Special Drawing Rights (SDR)

Special Drawing Rights (SDR)

3184   05-May-2018, Sat

Introduction

Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs augment international liquidity by supplementing the standard reserve currencies.

 

SDR Calculation

SDR is calculated based on the basket of five international currencies

The five currencies include

a) US Dollar

b) Euro

c) Yen

d) Pound

e) Yuan

 

Role of SDR

a) SDR had a dominant role in the world economy and trade during the fixed rate regime

b) SDR role diminished after the collapse of fixed rate regime

c) The floating rate regime saw huge accumulations of international currency reserves

d) In 2009, SDR regained popularity by allocating 182.6 billion SDR to global economy amidst the global economic crisis

e) IMF helped world nations to get out of the financial crisis through SDR allocation

f) Now, SDR has become a dominant force in international economic scenario

 

Value of SDR

a) SDR is an international reserve asset

b) SDR is not a currency

c) It is also not a claim on the IMF

d) SDR exchanged for freely usable currencies

e) Allocated to members of IMF from time to time

f) SDR is a potential claim on the IMF member countries

g) 204 billion SDRs is equivalent to $285 billion in value

h) Valuation and weight of the IMF currencies basket done once in 5 years

i) Next valuation to be done on September 30, 2021

 

SDR Weightage

Following is the weight assigned to the basket of five currencies

a) US Dollar – 41.73 %

b) Euro – 30.93 %

c) Yuan – 10.92 %

d) Yen – 8.33 %

e) Pound Sterling – 8.09 %

 

Criteria to get added to SDR

a) SDR basket of currencies determined by the IMF Executive board

b) Export criteria – The exports of the country must have the largest value in five years

c) Holders of SDRs can obtain freely usable in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

d) A “freely usable” currency is defined in the IMF’s Articles of Agreement to mean a currency that the IMF determines

     (i) is, in fact, widely used to make payments for international transactions, and

     (ii) is widely traded in the principal exchange markets.

e) Earlier in 1999, Euro was included in the SDR basket replacing Franc

f) In 2016, Chinese Yuan was included in the SDR basket

 

SDR Interest Rate

a) Interest rate is determined weekly by IMF

b) Interest rate charged on IMF loans and SDR allocations

c) Interest rate is given to members of IMF based on their SDR holdings

d) Interest rate determined on short-term debt instrument basis prevailing in the money market of SDR currency basket

 

Conclusion

a) SDR of IMF is going to play a crucial role in the global economy

b) SDR allocations to member countries of IMF is focused on recovering from an economic turmoil

c) SDR basket of currencies are considered as a global standard of currency exchange

d) The currencies included in the IMF SDR currency basket will play a dominant role in the world economy

e) The five nations in SDR are considered to be politically important and dominant in the international affairs

f) The recent inclusion of Chinese Yuan is considered a political victory for China over the USA

g) World trade is to be dominated by the SDR basket of currencies with a great boost in international relations

Inflation - Types, Causes, Measurement and Effects

Inflation - Types, Causes, Measurement and Effects

1416   30-Apr-2018, Mon

INTRODUCTION

What is inflation?

Inflation is a sustained rate at which the general level of prices of goods or services are increasing, and at the same time the rate of purchasing power of currencies are decreasing. Inflation is measured as an annual change in percentage.

 

Prices of things rise over time under conditions of inflation and as it does, every currency you own buys smaller percentage of service/good. Therefore, when prices rise and currencies fall, you have inflation. The purchasing power is the expression of the value of currencies. Purchasing power, is the amount of tangible/real goods/services the money can buy at a moment in time. When there’s inflation, there’s decline in the purchasing power of money.

According to Crowther, “Inflation is State in which the Value of Money is Falling and the Prices are rising.”

In Economics, the word ‘inflation’ refers to General rise in Prices Measured against a Standard Level of Purchasing Power.

 

Example –

In 2014 1 Kg of Rice = Rs 40

In 2016 1 Kg of Rice = Rs 60

The above increase in price of rice. The purchasing power of money has decline as the same amount of good is available at higher price. Hence, the above price rise of rice over a period of time is called as inflation that is affecting the purchasing power of the people .This in turn reduces the value of money as for each commodity we have to spend more than the previous one.

 

What causes inflation?

There’s no single theory behind the cause of inflation that economists/academics agree upon. However, there are a few commonly held hypotheses:

1. Demand-pull inflation

This theory can be summarized as “too much money chasing too few goods”. It is a mismatch between demand and supply , if demand is growing faster than supply, prices will increase. This usually occurs in growing economies as more people gain purchasing power while the supply is not able to catch up to growing demand.When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation.

 

2. Cost-push inflation

According to cost-push inflation, inflation is caused when production costs of companies rise. When production costs (taxes, wages, imports, etc.) increase, companies increase the prices of their goods/services to maintain their profit margins.

 

3. Monetary inflation

According to this theory, inflation is caused by the excessive supply of money in economies. Prices of commodities are determined by their demand & supply. When the supply is excess, the prices of commodities go down. If the commodity is money, excess supply of money reduces its value and the result is that the prices of everything else priced in currencies (dollars, rupees, etc.) must go up.

