) The word overdraft means the act of overdrawing from a bank account. In other words,
the account holder withdraws more money from a bank account that has been deposited in it.

Now try to understand about the differences between these two -

The primary differences between cash credit and over draft is how they are secured and whether the money is lent
out of a separate account
 Cash Credit (CC)
More commonly offered
User
for businesses than individuals
Security can be a tangible
Security asset, such as stock, raw materials,
or some other commodity
A certain percentage of
Credit
the value of the commodities /
Limit
debts pledged by the a/c holder
Over Draft (OD)
Can be used for any purpose, individual or business
Allowed against a host of
other securities including financial instruments,
like shares, units of MFs, surrender value of LIC
policy and debentures etc. Some ODs are even
granted against the perceived worth of
an individual, known as clean ODs.
Acts more like a traditional loan. Money is lent as
with a cash credit account, but a wider range
of collateral can be used to secure the credit.

Non Performing Assets (NPA)

If the borrower (of a loan/advance from a bank) is unable to repay the interest and principal repayments
to the bank, for a considerable amount of time, then the loan/advance will be called non-performing.
Since loans/advances are assets of the bank, it will be known as Non-performing Assets (NPA). In Indian
context, if the borrower has failed to make interest or principal payments for 90 days (3 months), then the
loan/advance is considered NPA.

NPA Classification

Banks are required to classify NPAs into the following 3 categories, based on the nonperforming period and
the realisability (recoverability) of the dues -

1. Substandard Assets - (90 days - 12 months)

Assets remained NPA for less than or equal to 12 months (1 year) are Substandard Assets.

Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
2. Doubtful Assets - ( > 12 months)
Assets remained Substandard assets for 12 months (1 year) are Doubtful Assets.

Such an asset will have all the weaknesses inherent in substandard assets, with the added characteristic that
the weakness make collection or liquidation in full - on the basis of currently known facts,
conditions and values - highly questionable and improbable.
3. Loss Assets -
Assets where loss has been identified by the bank or internal/external auditors or the RBI inspection, but the
amount has not been written off wholly.

Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is
not warranted although there may be some salvage or recovery value.
 SARFAESI Act, 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI),
2002 was enacted to empower the banks and financial institutions (lenders) to recover their bad loans / NPAs from
the borrowers, without the intervention of the court.

Applicability of the Act :

Secured Loans - SARFAESI Act is applicable only for the secured loans (meaning loans backed by underlying
securities). In this case, banks or financial institutions can seize and/or sell the underlying securities,
like hypothecation, pledge, mortgage, etc and recover the loan amount.
Unsecured Loans / Agricultural lands - For unsecured loans (not backed by underlying securities) or
agricultural loans (where agricultural land is the underlying security), banks cannot seize or sell by itself. In
these case, banks need to move to court and file Civil case against the defaulters.

Pledge, Hypothecation, Mortgage, Lien

Securities for loan
If you want a loan from a bank (or any other financial institution), you generally need to provide some kind
of security against the loan to the bank. There are several types of securities, against which a bank will offer you
a loan -

1. Pledge - It is used when the bank (or, lender, known as pledgee) takes actual possession of the securities,
such as goods, certificates, golds, etc, (you provide it to bank to avail loan) which are generally movable in
nature. Bank keeps the securities with itself, and provide loan to you.
Bank will return the securities (possession of goods) to you (borrower, known as pledgor), after you repay all
the debts (i.e., loan) to the bank. In case you are unable to pay back, then the bank has the right to
sell the assets, and recover the loan amount (with interest).

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

Example - Car loans, Bus loans, etc.

3. Mortgage - It is used when you (borrower) have the actual possession of the assets, for which you are
granted loan (e.g., house loan), or against which you are granted loan (e.g., house mortgaged). Mortgages are
generally those assets, which are permanently attached with Earth surface, like house, land, factory etc.
In case you are unable to repay the loan amount, the bank has the right to seize and sell the mortgage,
and recover the loan amount (with interest).
4. Lien - It is almost similar to Pledge, except that in case of lien, the lender can only
detain the asset/goods until the borrower repays the loan, but have no right to sell the asset,
 unless explicitly declared in the lien contract. (For a pledge, the lender can sell the asset, if the borrower is
unable to pay the loan)

Base Rate
Base Rate System
Bank lends money to its customers by loans or advances or other credit facilities. It charges some interest on
the lending / credit. Does a bank need to follow any specific rules while providing money to its customers?

Yes, banks follow Base rate system, formulated by RBI. Base rate is the minimum chargeable interest for the credit
sanctioned to the customer (meaning, no bank can offer loans to its customers below this interest rate).
Base rate system replaced the Benchmark Prime Lending Rate (BPLR) system on July 1, 2010.

Exclusions
There are some few exclusions, where you can grant loan below base rate, as -

1. Differential Rate of Interest (DRI) Scheme beneficiaries

2. Loans to bank's own employees (including retired employees)
3. Loans to bank's depositors against their own deposits (e.g., granting loan on his own fixed deposit, etc.)

DRI Scheme
As per RBI guidelines, for lending under DRI scheme, banks are required to grant loans at concessional
rate of interest to the eligible beneficiaries -

Family income ceiling per annum in rural and urban area should be less than Rs. 18,000 and Rs.
24,000 respectively
Borrower should not be benefited under any subsidy-linked schemes of government
Max. limit of loan - Rs. 15,000. For housing loan, it could be up to Rs. 20,000
Banks are required to lend 1 % of their total outstanding advances under DRI Scheme every year.

Automated Teller Machine (ATM)

Services / Facilities provided by ATMs:

Cash Withdrawal
Account Information
Cash Deposit (not permitted at WLAs)
Regular Bill Payment
Purchase of Vouchers
PIN change
Mini / Short Statement
Cheque book request
Loan Account Enquiry, etc.
Classification
ATMs can be classified depending on the owner and operator -

1. Bank-owned ATM
These are owned and operated by individual banks.

2. White Label ATM (WLA)

These type of ATMs are set up, owned and operated by non-bank entities (e.g.,NBFCs). WLAs are authorized
under Payments and Settlement Systems Act, 2007 by RBI. These have following features -
Logo displayed on the machine or premises will be of WLA Operator's. However, customers can use these
ATMs, as of using other bank ATMs (bank other than card issuing bank)
Cash deposit is not permitted in the WLA machine (as of now).
3. Brown Label ATM (BLA)
These type of ATMs are set up and owned by a Service provider, but cash management (operation)
and connectivity is provided by a sponsor bank (brandof this bank is used on the ATM).

By using BLAs, banks have the opportunity to cut the huge cost of setting up of an ATM (bank-owned ATM)

Non Banking Financial Corporations (NBFC)

Non Banking Financial Companies (NBFC)

NBFCs are financial institutions that provides almost similar banking services (like providing loans and credits) but
doesn't possess banking license. So there are some limitation / restriction in its services.
NBFCs are registered under the Companies Act, 1956, whereas banks are regulated under Banking Regulation Act,
1949.

Differences between a Bank and an NBFC

It cannot accept Demand Deposits from public. If someone want to invest in an NBFC, it could have
some maturity (like happens in time deposits). Though some special permission is given
to LIC and GIC by RBI. These two NBFC can take demand deposits.
It is not a part of the Payments and Settlement System of India.
It cannot issue cheques drawn on itself.
Deposits are not insured or covered under Deposit Insurance and Credit Guarantee Corporation (DICGC),
which generally covers the bank accounts.

White Label ATM (WLA) - NBFC ATMs

Most of the ATMs belong to banks, but the cash dispensing machines that are owned and operated by NBFCs are
called White Label ATMs. Surely they charge extra money for providing this service, and generally operates in semi-
urban and rural areas (tier III to VI areas)

NBFCs that provides WLA - Tata Communications Payment Solutions, Prizm Payment Services Pvt. Ltd, Muthoot
Finance Ltd, Vakrangee Ltd, BTI Payments Pvt. Ltd., Srei Infrastructure Finance Ltd, RiddiSiddhi Bullions Ltd. (total
7 as of May 2014)
NBFC businesses -

loans and advances

acquisition of shares, stocks, bonds
insurance, etc.

