financial awareness capsule -...

Financial Awareness Capsule

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S.No Topic Page no

1 Indian Financial system 3

2 Financial Market and its types 4

3 RBI and its Functions 7

4 Subsidiaries of RBI 10

5 SEBI and its Functions 12

6 Bonds and types 14

7 Foreign Exchange Reserves 18

8 Indian Economy 20

9 Capital Market 22

10 Financial Inclusion (FI) 24

11 National Income and its types 26

12 MIBOR and MIBID 28

13 Balance of Trade and Balance of Payment 30

14 Bancassurance 32

15 GST e-way Bill 34

16 Mutual Funds 37

17 Stock market 42

18 Shares 44

19 Derivatives 46

20 Electoral Bonds 49

21 Schemes 51

22 Financial Institutions in India 53

23 International Financial Institutions 56

24 Important Financial Terms 58

25 Abbreviations 62

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Indian Financial System

Financial System is the flow of funds from the areas of surplus to the areas of deficit. Financial system operates at

national and global level. Financial system allows funds to be allocated, invested, or moved between economic

sectors.

Components of Financial System:

1. Financial services

Financial Services refers to the activities that are concerned with the design and delivery of financial instruments to

individuals and businesses within the area of banking and related institutions, insurance etc.

a. Banking services- Includes the banking operations such as deposit and withdrawal of money.

b. Insurance Services- It includes selling of insurance policies, brokerages, insurance underwriting or the

reinsurance

c. Foreign Exchange services- Includes the exchange of foreign currency exchange

d. Investment services- It includes custody, Capital market services, private banking.

e. Other Services include Bank cards, Private equity, Venture capital, Intermediation or advisory services,

Debt resolution.

f. Financial export- It is a financial service provided by a domestic firm to a foreign firm or individual

2. Financial Instruments

Financial Instruments represents a claim to the payment of a sum of money in the future and periodic payment in

the form of interest. Some of the important financial instruments include:

a. Call money- Call money is a very short term loan that does not contain regular principal and interest

rates. When money is lent for a day it is known as call money. Money borrowed on a day and repaid on

the next day is call money

b. Notice Money- Notice Money refers to the borrowing and lending of funds for 2- 14 days. No collateral

security is required to cover these transactions.

c. Term Money- Term Money refers to borrowing and lending of funds for a period of 15 days to 1 year.




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d. Commercial Paper- Commercial paper is an unsecured, short term debt instrument issued by a

corporation, typically for the financing of accounts. Maturity period- 7 days to 1 year from the date of

issue

e. Certificate of deposits- Certificates of deposit are a special form of term deposits, which are issued for a

specific reference period, usually up to 12 months, for a certain amount and a certain interest rate, fixed

or variable, traded in the secondary money market.

f. Treasury Bills- Treasury Bills, also known as T-bills are the short-term money market instrument, issued

by the central bank on behalf of the government to curb temporary liquidity shortfalls. These do not

yield any interest, but issued at a discount, at its redemption price, and repaid at par when it gets

matured. Maturity period- 91, 182 and 364 days.

3. Financial Market

a. Money market: Money market basically refers to a section of the financial market where financial

instruments with high liquidity and short-term maturities are traded. It is divided into two types

i) Organized Money Market

ii) Unorganized Money Market

b. Capital Market: Capital market is a market where buyers and sellers engage in trade of financial

securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and

institutions. It is divided into three categories.

i) Government securities market

ii) Long term Loans Market

iii) Corporate Securities Market

c. Forex Market- The forex market is the market in which participants can buy, sell, exchange, and

speculate on currencies. The forex market is made up of banks, commercial companies, central banks,

investment management firms, hedge funds, and retail forex brokers and investors.

4. Financial Intermediaries

Financial intermediaries (FIs) are financial institutions that intermediate between ultimate lenders and ultimate

borrowers. Funds flow from ultimate lenders to ultimate borrowers either directly or indirectly through financial

institutions.





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FIs are commercial banks, cooperative credit societies and banks, mutual savings banks, mutual funds, savings and

loan associations, building societies and housing loan associations, insurance companies, merchant banks, unit

trusts, and other financial institutions.

Types of financial intermediaries are:

a. Depository Institutions: Depository institutions include Bank, building society, credit union, or other financial

institution that solicits and accepts savings of the general public as demand deposits or time deposits, and

pays a fixed or variable rate of interest. Also called savings association, savings institution and thrift

institution.

b. Non-Depository institutions: These are brokerage firms, insurance and mutual funds companies that cannot

collect money deposits but can sell financial products to financial customers.

Financial Market

Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures,

bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country’s

economy. It acts as an intermediary between the savers and investors by mobilizing funds between them.

Functions of Financial Markets:

1. It helps in determining the price of the securities.

2. It facilitates mobilization of savings and puts it to the most productive uses.

3. It provides liquidity to tradable assets by facilitating the exchange as the investors can sell their securities and

converts assets into cash.

4. Capital formation

5. It ensures low cost of transactions and information

6. It provides security to dealings in financial assets

Types of Financial Markets:

Financial Market is divided into two types:

a) Money Market

b) Capital Market





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Money Market:

The money market is a market for short-term funds, which deals in financial assets whose period of

maturity is up to one year.

It should be noted that money market does not deal in cash or money as such but simply provides a market

for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc.

These financial instruments are close substitute of money. These instruments help the business units, other

organizations and the Government to borrow the funds to meet their short-term requirement.

Most of the money market transactions are taken place on telephone, fax or Internet.

The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and

other specialized financial institutions.

The Reserve Bank of India is the leader of the money market in India.

Money Market Instruments:

I. Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of

funds. Treasury bills are highly liquid instruments which means, at any time the holder of treasury bills can

transfer of or get it discounted from RBI. Banks, Financial institutions and corporations normally play major

role in the Treasury bill market. Treasury bills are presently issued in three maturities, namely, 91 day, 182

day and 364 day.

II. Commercial Paper: The CP is an unsecured instrument issued in the form of promissory note. Commercial

paper is an unsecured, short term debt instrument issued by a corporation, typically for the financing of

accounts. Maturity period- 7 days to 1 year from the date of issue.The highly reputed companies (Blue Chip

companies) are the major player of commercial paper market.

III. Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks

and Special Financial Institutions (SFIs), which are freely transferable from one party to another. These can

be issued to individuals, co-operatives and companies. Their maturity period is between seven days to one

year for commercial banks. For Financial Institutions, the maturity is not less than a year and not more than

three years.

IV. Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. They

borrow and lend money from each other normally on a daily basis. It is repayable on demand and its






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maturity period varies in between one day to a fortnight. The rate of interest paid on call money loan is

known as call rate.

Capital Market:

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc.

The buying/selling is undertaken by participants such as individuals and institutions.

In the capital market, both equity and debt instruments, such as equity shares, preference shares, debentures, zero-

coupon bonds, secured premium notes and the like are bought and sold, as well as it covers all forms of lending and

borrowing.

Functions of capital Market:

1. Mobilization of savings to finance long term investments

2. Encourage wide range of ownership of productive assets

3. Facilitates trading of securities

4. Offering insurance against market or price risk, through derivative trading

5. Quick valuation of financial instruments like shares and debentures

6. Facilitates Transaction settlement as per the time schedules

7. Minimization of transaction and information cost

Types of Capital Market:

Capital market is divided into two segments

a) Primary market

b) Secondary market

Primary Market:

The Primary Market consists of arrangements, which facilitate the procurement of long term funds by

companies by making fresh issue of shares and debentures.

It is the market for the trading of new securities, for the first time. It embraces both initial public offering

and further public offering.

In the primary market, the mobilization of funds takes place through prospectus, right issue and private

placement of securities.





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It is usually done through private placement to friends, relatives and financial institutions or by making

public issue.

The companies have to follow a well-established legal procedure and involve a number of intermediaries

such as underwriters, brokers, etc. who form an integral part of the primary market.

Secondary Market:

The secondary market known as stock market or stock exchange plays an equally important role in

mobilizing long-term funds by providing the necessary liquidity to holdings in shares and debentures.

It provides a place where these securities can be encashed without any difficulty and delay.

It is an organized market where shares, and debentures are traded regularly with high degree of

transparency and security.

The trading takes place between investors, which follows the original issue in the primary market. It covers

both stock exchange and over-the counter market.

Reserve Bank of India

The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s bank. The RBI controls monetary

and other banking policies of the Indian government.

The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with the Reserve Bank of India Act,

1934. The Reserve Bank is permanently situated in Mumbai since 1937.

The Reserve Bank is fully owned and operated by the Government of India.

The Reserve Bank’s operations are governed by a central board of directors, RBI is on the whole operated with a 21-

member central board of directors appointed by the Government of India in accordance with the Reserve Bank of

India Act.

The Central board of directors comprise of:

Official Directors – The governor who is appointed/nominated for a period of four years along with

four Deputy Governors

Non-Official Directors – Ten Directors from various fields and two government Official





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Organization structure:

Objectives of RBI:

To manage the monetary and credit system of the country.

To stabilizes internal and external value of rupee.

For balanced and systematic development of banking in the country.

For the development of organized money market in the country.

For proper arrangement of agriculture finance.

For proper arrangement of industrial finance.

For proper management of public debts.

To establish monetary relations with other countries of the world and international financial institutions.

For centralization of cash reserves of commercial banks.

To maintain balance between the demand and supply of currency.

Functions of RBI:

1. Monetary Authority:

Formulates, implements and monitors the monetary policy






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Maintaining Price stability and ensuring adequate flow of credit to productive sectors.

2. Issuer of currency:

Issues and exchanges or destroy currency and coins not fit for circulation

To give public adequate quantity of supplies of currency notes and coins and in good quality

The RBI is the only authorized body that can issue currency in the country. So they print, distribute

and regulate the flow of currency in the economy.

The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes.

It has the sole right to issue currency notes of various denominations except one rupee note (which is

issued by the Ministry of Finance).

3. Banker’s Bank:

As bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and lends them

funds for short periods.

The RBI provides financial assistance to commercial banks and State cooperative banks through

rediscounting of bills of exchange.

As the RBI meets the need of funds of commercial banks, the RBI functions as the Tender of the last

resort.

The RBI also will dictate interest rates and the CRR limits to the commercial banks.

4. Banker to the Government:

The RBI acts as the banker to the government of India and State Governments (except Jammu and

Kashmir). As such it transacts all banking business of these Governments.

The RBI provides them with these facilities like depositing monies, remittances etc.

It can also make advances and provide loans to the government whenever necessary.

5. Regulator of Foreign Exchange:

To facilitate external trade and payment and promote orderly development and maintenance of

foreign exchange market in India.

RBI sells the foreign currency in the foreign exchange market when its supply decreases in the

economy and vice-versa.