 

What are the different types of inflation?

A. Creeping inflation:

Creeping is a mild inflation, which occurs when there is price rise of 3% or less a year. According to the Federal Reserve, when there’s a rise of 2% or less in prices, it benefits the economic growth. The creeping inflation makes consumers expect that the prices will keep increasing, which in turn boosts demand for goods and services, as consumers now want to buy a lot to beat the future prices. And this, is how creeping inflation drives economic expansion. This is also the reason for Federal Reserve to set 2% as its target inflation rate.

 

B. Walking inflation:

Walking is a stronger inflation, somewhere with price rise between 3% to 10% a year. Walking inflation is harmful to the economy, as it accelerates economic growth (too fast). As a result consumers start purchasing goods/services more than their requirement to avoid higher future prices. This further increases the demand so much that it’s challenging for suppliers to keep up with the demands. This results in common services/goods being priced out of reach of most people.

 

C. Galloping inflation:

When inflation rises to 10% of more, there’s a havoc wrecked on the economy. The currencies lose value so drastically that incomes of employees and business can’t keep up with prices and costs. This leads to instability in the Economy and loss in credibility of the government leaders. This is the type of inflation that must be prevented at all costs.

 

D. Hyperinflation:

Increase in inflation beyond the inflation range of 2 or 3%, could lead to hyperinflation, a condition where inflation quickly rises out of control. Hyperinflation occurs when prices skyrocket more than 50% a month. Hyperinflation is a rare phenomenon. Some examples of hyperinflation are Germany in 1920s, Zimbabwe in 2000s and America during its civil war.

 

E. Stagflation:

Stagflation is when the growth in economy becomes stagnant, but there’s still price inflation. This seemingly contradictory phenomena is rare like hyperinflation, but can create havoc in economy by combining high unemployment rate, severe inflation and poor economic growth. Stagflation is a huge challenge to Central banks, due to increase in risks associated with monetary policy responses and fiscal. Central banks usually increase interest rates to combat high inflation, but doing so during stagflation could increase unemployment further. Therefore, central banks need to keep a limit on their ability to decrease rates during stagflation. Possibly the most difficult inflation to manage.

 

F. Core inflation:

This type of inflation measures the rising prices of all commodities except energy and food, due to the fact that gas prices increase every summer.

 

G. Wage inflation:

Wage inflation occurs when wages of workers rise faster than the cost of living. Wage inflation occurs when there are labor unions demanding higher wages, when workers control their pay or when there’s a shortage of workers.

 

H. Asset inflation:

Asset inflation refers to increase in prices of one asset class (gold, oil, housing, etc.). Asset inflation is often overlooked by inflation watchers when the overall inflation is low.

 

I. Suppressed Inflation:

Existing inflation disguised by government Price controls or other interference in the economy such as subsidies. Such suppression, nevertheless, can only be temporary because no governmental measure can completely contain accelerating inflation in the long run. It is Also Called Repressed Inflation.

 

Effect of Inflation –

a) They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

b) Uncertainty about the future purchasing power of money discourages investment and saving.

c) There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

d) Higher income tax rates.

e) Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

 

Measurement of Inflation

Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate.

Inflation is often measured either in terms of Wholesale Price Index or in terms of Consumer Price Index.

 

Wholesale Price Index(WPI) :

The Wholesale Price Index is an indicator designed to measure the changes in the price levels of commodities that flow into the wholesale trade intermediaries. The index is a vital guide in economic analysis and Policy formulation. It is a basis for price adjustments in business contracts and projects. It is also intended to serve as an additional source of information for comparisons on the international front.

 

Consumer Price Index (CPI):

Consumer price index is specific to particular group in the population. It shows the cost of living of the group. It is based on the changes in the retail prices of goods or services. Based on their incomes, consumer spends money on these particular set of goods and services. There are different consumer price indices. Each index tracks the changes in the retail prices for different set of consumers.

 

Consequences of Inflation –

Adverse effect on production

Adverse effect on distribution of income

Obstacle to development

Changes in relative prices

Adverse effect on the B.O.P (Balance of Payment)

 

Measures of Inflation –

Monetary policy

Credit Control

Demonetization of Currency

Issue of New Currency

 

Fiscal policy

Reduction in Unnecessary Expenditure

Increase in Taxes

Increase in Savings

Surplus Budgets

Public Debt

 

Other Measures

To Increase Production

Rational Wage Policy

Price Control

 

Inflation a threat to Indian economy -

a) Inflation has become a household name for millions of Indians who are finding it extremely difficult to make both ends meet. Prices are growing faster than the household income almost for all products and services including real estate, food, transportation, luxuries.

b) The global economic crisis saw many economies stumble but India rebounded faster and was surging ahead with a growth rate of 9%. But the inflationary pressure is forcing the government to adopt measures which are taking the steam out of the Indian growth story

c) For the last two years India is witnessing double digit food inflation which had reached a high of around 18% in December 2010 with prices of onions, garlic and tomatoes skyrocketing. Lentils, milk and meat have witnessed a steady rise in prices which is putting pressure on the home budget of millions of Indians.

d) Millions of poor people in India are struggling to arrange a two-square meal for their family members. We are running the risk of having an entire generation of malnourished children who are otherwise considered the future of India.

e) The tightening of the economy may control inflation in the long run but it is also slowing our economy and as predicted by the IMF India’s growth will be only around 6-7% instead of 9%.