Int'l Development Banks - ADB, WB, IMF, NDB, AIIF

There are several development banks in the world with the principal goal of development among others.
From India's point of view, the most notable among those development banks are the followings -

Asian Development Bank (ADB)

World Bank (WB)
International Monetary Fund (IMF)
New Development Bank (BRICS-NDB)
Asian Infrastructure Investment Bank (AIIF)

Asian Development Bank (ADB)

ADB is a regional development bank, headquartered in Metro Manila, Philippines. It was established
on Aug 22, 1966, to facilitate economic development in Asia, with the motto 'Fighting poverty in Asia and
the Pacific'.

President - Takehiko Nakao
Membership - 67 countries

World Bank (WB)

World Bank is a financial institution of United Nations (UN), established on July 1944, headquartered
in Washington D.C., USA. It provides loans to developing countries for their capital programs. The official
goal of WB is the reduction of poverty, and the motto is 'Working for a World Free of Poverty'.
President - Jim Yong Kim

Money Market
1. Call, Notice, Term Money
This is a method by which banks lend or borrow money from each other to maintain their daily needs. Note that
no collateral security is needed, but interest need to be paid.

Call Money - deals in overnight (1 day) funds

Notice Money - deals in funds for 2 to 14 days
Term Money - deals in funds for 15 days - 1 year

Note that this is completely used in Inter-bank market. Eligible participants are -

Scheduled Commercial Banks (SCBs), excluding RRBs

Co-operative Banks, other than Land Development Banks
Primary Dealers (PDs)
2. Certificates of Deposit (CD)
CDs are certificates issued by banks or other financial institutions (need to be qualified before issuing) to the
general public, to raise short-term resources within the umbrella limit.

In the form of - Dematerialized (through Demat account) or Usance Promissory Notes

Issuer - Scheduled Commercial Banks (excluding RRBs), permit-granted Financial Institutions (FIs)
Issued to - individuals, corporations, companies (including banks), trusts, etc.

Maturity - Bank CDs (7 days - 1 year) and FI CDs (1 - 3 years)

Minimum size - Minimum amount of CD is Rs. 1 lakh, and multiple thereof

3. Commercial Papers (CP)

CPs are unsecured instrument issued in the form of a promissory note (refer to my previous post to know more),
that are issued by corporates.

In the form of - Promissory Notes

Issuer - Corporates, Primary Dealers (PDs), Financial Institutions (FIs). Note that all the corporates are not eligible
for issuing CPs. They need a good rating (generally 'A-2', refer SEBI) from either rating agencies - CRISIL, ICRA,
CARE, FITCH Ratings India Pvt. Ltd, etc.

Issued to - Individuals, banks, other corporates, NRI, FII (need SEBI approval)

Maturity - 7 days to 1 year

Minimum size - Minimum amount of CP is Rs. 5 lakh and multiple thereof

4. Inter-Corporate Deposits (ICD)

These are issued by one corporate to other for their money requirements. You can think ICDs as analogous to Inter-
bank deposits (call money, notice money, term money).

These are helpful for low-rated corporates, because they are not eligible to issue Commercial Papers (CP) to
general public and raise money. So the alternative way for them, is to use ICDs.

Chapter 2 - RBI and Monetary Policy

Settlement Systems of India

India has two main electronic funds settlement system for one-to-one transactions -

1. National Electronics Funds Transfer (NEFT)

2. Real-time Gross Settlement (RTGS)

Transactions can be bulk (meaning one-to-many or many-to-one transactions) and repetitive (regularly
happening, like monthly) in nature. This type of transactions are routed through Electronic Clearing
Service (ECS), and of two types -

1. ECS Credit
2. ECS Debit
National Electronics Funds Transfer (NEFT) - one-to-one
NEFT payment system facilitates one-to-one funds transfer. In this system, individuals,
firms and corporate can electronically transfer funds from any bank branch to
any individual, firm or corporate, having an account with any other bank in the country which is NEFT-
enabled.

Note that, recipient should have a bank account (so that transfer can be traced), but the person who
is transferring fund need not have any account, but in that case, there is a maximum transfer limit of Rs.
50,000 (for this walk-in customers, need to provide their identity documents).

But if he/she transfer fund from an account, then there is no limit of maximum transfer, though per
transaction max limit is Rs. 50,000. e.g., For transferring Rs. 1 lakh through NEFT, there will be 2 transactions.

Note that NEFT settles transactions on net-basis and works in hourly batches. Currently, there are 12 batches (8
am to 7 pm) on weekdays and 6 batches (8 am to 1 pm) on Saturdays. Banks wait and collect all
the transactions made within an hour, and then settles the transaction (not individually, known as netting). For
an example, if you make a transaction on 8:30 am, then your settlement will wait till the hourly batch of 9 am,
and at 9:00 am, your transaction will be settled.

Transaction Costs -
No inward transaction cost for NEFT
But for outward transactions -

Up to Rs. 10,000 - maximum Rs. 2.5 + Service Tax

Above Rs. 10,000 to Rs. 1 lakh - maximum Rs. 5 + Service Tax
Above Rs. 1 lakh to Rs. 2 lakhs - maximum Rs. 15 + Service Tax
Above Rs. 2 lakhs - maximum Rs. 25 + Service Tax

Real-Time Gross Settlement (RTGS) - one-to-one

In this system, settlements are done on real-time (meaning, instantly, or without delay, note that NEFT need to
wait for an hourly batch) and on gross basis (meaning, individually, transaction will not be netted with others
like NEFT which are settled in hourly batches). RTGS is the fastest possible money transfer system through
the banking channel.

Note that RTGS is meant for high-value transactions, and there is a minimum transaction limit of Rs. 2
lakhs (no upper limit). All the transactions go through the books of RBI.

RBI on Dec 15, 2014, increased RTGS total business hours from 7 hours 30 minutes to 12 hours. Now
the business hour will be 8 am to 8 pm on weekdays against the earlier 9 am to 4:30 pm.

Transaction Costs -
No inward transaction cost for RTGS
But for outward transactions -
 Rs. 2 lakhs to Rs. 5 lakhs - maximum Rs. 30 per transaction
Above Rs. 5 lakhs - maximum Rs. 55 per transaction

ECS Credit - one-to-many (single debit, multiple credit)

ECS Credit facility is used by an institution, where it needs to pay several recipients on a regular basis (may
be monthly). Here single debit is made on the payers account and multiple credit is made to
the beneficiaries or recipients.
For example, for paying salary, dividend, pension, etc. one can use this ECS Credit facility
(e.g., employers account is debited once, and several employees are paid salary, by crediting their accounts)

ECS Debit - many-to-one (multiple debit, single credit)

ECS Debit facility is used by an institution, for raising debits to a large number of accounts. E.g., bill
payment for consumers of utility services (like electricity bills deducted from bank accounts of several customers,
and credited to the electricity supplier's account), periodic investments in mutual fund, insurance premium, etc.

Note, that there are several other payment systems, like Immediate Mobile Payment System (IMPS, need to
register mobile number), Aadhaar-enabled Payment System (AEPS, need an Aadhar card), etc.

1. Which of the following is one-to-many electronic fund settlement system?

a. NEFT b. RTGS c. ECS Credit d. ECS Debit
2. What is the full form of NEFT?
a. National Electronic Funds Transfer b. National Electric Funds Transfer c. National Electronic
Funds Transmission d. National Electric Funds Transmission
3. What is the significance of 'Real-time' in RTGS?
a. Funds will eventually be transmitted to beneficiary account b. Funds will be settled in batches
c. Funds will be settled as soon as initiated d. None
4. NEFT settlement is done in
a. Hourly batches b. Real time c. Daily batches d. none of the above
5. What is the maximum limit of funds transfer through NEFT?
a. Rs. 50,000 b. Rs. 1 lakh c. Rs. 2 lakh d. There is no upper limit for NEFT
6. Which of the following is must for NEFT funds transfer?
a. Person who is transferring money has an account b. Beneficiary / recipient has an account c. Both
(a) and (b) d. None of the above
7. Walk-in customers can transfer money through NEFT, with a maximum limit of -
a. Rs. 50,000 b. Rs. 1 lakh c. Rs. 2 lakh d. There is no such limit
8. If you transfer Rs. 2 lakh through NEFT, then how many transactions will occur?
a. 1 transaction b. 2 transactions c. 4 transactions d. 8 transactions
9. Which of the following funds transfer systems is the fastest?
a. NEFT b. RTGS c. IMPS d. AEPS
10. What is the minimum and maximum transaction limit for RTGS?
a. Rs. 1 lakh, Rs. 1 crore b. Rs. 2 lakh, No max. Limit c. No min. limit, Rs. 2 lakh d. no min. limit, no
max. limit
11. What is the current RTGS transaction charge for funds transfer above Rs. 5 lakh (as of April 23, 2015)?
a. Rs. 30 b. Rs. 35 c. Rs. 50 d. Rs. 55
12. Which of the following is true regarding ECS Credit?
a. Single debit on payers account and Single credit in beneficiary account b. Multiple debit on payers
accounts and Single credit in beneficiary account c. Single debit on payers account and multiple credit
in beneficiaries accounts d. Multiple debit on payers account and Multiple credit in beneficiary account
13. Which of the following is the best example of ECS Debit?
a. Salary payment by employer b. Pension c. Periodic investments in Mutual Funds d. Dividend to
shareholders
 14. What is the full form of IMPS?
a. Immediate Mobile Payment System b. Instant Mobile Payment System c. Instant Medium Payment
System d. Immediate Medium Payment System
15. Which of the following must be linked with Aadhar-card?
a. NEFT b. RTGS c. IMPS d. AEPS

Money Laundering
The PMLA, 2002 is the principal framework in India to combat money laundering cases. It defines money laundering
offence and provides for the freezing, seizure and confiscation of the proceeds of crime.