RBI Manages the Foreign Exchange Management Act 1999





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The RBI has the authority to enter into foreign exchange transactions both on its own account and on

behalf of the Government.

6. Controls credit in the Economy:

This can be said to be the primary function of the Reserve Bank of India, the control of credit and

money in the market.

It uses qualitative and quantitative methods to either expand or contract the available credit in the

economy according to circumstances.

The most extensively used credit instrument of the RBI is the bank rate.

The RBI also relies greatly on the selective methods of credit control.

Subsidiaries of RBI

There are four Subsidiaries of RBI. They are

1. Deposit Insurance and Credit Guarantee Corporation of India(DICGC),

2. Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL),

3. Reserve Bank Information Technology Pvt Ltd (ReBIT),

Deposit Insurance and Credit Guarantee Corporation of India (DICGC):

Establishment: July 15, 1978

Headquarters: Mumbai

DICGC was formed by merging Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of

India Ltd. (CGCI)

Authorized capital: 50 crore

Chairman: NS Viswanathan

Maximum amount insured by DICGC: Rs1 lakh

Four branches: Chennai, Nagpur, Kolkatta and New Delhi

Role of DICGC:

DICGC was established for providing insurance of deposits and guaranteeing of credit facilities.

At present, DICGC insures each depositor of a registered insured bank up to a maximum of Rs.1 Lakh for all

bank deposits, such as saving, fixed, current, recurring deposits.




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The credit guarantee scheme of DICGC is presently not operative due to availability of alternative guarantee

schemes.

The DICGC was providing coverage for small loans as well and it was using the premium collected for deposit

insurance to settle claims under small loans for many years.

DICGC stipulates that only banks should pay the insurance premium and it cannot be collected from

depositors.

From various reports it is clear that the insurance premium collected from PSBs is being utilised to settle the

claims of cooperative banks.

It is a known secret how funds of cooperative banks are misused by politicians across States with immunity.

Apart from this the major ownership of PSBs is with the government, which has got the capacity to enable

banks to repay the deposits, here the role of DICGC’s deposit insurance scheme is dubious.

Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL):

Establishment: February 3, 1995

Headquarters: Bengaluru

The BRBNMPL has been registered as a Private Limited Company under the Companies Act 1956.

Chairman: Dr. Chakrabarty

Note presses: Mysore and salboni

To augument the production of bank notes in India to enable the RBI to bridge the gap between the supply

and demand for bank notes in the country.

Reserve Bank Information Technology Pvt Ltd (ReBIT):

Establishment: July 4, 2016


It is classified as Non-govtcompany and is registered at Registrar of Companies.

Chairman: KiranKarnik

Role of ReBIT:

Deliver and manage IT projects of RBI

Assist RBI in performing risk-based supervision of regulated entities

Safeguard RBI assets by detecting and responding to cyber-threats.





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Securities Exchange Board of India

Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility

to regulate the Indian capital markets.

It monitors and regulates the securities market and protects the interests of the investors by enforcing

certain rules and regulations.

Establishment: April 12, 1992 under SEBI Act1992.


Chairman: Ajay Tyagi

Objective:

Protection: To protect rights and interests of the investors by properly guiding them and ensuring the safety

of the money invested.

Establishing Balance: To establish a balance between statuatory regulation and self regulation by the

securities industry.

Establishing a code of conduct: To regulate and develop a code of conduct for intermediaries such as brokers

, underwriters and so on

Promote proper functioning: To promote orderly functioning of the stock exchange and securities industry

by regulating them.

Prevention of malpractices: To prevent fraudulent and malpractices related to trading and regulate the

activities of the stock exchange.

Functions of SEBI:

To protect the interests of investors in securities market

To promote the development of securities market

To regulate the business in stock exchanges and any other securities markets.

Regulates the operations of depositories, participants, custodians of securities, foreign portfolio

investors and credit rating agencies.

It must govern the market intermediaries such as brokers, banks, consultants etc.

t prohibits inner trades in securities, i.e. fraudulent and unfair trade practices related to the securities

market.

It ensures that investors are educated on the intermediaries of securities markets.






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It monitors substantial acquisitions of shares and take-over of companies.

SEBI takes care of research and development to ensure the securities market is efficient at all times

Registering and regulating the working of Venture Capital Funds and collective investments schemes

including mutual funds.

Promoting and regulating self - regulatory organizations.

Calling for information form, undertaking inspection, conducting inquiries and audits of the stock

exchange, mutual funds and intermediaries and self - regulatory organizations in the securities market.

Calling for information and record from any bank or any other authority or boars or corporation

established or constituted by or under any Central, State or Provincial Act in respect of any transaction in

securities which are under investigation or inquiry by the Board.

Structure Of SEBI:

SEBI, just like any corporate firm has a hierarchical structure and consists of numerous departments headed by their

respective heads. Following is a list of some of the departments of SEBI:

Foreign Portfolio Investors and Custodians

Human Resources Department

Information Technology

Investment Management Department

Office of International Affairs

Commodity and Derivative Market Regulation Department

National Institute of Securities Market

Apart from the department heads, the senior management of SEBI consists of a Board of Directors who are

appointed as follows:

chairman nominated by the Union Government of India

2 members from the Union Finance Ministry of India

1 member from the Reserve Bank of India (RBI)

5 members nominated by the Union Government of India





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Bonds and its types

Definition: Bonds can be defined as the negotiable instrument, issued in relation to borrowing arrangement that

indicates indebtedness.

It is an unsecured debt instrument, in which the bond investor extends credit to the issuer, which in turn commits

to repay the loan amount on the specified maturity date, along with interest throughout the life of the bond. The

issuer can be the municipal corporation , government or company.

Characteristics of Bond:

A bond is generally a form of debt which the investors pay to the issuers for a defined time frame. In a

layman’s language, bond holders offer credit to the company issuing the bond.

Bonds generally have a fixed maturity date.

All bonds repay the principal amount after the maturity date; however some bonds do pay the interest along

with the principal to the bond holders.

Types of Bonds:

1. Government Bonds:

A government bond is a bond issued by a national government denominated in the country’s

domestic currency.

A government bond is a bond issued by a national government, generally promising to pay a certain

amount (the face value) on a certain date, as well as periodic interest payments.

Such bonds are often denominated in the country’s domestic currency.

In the primary market, Government Bonds are often issued via auctions at Stock Exchanges.

In the secondary market, government bonds are traded at Stock Exchanges.

Although, government bonds are usually referred to as risk -free, there are currency, inflation, and

default risks for government bondholders.

2. Zero coupon bonds:

A zero-coupon bond is a bond with no coupon payments, bought at a price lower than its face value,

with the face value repaid at the time of maturity.

Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating

(“stripping off”) the coupons from the principal.





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In other words, the separated coupons and the final principal payment of the bond may be traded

separately.

Zero coupon bonds have a duration equal to the bond’s time to maturity, which makes them

sensitive to any changes in the interest rates.

Pension funds and insurance companies like to own long maturity zero-coupon bonds since these

bonds’ prices are particularly sensitive to changes in the interest rate and, therefore, offset or

immunize the interest rate risk of these firms’ long-term liabilities.

3. Floating Rate Bonds:

Floating rate bonds are bonds that have a variable coupon equal to a money market reference rate

(e.g., LIBOR), plus a quoted spread.

FRBs are typically quoted as a spread over the reference rate. At the beginning of each coupon

period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the

spread.

A typical coupon would look like three months USD LIBOR +0.20%.

FRBs carry little interest rate risk. A FRB has duration close to zero, and its price shows very low

sensitivity to changes in market rates.

As FRBs are almost immune to interest rate risk. The risk that remains is a credit risk.

Securities dealers make markets in FRBs. They are traded over the counter, instead of on a stock

exchange.

4. Corporate Bonds:

Corporate bonds are debt securities issued by private and public corporations.

Companies issue corporate bonds to raise money for a variety of purposes, such as building a new

plant, purchasing equipment, or growing the business.

When one buys a corporate bond, one lends money to the "issuer," the company that issued the

bond.

In exchange, the company promises to return the money, also known as "principal," on a specified

maturity date.

Until that date, the company usually pays you a stated rate of interest, generally semiannually.






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While a corporate bond gives an IOU from the company, it does not have an ownership interest in

the issuing company, unlike when one purchases the company's equity stock.

5. Municipal Bonds:

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other

governmental entities to fund day-to-day obligations and to finance capital projects such as building

schools, highways or sewer systems.

By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a

promise of regular interest payments, usually semi-annually, and the return of the original

investment, or principal.

A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be

years in the future.

Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a

decade.

6. Treasury Bonds:

A Treasury bond (T-bond) is a government debt security that earns interest until maturity, at which

point the owner is also paid a par amount equal to the principal.

Treasury bonds are U.S. government debt securities with a maturity range between 10 and 30 years

and which are marketable and set at a fixed interest rate.

T-bonds pay semiannual interest payments until maturity, at which point the face value of the bond

is paid to the owner.

Along with Treasury bills, Treasury notes, and Treasury Inflation-Protected Securities, Treasury bonds

are one of four virtually risk-free government-issued securities.

7. Mortgage Bonds:

A mortgage bond is secured by a mortgage or pool of mortgages that are typically backed by real

estate holdings and real property, such as equipment.

In the event of default, mortgage bondholders could sell off the underlying property to compensate

for the default and secure payment of dividends.

A mortgage bond is a bond backed by real estate holdings or real property.




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In the event of a default situation, mortgage bondholders could sell off the underlying property

backing a bond to compensate for the default.

Mortgage bonds tend to be safer than corporate bonds and, therefore, typically have a lower rate of

return.

8. Convertible Bond:

A convertible bond is a fixed-income debt security that yields interest payments, but can be

converted into a predetermined number of common stock or equity shares.

A convertible bond pays fixed-income interest payments, but can be converted into a predetermined

number of common stock shares.

The conversion from the bond to stock happens at specific times during the bond's life and is usually

at the discretion of the bondholder.

A convertible bond offers investors a type of hybrid security that has features of a bond, such as

interest payments, while also having the option to own the underlying stock.

9. Collateral Bond:

Collateral bond refers to the act of borrowing money with the borrower offering an asset or a

property as a security measure for the lender.

If the borrower fails to pay the debt on time, the lender acquires the asset or property that the

borrower put up as collateral.

10. Masala Bonds:

Masala Bonds are rupee-denominated borrowings issued by Indian entities in overseas markets.

Masala means spices and the term was used by International Finance Corporation (IFC) to popularize

the culture and cuisine of India on foreign platforms.

The objective of Masala Bonds is to fund infrastructure projects in India, fuel internal growth via

borrowings and internationalize the Indian currency.





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Foreign Exchange Reserves

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can

include bonds, treasury bills and other government securities.