 

Current status of inflation in India –

  • Currently inflation rate is around 9.44% in India, much above the acceptable rate of 5%.
  • The food price index is at 8.31% causing much discomfort to the policymakers. which under the current scenario seems impossible.

 

How to Control Inflation

Monetary Measures –

  • Credit Control
  • Issue of new currency

 

Fiscal Measures –

  • Reduction in Unnecessary Expenditure
  • Increase in taxes
  • Increase in savings
  • Surplus Budgets
  • Public Debts
  • To increase in production
  • Rational wage policy
  • Price control
  • Rationing

Green Banking

Green Banking

13232   30-Apr-2018, Mon

Introduction

The concern for environmental sustainability by the banks has given rise to concept of Green Banking. The concept of “Green Banking” will be mutually beneficial to the banks, industries and the economy. Green financing is the part of green banking.

 

What is Green Banking?

Green Banking is an umbrella term that refers to the practices & guidelines that make banks sustainable in environment, economic & social dimensions by promoting eco-friendly activities & reducing carbon footprints from banking activities.

 

Green banking aims at improving the operations and technology along with making the clients habits environment friendly in the banking business. It is like normal banking along with the consideration for social as well as environmental factors for protecting the environment. It is the way of conducting the banking business along with considering the social and environmental impacts of its activities.

 

Risks in green banking

Green banking is very important in mitigating the following risks involving in banks.

Credit Risk:

Due to climate change and global warming there will be direct as well as indirect costs to banks. It has been observed that due to global warming there had been extreme weather condition which affects the economic assets financed by the banks thus leading to high incidence of credit default. Credit risk can also arise indirectly when banks lead to companies whose businesses were affected due to changes in environmental regulation.

 

Legal risk:

If banks don’t comply with the relevant environmental regulations, they could face legal risks. Banks could also face risks of direct vendor liabilities for costs of cleaning up the damages, in case they possess assets that cause pollution.

 

Reputation Risk:

Due to increasing environmental awareness banks are prone for reputation risk if their direct or indirect actions are viewed as socially and environmentally damaging. Reputation risks emerge from the financing of environmentally objectionable projects.

 

Strategies

Indian Banks can adopt green banking as business model for sustainable banking. Some of following strategies little reflected in their banking business or must be adopted by banks.

Carbon Credit Business (CBS):

All Nations must reduce greenhouse gases emission and reduce carbon to protect our environment. These emissions must be certified by Certified Emission Reductions commonly known as carbon credit.

 

Green Banking Financial Products:

Banks can develop innovative green based products or may offer green loans on low rate of interest. As Housing and Car loan segments constitute the main portfolio of all banks so they adopt green loans facility.

 

Paperless Banking:

All banks are shifting on CBS or ATM platform providing electronic banking products and services. So there is a scope for banks to adopt paperless banking. Private and foreign banks are using electronics for their office but in PSU banks are still using huge paper quantity.

 

Energy Consciousness

Banks have to install energy efficient equipment’s in their office. Banks have to transform this green banking in hardware, waste management, energy efficient technology products. Banks can donate energy saving equipment to schools and hospitals.

 

Mass Transportation System:

Banks have to provide common transport for groups of officials posted at one office.

 

Social Responsibility Services:

Indian banks can initiate various social responsibility services like tree plantation camps, maintenance of parks and pollution checkup camps.

 

The Financial Times and International Finance Corporation (IFC) is a member of World Bank Group launched Sustainable Finance Awards for institutions that are integrating social, environmental and corporate governance into their business operations. Their awards highlight the partnership between financial and non-financial companies in finding commercially viable and innovative solutions to sustainability challenges. The five categories of Sustainable Finance awards as per Financial Times are as follows

1) Sustainable Bank of the Year

2) Technology in Sustainable Finance

3) Sustainable Investment of the Year

4) Sustainable Investor of the Year

5) Achievement in Inclusive Business

 

Green banking in India

The various banks in India which provide green banking services to their customers are as follows

 

1. State Bank of India:

SBI has launched green banking policy and set up windmills in Tamil Nadu, Maharashtra and Gujarat in generating 15MW power. This is the first bank in India which is in green banking and promoting green power projects.

 

2. Punjab National Bank:

They had taken various steps for reducing emission and energy consumption.

 

3. Bank of Baroda:

They had taken various green banking initiatives such as financing a commercial project. BOB is giving preference to environment friendly green projects such as windmills, biomass and solar power projects which help in earning the carbon credits.

 

4. Canara Bank:

As a part of green banking initiative, it had adopted environmental friendly measures such as mobile banking, internet banking, telebanking, solar powered biometric operations.

 

4. ICICI Bank Ltd:

ICICI bank had started ‘Go Green’ initiative which involves activities like Green products/offerings, Green engagement and green communication with customers.