Some features -

RBI, SEBI and IRDA have been brought under the PMLA, making the provision of this act to be applicable to
all the financial institutions in India, including banks, MFs, Insurance companies, etc.
The monitoring agency of Anti-Money Laundering activities in India is the Financial Intelligence Unit
(FIU-IND). It is an independent body reporting directly to the Economic Intelligence Council (EIC), headed
by the Finance Minister.
Punishment includes imprisonment up to 3 - 7 years, with fine up to Rs. 5 lakh.

Banks' Obligations

To follow the KYC norms properly

Maintain records for - nature and value of the transaction, single or series of transactions, keep record for 10
years, etc.
Verify and maintain the records of identity of all clients, etc.

Issuance of Currency
According to RBI Act 1934, Section 22, RBI has the sole right to issue bank notes of all denominations. RBI is
responsible for the design, production and management of the currency of India, with the goal of ensuring
an adequate supply of clean and genuine notes.

The responsibility for coinage vests with the Government of India on the basis of The Coinage Act, 2011. RBI acts as
an agent of government which merely distributes the coins in the market.

Minimum Reserve System to issue currency

India adopted Minimum Reserve System in the tenure of RBI governor Sir Benegal Rama Rau in 1957. In this
system, RBI is required to maintain a minimum reserve of Rs. 200 crore in gold and forex, of which at least Rs. 115
crore should be in gold form (earlier India followed Proportional Reserve System) to issue currency in India.

Notes and Coins production

Notes are printed at 4 Printing Presses, located at - Nashik, Dewas, Mysore and Salboni
Coins are minted at 4 Mints, located at - Mumbai, Noida, Kolkata and Hyderabad

Soiled and Mutilated Notes

Soiled Notes
Soiled notes are those notes -

became dirty
slightly cut
in the denomination of Rs. 10 and above, which are in two pieces. However, the cut should not pass through
the number panels

Soiled notes can be exchanged at -

counters of public sector bank (PSB) branch

currency chest branch of a private sector bank
Issue office of RBI

Note that, there is no need to fill any type of form to exchange Soiled Notes. Also note that the exchange is in full
value, meaning you will get the whole amount of the soiled note in exchange.

Mutilated Notes
Mutilated notes are those notes -

are in pieces (more than two)

essential portions are missing. Essential portions are - name of issuing authority, guarantee,
promise clause, signature, Ashoka Pillar emblem / portrait of Mahatma Gandhi, water mark

Mutilated notes are exchanged at the same places described above (for Soiled notes), without filling any type
of form. However, note that the exchange value can be in full or part, according to RBI (Note Refund)
Rules. (depending on the mutilation of the notes, you will get the value)

Also, there is another exchange facility for mutilated notes, referred to as Triple Lock Receptacle (TLR). (Put the
mutilated notes in a TLR cover along with details, and deposit it in the TLR box at RBI Issue Office. Amount will be
returned by means of a bank draft or pay order).

Excessively Soiled, Brittle, Burnt Notes

Notes which have become excessively soiled, brittle, or burnt can be exchanged only at Issue Office of RBI. (need to
approach to the Officer-in-charge of the Claims Section, Issue Department of RBI).

Chapter 3 - Money Market

Money Market - Part I

Money Market
It generally provides investment avenues of short time tenor, by definition for a maximum one year. Money
market transactions are generally used for funding the transactions in other markets including Government
securities market, Capital market and meeting short term liquidity mismatches.

The one year tenor can be classified into -

 1. Overnight market - tenor of transactions is one working day (also called Call Money market)
2. Notice Money market - tenor from 2 days to 14 days
3. Term Money market - tenor from 15 days to 1 year

Instruments used
Money market instruments include Call Money, Repos, T-Bills, Commercial Papers (CP), Certificate of Deposits
(CD), and Collateralized Borrowing and Lending Obligations (CBLO).

Borrowing money from RBI

Banks can borrow money from RBI with or without securities, and for 1 day to 1 year period. Depending on these,
there are 3 ways to borrow money from RBI, and hence 3 rates -

1. Repo (Repurchase) rate -

This is a type of collateral lending by RBI. Here, banks sells securities (gov. securities) to RBI with a repurchase
agreement (meaning banks will buy back those securities at future date with extra interest). The rate charged
by RBI is known as Repo rate.

It comes under Liquidity Adjustment Facility (LAF) of RBI monetary policy (i.e., a way
to adjust market liquidity, along with reverse repo).

Banks borrow money by repo to meet their daily mismatches. Repo auctions are conducted by RBI on a daily basis,
except Saturdays. Here, minimum bid size is of Rs. 5 crore and multiple. All commercial banks (except RRBs) can
borrow through repo facility. Repo borrowings have a tenure of 1 day to 90 days.

2. Marginal Standing Facility (MSF) -

Now think what will happen if banks are not able to maintain their daily mismatches even with repo (it happens!).
Hence RBI provided (from 2011) one more facility to banks - Marginal Standing Facility (MSF). Albeit its
a penalty rate (because banks are not able to maintain their mismatches with repo), and always higher than repo
rate (currently 100 basis point higher).

In this scheme, banks borrow money with minimum bid size of Rs. 1 crore and multiple. The tenure is of 1 day only,
and banks can borrow 1 % of their respective NDTL under this scheme.

3. Bank Rate -
For the long term, i.e., 90 days to 1 year, banks can borrow money from RBI with bank rate. As it is a long term
borrowing, the rate is higher than repo rate.

Banks doesn't need any collateral or security, while borrowing for a long term under Bank Rate. It is not used as
a monetary policy to adjust the market, rather used to re-discount Bills of Exchange (refer our previous article
on Discounting Bills of Exchange), or other Commercial Paper.
Lending money to RBI
Now come to the lending part. Now think, what is the purpose of Reverse Repo? Why banks will lend money to RBI,
and when?

If a bank is able to maintain its money requirements properly, and has surplus money, then it would be better for the
bank to lend to RBI, rather than keeping it with itself. Because, lending money will give the bank interests in reverse
repo rate.

Its again a collateralized lending to RBI with repurchase agreement, as repo (works as opposite to repo).

Liquidity Adjustment Facility (LAF)

Repo and Reverse Repo together forms the Liquidity Adjustment Facility. It is a very essential and
efficient tool of RBI to adjust the market liquidity. Since raising or reducing the rates, will make the banks raise or
reduce its own rates to its customer (public), and of a short term tenure.

Money Market - Part II

Money Market Instruments (other than government issued)

1. Call, Notice, Term Money

This is a method by which banks lend or borrow money from each other to maintain their daily needs. Note that
no collateral security is needed, but interest need to be paid.

Call Money - deals in overnight (1 day) funds

Notice Money - deals in funds for 2 to 14 days
Term Money - deals in funds for 15 days - 1 year

Note that this is completely used in Inter-bank market. Eligible participants are -

Scheduled Commercial Banks (SCBs), excluding RRBs

Co-operative Banks, other than Land Development Banks
Primary Dealers (PDs)

2. Certificates of Deposit (CD)

CDs are certificates issued by banks or other financial institutions (need to be qualified before issuing) to the
general public, to raise short-term resources within the umbrella limit.

In the form of - Dematerialized (through Demat account) or Usance Promissory Notes

Issuer - Scheduled Commercial Banks (excluding RRBs), permit-granted Financial Institutions (FIs)
Issued to - individuals, corporations, companies (including banks), trusts, etc.