Most foreign exchange reserves are held in U.S. dollars, with China being the largest foreign currency

reserve holder in the world.

Foreign exchange reserves are a nation’s backup funds in case of an emergency, such as a rapid devaluation

of its currency.

Countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports,

remain liquid in case of crisis, and provide confidence for investors.

They also need reserves to pay external debts, afford capital to fund sectors of the economy, and profit from

diversified portfolios.

Purpose of FOREX:

To keep the value of their currencies at a fixed rate.

Countries with a floating exchange rate system use forex reserves to keep the value of their currency

lower than US Dollar.

To maintain liquidity in case of an economic crisis.

The central bank (RBI) supplies foreign currency to keep markets steady.

To ensure that a country meets its foreign obligations and liabilities.

Advantages of Forex:

The foremost advantage of the forex serves is in meeting the international finance obligations including

sovereign and commercial debts, financing of imports.

It helps in boosting the confidence of the market in the ability of a country to meet its external

obligations.

It acts as cushion for unforeseen external shocks. It was due the adequate forex reserve level that India

was able to bear the global meltdown of 2008.

Increases confidence of foreign investors and thus helps in boosting foreign direct investment (FDI).

RBI uses the forex reserves to adjust foreign exchange rate.






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In case of sharp fall in the foreign exchange value of the Rupee, RBI sells the Dollar which app reciates

the Rupee.

The foreign currency assets are invested mainly in instruments abroad which have the highest credit

rating and which do not pose any credit risk.

These include sovereign bonds, treasury bills and short-term deposits in top-rated global banks besides

cash accounts.

Composition of Forex:

1. Foreign currency Assets

2. Gold

3. Special Drawing Rights

4. Reserve Tranche Position

Foreign Currency Assets:

Foreign Currency Assets (FCA) is the most important component of the RBI's foreign exchange reserve are

the assets like US Treasury Bills bought by the RBI using foreign currencies. The FCA is the largest component

of the forex reserve.

Special Drawing Rights:

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 money

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.

Reserve Tranche Position:

The reserve tranche position (RTP) is portion of the required quota of currency that each International

Monetary Fund (IMF) member country must provide to the IMF that can be utilized for its own purposes

without a service fee.




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Indian Economy

India is a developing country and our economy is a mixed economy where the public sector co-exists with the

private sector.

India is likely to be the third largest economy with a GDP size of $15 trillion by 2030.The economy of India is

currently the world’s fourth largest in terms of real GDP (purchasing power parity) after the USA, China and Japan

and the second fastest growing major economy in the world after China.

Sectors of Indian Economy:

There are three sectors of Indian Economy. They are:

1. Primary sector

2. Secondary sector

3. Tertiary sector

Primary Sector:

Primary sector of Indian Economy includes activities undertaken by directly using natural resources.

The services in this sector are entirely dependent on the availability of the natural resources in order to keep the

day-to-day operations running.

Some of the Examples are: Agriculture, Mining, Fishing, Forestry, Dairy

It forms the base of all other products and so it is called agriculture and allied sector.

People engaged in Primary sector works are called red collar workers.

Secondary Sector:

Secondary sector includes the industries where the finished products are made from natural materials

produced in the primary sector.

Both these sectors end product is the consumption by the people. This sector is responsible for the employment

of almost 14 percent of the entire workforce currently working in India.

The secondary sector also contributes to almost 28 percent of the share of GDP.

This sector is the backbone of Indian economy and there are more development and growth in the near future.

Some of the examples are cotton fabric, Sugarcane production , Oil refinery, Textile Mills, Brewing plants

and processing industries etc.

It is also called Industrial Sector.

People engaged in secondary sector works are called blue collar workers.






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Tertiary Sector:

When the activity involves providing intangible goods like services then this is part ofthe tertiary sector.

It is also called as service sector.

The main problem that this sector is that the jobs which involve lower salaries do not attract much employment.

Some of the examples are Financial services, telephony, Management consultancy and IT.

Goods transportation come under this sector.

People engaged in these type of works is called white collar jobs.

Other classifications:

Organized sector:

The sector which carries out all activity through a system and follows the law of theland is called organized

sector.

It can also be defined as a sector, which is registered with the government and a number of acts apply to the

enterprises.

Schools and hospitals are covered under the organized sector.

Workers in the organized sector enjoy security of employment.

They are expected to work only a fixed number of hours. If they work more, they have to be paid overtime

by the employer.

Unorganized sector:

An unorganized worker is a home-based worker or a self-employed worker or a wage worker in the

organized sector

The unorganized sector uses mainly labour intensive and indigenous technology.

The workers in unorganized sector are so scattered that the implementation of the Legislation is very

inadequate and ineffective. There are hardly any unions in this sector to act as watch-dogs.

Small shopkeepers, some small scale manufacturing units keepall their attention on profit making and ignore

their workers basic rights.

Public sector:

In the sector, government owns most of the assets and it is the part of the economy concerned with

providing various governmental services.

The purpose of the public sector is not just to earn profits.





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Governments raise money through taxes and other ways to meet expenses on the services rendered by it.

Private Sector:

Ownership of assets and delivery of services is in the hands of private individuals or companies.

Activities in the private sector are guided by the motive to earn profits. To get such services we have to pay

money to these individuals and companies.

It is also called as citizen sector.

Capital Market

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks,

etc. The buying/selling is undertaken by participants such as individuals and institutions.

One of the important functions of the capital markets is to provide ease of transactions for both the investors

and the companies. Both parties should be able to find each other with ease and the legal aspect of things should

go smoothly.

Capital markets consist of the primary market, where new securities are issued and sold, and the secondary

market, where already-issued securities are traded between investors.

The most common capital markets are the stock market and the bond market.

Functions of Capital Market:

1. Mobilization of savings

2. Provision of Investment Avenue

3. Speed up Economic growth and Development

4. Continuous Availability of funds

5. Proper Regulation of Funds

6. Facilitates trading of securities

7. Quick valuation of financial instruments like shares and debentures

8. Offering insurance against market or price risk, through derivative trading

9. Encourage wide range of ownership of productive assets.

10. Capital formation

Role of Capital Market:






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The role of capital markets is vital for inclusive growth in terms of wealth distribution and

making capital safer for investors.

Capital market enhances efficient financial intermediation.

It increases mobilization of savings and therefore improves efficiency and volume of

investments, economic growth and development.

Types of Capital Market:

Capital Market are classified into two categories:

1. Primary Market

2. Secondary Market

Primary Market:

Primary markets are those types of capital market instruments where new securities are issues on the

exchange.

It embraces both initial public offering and further public offering.

In the primary market, the mobilization of funds takes place through prospectus, right issue and private

placement of securities.

This facilitated helps underwriting groups and investment banks to set the initial price range for a offered

security when then sell those securities directly to people.

An initial public offering, or IPO is an example of a primary market.

Corporations, national and local governments, and other public sector institutions can get financing through

the sale of new stock or bond issues through the primary market.

In order to raise capital in the form of equity, a company can sell its shares to members of the public.

When shares are sold directly to the public, this is done via the primary market route.

The sale of securities in the primary market is usually done through an investment bank or finance syndicate

of securities dealers.

Secondary Market:

Secondary markets are those types of capital market instruments where investors choose to buy securities

or even assets from other investors rather than buying from the issuing company.

Secondary market is where the trading of those securities take place into different exchanges and are traded

daily during trading days and trading times specified by exchanges.





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The trading takes place between investors, that follows the original issue in the primary market. It covers

both stock exchange and over-the-counter market.

Features of secondary market:

Gives liquidity to all investors. Any seller in need of cash can easily sell the security due to the presence of a

large number of buyers.

Very little time lag between any new news or information on the company and the stock price reflecting that

news.

The secondary market quickly adjusts the price to any new development in the security.

Lower transaction costs due to the high volume of transactions.

Demand and supply economics in the market assist in price discovery.

An alternative to saving.

Secondary markets face heavy regulations from the government as they are a vital source of capital

formation and liquidity for the companies and the investors.

High regulations ensure the safety of the investor’s money.

Financial Inclusion

Financial inclusion means that individuals and businesses have access to useful and affordable financial

products and services that meet their needs – transactions, payments, savings, credit and insurance –

delivered in a responsible and sustainable way.

Financial inclusion strives to remove the barriers that exclude people from participating in the financial

sector and using these services to improve their lives. It is also called inclusive finance.

Financial inclusion is an effort to make every day financial services available to more of the world's

population at a reasonable cost.

Advancements in fin tech, such as digital transactions, are making financial inclusion easier to achieve.

Objective:

Financial inclusion intends to help people secure financial services and products at economical prices

such as deposits, fund transfer services, loans, insurance, payment services, etc.

It aims to establish proper financial institutions to cater to the needs of the poor people.






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Financial inclusion intends to increase awareness about the benefits of financial services among the

economically underprivileged sections of the society.

The process of financial inclusion works towards creating financial products that are suitable for the less

fortunate people of the society.

Financial inclusion intends to improve financial literacy and financial awareness in the nation.

It also intends to bring in mobile banking or financial services in order to reach the poorest people living

in extremely remote areas of the country.

Benefits of Financial Inclusion:

Access to financial services opens doors for families

Allowing them to smooth out consumption and invest in their futures through education and health.

Access to credit enables businesses to expand, creating jobs and reducing inequality.

Financial inclusion is the bridge between economic opportunity and outcome.

It bridges the Urban - Rural Divide.

It will also be beneficial for the government because various schemes meant for poor does not reach

the poor because of middle men and moneylenders present in these areas, but with the banks being

present in these areas these limitations can be eliminated.

In villages where there are no banks available poor people take loans from moneylenders where the

poor keep paying interest whole life and in some cases even his or her children also have to repay

the debt of their parents.

With financial inclusion the poor people can take loan from banks which are well regulated and also

government through banking medium give various subsidies and thus will be saved from clutches of

greedy moneylenders.

It will also be helpful for the country as a whole also because these small savings by rural people can

be channelized and can help in capital formation and growth of the country as a whole because in

developing countries majority of rural population is not covered by banking system.

Schemes under Financial Inclusion:

The Government of India has been introducing several exclusive schemes for the purpose of financial inclusion.

These schemes intend to provide social security to the less fortunate sections of the society.

PradhanMantri Jan DhanYojana (PMJDY)





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Atal Pension Yojana (APY)

PradhanMantriVayaVandanaYojana

Stand Up India Scheme

PradhanMantri Mudra Yojana

PradhanMantriSurakshaBimaYojana (PMSBY)

SukanyaSamriddhiYojana

JeevanSurakshaBandhanYojana

Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)

Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives

Varishtha Pension BimaYojana (VPBY)

National Income and its concepts

Definition: National Income refers to the money value of all the goods and services produced in a country during a

financial year. In other words, the final outcome of all the economic activities of the nation during a period of one

year, valued in terms of money is called as a National income

National income is calculated for a particular period, normally a financial year (In India, financial year means April 1

to March 31 of next year). Net factor income from abroad is added to the domestic product to get the value of

National Income.