 

5. HDFC Bank Ltd:

HDFC bank is taking up various measures for reducing their carbon footprints in waste management, paper use and energy efficiencies.

 

6. Kotak Mahindra Bank:

Through the ‘Think Green’ initiative this bank had taken several initiatives such as to reduce the paper consumption and encouraging their customers to sign for e-statements and they had become partners with ‘Grow- Trees.com’ to plant one sapling for every e-statement on behalf of its customers.

 

7. IndusInd Bank:

It has initiated its Green Office Project under which it had installed solar powered ATMs in different cities targeting energy saving as well as reducing CO2 emissions.

 

8. YES Bank:

It has projects portfolio in the areas of alternative energy and clean Technologies.

 

9. HSBC Group:

HSBC has separate targets for data center, paper consumption and business air travel. The purposes of the targets are to drive efficiency, reduce its operational impact on the environment and generate cost savings.

 

10. IDBI:

IDBI Bank is providing various services in the field of Clean Development Mechanisms (CDM) to its client.

 

Conclusion

Green banking refers to the initiatives taken by banks to encourage environment-friendly investment. Green banking as a concept is a proactive and smart way of thinking towards future sustainability. It is very important for the banks to be pro-active and accelerate the rate of the growth of the economy. As there is a continuous change in the environmental factors leading the banks face intense competition in the global market. Banks needs to apply morality of sustainability and responsibility to their business model, strategy and formulation for products and services, operations and financing activities and become stronger. By adopting the environmental factors in their lending activities banks can recover the return from their investments and make the polluting industries become environment-friendly. These are the major information about Green Banking in India.

EXIM BANK

EXIM BANK

1761   26-Apr-2018, Thu

 

INTRODUCTION

With the increase in trade opportunities in the global market and to enhance the country’s domestic competitiveness, a specialised institution for foreign trade was required. Exim bank was set up for this purpose. Export-Import Bank or Exim bank of India is the export finance institution of the country. It was established in the year 1982 under the Export-Import Bank of India Act 1981. Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment . It provides financial assistance to exporters and importers. It coordinates the institutions which provide finance to export and import of goods. The sole aim is to enhance exports from India as well as to promote country’s international trade and investment.

 

How does EXIM bank provide assistance ?

  • It offers finance at all stages of the business cycle, starting from importing technology, product development, marketing, pre-shipment and post-shipment to overseas.
  • Technology and Innovation Enhancement and Infrastructure Development (TIEID) – To meet the long-term foreign currency needs of Indian exporters from MSME sector, Exim bank has tied up with financial institutions under TIEID.
  • Grassroots Initiatives & Development (GRID) program – to provide assistance to enterprises from rural areas of the country, Exim bank supports through GRID program. From this program, assistance is extended to small enterprises, NGO’s, artisans across the country helping and encouraging them to export.
  • The credit facility is extended to overseas sovereign governments and government-owned entities for import of goods and services from India.
  • Exim Bank provides assistance to Indian companies in locating overseas distributors /partners /buyers/ for their products/services.
  • The Exim Bank introduced a program called the Export Marketing Fund (EMF), in June 1986, under which finance is made available to Indian companies for undertaking export marketing activities. The program also covers activities like desk research, minor product adaptation, overseas operations and travel to India by buyers overseas.

 

Objectives:

  • To ensure and integrated and co-ordinated approach in solving the allied problems encountered by exporters in India.
  • To pay specific attention to the exports of capital goods;
  • Export projection;
  • To facilitate and encourage joint ventures and export of technical services and international and merchant banking;
  • To extend buyers’ credit and lines of credit;
  • To tap domestic and foreign markets for resources for undertaking development and financial activities in the export sector.

 

Functions of Exim Bank:

1. Corporate banking group:

Corporate banking group handles various financing programs for exporters, importers and overseas investment by Indian companies.

 

2. Project finance/trade finance :

Project finance group deals with the services related to export credit such as pre-shipment credit, suppliers credit. The projects related to the financing of export transactions of the agricultural sector are also handled by this group.

 

3. Export services group:

Export services group provides services such as value added information for promoting investments and advisory services.

 

4. Export marketing group:

Export marketing group provides loans/assistance for exporters (example Indian company) to perform export operations to overseas markets.

 

5. Support services group:

Support services group render services which include areas of planning, research, corporate finance, loan recovery, etc.

 

6. Small and medium enterprises:

Various lending/ financial assistant programs are formed to handle credit proposals from small and medium enterprises (SME).

 

Board of members:

The Exim bank constitutes of the board of directors with managing director and chairman. Currently, they are 13 members body. The board of member consists of:

  • Representatives of government of India
  • Reserve bank of India
  • IDBI – Industrial Development Bank of India
  • ECGC - Export Credit Guarantee Corporation of India
  • Representatives of commercial banks
  • Representatives of exports
  • Chairman and managing director
  •  

Headquarter - Mumbai, Maharashtra

LIBOR and MIBOR

LIBOR and MIBOR

2081   26-Apr-2018, Thu

 

 

LIBOR:

LIBOR stands for London Inter Bank Offered Rate. LIBOR is the benchmark/reference for average interest rates – used by the A-Grade banks as “Offer” for lending their funds to the A-Grade banks as unsecured loans in marketable lot in London based interbank transactions.