Maturity - Bank CDs (7 days - 1 year) and FI CDs (1 - 3 years)

Minimum size - Minimum amount of CD is Rs. 1 lakh, and multiple thereof

3. Commercial Papers (CP)

CPs are unsecured instrument issued in the form of a promissory note (refer to my previous post to know more), that
are issued by corporates.

In the form of - Promissory Notes

Issuer - Corporates, Primary Dealers (PDs), Financial Institutions (FIs). Note that all the corporates are not eligible for
issuing CPs. They need a good rating (generally 'A-2', refer SEBI) from either rating agencies - CRISIL, ICRA, CARE,
FITCH Ratings India Pvt. Ltd, etc.
Issued to - Individuals, banks, other corporates, NRI, FII (need SEBI approval)
Maturity - 7 days to 1 year
Minimum size - Minimum amount of CP is Rs. 5 lakh and multiple thereof

4. Inter-Corporate Deposits (ICD)

These are issued by one corporate to other for their money requirements. You can think ICDs as analogous to Inter-
bank deposits (call money, notice money, term money).

These are helpful for low-rated corporates, because they are not eligible to issue Commercial Papers (CP) to general
public and raise money. So the alternative way for them, is to use ICDs.

Money Market - Part III

Instruments of Money Market
Now, its time to learn about the several instruments that work in Money Market. Note that the tenure of the money
market is overnight (1 day) to 1 year (365 days). So, all the instruments here works within this tenure. Though there is
no such restriction, or no such obvious line of distinction.

Government Instruments

1. Treasury Bills (91 - 364 days)

Treasury Bills or T-Bills are the most important and used mean for the government to acquire money from the market,
to maintain its money requirements. On behalf of the government, RBI issues T-Bills to public as auction on some
fixed date.

These are the least risky money market instrument and have 3 maturity periods - 91 days, 182 days, 364
days (meaning you can claim for your return only after these term periods). Note that Treasury Bill is a type
of debenture (already discussed in the article - Equity & Debt), hence doesn't require any collateral as security. You
only buy a T-Bill, because you know that government will never default on your payment.
Treasury Bills are issued on discount basis and can be redeemed at par, and it doesn't bear any interest. Let clear with
an example -

Suppose you want to buy a T-Bill of Rs. 10,000 with 91 days maturity. RBI may tell you that the
discount rate is 1.5 %. So you can redeem a discount of = 10,000 x 1.5/100 = Rs. 150.
This means you can buy the treasury bill in Rs 10,000 - 150 = Rs. 9,850 (your profit will be Rs. 150, which you can
redeem as discount). After 91 days (the maturity), you go to RBI to get the return, and RBI will give you Rs. 10,000.
Summary - You buy the T-Bill in Rs. 9,850 and get in return Rs. 10,000 (face value). Note that, there is
no interest involved in T-Bill.

2. Cash Management Bill (CMB) (< 91 days)

Government can take loans from RBI as Ways and Means Advances (WMA; will discuss in later posts). But there is
a limit on WMA advances, and the loans above the limit bears extra interest. Therefore, it is better for
the government to acquire money from the general public. Cash Management Bill (CMB) is such instrument that
helps government to maintain its temporary cash requirements for less than 90 days.

Note that, T-Bills can not be used for the temporary (upto 90 days) or urgent requirements. CMB comes handy for this
purpose, instead of high interest loans.

Features of CMB is almost similar to that T-Bills including auction process, discount to the face value, etc.

3. Dated Securities
Though definition-wise this doesn't come under Money Market. But it is better to discuss it here in government
security section.
Dated Securities are long-term securities that helps government to take money from public for more than 1 years.
Here government issues securities that bear a date of a distant future, which could help in long-term development
projects, or otherwise.

It is important to mention here, that state governments cannot issue T-Bills to public. So state governments can issue
only Dated Securities for a long term. These are known as State Development Loans (SDL).

Gilt-edged Security - All the government securities are collectively called gilt-edged securities, or government
securities.

Negotiable Instruments - Part I

What is a negotiable instrument?

Negotiability of an instrument depends on 2 criteria -

1. Price Rigidity - The price of the instrument is not firmly established, and can be adjusted depending on
the circumstances. If it cannot be adjusted or be changed, then it is non-negotiable.
 2. Transferability - The instrument can be transferred from one party to another, provided all
proper documentation are included and valid. But if the ownership cannot be transferred, then it is deemed
to be a non-negotiable instrument.

For example, Certificate of Deposit (CD) is a negotiable instrument, whereas Indian Government Savings bonds
are non-negotiable instruments.

Negotiable Instruments Act, 1881 (India)

It is a British colonial age act that is still in use. It defines 3 types of negotiable instruments that are widely used in
Indian market - Promissory Notes, Bills of exchange, Cheques.
Before going into the topics, let some concepts be cleared first -

Unconditional Undertaking / Promise - You are promising or undertaking to pay without any condition
Unconditional Order - You are providing an order (to someone, or some institution, or bank) to
pay without any condition

Two more concepts -

Pay to Bearer - Pay the amount to, whoever comes with (bears) the instrument and demands to be paid
Pay to Order - Pay to a certain person, not anybody

Negotiable Instruments - Part II

Promissory Note Bill of Exchange Cheque

Unconditional undertaking, or prom Unconditional order
Nature Unconditional order to pay
ise to pay to pay

3 parties drawer, 3 parties drawer,

Parties 2 parties maker, payee
drawee, payee bank, payee

Liability of Drawer (maker) Liability

Liability Liability of maker is primary is secondary, drawee (e.g. of drawer (maker)
bank) is primary is primary

Both drawer and paye

Special Maker and payee must be Both drawer and payee ma e may be the same
cases two different persons y be the same person person for Self-
cheque

Can be presented
for payment only when it
Accepta No need of acceptance of maker, is accepted by drawee (acc Does not require
nce while presenting for payment eptance is must, any acceptance
before drawee can be
made liable upon it)
 Drawee can Can be drawn payable
Conditio A maker cannot put
put conditions only if he to bearer or on
ns any conditions on it
accepts the bill demand

When
made payable to bearer, it Payable immediately
If doesn't contain payees name,
Legality is not considered on
but state to be payable to bearer,
cases as illegal (entitled to 3 demand without any
is illegal.
days of grace unless it is days of grace
payable on demand)

If dishonored, a notice of Notice of

dishonor is required to be dishonor is not
Dishono given by necessary. Want
If dishonored, no notice required
r the holder (payee) to of assets in the hands
the maker of the bill of banker is sufficient
(drawer) notice

Crossing of Cheques
Bearer Cheque & Ordered Cheque
There are two types of cheques -

Payable to bearer -
Whoever bears or holds the instrument. If you don't provide any crossing on the cheque, then it will be
a bearer cheque. If you take it to the bank counter, you will be able to en-cash the cheque, without any issue.
Payable to order -
Only to a certain person/institution. If you provide a crossing on the cheque, it will be a ordered
cheque. There will be several conditions for an ordered cheque as described below.

Crossing of Cheques are defined in Section 123 of Negotiable Instrument Act, 1881. There are four types
of crossing (i.e., putting conditions on cheque):

1. Crossed Generally [Putting Two Parallel Transverse Lines on the cheque]

It provides the condition to the banker that the amount can be credited to any account but through a banking
channel, so that the beneficiary may be traced.

2. Crossed Specially [Putting the name of the banker, e.g., SBI, ICICI, etc]
Here the bank makes payment only to the banker whose name is written in the crossing. It is more safe than
the generally crossed cheques, because it restricts to the only banker you want to use.

3. Account Payee / Restrictive Crossing - [Putting the word 'Account payee']

The collecting bank is supposed to credit the amount only to the account of payee, nowhere else.

4. Non-negotiable Crossing - [Putting the word 'Not Negotiable']

Here, you are making the cheque (which is a negotiable instrument) non-negotiable. It means you
cannot endorse the cheque to other person (restricting the transferability, refer to the previous posts)
 Cheque Truncation System (CTS)
As per Negotiable Instrument Act, 1881, each and every cheque is required to be presented to
the drawee bank (paying bank) for the payment.

Earlier, cheques deposited by customers, used to be presented by the collecting bank (customer's bank) to the paying
bank (cheque issuer's bank). Thus, it required the physical movement of the cheque from collecting bank to the paying
bank, consuming a significant amount of time to clear the cheque. (Consider several cheque to be cleared in several
paying banks! How much time it could take!)