National Income = C + I + G + (X – M)

Where,

C = Total consumption expenditure

I = Total investment expenditure

G = Total government expenditure

X – M = Export – Import

Concepts of National Income:

1. Gross Domestic Product(GDP):

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity.

More specifically, GDP represents the monetary value of all goods and services produced within a nation's

geographic borders over a specified period of time.





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GDP calculation includes income of foreigners in a Country but excludes income of those people who are

living outside of that country.

2. Net Domestic Product(NDP):

Net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted to

account for depreciation.

Net domestic product accounts for capital that has been consumed over the year in the form of housing,

vehicle, or machinery deterioration.

NDP = Gross Domestic Product – Depreciation

Depreciation constitutes all the wear and tear or any other damages to the final product. It mainly occurs

due to unsafe transportation, Unsafe practices at storing, and many more.

3. Gross National Product:

Gross national product (GNP) is an estimate of total value of all the final products and services turned out in

a given period by the means of production owned by a country's residents.

While Calculating GNP, income of foreigners in a country is excluded but income of people who are living

outside of that country is included. The value of GNP is calculated on the basis of GDP.

GNP = GDP + X - M

Where,

X = income of the people of a country who are living outside of the Country

M = income of the foreigners in a country

4. Net National Product:

Net national product (NNP) is gross national product (GNP), the total value of finished goods and services produced

by a country's citizens overseas and domestically, minus depreciation.

NNP = GNP - Depreciation

National income calculated by considering two major cost factors, which are listed as follows:

Factor Cost- It constitutes production cost which includes cost of raw materials, machine cost, salary and many

more things at ground level.

Market Cost- It constitutes whole sale cost which includes Transportation cost, Salary, Indirect tax, Maintenance

cost, costs at ground level and marginal profit.

NNP (Factor Cost) = NNP (Market Cost) + Subsidies – Indirect tax






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BASIS FOR

COMPARISON

GDP GNP

Meaning The worth of goods and services

produced within the geographical

limits of the country is known as

Gross Domestic Product (GDP).

The worth of goods and services

produced by the country's citizens

irrespective of the geographical

location is known as Gross National

Product (GNP).

What is it? Production of products within the

country's boundary.

Production of products by the

enterprises owned by the residents

of the country.

Basis Location Citizenship

Calculation GDP = Consumption + Investment

+ Government Spending + Net

Export

GNP = GDP - NFIA

On which scale

productivity is

measured?

On a local scale On international scale

Focus on Domestic production Production by nationals

Outlines The strength of the country's

domestic economy.

How the residents are contributing

towards the country's economy.

MIBOR and MIBID

Based on the recommendation of the Committee for the Development of Debt Market, the National Stock Exchange

(NSE) launched the Mumbai Interbank Offer Rate (MIBOR) and Mumbai Interbank Bid Rate (MIBID) in June, 1998.

MIBOR:

MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call money market.

It is the rate at which banks borrow unsecured funds from one another in the interbank market.

At present, it is used as a reference rate for floating rate notes, corporate debentures, term deposits,

interest rate swaps and forward rate agreements.





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The pricing of overnight indexed swaps, a type of overnight interest rate swap used for hedging interest rate

risk is based on overnight MIBOR.

MIBOR is calculated based on input from a panel of 30 banks and primary dealers and it represents India’s

interbank borrowing rate.

MIBOR is the indicator of Lending Rates for loans.

Banks borrow and lend money to one another on the interbank market to maintain legal liquidity levels and

meet reserve requirements placed on them by regulators.

Methods for calculating MIBOR:

MIBOR is calculated through a combination of the two following methods:

Polling – rates are taken through a representative panel of 30 banks and primary dealers. The rates provided

by this panel will then be summarized.

Bootstrapping – since there is no guarantee that the panel of participants will provide honest rates,

bootstrapping has to be combined with the polling method. This method involves statistical testing of the

mean reference rate for the purpose of reducing the noise and identifying the deviations in the data

gathered from market participants.

MIBID:

MIBID stands for The Mumbai Interbank Bid Rate.

MIBID is the rate of interest that a bank would be willing to pay to secure a deposit from another bank in the

Indian interbank market.

The MIBID rate is the weighted average of all interest rates that the participating banks offer on deposits on

a particular day. It is calculated by the National Stock Exchange (NSE).

MIBID was initially launched for the overnight call money market. However, it was later extended to term

money for 14 days/1 month/3 month durations on popular demand.

MIBID is calculated using the weighted average of transactions obtained from the Clearing Corporation of

India’s trading system.

Only trades that happen between 9 am and 10 am in the negotiated dealing system call segment are

considered.

MIBID rate is always lower than MIBOR rate because banks will try to pay less interest after taking loans and

will try to get more interest while offering loans.






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The MIBID rate and MIBOR rate are used as a benchmark rate for majority of deals struck for Interest Rate

Swaps, Term Deposits, Forward Rate Agreements and Floating Rate Debentures, etc.

Balance of Trade and Balance of Payment

Balance of Trade:

The balance of trade is the difference between the value of a country's imports and exports for a given

period.

value of exports – value of imports = balance of trade

It is used to measure the relative strength of a country's economy.

The balance of trade is also referred to as the trade balance or the international trade balance.

The calculation of the balance of trade yields one of two outcomes: a trade deficit or a trade surplus. A trade

deficit occurs when a nation imports more than it exports.

Components of Balance of Trade:

The balance of payments has three components.

They are

i. current account,

ii. financial account, and

iii. capital account.

The current account measures international trade, net income on investments, and direct payments. The financial

account describes the change in international ownership of assets.

Balance of Payment:

The balance of payments (BOP) is a statement of all transactions made between entities in one country and

the rest of the world over a defined period of time, such as a quarter or a year.

This includes all the transactions made by/to individuals, corporates and the government and helps in

monitoring the flow of funds to develop the economy.

BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e when a

country’s export is more than its import, its BOP is said to be in surplus

The balance of payments (BOP), also known as balance of international payments, summarizes all

transactions that a country's individuals, companies and government bodies outside the country.





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These transactions consist of imports and exports of goods, services and capital, as well as transfer

payments, such as foreign aid and remittances.

Transactions of Balance of Payment:

The balance of payments divides transactions in two accounts:

i. current account

ii. capital account.

Sometimes the capital account is called the financial account, with a separate, usually very small, capital

account listed separately.

The current account includes transactions in goods, services, investment income and current transfers.

The capital account, broadly defined, includes transactions in financial instruments and central

bank reserves. Narrowly defined, it includes only transactions in financial instruments.

The current account is included in calculations of national output, while the capital account is not.

Difference between Balance of Trade and Balance of Payment:

Balance of Trade Balance of Payment

Definition Balance of Trade or BoT is a financial

statement that captures the nation’s

import and export of commodities with

the rest of the world.

Balance of Payment or BoP is a financial

statement that keeps track of all the

economic transactions by the nation

with the rest of the world.

Transactions

associated

with

Goods Goods and services

Capital

Transfers

Not included Included

Result BoT can either be favourable,

unfavourable or balanced.

Both the receipts and payments

sections tallies.




https://www.investopedia.com/terms/i/import.asp

https://www.investopedia.com/terms/e/export.asp

https://www.investopedia.com/terms/c/currentaccount.asp

https://www.investopedia.com/terms/c/capitalaccount.asp

https://www.investopedia.com/terms/c/current-transfers.asp

https://www.investopedia.com/terms/f/financialinstrument.asp

https://www.investopedia.com/terms/i/international-reserves.asp


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Component Current account

Financial account

Capital account

Current account

Capital account

Bancassurance

Bancassurance means selling insurance product through banks.

Banks and insurance company come up in a partnership wherein the bank sells the tied insurance company's

insurance products to its clients..

The insurance company benefits because it can reach a bank's client base to sell their products. They earn

additional revenues without having to build a salesforce or pay agent and broker commissions.

The bank benefits by improving customer satisfaction.

More services are provided under one roof. Moreover, the bank gains additional revenues from sales of

insurance products.

Banks earn additional revenue by selling insurance products, and insurance companies expand their

customer bases without increasing their sales force or paying agent and broker commissions.

Importance of Bancassurance:

The importance of Bancassurance are listed as follows:

Cost-effectiveness: Insurance companies look to Bancassurance as a cost-effective mode of distribution.

Helpful environment: Given that the customers already trust the bank with their money, they are also

generally more willing to consider new products from the same financial institution, thereby creating an

enabling environment to sell the products.

Commission-based income: A bank is able to income base and increase its overall productivity by

strengthening its branch network, goodwill and client base by presenting itself as a one-stop-shop for its

customers, therefore improving customer

Need for Bancassurance:

To improve the channels through which insurance policies are sold/marketed so as to make them reach the

hands of common man

To widen the area of working of banking sector having a network that is spread widely in every part of the

nation




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To improve the services of insurance by creating a competitive atmosphere among private insurance

companies in the market

Advantages of Bancassurance:

Diversification of Customer Portfolio.

Improved Profitability & Non-interest Fee Income.

Customer Loyalty and Retention. .

Increased Customer Lifetime Value.

Cost-effective Use of Existing Resources.

Specialized Training for Tellers and Branch Staff

Revenue and channel diversification

Quality customer access

Increase in volume and profit

Improved brand equity

The insurance company can establish itself more quickly in a new market , using a local existing bank

channel.

Disadvantages of Bancassurance:

Data management of an individual customer’s identity and contact details may result in the insurance

company utilizing the details to market their products, thus compromising on data security.

There is a possibility of the conflict of interest between the other products of bank and insurance policies

(like money back policy). This could confuse the customer regarding where he has to invest.

Better approach and services provided by banks to the customer is a hope rather than a fact. This is because

many banks in India are known for their bad customer service and this fact turns worse when they are

responsible to sell insurance products. Work nature to market insurance products requires submissive

attitude, which is a point that has to be worked on by many banks in India.

Models in Bancassurance:

There are various types Bancassurance models:

Distribution Agreement: Under this arrangement, the Insurer able to leverage the bank’s infrastructure

and provides source of fee income for banks. This is widely used bankassurance model in India. There is

low level of integration of product management and distribution channel.





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Strategic Alliance: In this model also, the Insurer able to leverage the bank’s infrastructure and provides

source of fee income for banks. There is sharing of customer database with insurance company. There is

low level of integration of product management and distribution channel management.

Joint Venture: Under this model, the bank participates in product and distribution design. There is joint

decision making and high system integration for infrastructure utilization.