 

HISTORY:

LIBOR rates used to be published since 1986 for the then three main currencies of the world, namely United States Dollar (USD), Great Britain Pound (GBP) and Japanese Yen (JPY) for four different maturity periods of one month, three months, six months and one year.

After the merger of currencies of the European nations into Euro, on January 01, 1999, LIBOR rates started to be published for 10 major currencies of the world and for 15 different maturity periods ranging from overnight to 1 week, 2 weeks, and 12 different months. These 10 (Currencies) x 15 (Different Time Periods) = 150 rates used to be published daily at 11.30 A.M. London Time i.e. 5.00 P.M. (Indian Standard Time).

The ten constituent currencies of LIBOR used to be USD, GBP, Euro, Swiss Franc, Canadian Dollar, JPY, Danish Krone, Swedish Krona, Australian Dollar and New Zealand Dollar. LIBOR used to be calculated and published by Thomas Reuters on behalf of British Bankers’ Association.

 

PRESENT STATUS:

The responsibility of LIBOR was handed over to Inter-Continental Exchange on February 01, 2014 administered by ICE Benchmark Administration (IBA). (This was done after detection of scandal in the calculations of LIBOR).

Since then it is also called by the name of ICE-LIBOR. Currently it constitutes of five major currencies i.e. CHF (Swiss Franc), EUR (Euro), GBP (Pound Sterling), JPY (Japanese Yen), and USD (US Dollar).

The rates are now quoted for overnight, one week, and 1, 2, 3, 6 and 12 months and thus

5 (Constituent Currencies) x 7 (Different Maturity Periods) = 35 ICE-LIBOR rates are published on every business day.

Usually, the borrower bank has to pay four to five basis points above the LIBOR.

 

CALCULATIONS:

A survey is made of the interest rate quotations from 18 major London based global banks on the beginning of every business day in London – at which rate they are willing to “Offer” their funds as unsecured funding to other A-grade borrower banks.

Out of the 18 responses, the four highest quoted rates and the four lowest quoted rates are deleted and an Arithmetical Mean is arrived of the remaining 10 responses.

 

SIGNIFICANCE:

LIBOR is used by different A-Grade banks either for interbank lending of the surplus funds or for interbank borrowing for meeting their short term liquidity requirements.

LIBOR has been in use as a reference/benchmark rate by the financial institutions for deciding interest rates for the different financial instruments.

The developed countries like Canada, U.K., U.S.A. and Switzerland rely on LIBOR as a reference/benchmark rate. LIBOR is also used by the well-known multinational commercial corporations.

 

MIBOR:

MIBOR stands for Mumbai Inter Bank Offered Rate. Like LIBOR, MIBOR is the benchmark for overnight interest rates BUT ONLY for the Indian Rupee (INR) at which banks can lend or borrow funds, in marketable size, from other banks in the Indian interbank money market.

 

HISTORY:

MIBOR was launched on June 15, 1998 as “Overnight” rate by Committee for the Development of the Debt Market. Later on, MIBOR started making “Offer” and dealing for 14-days maturity beginning from November 10, 1998.

Further, one month and three months maturities were also added to MIBOR on December 1, 1998. In addition to these maturities, w.e.f. June 6, 2008, the offers for the three days’ maturity rates were also commenced on every business Friday (i.e. from Friday to Monday) in collaboration with Fixed Income Money Market and Derivative Association of India (FIMMDA).

 

CALCULATIONS:

MIBOR used to be calculated daily by the National Stock Exchange of India Limited (NSEIL) by the calculated average of the “Offer” of the lending rates with weighted calculations of the quantum of surplus funds available with the lender banks for lending to the first-class borrowers.

Since June 22, 2015 FIMMDA joined the NSEIL for calculating the MIBOR and MIBOR was given the name of “FIMMDA-NSE MIBID/MIBOR”. MIBID stands for Mumbai Inter-bank Bid Rate. “Offer” Rates are obtained on every business day from “30 Offer Makers” comprising of Public Sector Banks, Private Sector Banks, Foreign Banks and the Approved Money Market Dealers and calculated weighted average of the polled rates are displayed on the NSEIL website. It must be noted that MIBOR rates are the “Polled Rates” and not the actual dealing rates.

 

SIGNIFICANCE:

MIBOR is used by different Indian banks either for interbank lending of the surplus funds or for interbank borrowing for meeting their short term liquidity requirements.

MIBOR has been in use as a reference/benchmark rate by the financial institutions for deciding interest rates for the different financial instruments like Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits, Loans of different maturities and mortgages, etc. MIBOR is also the benchmark for the Call Money Market Rates. But the volumes of MIBOR are quite meagre as compared with the volumes of LIBOR.

 

 

Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016

2528   26-Apr-2018, Thu

 

 Chairman, IBBI : Dr. M. S. Sahoo

• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India. It came into force in 2016.