Then, came the concept of Clearing house. Banks decided to meet in this clearing house, which acted as the central
place and settle their net amounts of cheques. Thus it reduced cheque processing time because they need not visit
several paying bank, taking several cheques.

Cheque Truncation System (CTS)

At present, we got a new concept of cheque clearing. Instead of sending the cheque physically by the collecting
bank to the paying bank, an electronic image (scan copy, along with all necessary details) is transmitted to
the drawee/paying bank for payment through the clearing house.

This reduced the time drastically, as CTS stopped the physical movement of cheque from one bank to another, and
also the costs involved with it.

Grid-based CTS clearing

RBI implemented CTS in the National Capital Region (NCR) of New Delhi, Chennai and Mumbai with effect
from February 1, 2008, September 24, 2011 and April 27, 2013 respectively.

After migration of the entire cheque volume from MICR system to CTS, the traditional MICR-based cheque
processing has been discontinued in these 3 locations.

Based on the advantages realized and experience gained, RBI decided to operationalize CTS across the country.
Accordingly, Grid-based CTS clearing has been launched in these 3 locations.

1. New Delhi Grid - NCR of New Delhi, Haryana, Punjab, UP, Uttarakhand, Bihar, Jharkhand, Chandigarh
2. Mumbai Grid - Maharashtra, Goa, Gujarat, MP, Chattisgarh
3. Chennai Grid - Andhra Pradesh, Telengana, Karnataka, Kerala, Tamil Nadu, Odisha, West Bengal, Assam,
Puducherry

CTS Clearing Cycle

Step 1 - The Collecting bank (or branch) captures the data (on MICR band), and the images of a cheque using
their Capture System (comprising scanner, core banking or other application)
To ensure security, safety and non-repudiation of data/images, end-to-end Public Key Infrastructure (PKI) has been
implemented in CTS.

Step 2 - The Collecting Bank sends the data and captured images duly signed and encrypted to
the central processing location (Clearing House).
The Clearing House processes the data, and arrives at the settlement figure and transfers the images and requisite
data to the Paying bank. This is known as presentation clearing.

Step 3 - The Paying Bank receives the images and data from the Clearing House for payment processing. The paying
bank generates the return file for unpaid instruments. The return file/data are then sent to the Clearing House.

Step 4 - The return file/data is processed by the Clearing House in the return clearing session and in the same way
as presentation clearing session. Then these are provided to the Collecting bank.

Step 5 - The Collecting bank processes the data received from Clearing House. The whole process is known
as Clearing Cycle.

The Clearing Cycle is treated as complete once the Presentation clearing and the associated Return clearing sessions
are successfully processed.

Amendment in NIA Act, 1881 for CTS

RBI has confirmed that with amendments to Section 6 and 1(4) and with addition of Section 81A in the NIA Act,
1881, the truncation of cheques has been legalized.

Forex
Foreign-exchange reserves (forex) are assets of a country, generally held by the central bank, and held in foreign
currencies. For India, RBI is authorized to maintain Indian forex, which is generally held in US Dollar, or other
foreign currencies.

But the question is why do a country hold forex reserve?

There are few reasons behind this. However most important is -

Influence Exchange Rate - If India has a large amount of forex, then it can target a certain exchange rate. For
example, If India wants to increase the value of Indian Rupee (INR), India could sell its dollar reserves to
buy INR on the foreign exchange market. The increased demand would appreciate the INR. In a fixed
exchange rate, forex reserves can play an important role in trying to keep a target exchange rate.
Guarantor for External Debts / Liabilities - If India holds a large amount of forex, then foreign countries, or
foreign banks (like, World Bank, ADB, etc) will be much willing to provide long term or short term loans.
Because, they will understand that India has the ability to payback the loan. It reflects as credit worthiness.

Indian forex
India has four types of forex assets -

1. Foreign Currency Assets - This is the most important part of forex, and holds the maximum portion of it. It
simply means how much foreign currency (generally dollar) India holds (Jan 23, 2015 - USD 2,97,510)
2. Gold Reserves - This is the next most important part. How much gold India holds (Jan 23, 2015 - USD
19,377 worth gold)
 3. Special Drawing Rights (SDR) - These are the drawing rights, or a claim to currency, that a country holds
with IMF, that can be sold or bought. Note that it can be exchanged with currencies. (Jan 23, 2015 - USD
4,047)
4. Reserve Position in the IMF - Also known as Reserve Tranche Position (RTP). It also represents a forex, to
some extent (Jan 23, 2015 - USD 1,101)

India holds total $360 billion by end March 2016

FERA and FEMA

Foreign Exchange Regulation Act (FERA), 1973
Government of India (PM was Smt. Indira Gandhi) enacted Foreign Exchange Regulation Act (FERA) in 1973 , which
came into force w.e.f. January 1, 1974, to regulate all Indian exchanges or dealings with foreign countries.

At the time of legislation of the law, India had acute shortage of foreign exchange (forex). The government then tried
to restrict (very strictly) the exchanges, or dealings of India with foreign countries. But the rules and regulations were
so stringent that it had a great impact on the import and export of currency.

There were several issues with this act, like -

Law violators were treated as criminal offenders (instead of civil offenders)

Wide power on the hand of Enforcement Directorate (E.D) to arrest any person, seize any document
(Corporate world found themselves at the mercy of E.D.!)
Control everything that was specified, relating to foreign exchange, aimed at minimizing dealings
in forex and foreign securities, etc.

Foreign Exchange Management Act (FEMA), 1999

FERA was too strict on regulating the foreign exchanges, that acted like an obstacle in foreign trade, and had
become incompatible with the pro-liberalization policies of government.

Hence government of India, under PM Shri. Atal Bihari Vajpayee repealed the FERA Act, and
introduced FEMA in 1999. This time, instead of "regulating" the foreign exchange, government tried to "manage" it
(with simpler norms).

FEMA has brought a new management regime of foreign exchange with the new framework of the World Trade
Organization (WTO). Also, it brought with it the Prevention of Money Laundering Act, 2002, w.e.f. July 1, 2005.
Difference between FERA and FEMA

FERA FEMA

Objectives To conserve forex and to prevent misuse To facilitate foreign trade and maintain forex

Consisted of 81 sections with great

Provisions Consists only 49 sections and is much simpler
complexity

Wide power on the hands of a police

Power of
officer (not below the rank of Deputy Power curtailed to a great extent
Search & Seize
SP)

Criminal offence, and was not

Civil offence, and is compoundable (charges can
Violation compoundable (charges could not be
be dropped)
dropped)

only citizenship was the criteria to

Residential More than 6 month stay in India is the criteria to
determine the residential status of a
status determine the residential status of a person
person

Chapter 4 - Capital Market

Capital Market - Part I

While Money Market deals with short-term (up to 1 year) funds, Capital Market deals with medium and long
term (more than 1 year) funds. It refers to all facilities and institutional arrangements
for borrowings and lending medium and long term funds.

Borrowers - private business corporations, PSUs, government, etc.

Lenders - individual, institutional investors, banks, financial institutions, government, etc.

Capital Market
Capital market is the part of a financial market, where companies that need capital for its business purpose,
issue stocks or bonds to the investors and raise money. Investors invest in capital market to earn profit from
its investment.

They have two options for investment - either buy equity (stock) instrument, or debt (bonds, debentures) instrument.
(Refer my previous post on Equity & Debts)

Primary and Secondary Market

Sometimes, a company directly approaches a market to get some investment and raise capital. For this purpose, they
can work with lead managers or merchant bankers, who help them to raise money.
If investors directly provide money to the company (meaning, company raises capital directly from investors), then it
means that the trading is in Primary Market.

After an investor has shares or bonds (whatever instrument he/she bought from the company in Primary Market),
can sell his/her shares/bonds to other investors. All consequent buying or selling will be traded in the Secondary
Market (meaning, investors doesn't buy instruments directly from the company in a Secondary market).

Issues in Primary Market

There are several type of Issues in a Primary market -
1. Initial Public Offering (IPO) - A company when first time wants to raise money from the market, issues shares to
the general public (meaning, previously shares held only by the founding members, or the company itself). This first
time share issue is known as Initial Public Offering (IPO).
After IPO, the company becomes a public company, because the general public is also the shareholder/stakeholder of
the company. It is now listed in one or more stock markets for trading in Secondary Market.