Financial Services Group: This is one stop shop for all financial services.

Full Integration Model: This model entails a full integration of banking and insurance services. The bank

sells the insurance products under its brand acting as a provider of financial solutions matching customer

needs. Bank controls sales and insurer service levels including approach to claims. Under such an

arrangement the Bank has an additional core activity almost similar to that of an insurance company.

Bancassurance companies in India:

SBI life insurance Company

LIC is tied up with Vijaya bank, Oriental bank of commerce, Corporation bank

ICICI Lombard

Barclays – MetLife India

Axis bank – MetLife India

Aviva Life

Kotak Mahindra

ICICI Pru - ICICI Pru Life Insurance has tied up with 18 banks

HDFC Standard Life - HDFC Bank, Indian Bank and Bank of Baroda and many cooperative banks

Birla Sun Life - The first bancassurance policy in India was sold by Birla Sun.

GST E- way Bills

E way Bill:

E way Bill is the short form of Electronic Way Bill.

It is a unique document/bill, which is electronically generated for the specific consignment/movement of

goods from one place to another, either inter-state or intra-state and of value more than INR 50,000,

required under the current GST regime.




https://www.profitbooks.net/gst-india-overview/


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As per the update on 23rd Mar 2018, Generation of the e-Way Bill has been made compulsory from 1st April

2018.

Inter-state implementation of e-way bill is notified to be implemented from 1st April 2018.

The implementation of E - way Bill to kick-off from 15th April 2018 in a phased manner.

When e-Way Bill is generated, a unique e-Way Bill Number (EBN) is made available to the supplier, recipient

and the transporter.

The e-Way Bill replaces the Way Bill, which was a physical document and existed during the VAT regime for

the movement of goods.

Who should register E way Bill:

Registered Person – E way bill must be generated when there is a movement of goods of more than

Rs50,000 in value to or from a Registered Person. A Registered person or the transporter may choose to

generate and carry E way bill even if the value of goods is less than Rs50,000.

Unregistered Persons – Unregistered persons are also required to generate e-Way Bill. However, where a

supply is made by an unregistered person to a registered person, the receiver will have to ensure all the

compliances are met as if they were the supplier.

Transporter – Transporters carrying goods by road, air, rail, etc. also need to generate e-Way Bill if the

supplier has not generated an e-Way Bill.

Objectives:

Single e-way Bill for hassle-free

No need for separate transit pass in each State for movement of goods

Shift from departmental-policing Model to self-declaration Model for movement of goods

Intimation of Generation of E way Bill:

1. Upon the generation of e-way bill, a unique e way bill number shall be made available to the supplier,

recipient and the transporter on the GST website who may utilize the same for furnishing the details in form

GSTR 1

2. The recipient shall communicate his acceptance or rejection of the consignment covered by the e-way bill

within 72 hours

3. In case the recipient does not communicate his acceptance or rejection within 72 hours of the details being

available on the GST website, it shall be deemed that he has accepted the details.






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How to Generate E way bill:

It can be generated on the e- way bill portal.

You need to login the portal.

Further steps need to be followed are given as a guide one way bill generation in e way bill portal

Documents required to generate E way Bill:

1. Invoice/Bill of supply/ Challan related to consignment of goods

2. Transport by road- Transporter ID or Vehicle Number

3. Transport by rail , ship or air- Transporter ID, Transport document number and Date on the document.

Benefits of GST E way Bill:

Ultimately, the digital interface system will facilitate a faster movement of goods, improve the turnaround

time of trucks, and help the logistics industry by allowing for an increase in the average distances travelled.

Taxpayers/transporters need not visit any tax officers/check posts for generation of e-way Bill/movement of

goods across States.

No waiting time at check posts and faster movement of goods thereby optimum use of vehicles/resources,

since there are no check posts in GST regime.

User-friendly e-way Bill system

Easy and quick generation of e-way Bill

Checks and balances for smooth tax administration and process simplification for easier Verification of e-way

Bill by Tax Officers.

All of these benefits will reduce travel time as well as travel costs.

Features of the GST E way bill:

User can create masters of his Customers, Suppliers & Products for easy generation of e-way Bill.

User can monitor e-way Bills generated on his account/behalf

Multiple modes for e-way Bill generation for ease of use.

User can create sub-users and Roles on portal for generation of e-way Bill.

Alerts will be sent to users via mail and SMS on registered mail id/mobile number.

Vehicle number can be entered either by the supplier/recipient of goods who generates EWB or the

transporter.

QR code will be printed on each e-way Bill for ease of seeing details.

Consolidated e-way Bill can be generated for vehicle carrying multiple consignments.





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Mutual Funds

A mutual fund is a professionally managed investment fund that pools money from many investors to

purchase securities. These investors may be retail or institutional in nature.

The money thus collected is then invested in capital market instruments such as shares, debentures and

other securities.

The income earned through these investments and the capital appreciation realized are shared by its unit

holders in proportion to the number of units owned by them.

Role of Mutual Funds:

The overall economic development is promoted

The mutual fund industry itself, offers livelihood to a large number of employees of mutual funds,

distributors, registrars and various other service providers.

Higher employment, Income and output in the economy boost the revenue collection of the

government through taxes and other means.

Mutual funds can also be a stabilizer and are viewed as a key participant in the capital market of an

economy.

They are transferring ownership of the securities among investors.

Advantages of Mutual Funds:

Diversification

Professional Management

Flexibility

Transparency

Tax Benefits

Economies of scale

Low costs

Well regulated systematic approach

Reinvestment of income

Limitations of Mutual Funds:

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Dilution

No control over cost

Lack of Portfolio Customization

Types of Mutual Funds:

Mutual funds are classified according to

1. Based on Structure

2. Based on Asset class

3. Based on Investment objective

4. Based on specialty

5. Based on Risk

Based on structure:

Open Ended Mutual funds:

These do not have a fixed maturity

Sale Transaction

Re purchase Transaction

The key feature is liquidity

Close- Ended Mutual Funds:

The price of the closed-ended mutual funds is based on the demand and supply just like stocks.

Closed-ended mutual funds are not liquid and the prices are less than the normal price per unit due to less

volume of trading.

Investors cannot enter nor exit from the scheme till the term of the scheme ends.

Interval Funds:

The funds which have a features-mix of open-ended and closed-ended are called interval funds.

Interval funds are closed funds with an option to transact funds directly for a certain pre-decided period.

They have open-ended feature during that pre-defined period and close-ended for the rest of the time.

Based on Asset Class:

Equity Funds:

Equity funds invest mostly in equity stocks of the company

Equity funds are considered to be risky but they tend to give higher returns in the long term





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Debt Funds:

Debt funds are mutual funds which usually invest in the government securities, corporate bonds etc.

Debt funds are more stable and less volatile to the market conditions.

Money Market Funds:

A money market refers to the mutual funds that are highly liquid and where the money is invested in short-

term investments like deposits certificates, treasury bills etc.

You can have your money invested in money market funds for a duration like a day.

Balanced or Hybrid Funds:

Balance or hybrid funds are a mix of equity and debt funds.

They tend in to invest an equal amount in equity and debt funds to keep the risk level balanced in the

investment.

Based on Investment Objective:

The money is invested in growth funds with the prime objective of getting a capital appreciation.

Although growth funds are risky, they tend to offer high returns in the long run.

Income Funds

Money gets invested in fixed income instruments like government bonds and debentures under income

funds.

The objective of the income fund is stable income on investment with modern growth of capital.

Liquid Funds

The money gets invested in short-term financial instruments like treasury bills, deposit certificates for the

purpose of providing ease of taking out money anytime.

Liquid funds are considered to be low risk with average returns and are ideal for people looking for short-

term investment.

Capital Protection Funds

The primary objective of these funds is to protect the money invested and thus the funds get split in

between equity and fixed income investments.

Fixed Maturity Funds

In fixed maturity funds, the investment is made in closed-ended debt funds having a fixed date of maturity.

Pension funds






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Money invested in pension funds are for a long period of time keeping in mind the long-term objective of

getting a regular pension to the investor when he retires.

The money in the pension funds gets invested in equity and debt instruments where equity helps the

investment grow and debt funds maintain a balance of risk in the investment.

The returns on the pension fund can be withdrawn as a lump sum or as regular pension or even the

combination of the both.

Based on Speciality:

Sector Funds

Sector funds are the funds that stick to one sector of the industry when investing.

Index Funds

The index fund is a type of investment which is made to match the working of a market index like BSE.

These funds provide broader exposure to the market, less operating cost and low portfolio turnover.

Fund of Funds

Funds of funds are the types of mutual funds that invest in other mutual funds.

The returns solely depend upon the performance of the target fund.

These types of funds are also referred to as multi-manager funds.

Emerging Market Funds

In emerging market funds, the investment is made in the developing countries which are growing

economically at a good rate.

These funds are considered risky as a lot of other factors depend on the performance of political and

economic situations of the particular developing country.

International Funds

International funds invest their money in the international companies located in other parts of the world.

International funds are also known as foreign funds.

The money in international funds will not be invested in the investor's own country.

Global Funds

These are similar to international funds and invest their money in the companies located in all the parts of

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The only difference from international funds is that investment can also be made in the same country of the

mutual fund investment.

Real Estate Funds

As the name sounds, the real estate funds invest their money in real estate business.

The investment in a real estate project can be made at any phase of the project.

Commodity Focused Stock Funds

The investment is done in companies that are working in the commodities market, for example, mining

companies or producers of commodities.

Performance of these funds is directly linked to the performance of those commodities in the market.

Market Neutral Funds

These funds do not invest directly in the market.

They invest in securities, treasury bills with the aim of steady and fixed growth.

Inverse/leveraged Funds

These funds don't operate as a normal mutual fund.

They make a profit when the market falls and incur a loss when the market does well.

The risk factor in such funds is very high as they can make you huge loss or profit as per the market

conditions.

Asset Allocation Funds

These funds allow the portfolio manager to adjust the allocated assets to achieve results.

The amount of investment gets divided into such funds to invest in different instruments like bonds and

equity.

Based on Risk:

Low Risk

These types of mutual funds invest in debt market where the risk to the investment is very low.

The investments tend to be long-term but due to the low risks associated with it, the returns are also

moderate.

Example of a low-risk mutual fund will be debt funds where the investment is made in very safe government

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Medium Risk





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These investments carry medium risk to the investor.

Medium risk mutual funds are ideal for those who are willing to take some risk to get good returns on their

investment.

The investment portfolio is a mixture of debt funds and equity funds.

High Risk

These investments are high and are for those who are willing to take a high risk on their investment for an

expectation of high returns.

High-risk investment invests a majority of the money (investment) in equity stocks of the company.