• It is considered as most important economic reform after GST in recent times. Aimed at creating single law for insolvency and bankruptcy.

• In India, the legal and institutional machinery for dealing with debt default has not been in line with global standards. IBC 2016 aims to change this.

• Resolving insolvency was a long process before IBC and did not offer an economically viable arrangement. IBC is a major step towards ease of doing business in India.

• IBC will boost lengthy winding up process and reduce the time and good exit option in case business could not get success.

• The insolvency resolution process should be completed within 180 days which may be extended up to 270 days in some special cases.

• Under Fast Track Corporate Insolvency resolution process, completion time is 90 days. The corporate under Fast Track are covered whose asset and income are below a prescribed level that may be prescribed by the Central Government.

• Insolvency and Bankruptcy Code (Amendment) Bill 2017 : The bill replaces an ordinance that was brought seeking to bar wilful defaulters, defaulters whose dues had been classified as non-performing assets (NPAs) for more than a year, and all related entities of these firms from participating in the resolution process.

• Set up on 1st October 2016 under the Insolvency and Bankruptcy Code, 2016 (Code).

• It is a unique regulator. It regulates the professions under IBC 2016 Act and the proceedings involved.

• It has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.

• It writes and enforces rules for transactions, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.

• 2018 major amendment to be finalized : The IBC amendments proposed by the panel, led by corporate affairs secretary Injeti Srinivas, make a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and decide their future along with lenders.

• Proposed by a 14-member insolvency law committee headed by corporate affairs secretary Injeti Srinivas

 

KEY FACTS

  • For resolution of individuals, two distinct processes namely- “Fresh Start” and “Insolvency Resolution”.
  • For resolution of insolvency, liquidating and bankruptcy, it provides for the establishment of National Companies Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) as a nodal adjudicating authority.
  • It also strengthened the rights of workers and the creditor.
  • The code gives a push for ease of doing business in the country.
  • It gives a clear and speedy process for identifying financial distress and resolution of companies and limited liability entities.
  • It also enables the provision to deal with cross-border insolvency.
 
         Till date due to the weak insolvency regime, significant inefficiencies and systematic abuse are some of the major reasons that have led to the distressed state of credit markets(Banks/lending institutions) in India. With the enactment of this code, the Government has sent a positive signal with promises of bring about far-reaching reforms with a thrust on insolvency resolution that is creditor driven. Aiming at early identification of fiscal distress and financial failure the law envisages maximising the asset value of an insolvent firm. With provisions to address cross-border insolvency through bilateral and reciprocal arrangements with other countries it strives to provide a level playing ground to businesses in India at par with other developed and developing nations.
 
This Bankruptcy law accepts that firms and business ventures can fail and it allows entrepreneurs to make a new start. The focus of this unified regime on structured and time-bound process for insolvency resolution and liquidation could significantly improve debt recovery rates and revitalise the ailing Indian Banking System and corporate bond markets. While it facilitates failed/debt-ridden firms to wind up in a painless manner, the code also paves the way for resurrection too.

 

 

Insurance Regulatory and Development Authority (IRDA)

Insurance Regulatory and Development Authority (IRDA)

1730   24-Apr-2018, Tue

Insurance Regulatory Development Authority ( IRDA ) ( Insurance Sector )

Established: 1999

Sector: Insurance

Headquarters: Hyderabad, Telangana

Chairperson: T.S.Vijayan

 

INTRODUCTION

Insurance is listed as a Union subject in the Seventh Schedule of the Constitution of India. Therefore, only Union Government has the authority to formulate laws on insurance sector and a State Government cannot.

The Insurance Regulatory and Development Authority (IRDA) is a Statutory, autonomous and apex body to regulate the insurance sector in India.It was created upon the recommendations by the Malhotra Committee report of 1994. The report recommended that a independent authority to regulate the insurance industry in India should be established.

By the IRDA Act, 1999 this authority was setup. In 2000 it received the staus of a Statutory body by the Parliament.

New Development: Since July 2014 the FDI limit in the insurance sector has been raised to 49% by the government. Earlier it was 26 percent.

The members and the Chairman of IRDA are appointed by the Government of India.

 

Organisational setup of IRDA

The Insurance Regulatory and Development Authority (IRDA) is a ten member team, appointed by the Government of India, consisting of the following:

  • One Chairman

  • Five whole-time members

  • Four part-time members

 

Functions & Duties of IRDA ( As per the IRDAI Act of 1999 ):-

  • Ensure orderly growth of Insurance industry.

  • Protection of interest of policy holders.

  • Issue consumer protection guidelines to insurance companies.

  • Grant, modify, and suspend license for insurance companies.

  • Lay down procedure for accounting policies to be adopted by the Insurance companies.

  • Inspect and audit of Insurance companies and other related agencies.

  • Regulation of capital adequacy, solvency, and prudential requirements of Insurance business.

  • Regulation of product development and their pricing including free pricing of products.

  • Promote and regular self regulating organizations in the insurance industry.

  • Re-insurance limit monitoring.

  • Monitor investments.

  • Vetting of accounting standards, transparency requirements, in reporting.