2. Follow-On Public Offering (FPO) - After sometimes (after IPO), suppose, the company again wants to issue shares
(shares held by company) to the public, then it will be known as Follow-On Public Offering. Note that this is done
in Primary Market (investors buy directly from company), not in Secondary market (investors buy from other
investors, or stock markets)

Confusion - Don't confuse FPO as Secondary Market offering. As I discussed earlier, that Secondary market deals only
within the investors, not with the company, whereas, IPO and FPO work between the company and
the investor (hence in Primary Market).

Company in need of capital, can raise money, by issuing shares to its existing shareholders, or to non-shareholders.

3. Rights Issue - If the company issues shares to existing shareholders in per share basis, then
the percentage stake will not be diluted. This is known as Rights Issue.
For an example, suppose a company issues 1:3 Rights Issue @ Rs. 50/share. It means an existing shareholder having 3
shares already can buy 1 new share at Rs. 50. Note that the percentage stake is not diluted, because
every shareholder again holds the same percentage of shares.

4. Preferential Issue - If the company issues shares to some other selected (preferred) people who is not an existing
shareholder, then it will be known as Preferential Issue. Note that percentage stake is diluted here,
because new person becomes shareholder.

Trade in Secondary Market

After the IPO, investors have the securities they bought, and the company has the money/capital. The company
then lists the securities on one or more Stock Exchanges (like BSE, NSE, Nasdaq, etc).
Companies apply to the respective stock exchanges to get their stocks listed, after paying a listing
fee. Listing facilitates the subsequent buying and selling of the securities through current and prospective investors.
This enables investors to make profits, reduce risks, invest in prospective growth areas, and so on (and making a lot
of speculations! ups and downs in stock market)

Note that in Secondary market, investors can buy and sell their stocks from and to other investors.

Primary Market - You buy shares from company itself

Secondary Market - You buy shares from some other shareholder, rather than the company, meaning
the share is already gone through the Primary market.

Types of Shares
Before going to how you could calculate sensex, it is important to know about different types of shares -

Restricted Shares - restricted to its own employees, or insiders, cannot be issued to public without special
permission
Float Shares - freely bought of sold in public (consider as floating in public market)
Outstanding Shares - represents all the shares the company actually issued, either to the public or to its
own employees (meaning, restricted shares + float shares)
 Authorized Shares - maximum share that a company can issue. Shareholder's Vote is necessary to increase or
decrease it.

Commodity Market, Hedging, Blue Chip, Bear and Bull

1. A commodity market is a market that trades in primary/raw products, rather than manufactured products.
Commodities include -
a. Soft commodities, like wheat, cocoa, sugar, etc (agricultural products)
b. Hard commodities, like gold, rubber, oil, etc (mined products)
c. Both (a) and (b)
d. None of the above

2. Commodity Market trading can include -

a. Physical trading
b. Derivatives trading (futures, forwards, options, etc.)
c. Both (a) and (b)
d. None of the above

3. Which of the following is/are commodity exchanges of India?

a. Multi Commodity Exchange (MCX)
b. National Commodity and Derivatives Exchange (NCDEX)
c. National Multi-Commodity Exchange (NMCE)
d. All of the above

4. Which of the following is the regulatory body of Commodity Market / Derivative Market?
a. Reserve Bank of India (RBI)
b. Securities and Exchange Board of India (SEBI)
c. Forwards Market Commission (FMC)
d. None of the above
* FM Arun Jaitley announced merger of FMC with SEBI in his Budget 2015-16 speech

5. Who is the current chairman of Forwards Market Commission (FMC)?

a. Ramesh Abhishek
b. Raghuram Rajan
c. U.K.Sinha
d. S.S.Mundra

6. Hedging is the process of -

a. increasing risk
b. reducing risk
c. increasing profit
d. reducing profit

7. Nationally recognized and financially sound companies, investment on which is considered reliable are known as -
a. Blue Chip companies
b. Red Chip companies
c. Green Chip companies
d. Black Chip companies

8. Which of the following is/are considered as Blue chip companies of India?

a. HDFC
b. Reliance
c. Infosys
d. All of the above

9. In market trends, Bull market is -

a. A period of generally rising share prices in stock market
b. A period of generally lowering share prices in stock market
c. A period of generally stagnant share prices in stock market
d. None of the above

10. Which of the following is true regarding Bear and Bull in market trends?
a. Bear means upward and Bull means downward market trends
b. Bear means downward and Bull means upward market trends
c. Bear means stagnant and Bull means upward market trends
d. Bear means upward and Bull means stagnant market trends

Application Supported by Blocked Amount (ASBA)

Investment on Shares

The traditional process of applying in Initial Public Offers (IPO), Follow-on Public Offers (FPO), Right
Issues, etc. (i.e., investing in shares) is to use cheque as a mode of payment and submitting applications.

It has some problems associated -

Investors have to pay the entire fee upfront (at the time of bidding for shares)
Refunds (in case bidding failed) through cheques usually take up to 45 days.

Applications Supported by Blocked Amount (ASBA)

SEBI (capital market regulator) introduced ASBA in September, 2008 in Indian Capital market to facilitate
the application process for shares to benefit the investors, by removing the above problems.
ASBA is an application to buy shares, where investors authorize the bank (mediates the
process) to block the application money in his bank account. Investors cannot withdraw the blocked amount, until
the whole process is over.

If the investor is selected for share (means he is allotted shares / bidding successful), then his blocked
amount will be automatically debited from his account, and an equivalent share will be credited in his Demat
Account.
If the investor is not selected for share (means his bidding is unsuccessful), then the blocked amount will
be unblocked, and he can withdraw that amount as per his wish.

Note that ASBA solved the above two problems.

Interests in the Blocked Amount

Under ASBA, the blocked amount will continue to earn interest during the application processing period, if held in
an interest bearing account (like savings account, etc.). Bank will mark a lien on the deposit, which will be removed
immediately after the allotment process is completed.

Chapter 5 - Public Finance

Revenue, Fiscal and Primary Deficits

Revenue Deficit
For every financial year, government plans a budget. Government needs to predict how much it hopes to earn
as revenue and how much to spend as expenditure.
Suppose, for a financial year, government predicts to earn revenue of Rs. 525 crore (just a figure to understand) and
expects to spend Rs. 400 crore. Then the predicted Net Revenue will be predicted revenue minus predicted
expenditure, i.e., Rs. (525 - 400) crore = Rs. 125 crore.

Fiscal Deficit
In the Revenue Deficit/Surplus, deficit or surplus was calculated on the predicted and actual Net Revenue.
But, if the government actually makes the deficit, then we are talking about Fiscal Deficit. That means, if the
government spends more than it earns in a financial year, then (obviously) the expenditure is greater than
the revenue, leading to the Fiscal Deficit.

Note Fiscal Deficit means actual loss of revenue, while Revenue Deficit can mean actual loss, or actual profit, for
the financial year.

Also note that, while calculating Fiscal Deficit, we need to exclude the borrowings of the government (because it
certainly is not actual revenue, its a debt, that the government needs to pay back to the lender/investor)

Primary Deficit
After borrowing from the investors, government needs to pay interest on the borrowings. If these interests are
deducted from the Fiscal Deficit, then we get the Primary Deficit.
Fiscal Responsibility and Budget Management Act (FRBM), 2003
FRBM Act was legislated to institutionalize financial discipline and improve macroeconomic and public
fund management, reduce fiscal deficit, by making a balanced budget. It was introduced by former finance
minister Shri Yashwant Sinha.

Balance of Payment
Balance of Payments (BOP) of a country is its record of all financial transactions performed between the
residents (meaning individual, firms, government) and the rest of the world (albeit within a period, usually a financial
year). Here a point need to be mentioned, BOP data isn't concerned with actual 'payments', rather with 'transactions'.

For the international trade, a country's BOP deals with three types of accounts -

1. Current Account - It is the most important of the three. It has mainly four components - goods, services,
income and current transfers (meaning worker's remittances, donations, aids, etc.). It is very obvious now -
if the outflow of this components are more than the inflow, it will result in Current Account Deficit (CAD).
2. Capital Account - All international capital transfers are recorded here (Capitals meaning non-financial
assets, such as land and non-produced assets, such as mine)
3. Financial Account - It contains the direct investment (remember FDI, ODI), portfolio investment, reserve
assets, etc.

Often the last two accounts are mentioned as a single one - Capital and Financial Account.