Stock Market

The stock market refers to public markets that exist for issuing, buying and selling stocks that trade on a

stock exchange or over-the-counter.

Stocks, also known as equities, represent fractional ownership in a company, and the stock market is a place

where investors can buy and sell ownership of such investible assets.

An efficiently functioning stock market is considered critical to economic development, as it gives companies

the ability to quickly access capital from the public.

Role of Stock Market:

Stock exchanges play a vital role in the functioning of the economy by providing the backbone to a modern

nation's economic infrastructure.

Stock exchanges help companies raise money to expand.

They also provide individuals the ability to invest in companies.

Functions of Stock Market:

1. Provides Liquidity and Marketability to Existing Securities

2. Pricing of Securities

3. Spreading of Equity Culture

4. Safety of Transaction

5. Providing scope for speculation

6. Contributes to Economic Growth

7. Mobilizes Savings




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8. Mobility of Funds

9. Healthy Speculation

10. Capital Formation

11. Protects investors

12. Economic Barometer

13. Attracts Foreign Capital

14. Regulation of Capital management

15. Monetary and Fiscal policies

Features:

Stock exchange is a market for second hand securities

It is basically a market for second-hand listed securities of companies viz., shares, debentures/ bonds and

government securities.

Stock exchange allows dealing only in listed securities. In fact, stock exchange maintains an official list of

securities that could be purchased and sold at its floor. Unlisted securities i.e., securities which do not figure

in the official list of the stock exchange; could not be dealt in the stock exchange.

Stock exchange is in organized market for dealing in securities. Activities of a stock exchange are governed

by a recognized code of conduct, apart from statutory regulations.

All transactions in securities at the stock market are effected through authorized members only.

Types of Stock:

There are two main types of stocks: common stock and preferred stock.

Common Stock

Common shares represent ownership in a company and a claim (dividends) on a portion of profits.

Investors get one vote per share to elect the board members, who oversee the major decisions made by

management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every

other investment.

This higher return comes at a cost since common stocks entail the most risk.

If a company goes bankrupt and liquidates, the common shareholders will not receive money until the

creditors, bondholders, and preferred shareholders are paid.






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Preferred Stock

Preferred stock represents some degree of ownership in a company but usually doesn't come with the same

voting rights. (This may vary depending on the company.)

With preferred shares investors are usually guaranteed a fixed dividend forever.

This is different than common stock, which has variable dividends that are never guaranteed.

Another advantage is that in the event of liquidation preferred shareholders are paid off before the common

shareholder (but still after debt holders).

Preferred stock may also be callable, meaning that the company has the option to purchase the shares from

shareholders at any time for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity.

A good way to think of these kinds of shares is to see them as being in between bonds and common shares.

Shares

Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any

profits, if any are declared, in the form of dividends.

Importance of Shares:

Companies often issue shares to raise capital for operational and strategic reasons.

Shares of public companies trade on regulated stock exchanges, where investors can place buy and sell

orders.

Shares are an integral part of the economy because they are a core component of most investment

portfolios.

Advantages of Shares:

Three characteristic benefits are typically granted to owners of ordinary shares: voting rights, gains, and

limited liability.

Common stock, through capital gains and ordinary dividends, has proven to be a great source of returns

for investors, on average and over time.

Companies also benefit from issuing shares in that they do not incur debt obligations, although they do

forfeit some of the ownership stake

Dividend entitlement




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Capital gains

Limited liability

Control

Claim over income and assets

Right shares, bonus shares

Liquidity

Disadvantages of Shares:

Dividend uncertainty

High risk

Fluctuation in market price

Limited control

Residual claim

Types of Shares:

The five main types of shares are:

1. Ordinary shares:

The most common type of shares and are standard shares with no special rights or restrictions.

They have the potential to give the highest financial gains, but also have the highest risk.

Ordinary shareholders are entitled to voting rights, however, they are the last to be paid if the

company is wound up.

2. Non-voting ordinary shares :

It carry the same conditions as ordinary shares except with regards to voting rights.

Shareholders may have voting rights under certain circumstances or they may have no voting rights

at all.

3. Preference shares :

It typically carry a right that gives the holder preferential treatment when annual dividends are

distributed to shareholders.

Shares in this category receive a fixed dividend, which means that a shareholder would not benefit

from an increase in the business' profits.





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However, usually they have rights to their dividend ahead of ordinary shareholders if the business is

in trouble.

Preference shares carry no voting rights.

4. Cumulative preference shares :

This gives holders the right that, if a dividend cannot be paid one year, it will be carried forward to

successive years.

Dividends on cumulative preference shares must be paid, despite the earning levels of the business,

provided the company has profits that can be distributed.

5. Redeemable shares :

These Shares come with an agreement that the company can buy them back at a future date - this

can be at a fixed date or at the choice of the business.

A company cannot issue only redeemable shares, so they must ensure that they also issue non-

redeemable shares.

Derivatives

A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or

group of assets, a benchmark.

The derivative itself is a contract between two or more parties, and the derivative derives its price from

fluctuations in the underlying asset.

The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest

rates, and market indexes.

These assets are commonly purchased through brokerages.

Common derivatives include futures contracts, forwards, options, and swaps.

Most derivatives are not traded on exchanges and are used by institutions to hedge risk or speculate on

price changes in the underlying asset.

Exchange-traded derivatives like futures or stock options are standardized and eliminate or reduce many of

the risks of over-the-counter derivatives

Derivatives are usually leveraged instruments, which increases their potential risks and rewards.

Role of Derivatives:





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1. Management of Risk

2. Price Discovery

3. Price Stabilization

4. Exploit Opportunities to enhance Returns

5. Efficiency in Trading

6. Control Market Activities

7. Higher Trading Volume

8. Acts as a catalyst

Functions of Derivatives:

Derivatives shift the risk from the buyer of the derivative product to the seller and as such are very

effective risk management tools.

Derivatives improve the liquidity of the underlying instrument.

Derivatives perform an important economic function viz. price discovery.

They provide better avenues for raising money.

They contribute substantially to increasing the depth of the markets.

Characteristics of Derivatives:

Derivatives have the characteristic of Leverage or Gearing.

With a small initial outlay of funds (a small percentage of the entire contract value) one can deal big

volumes.

Pricing and trading in derivatives are complex and a thorough understanding of the price behaviour and

product structure of the underlying is an essential pre-requisite before one can venture into dealing in these

products.

Derivatives, by themselves, have no independent value. Their value is derived out of the underlying

instruments.

Advantages of Derivatives:

Hedging Risk Exposure

Underlying asset price determination

Market efficiency

Access to unavailable assets or markets





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They help in transferring risks from risk adverse people to risk oriented people.

They help in the discovery of future as well as current prices.

They catalyze entrepreneurial activity.

They increase the volume traded in markets because of participation of risk adverse people in greater

numbers.

They increase savings and investment in the long run.

Disadvantages of Derivatives:

High Risk

Counter party Risk

Speculative features

Types of Derivatives:

Derivative contracts are of several types. The most common types are forwards, futures, options and swap.

Forward Contracts

A forward contract is an agreement between two parties a buyer and a seller to purchase or sell something

at a later date at a price agreed upon today.

Any type of contractual agreement that calls for the future purchase of a good or service at a price agreed

upon today and without the right of cancellation is a forward contract.

Future Contracts

A futures contract is an agreement between two parties a buyer and a seller to buy or sell something at a

future date.

The contact trades on a futures exchange and is subject to a daily settlement procedure.

Unlike forward contracts, futures contracts trade on organized exchanges, called future markets.

Future contacts also differ from forward contacts in that they are subject to a daily settlement procedure. In

the daily settlement, investors who incur losses pay them every day to investors who make profits.

Options Contracts

Options Contracts are of two types’ calls and puts.

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given

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Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given

price on or before a given date.

Swaps are private agreements between two parties to exchange cash flows in the future according to a

prearranged formula.

They can be regarded as portfolios of forward contracts.

The two commonly used swaps are interest rate swaps and currency swaps.

1. Interest rate swaps: These involve swapping only the interest related cash flows between the parties in

the same currency.

2. Currency swaps: These entail swapping both principal and interest between the parties, with the cash

flows in one direction being in a different currency than those in the opposite direction.

Electoral Bonds

Electoral Bond refers a bond which has its specified face value, mentioned on it like a currency note.

These bonds can be used by the individuals, institutions and organizations to donate money to the

political parties.

These electoral bonds will be available in the denomination of Rs.1,000, Rs.10,000, Rs.1 lac, Rs.10 lacs

and Rs1 crore.

Finance Minister ArunJaitley announced all guidelines related to electoral bonds in the LokSabha in

January 2018.

Donations made through these bonds are exempt from taxes.

They cannot be purchased by paying cash.

The maximum amount that a political party can receive as donation in cash is capped at Rs2000.

Electoral bonds thus permit them to raise higher sums.

Every donor has to provide his KYC detail to the banks.

Electoral bonds will be valid for 15 days from the date of purchase. No interest will be given by the banks

on these bonds. These bonds can be bought from selected branches of State Bank of India only.

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Electoral bonds have been introduced to promote transparency in funding and donation received by

political parties.

The scheme envisages building a transparent system of acquiring bonds with validated KYC and an audit

trail.

A limited window and a very short maturity period would make misuse improbable.

The electoral bonds will prompt donors to take the banking route to donate, with their identity captured

by the issuing authority.

This will ensure transparency and accountability and is a big step towards electoral reform.

Eligibility for Electoral Bonds:

As per provisions of the Scheme, electoral bonds may be purchased by a citizen of India, or entities

incorporated or established in India

A person being an individual can buy electoral bonds, either singly or jointly with other individuals.

Only the registered Political Parties which have secured not less than one per cent of the votes polled in the

last LokSabha elections or the State Legislative Assembly are eligible to receive the Electoral Bonds.

Features of Electoral Bonds:

These bonds will be issued by notified banks.

The donor may approach these banks and purchase the bonds.

The donor shall be permitted to buy the bonds through cheque/digital payment. Hence the identity of

the donors will be protected (if the donors are identified, they may get caught up in political rivalry-

especially if the donor is a businessman).

The donor will donate these bonds to the political party.

The political party has to encash it into the account which is registered with the Election Commission of

India.

Advantages:

Very easy to set up

Minimum capital requirements are not applicable

Much easier to run – easy to join the board of directors, minimum quorum to conduct the board of

directors meeting.

Tax benefits are provided





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Conditions under Electoral Bonds:

Every party that is registered under section 29A of the Representation of the Peoples Act, 1951 (43 of 1951)

and has secured at least one per cent of the votes polled in the most recent LokSabha or State election has

been allotted a verified account by the Election Commission of India. Electoral bond transactions can be

made only via this account.

The bonds will be available for purchase for a period of 10 days each in the beginning of every quarter, i.e. in

January, April, July and October as specified by the Central Government.