  • Ensure the health of the industry by preventing sickness through appropriate action.

  • Publish information about the industry.

  • Prescribe qualification and training needs of agent.

  • Monitor the charges for various services by Insurance companies.

  • Regulating intermediaries like – Agents, Brokers, Surveyors, TPA Health services.

 

Mission of Insurance Regulatory and Development Authority (IRDA)

        The IRDA has a mandate to fulfill the following :

  • To protect the interests of policyholders and ensure fair treatment to them.

  • To facilitate speedy and orderly growth of the insurance industry sector in Indian economy, for the benefit of common man, and to give long- term funds which will accelerate growth of our economy.

  • To ensure that the customers of insurance receive clear and correct information about the products as well as the services.

  • It specifies the percentage of premium income of the insurer that can go to finance schemes for promotion and regulation of professional organisations.

  • It also specifies the percentage of life insurance business and general insurance business that can be undertaken by the insurer in the social and rural sector.

  • It supervises the working of the Tariff Advisory Committee also.

  • IRDA has the power to frame regulations regarding the Insurance market.

  • It promotes competition among the insurance companies and insurers in order to enhance customer satisfaction, by providing increased choice to consumers. Like it allowed Health Insurance Portability.

  • IRDA is also involved in the field of Consumer education and assistance.

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI)

1741   23-Apr-2018, Mon

The Securities and Exchange Board of India (SEBI)

Introduction

SEBI is a Statutory Body. The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.

The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

SEBI has to be responsive to the needs of three groups, which constitute the market:

1) The issuers of securities

2) The investors

3) The market intermediaries.

 

History of SEBI

Initially SEBI was an Unstatutory Body without having Statutory Power. In 1995 SEBI was given an special Statutory Power by the Government of India under SEBI Act 1992. In 1998 SEBI was constituted as the regulator of Capital Market in India under a Resolution Passed by The Government of India

 

Headquarters

Its headquarters at the business district of Bandra Kurla Complex in Mumbai (Maharashtra), and has Northern, Eastern, Southern and Western Regional Offices in New Delhi, Kolkata, Chennai and Ahmedabad respectively. It has opened local offices at Jaipur and Bangalore.

 

Management of the Board

The Board shall consist of the following members, namely: -

(a) A Chairman (Nominated by Government of India)

(b) Two members from amongst the officials of the [Ministry] of the Central Government dealing with Finance

(c) One member from amongst the officials of [the Reserve Bank];

(d) Five other members of whom at least three shall be the whole-time members to be appointed by the central Government.

Chairman- AJAY TYAGI was appointed as Chairman of SEBI on April 27, 2017. He will succeed Upendra Kumar Sinha whose extended tenure ends on  March 1,2017 

 

Major Functions of SEBI

  • To promote the development of Securities Market and to regulate the Securities Market.

  • To Protect the Interest of Investor in Securities.

  • To overview the market operations, organizational structure and administrative control of exchange.

  • Registration and regulation of the working of the intermediaries.

  • For prohibit the unfair trade practices in the market.

  • Promoting and regulating self regulatory organizations.

  • To provide education for the investors and to give training for the intermediaries.

  • To regulate substantial acquisition of shares and to take over it.

  • SEBI also regulate –

  • Primary Market
  • Secondary Market
  • Mutual Funds
  • Foreign Institutional Investment (FII)

 

Powers

For the discharge of its functions efficiently, SEBI has been vested with the following powers:

- To approve by−laws of stock exchanges.

- To require the stock exchange to amend their by−laws.

- Inspect the books of accounts and call for periodical returns from recognized stock exchanges.

- Inspect the books of accounts of financial intermediaries.

- Compel certain companies to list their shares in one or more stock exchanges.

- Registration brokers.

 

Role of SEBI in IPO (Initial Public offering)

  • The rules and regulations related to Public Issues in India /IPO are purely governed by SEBI
  • Any New Organisation / Company going public in India i.e. Selling of IPO, Should get approval from SEBI
  • SEBI validate the IPO(Initial Public offering) and make sure that document has complete information to help investors to take ready decision before applying shares in an IPO

 

Major Department’s of SEBI

MIRSD – Market Intermediaries Regulation and supervision Department

DNPD - Derivatives and New Product Department

IVD - Investigation Department

LAD - Legal Affairs Department

IMD - Investment Management Department

ISD - Integrated Surveillance Department

MRD - Market Regulation Department

CFD - Corporation Finance Department

DIFFERENCE BETWEEN NEFT & RTGS

DIFFERENCE BETWEEN NEFT & RTGS

2952   11-Apr-2018, Wed

NEFT & RTGS

 

What is NEFT?

NEFT stands for National Electronic Fund Transfer. It is a payment system which facilitates one-to-one funds transfer from one financial institution to another. Using NEFT, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the system. Under NEFT the settlement takes place in batches rather than individually.

The batches are settled in hourly time slots.

 

What is RTGS?

RTGS stands for Real Time Gross Settlement. As the name suggests, it enables money to move from one bank to another on a real time and gross basis. Since these fund settlements take place in the books of the Reserve Bank of India (RBI) these payments are final and irrevocable.