Chapter 6 - Other Topics

LIBOR, MIBOR, MIBID

Inter-Bank Offer Rate
When a bank offers loan to other banks (or any other financial institutions), then it charges interest on that loan.
The interest rates charged on the loans vary from bank to bank. But these rates need to follow a benchmark, so
that interest rates does not differ too much among them (meaning, it should not happen, that an X bank charges 10 %
interest per annum on a loan, whereas, Y bank charges 20 % on the same type of loan, it should be at par)

Generally, Inter-bank offer rate is of short-term nature (overnight to 1 year), and is followed for deciding interest
rates to be charged on the loans offered to other banks (refer Call / Notice / Term Money) (inter-bank market). It acts
like a benchmark for deciding interest rates.

Several financial markets follow different Inter-bank offer rates, like -

London Inter-Bank Offer Rate (LIBOR)

Mumbai Inter-Bank Offer Rate (MIBOR)
Tokyo Inter-Bank Offer Rate (TIBOR)
Singapore Inter-Bank Offer Rate (SIBOR)
Hong Kong Inter-Bank Offer Rate (HIBOR), etc.
 Non Residential Indians (NRI) Accounts
Non-Resident Ordinary (NRO)
You are a citizen of India. You work here, and you have a good income. Now suppose, you want to move to
a foreign country (for whatever purpose) (meaning you are going to be an NRI). Then what will you do to for
your Indian earnings, like rent, dividends? Or may be you want to send remittances from foreign country. Then the
handy account for you is Non-Resident Ordinary (NRO) Rupee Account.

The balance maintained in this type will be Rupee (INR) dominated. You can open Savings, Current, Fixed, Term -
types of account.

Non-Resident External (NRE)

You are already an NRI. You have foreign currency with you. You can open this type of NRE Account. Note that you
have to deposit foreign currency while opening this account (can use traveler's cheque or notes).

The balance will be maintained in Rupee (INR). This will facilitate mostly in your remittances to India. You have
several options or opening Savings, Current, Fixed, Term accounts.

Foreign Currency Non-Resident Bank (FCNR(B))

This is another type of account for NRIs and almost similar to NRE account. However there are some major differences

You can only maintain your FCNR(B) account in foreign currencies (like, Pound, Dollars, Euro, Yen, etc)
Only one type of deposit is allowed - term deposit of 1 to 5 year maturity.

NOSTRO, VOSTRO, LORO Accounts

Nowadays, bank operations are not confined within a national border. Banks are
opening branches in foreign countries. But the problem is - Is it possible for a bank to open branch in each and
every country?
Obvious answer is no. Then what is the easiest way to handle this situation?

Open an account in the foreign countries' bank!!

Here Nostro, Vostro and Loro accounts come into play. Note that all these accounts are termed as one's own country-
basis.

NOSTRO Account
Italian word 'nostro' means 'ours'. Hence, Nostro account points at - "Our account with you"
Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic bank (from our
perspective, our bank). It obviates that account is maintained in that foreign currency.

For example, SBI account with HSBC in U.K. (may be)

VOSTRO Account
Italian word 'vostro' means 'yours'. Hence, Vostro account points at - "Your account with us"
Vostro accounts are generally held by a foreign bank in our country (with a domestic bank). It generally maintained
in Indian Rupee (if we consider India)
For example, HSBC account is held with SBI in India. (may be)
LORO Account
Again, Italian word 'loro' means 'theirs'. Therefore, it points at - "Their account with them"
Loro accounts are generally held by a 3rd party bank, other than the account maintaining bank or with whom
account is maintained.

For example, BOI wants to transact with HSBC, but doesn't have any account, while SBI maintains an account
with HSBC in U.K. Then BOI could use SBI account. (again may be)

Banking Ombudsman
Ombudsman is an official appointed to investigate individual's complaints against a company or organization,
especially a public authority (Google definition of 'Ombudsman').

To facilitate customer complaints resolution process, RBI introduced this fast and inexpensive (no fee to avail this
facility) Ombudsman Scheme in 1995 under Section 35A of Banking Regulation Act, 1949. In this
scheme, RBI appoints the Banking Ombudsman, generally a senior official, to redress customer complaints
against deficiency in certain banking services provided by a bank.

Banks covered under this scheme

Scheduled Commercial Banks (SCBs)

Regional Rural Banks (RRBs)
Scheduled Primary Co-operative Banks

Banking Ombudsmen and their location

Currently, total 15 Banking Ombudsmen have been appointed by RBI, and their offices are located mostly in the state
capitals.

Legal power of Ombudsman

Banking Ombudsman is a quasi-judicial authority, who has legal power to summon both the parties - Bank and
its customer, to facilitate the resolution of complaint through mediation.

Banking Ombudsman Scheme, 2006

The latest scheme is Banking Ombudsman Scheme, 2006, which has wider extent and scope than its previous versions,
like online submission of complaints is possible. Also, if customer is not satisfied with the resolution provided
by Ombudsman, he can approach the Appellate authority, i.e., Deputy Governor of RBI.

Complaint process
A customer can file a complaint before the Ombudsman, only after the followings -

If he has not received any reply from the bank within a period of 1 month after the bank has received
his complaint (meaning, customer has to complain to the bank first, then Ombudsman)
If the bank rejects the complaint of the customer
If the customer is not satisfied with the reply from the bank
He can file a complaint by writing on a plain paper, or online, or email to the Banking Ombudsman (under whose
jurisdiction the bank branch is)

Note that, Banking Ombudsman is not meant to replace the traditional Consumer Courts or Forums, but the scheme
only supplements them. Also note that this scheme deals with complaints of max. Rs. 10 lakh disputes.

ADR and GDR

Depository Receipts (DR) A publicly listed (stock exchange listed) company might want to raise money from foreign
countries (in contrast to its domestic country). So it will list its securities (stocks or equities) to a foreign country's stock
exchange in form of Depository Receipts (DR). Therefore, DRs are a type of negotiable financial security (usually
stocks/equity) by a foreign publicly listed company, which are traded on a local Stock exchange.

American Depository Receipts (ADR)

Depository Receipts were first started in USA in late 1920s. DRs issued by any company of USA/America will be known
as American Depository Receipts (ADR). ADRs, generally, are traded in US Dollar.

Global Depository Receipts (GDR)

DRs became popular in other parts of the world after its introduction in USA. DRs of all other countries (other than
USA) will be known as Global Depository Receipts (GDR).

DEAF Scheme
There are several accounts in banks which are not operated for 10 years (or more), or there are deposits which
are unclaimed for 10 years (or more). There is little possibility that thedeposits will be reclaimed by the owner (as it is
unclaimed for that long period).

RBI decided to acquire those unclaimed amounts and create a fund, which could be used for the good of the public. It
amended the Banking Regulation Act, 1949, by adding Section 26A, which empowers RBI to establish the Depositor
Education and Awareness Fund (DEAF).

All the unclaimed amounts in the banks need to be transferred within 3 months after becoming 10 years default, to
the DEAF fund. Also note that the transfer is allowed only in electronic mode.

The goal of this DEAF fund is to promote depositor interest, like educating them, or creating awareness among them,
or some other purpose.

Situational Question
If someone comes to your bank and claims for his/her deposit (which has already been transferred to DEAF fund,
because it defaulted for 10 years), what will you do?
You will verify his/her claim, and after successful verification, will honor the claim.
Note that the bank would be liable to pay the amount to the depositor/claimant and claim refund of
such amount from the DEAF fund (even after 10 years).

Finance Ministry
Ministry of Finance (MoF)

Finance Ministry is one of the most important ministries of Government of India. It governs the following -

Taxation (direct and indirect - CBDT and CBEC comes under this ministry)
Financial Institutions (Banks, NBFCs, etc.)
Capital Markets (SEBI, etc)
Financial Legislation (Money Bills, etc.)
Center and State finances
General Budget (presented by Finance Minister)

Departments of MoF

Ministry of Finance of India comprises 5 departments -

1. Economic Affairs

Department of Economic Affairs (DEA) formulates and monitors the economic policies and programmes of
the government. It performs the following functions -

General Budget (excluding Railway Budget) preparation

Formulation of macroeconomic policies - fiscal policy, inflation, public debt management, capital
market regulation, stock exchange, etc.
Deals with external resources through Bilateral and Multilateral cooperation with foreign
countries, foreign investments, forex, balance of payments (BOP), etc.
Indian currency production (bank notes and coins), postal stamps, cadre management, etc.