An additional period of 30 days shall be specified by the Central Government in the year of LokSabha

elections.

The electoral bonds will not bear the name of the donor. In essence, the donor and the party details will be

available with the bank, but the political party might not be aware of who the donor is.

The intention is to ensure that all the donations made to a party will be accounted for in the balance sheets

without exposing the donor details to the public.

Schemes launched by Modi Government

1. PradhanMantriKisanSammanNidhi Scheme

This scheme promises to pay all poor farmers (small and marginal farmers having lands up to 2 hectares)

Rs6,000 each every year in 3 installments through Direct Bank Transfer. It would reportedly benefit around

14.5 crore farmers all over India.

2. PradhanMantriKisan Pension Yojana:

To address the problems of farm sector distress, the Modi 2.0 Cabinet has approved a proposal to provide

small and marginal farmers with a minimum Rs3,000 per month fixed pension, costing Rs10,774.5 crore per

annum to the exchequer.

The eligible farmers in the 18-40 years age group can participate in this voluntary and contributory pension

scheme.

Once the beneficiary of the pension dies, the spouse will be entitled to receive 50% of the original

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3. Jan DhanYojana

PradhanMantri Jan DhanYojana is a National Mission on Financial Inclusion which has an integrated

approach to bring about comprehensive financial inclusion and provide banking services to all households

in the country.

The scheme ensures access to a range of financial services like availability of basic savings bank account,

access to need based credit, remittances facility, insurance and pension.

4. Swachh Bharat Mission

On 2nd October 2014, Swachh Bharat Mission was launched throughout length and breadth of the country

as a national movement. The campaign aims to achieve the vision of a 'Clean India' by 2nd October 2019.

The Swachh Bharat Abhiyan is the most significant cleanliness campaign by the Government of India.

5. PradhanMantriShram Yogi Maan-dhan (PM-SYM)

It is a voluntary and contributory pension scheme, under which the subscriber would receive the following

benefits:

Minimum Assured Pension: Each subscriber under the PM-SYM, shall receive minimum assured pension

of Rs3000/- per month after attaining the age of 60 years.

Family Pension: During the receipt of pension, if the subscriber dies, the spouse of the beneficiary shall

be entitled to receive 50% of the pension received by the beneficiary as family pension. Family pension is

applicable only to spouse.

If a beneficiary has given regular contribution and died due to any cause (before age of 60 years), his/her

spouse will be entitled to join and continue the scheme subsequently by payment of regular contribution

or exit the scheme as per provisions of exit and withdrawal.

6. PM Mudra Yojna:

Launched on April 8, 2015 for providing loans up to 10 lakh to the non-corporate, non-farm

small/micro enterprises.

To create an inclusive, sustainable and value based entrepreneurial culture, in collaboration with our

partner institutions in achieving economic success and financial security.

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It is a pension scheme mainly aimed at the unorganized sector such as maids, gardeners, delivery

boys, etc. This scheme replaced the previous SwavalambanYojana which was not accepted well by the

people.

8. Prime Minister JeevanJyotiBimaYojana:

It is a government-backed Life insurance scheme in India. PradhanMantriJeevanJyotiBimaYojana is

available to people between 18 and 50 years of age with bank accounts.

9. PradhanMantriSurakshaBimaYojana-:

It is a government-backed accident insurance scheme in India. As of May 2016, only 20% of India's

population has any kind of insurance, this scheme aims to increase the number.

10. Digital India Mission:

With a vision to transform India into a digitally empowered society and knowledge economy.

11. Gold Monetization Scheme:

Launchedin 2015, under this scheme one can deposit their gold in any form in a GMS account to earn

interest as the price of the gold metal goes up.

12. Stand Up India:

Facilitates bank loans between 10 lakh and 1 Crore to at least one Scheduled Caste (SC) or Scheduled

Tribe (ST) borrower and at least one woman borrower per bank branch for setting up a greenfield

enterprise.

Financial Institutions in India

Credit Rating Agencies

Credit rating agency is a company which rates the companies and government on the basis of their ability to pay

back the debt in timely manner. There are four credit rating agencies in India:

I. CRISIL (Credit Rating and Information Services of India Ltd.)

India’s first credit rating agency.

Founded:1987

Headquarter: Mumbai

II. ICRA (Investment Information and Credit Rating Agency)





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It is an Indian independent and professional investment information agency.

Founded: 1991

Headquarter: Gurugram

III. CARE (Credit Analysis & Research Ltd.)

It is second largest credit rating agency in India.

Founded:1993

Headquarter: Mumbai

IV. Onicra Credit Information Company Ltd

It is a private sector agency set up by Onida finance.

Established :1993

Headquarter : Gurugram

CIBIL (Credit Information Bureau (India) Ltd.

India’s first credit information company.

Founded :2000

Headquarter: Mumbai

SEBI (Securities Exchange Board of India)

SEBI is a regulator of India’s securities market.

Established: 1992

Headquarter: Mumbai

Chairman: Ajay Tyagi

IRDAI (Insurance Regulatory and Development Authority of India)

It is an autonomous, statutory agency tasked with regulating and promoting the insurance and re-insurance

industries in India.

Founded : 1999

Headquarter: Hyderabad

Chairman: Subash Chandra Khuntia

MUDRA Bank (Micro Units Development and Refinance Agency Bank )

It is financial institution which is setup under the PradhanMantri MUDRA Yojna. It is set up to provide loans at low

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Headquarter: New Delhi

Founded: 8 April 2015

MUDRA can be classified into three types:

Shishu: under this loans up to Rs 50000 will be provided

Kishore: under this loans up to Rs 5 lakh will be provided

Tarun: under this loans up to Rs 10 lakh will be provided

NPCI (National Payments Corporation of India)

It is the umbrella organization for all retail payment systems in India, which aims to allow all Indian citizens to have

unrestricted access to e-payment services.

Founded: 2008

Headquarter : Mumbai

chairman : BiswamohanMahapatra

NHB (National Housing Bank)

National Housing Bank is the apex bank in India. It is the wholly owned subsidiary of the Reserve Bank of India.

Founded: 1988

Headquarter :New Delhi

Chief Executive: RV Verma

SIDBI(Small Industrial Development Bank of India)

It is the subsidiary of Industrial Development Bank of India. It was set up to promote finance and to develop micro

and medium industries of India.

Established: 1990

Headquarter: Lucknow, Uttar Pradesh

Chairman: Mohammed Mustafa

Export- Import Bank of India

It is the premier export finance institution of the country that seeks to build value by integrating foreign trade and

investment with the economic rise of India.

Established : 1982

Headquarter : Mumbai

Chairman : Venkat Subramanian





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NABARD: National Bank for Agriculture and Rural Development

Established :12th July 1982

Recommendation: SivaramanComittee.

Headquarter: Mumbai, Maharashtra.

Chairman: Harsh Kumar Bhanwala.

Aim: To uplift Rural India & rural non-farm sector.

NABARD acts as regulator for co-operative banks &RRB's (Regional Rural Banks).

ECGC: Export Credit Guarantee Corporation

To strengthen the export promotion by covering the risk of exporting on credit

Established: 30 July 1957


Chairman: GeethaMuralidhar

International Financial Institutions

World Bank:

Established: 1945

Member countries: 189 members

Headquarters: Washington DC

President: David Malpass

World Bank Group:

International Bank for Reconstruction and Development (IBRD),

International Finance Corporation (IFC)

International Development Association (IDA),

International Centre for Settlement of Investment Disputes (ICSID),

Multilateral Investment Guarantee Agency (MIGA)

Function: It focuses on improving education, health, and infrastructure. It also uses funds to modernize a country's

financial sector, agriculture, and natural resources management.

International Monetary Fund (IMF):





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Established: 27 December 1945

Member Countries: 189

Headquarter: Washington , DC

Head: KristalinaGeorgieva

Function: It works to foster global growth and economic stability by providing policy advice and financing the

members by working with developing nations helps them achieve macroeconomic stability and reduce poverty.

Asian Development Bank:

Established: 1966


Headquarters: Manila, Phillipines

Head: TakehikoNakao

Function: Promote investment in the public and private sector for development purposes. Help member countries

to coordinate their development policies and plans. To Answer the requests for assistance in coordinating the

development policies and schemes of member countries

Asian Infrastructure Investment Bank:

Established: 2015


Headquarters: Beijing, China

Head: Jin Liqun

Function: Its mission is to improve social and economic outcomes in its region, Asia, and beyond

European Investment Bank:

Established: 1958


Headquarters: Luxembourg

Head: Werner Hoyer

Function: This makes loans, guarantees, and provides technical assistance and venture capital for business projects

that are expected to further EU policy objectives

European Bank for Reconstruction and Development:

Established: 1991





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Headquarters: London

Head: SS Chakrabarti

Function: To aid ex-Soviet and Eastern European countries transitioning into democracies by developing free-

market economies

African Development Bank:

Established: 1964


Headquarters: Cote d’ Ivory

Head: AkinwumiAdesina

Function:

Making loans and equity investments for the socio-economic advancement of the RMC.

The bank provides technical assistance for development projects and programs.

It promotes investment of public and private capital for development.

Important Financial Terms

Asset: Any resource that has economic value that an individual or corporation owns. Assets are generally viewed as

resources that produce cash flow or bring added benefit to the individual or company.

Actuaries: A person with expertise in the fields of economics, statistics and mathematics, who helps in risk

assessment and estimation of premiums etc for an insurance business, is called an actuary.

Accounts Receivable: The amount of money owed by customers or clients to a business after goods or services have

been delivered and/or used.

Amortization: It is an accounting technique by which intangible assets are written off over a period of time.

Accounts Payables: The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or

services they have delivered.

Annuity : It is an investment scheme under which investor makes recurring investments and lump sum payment is

made to him at the end.

ATM ( Automatic Teller Machine) : They are machines that dispense cash, receive cash, accept cheques, and give

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Arbitrage : It is the process of simultaneous buying and selling of an asset from different platforms, exchanges or

locations to cash in on the price difference.

Bancassurance: Bancassurance means selling insurance products through banks. Banks and insurance company

come up in a partnership wherein the bank sells the tied insurance company’s insurance products to its clients.

Balance of payment: It is the difference between a country’s exports and imports.

Bank Rate : It is the rate charged by the central bank for lending funds to commercial banks.

Basis Point : One- hundredth of 1% point normally used for indicating cost of finance.

Balance Sheet: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and

owner or shareholder equity at a given time.

Bitcoin: Bitcoin is a virtual currency or cryptocurrency and a payment system. It can be defined as a decentralized

means of tracking and assigning wealth or economy, it is a software protocol.

Bond: A debt instrument used by corporations, governments (including Federal, State and City) and many other

institutions that are used to generate capital.