 

How are NEFT and RTGS different?

1. In how the money is transferred.

• In NEFT, money transfer takes place in batches, thus the process is comparatively slower

• In RTGS, the gross amount is transferred. It is a quick way of moneytransfer.

 

2. In timings.

• NEFT transfer can take place from

  8:00am-6:30pm (On weekdays)

  8:00am-12:30pm (On Saturdays)

 

• RTGS transfer can take place from

  9:00am-4:30pm (On weekdays)

  8:00am-1:30pm (On Saturdays)

 

3. In the amount transfer limits.

• In NEFT there’s no transfer limit : minimum or maximum

• In RTGS, there’s no maximum limit. However, minimum amount to be transferred should be at least

  2 lakhs.

 

4. In fee/ price charged by the RBI

  Fee/ price charged by the RBI

  NEFT

  Up to 10,000     :- Rs. 2.5

  10,001 – 1 lakh :- Rs. 5

  1 – 2 lakhs        :- Rs. 15

  Above 2 lakhs   :- Rs. 25

  RTGS

  Up to 2 – 5 lakhs :- Rs. 25-30

  Above 5 lakhs     :- Rs. 50-55

 

5. In what the method is beneficial for.

• NEFT is beneficial for small money transfers

• RS is beneficial for large money transfers

Important Numbers / Codes Used in Banking System

Important Codes / Numbers Used in Banking System

4212   03-Mar-2018, Sat

1. IFSC Code - IFSC Code is the acronym for Indian Financial System Code developed by RBI - Reserve Bank Of India as a unique Identification code to each of the bank branches in India. The Bank IFSC Code consists of 11 alpha-numeric characters that uniquely identifies a bank-branch participating in the RTGS and NEFT system.

 

2.  MICR- MICR (Magnetic Ink Character Recognition) is a 9 digit code and its technology used to verify the legitimacy or originality of paper documents, especially checks. Special ink, which is sensitive to magnetic fields, is used in the printing of certain characters on the original documents. 

 

3. Permanent Account Number (PAN)- PAN is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any "person" who applies for it or to whom the department allows the number. 

 

4.  Aadhaar Card- Aadhaar, which means ' foundation' is a 12 digit unique-identity number issued to all Indian residents based on their biometric and demographic data.

 

5.  TAN (Tax Collection Account Number)- Tax Deduction Account Number or Tax Collection Account Number is a 10 -digit alpha-numeric number issued by the Income-tax Department. TAN is to be obtained by all persons who are responsible for deducting tax at source (TDS) or who are required to collect tax at source (TCS).

 

6.  Mobile Money Identifier (MMID)-  Mobile Money Identifier or MMID is a 7 digit number of a bank customer. This number is used when you try to send or receive money using the IMPS method.

 

7.  Universal Account Number (UAN)- The UAN is a Universal Account Number with is a 12-digit pin prearranged to each member of Employee Provident Fund, EPF. The number if issued by the Ministry of Labour and Employment, Government of India. The number lets the employee connect his PF across organisations.

 

8.  Permanent Retirement Account Number (PRAN)- PRAN is an acronym for Permanent Retirement Account Number, which is the unique and portable number provided to each subscriber under NPS and remains with him throughout. 

 

9.  International Securities Identification Number (ISIN)- The ISIN standard is used worldwide to identify specific securities such as bonds, stocks (common and preferred), futures, warrant, rights, trusts, commercial paper and options. ISINs are assigned to securities to facilitate unambiguous clearing and settlement procedures. They are composed of a 12-digit alphanumeric code and act to unify different ticker symbols “which can vary by exchange and currency” for the same security. In the United States, ISINs are extended versions of 9-character CUSIP (Committee on Uniform Security Identification Procedures) numbers; ISINs can be formed by adding a country code and check digit to the beginning and end of a CUSIP, respectively.

 

10. Society for Worldwide Interbank Financial Telecommunication (SWIFT)- A SWIFT code is an international bank code that identifies particular banks worldwide. It's also known as a Bank Identifier Code (BIC). CommBank uses SWIFT codes to send money to overseas banks. A SWIFT code consists of 8 or 11 characters.   

11.
Legal Entity Identifier (LEI)- The LEI is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction. It is a unique 20 digit alphanumeric code that is assigned to a legal entity.

 

Name of the Code Short form Number of digits or Characters of codes
Indian Financial System Code IFSC 11 Alpha numeric code
International Securities Identification Number ISIN 12 Alpha Numeric code
Permanent Account Number PAN 10 Alpha Numeric code
Legal Entity Identifier LEI 20 digit alpha numeric code
Tax Deduction and Collection Account Number TAN 10 Alpha Numeric code
Society for Worldwide Interbank Financial Telecommunication SWIFT 8 to 11 Alphabetic code
AADHAR AADHAR 12 digit code
Universal Account Number UAN 12 digit code
Permanent Retirement Account Number PRAN 12 digit code
Mobile Money Identifier MMID 7 digit code
Magnetic Ink Character Recognition MICR 9 digit code
Basic Statistical Returns BSR 7 digit code


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