Economic Affairs Secretary - Shri Rajiv Mehrishi

2. Expenditure

Department of Expenditure governs the public financial management system in the Central government. It
performs the following functions -

Appraises major schemes or projects before sanction (both Plan and non-Plan expenditure)
Center to State financial resources transfer
Implementation of Central Pay Commission (currently 7th Pay Commission chaired by Justice Ashok
Kumar Mathur) and Finance Commission (currently 14th Finance Commission chaired by Dr. Y.V.Reddy)
recommendations.
Expenditure management of Central Ministries or Departments, etc.

Expenditure Secretary - Shri Ratan P.Watal

3. Revenue

Department of Revenue controls all the Direct and Indirect Taxes by Central Board of Direct Taxes
(CBDT) and Central Board of Excise and Customs (CBEC) respectively.

Note that Income Tax, Customs Duty, Excise Duty, etc. - all type of taxes are governed by Revenue Department.

Revenue Secretary - Shri Shaktikanta Das

4. Financial Services

Department of Financial Services (DFS) governs all banks, insurance, pension and financial
services (including MSMEs) provided by government agencies or private corporations.

Financial Services Secretary - Shri Hasmukh Adhia

5. Disinvestment

Department of Disinvestment is responsible for making policy

regarding disinvestment and privatization of Public Sector Units (PSU) of government of India.

Disinvestment Secretary - Smt. Aradhana Johri

Cadres of MoF

The following cadres of Indian Civil Services work under Ministry of Finance -

Indian Economic Service (IES)

Indian Revenue Service (IRS)
Indian Cost Accounts Service
Indian Civil Accounts Service

Finance Minister

First Finance Minister of independent India is Shri R.K.Shanmukham Chetty and current Finance Minister is Shri
Arun Jaitley.

Minister of State for Finance

Current Minister of State for Finance is Shri Jayant Sinha

Finance Secretary

Finance Secretary plays the leadership role among the 5 departmental secretaries (chosen among them).
Generally Finance Secretary tends to be the senior most of the 5 (seniority based on entry into civil services, not
based on actual age).
 Pre-2005 Banknotes and MG-2005 Series
Banknotes Series
Since Independence of India, three different series of banknotes are issued -

1. Ashoka Pillar Banknotes - Issued in 1949

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

MG Series - 2005 Banknotes

These series banknotes are issued in the denomination of Rs. 10, 20, 50, 100, 500 and 1000, and contain
some additional new security features that MG Series-1996 doesn't have. Started from August 2005, MG Series -
2005 banknotes are currently being used in India.

It is very easy to distinguish MG-Series 2005 notes from its predecessors, because these notes bear the year of
printing on the reverse side.

Withdrawal of Pre-2005 Banknotes

RBI changed the design of pre-2005 banknotes and introduce new security features primarily to minimize
the risk of counterfeiting. So that the economy can be protected from counterfeiters or forgers.

Also, the withdrawal exercise is in conformity with the standard international practice of not having multiple
series of notes in circulation at the same time.

Public can visit any bank branch, or RBI Issue Office to exchange pre-2005 banknotes.

Recently, the deadline of January 1, 2015 has been extended to June 30, 2015 by RBI.

Situational Question
RBI has given a deadline for the exchange of pre-2005 banknotes. What will happen to those notes (that will still
remain in circulation) after the deadline? Will those remain a legal tender?

RBI has clarified that the public can continue to freely use those notes for any transaction and
can unhesitatingly receive those notes in payment, as all such notes continue to remain legal tender.

But public is encouraged to exchange pre-2005 notes with MG Series-2005 notes.

Current Finance Secretary is Economic Affairs Secretary - Shri Rajiv Mehrishi

New Social Security Schemes

New Social Security Schemes by PM Modi

After Jan Dhan (PMJDY), the government will launch 3 mega social security initiatives in India (a Pension and
two Insurance schemes) on May 9, 2015 in Kolkata.

These schemes are aimed at providing affordable universal access to essential social security protection in a
convenient manner linked to auto-debit facility from the bank account of a subscriber.

The Insurance and Pension Schemes

1. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) - Life Insurance

2. Pradhan Mantri Suraksha Bima Yojana (PMSBY) - Accidental Insurance
3. Atal Pension Yojana (APY) - Pension

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

It will offer a renewable one-year life cover of Rs. 2 lakh to all savings bank account holders in the age group of 18-
50 years, covering death due to any reason, for a premium of Rs. 330 / annum per subscriber.

The scheme would be offered or administered through Life Insurance Corporation (LIC) or other Life Insurance
companies willing to offer the product on similar terms on the choice of the bank concerned.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

It will offer a renewable one-year accidental death-cum-disability cover of Rs. 2 lakh for partial/permanent
disability to all savings bank account holders in the age group of 18-70 years for a premium of Rs. 12 /
annum (i.e., Rs. 1 / month) per subscriber.

The scheme would be administered through public sector General Insurance companies or other general insurance
firms willing to offer the product on similar terms on the choice of the bank concerned.

Atal Pension Yojana (APY)

It will focus on the unorganized sector and provide subscribes a fixed min. pension of Rs. 1000, 2000, 3000,
4000 or 5000 per month starting at the age of 60 years, depending on the contribution option exercised on entering at
an age between 18-40 years.

The period of contribution by any subscriber under APY would be 20 years or more. The fixed min. pension would
be guaranteed by the government.

While the scheme is open to bank account holders in the prescribed age group, the central government would also co-
contribute 50 % of the total contribution, or Rs. 1000/annum, whichever is lower, for a period of 5 years for those
joining the scheme before December 31, 2015 and are not members of any statutory security scheme and are
not income tax payers.
 Beti Bachao, Beti Padhao Initiative

Child Sex Ratio (CSR)

Child Sex Ratio is the number of females per thousand males in the age group of 0 - 6 years (under 7 years).
Ratio greater than 1 means, there are more boys than girls in the population. Note that this trend of imbalance, if
allowed, will follow in older ages (in future years).

According to the decennial (10 year) census of India, the CSRs in different census are -

1991 census - 945 girls per 1000 boys

2001 census - 927 girls per 1000 boys
2011 census - 918 girls per 1000 boys

Note the drastically declining figure of girl child. This is a major indicator of women dis-empowerment. There may be
several practical reasons, but the most important is our patriarchal mindset, which needs to be changed.

Therefore, the need of the hour is to educate people and start campaigns to save the girl child. We should remember,
'The Happiness of a Nation lies in the Dignity of its Daughters'.

Beti Bachao Beti Padhao Initiative

To ensure the survival, protection and empowerment of the girl child, government has launched a commendable
initiative - 'Beti Bachao Beti Padhao'. This is a joint initiative of 3 ministries of government of India -

Ministry of Women and Child Development

Ministry of Health and Family Welfare
Ministry of Human Resource Development

This initiative will be implemented through a national campaign and focused multi-sectoral
action in 100 selected districts, that are low in CSR.

Objectives

Prevention of gender-biased sex selective elimination - enforcement of laws, especially the implementation
of Pre-Conception & Pre-Natal Diagnostic Techniques (Prohibition of Sex Selection) Act, 1994
(PC&PNDT Act) with stringent punishments for violations.
Ensuring survival and protection of the girl child - the access to various entitlements, changes in patriarchal
mind-set, etc. are to be addressed in order to ensure equal value, care for and survival of the infant and young
girl child.
Ensuring education and participation of the girl child - access and availability
of services and entitlements during the various phases of the life cycle of the girl child - related to nutrition,
health care, education, etc.
Outlays

Budgetary allocation - Rs. 100 crore

Fund will be mobilized from 'Care and Protection of Girl Child - A Multi Sectoral Action Plan' - Rs. 100 crore
Corporate Social Responsibility - for additional resources

Sukanya Samriddhi Account

Sukanya Samriddhi account can be opened in the name of girl child, before she attains 10 years age. Some important
points about this special account scheme -

Minimum deposit - Rs. 1,000

Maximum deposit in a year - Rs. 1.5 lakh
Interest rate - 9.1 % per year for the savings accounts
Full income tax exemption (no tax)
Partial withdrawal, maximum up to 50 % balance can be withdrawn by the girl child after attaining 18 years
Account will remain operative till the girl attains - 21 years
A legal guardian / natural guardian can open account in the name of girl child
A guardian can open only one account in the name of one girl child and max. 2 accounts in the name of two
different girl children
Account can be opened up to age of 10 years from date of birth (initially 1 year grace period has been given)