Bankruptcy: When an organization is unable to honour its financial obligations or make payment to its creditors, it

files for bankruptcy. A petition is filed in the court for the same where all the outstanding debts of the company are

measured and paid out if not in full from the company’s assets.

Call money : It is the rate at which short term funds are borrowed and lent in the money market. When money is

lent for a day it is called call money.

Capital: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by

taking your current assets subtracted from current liabilities—basically the money or assets an organization can put

to work.

Cheque: It is written by individual to transfer amount between two accounts of the same bank or a different bank

and the money is withdrawn from the account.

Core Banking Solutions (CBS): It is a networking of branches which enables customers to operate their accounts and

avail banking services from any branch of the bank on CBS network, regardless of where he maintains his account.

Credit: An accounting entry that may either decrease assets or increase liabilities and equity on the company's

balance sheet, depending on the transaction. When using the double-entry accounting method there will be two

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Cash Reserve Ratio: It is the amount of funds that the banks are bound to keep with RBI as a portion of their Net

Demand and Time Liabilities (NDTL).

Dividend: It is the amount per share paid by a company to its shareholders. Dividend value is based upon

company’s profitability.

Demat Account: The way in which a bank keeps money in a deposit account in the same way the depository

company converts share certificates into electronic form and keep them in a demat account.

Deflation: When the overall price level decreases so that inflation rate becomes negative is called deflation.

Diversification: The process of allocating or spreading capital investments into varied assets to avoid over-exposure

to risk.

Depreciation : The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This

decrease is called depreciation.

Equity: Equity= Total assets- Total liabilities

EMI: EMI or Equated Monthly Installment, as the name suggests , is one part of the equally divided monthly outgoes

to clear off an outstanding loan within a stipulated time frame.

Exchange Rate: It is the price of one currency in terms of another currency.

Face value: The amount mentioned on face of a bond certificate.

Fiscal Deficit :The difference between total revenue and total expenditure of the government is termed as fiscal

deficit.

Inflation : It is an increase in the quantity of money in circulation without any corresponding increase in goods thus

leading to an abnormal rise in the price level.

Insolvency:A state where an individual or organization can no longer meet financial obligations with lenders when

their debts come due.

Initial Public Offering (IPO) : An initial public offering is when a private company or corporation raises investment

capital by offering its stock to the public for the first time.

Liquidity: Liquidity means how quickly you can get your cash on your hands. In simple terms, liquidity is to get your

money whenever you need it.

Marginal Standing Facility: MSF is a window for banks to borrow from RBI in an emergency situation when inter

bank liquidity dries up completely.





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Market Capitalisation: It is the aggregate valuation of the company based on its current share price and the total

number of outstanding stocks. It is calculated by multiplying the current market price of the company’s share with

the total outstanding shares of the company.

Mortgage: A legal agreement that conveys the conditional right of ownership on an asset or property by its owner

to a lender as security for a loan.

Mutual fund: A mutual fund is a professionally managed investment fund that pools money from many investors to

purchase securities.

Non- performing Assets: A non- performing asset is a loan or advance for which the principal or interest payment

remained overdue for a period of 90 days.

Plastic Money: Generic term for all types of bank cards, credit cards, debit cards, smart cards etc..

Prime Rate: Determined by the federal funds rate (the overnight rate at which banks lend to one another) the

prime rate is the best rate available to a bank’s most credit-worthy customer.

Point Of Sale : It refers to a location at which a payment of card transaction occurs.

Prime Lending Rate: The interest rate charged by banks to their largest, most secure, and most credit worthy

customers on short term loans.

Repo rate : When RBI provides a loan to the bank for short term between 1 to 90, RBI takes some interest from the

bank is termed as repo rate.

Reverse Repo rate : When bank deposit its excess money in RBI then provide some interest to that bank.

Recession:An economic condition defined by a decline in GDP for two or more consecutive quarters. During a

recession, the stock market usually drops, unemployment increases, and the housing market declines.

Retail Banking: It is a type of banking in which direct dealing with retail customers is done. It is popularly known as

consumer banking or personal banking.

Special Drawing Rights: It is a reverse asset created within the framework of the International Monetary Fund in an

attempt to increase international liquidity.

Statuatory Liquidity Ratio: Every bank has to maintain a certain % of their total deposits in the form of ( Gold+ cash

+ bonds+ securities ) with themselves at the end of every business days.

Universal Banking: when financial institutions and banks undertake activities related to banking like investment,

issue of debit and credit card.






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Virtual Banking: Internet Banking is sometimes known as virtual banking. It is called so because it has no bricks and

boundaries. It is controlled by World Wide Web.

Yield: The annual rate of return for an investment expressed as a percentage.

Wholesale Banking: It is similar to retail banking with a slight difference is that it mainly focuses on the financial

needs of the institutional clients and the industry.

Abbreviation

AEPS – Aadhar Enabled Payment System.

APBS – Aadhar Payment Bridge System.

ATM – Automated Teller Machine.

ALM - Asset Liability Management.

BBPS – Bharat Bill Payment System.

BHIM - Bharat Interface for Money.

BCBS - Basel Committee on Banking Supervision.

CASA – Current Account Saving Account/

CAD – Current Account Deficit.

CAR - Capital Adequacy Ratio.

CAGR – Compound Annual Growth Rate.

CBS – Core Banking Solutions.

CCL - Cash Credit Limit.

CIDR - Central Identities Data Repository.

CIBIL - Credit Information Bureau of India

Limited.

CDR - Corporate Debt Restructuring.

CFR - Central Fraud Registry.

CTS – Cheque Truncation System.

CRR – Cash Reserve Ratio.

CRIS – Comparative Rating Index for Sovereign.

CRISIL - Credit Rating Information Services Of

India

CRAR - Capital to Risk Weighted Asset Ratio.

CVV - Card Verification Value.

DTC – Direct Tax Code.

DNS - Domain Name System.

DEAF - Depositor Education and Awareness

Fund.

DTAA – Double Taxation Avoidance Agreement.

DII – Domestic Institutional Investor.

DIDF - Dairy Processing Infrastructure

Development Fund.

ECB- External Commercial Borrowing.

ECS – Electronic Clearing Service.

EEFC - Exchange Earner's Foreign Currency.

EFSF – European Financial Stability Facility.

EFTPOS - Electronic funds transfer at point of

sale.

EFT – Electronic Fund Transfer.

ELSS - Equity Linked Saving Scheme.

EPS - Earnings per Share.

EPOS - Electronic Point Of Sale.

ETF - Exchange Traded Fund.

FRBM - Fiscal Responsibility and Budget

Management

FII – Foreign Institutional Investor.

FCNRA – Foreign Currency Non- Resident

account.

FEMA - Foreign Exchange Management Act.

FPI - Foreign Portfolio Investment.

FRN - Floating Rate Note.

FINO - Financial Inclusion Network and

Operation Limited.

GAAR - General anti-avoidance rule.

GDR – Global Depository Receipt.

GDP – Gross Domestic Product.

GIRO - Government Internal Revenue Order.





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GNFV - Gross Negative Fair Value.

GST – Goods and Services Tax.

HCE - Host Card Emulation

IBBI - Insolvency and Bankruptcy Board of India.

ICAAP - Internal Capital Adequacy Assessment

Process.

IDF – Infrastructure Debt Fund.

IDR - Indian Depository Receipts.

IDRBT - Institute for Development and Research

Of Banking.

IFSC - Indian Financial System Code.

IMPS - Immediate Payment Service.

IMPS - Interbank Mobile Payment Service.

IPO - Initial Public Offering.

IRDA - Insurance Regulatory and Development

Authority of India.

IRR - Internal Rate Of Return.

KCC - Kisan Credit Card.

KYC - Know Your Customer.

KVP - KisanVikasPatra.

LAF - Liquidity Adjustment Facility.

LIBOR – London Inter-Bank Offered Rate.

LGD - Loss Given Default.

MCLR - Marginal cost of fund based lending rate.

MTN - Medium Term Note.

MUDRA - Micro Units Development And

Refinance Agency.

MMID - Mobile Money Identifier.

MPIN - Mobile Personal Identification Number.

MFI - Micro Finance Institutions.

MFDC – Micro Finance Development Council.

MSF – Marginal Standing Facility.

MIBOR – Mumbai Inter Bank Offered Rate.

MICR – Magnetic Ink Character Recognition.

NABARD - National Bank for Agriculture and

Rural Development.

NAV - Net Asset Value.

NBFC - Non -Banking Financial Companies.

NDTL – Net Demand and Time Liabilities.

NECS - National Electronic Clearing System.

NFA - No Frills Account.

NPA – Non- Performing Assets.

NHB - National Housing Bank.

NPCI - National Payment Corporation of India.

NFS – National Financial Switch.

NACH – National Automated Clearing House.

NPD - Net Primary Deficit.

NPV - Net Present Value.

NEFT – National Electronic Fund Transfer.

NFC - Near field communication.

NPS – New Pension Scheme.

NSSF - National Small Savings Fund.

OTC – Over the Counter.

OTP - One-Time Password.

OECD - Organisation for Economic Cooperation

and Development.

OECO - Organisation for Economic Co-operation.

OLTAS - OnLine Tax Accounting System.

OMO - Open Market Operations.

P2P - Peer-to-peer.

PIN – Personal Identification Number.

PAN – Permanent Account Number.

PAC - Personal Access Code.

PAC – Public Account Committee.

PCA - Prompt Corrective Action.

PCR - Provision Coverage Ratio.

PCR – Public Credit Registry.

PAT - Profit After Tax.

PLR – Prime Lending Rate.

PPP – Purchasing Power Parity.

PPP – Public Private Partnership.

PFE - Potential Future Exposure.

PSPs - Payment Support Providers.








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QIB - Qualified Institutional Bankers.

RIDF - Rural Infrastructure Development Fund.

RNR - Revenue Neutral Rate.

RWA - Risk Weighted Asset.

RTGS – Real Time Gross Settlement.

SLR – Statutory Liquidity Ratio.

SDR – Special Drawing Rights.

SHGs - Self-Help Groups.

SARFAESI - Securitization and Reconstruction of

Financial Assets and Enforcement of Security

Interest.

SFTs: Securities financing transactions.

TDS - Tax Deducted at Source.

TORA - Transparency of Rules Act.

TRAI - Telecom Regulatory Authority of India.

TIEA – Tax Information Exchange Agreement.

USSD - Unstructured Supplementary Services

Data.

UIDAI - Unique Identification Authority of India.

VAT - Value Added tax.

VPA - Virtual Payment Address.

WL ATM - White Label ATM.

WMA - Ways and Means Advances.

WPI - Wholesale Price Index.

YTM - Yield to Maturity.

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