Bond

What is a bond?
A bond is a type of investment that represents a loan between
a borrower and a lender. Think of it as similar to getting a personal loan from a
bank except in this case you are the lender (known as
the investor or creditor) and the borrower is generally
a government or corporation(known as the issuer).
With bonds, the issuer promises to make regular interest payments to the
investor at a specified rate (the coupon rate) on the amount it has borrowed
(the face amount / face value) until a specified date (the maturity date).
Once the bond matures, the interest payments stop and the issuer is required to
repay the face amount of the principal to the investor. Because the interest
payments are made generally at set periods of time and are fairly predictable,
bonds are often called fixed-income securities.
How are bonds different from stocks?
Bonds are considered debt investments. On the other hand, a stock
purchase is considered an equity investmentbecause the investor (also
known as the stockholder) becomes a part owner of the corporation.
The issuers of stock or equity are typically companies; issuers of debt can be
either companies or governments.
While bonds generally dont provide an opportunity to share in the profits of the
corporation, the stockholder is entitled to receive a portion of the profits and
may also be given voting rights. Bondholders earn interest while stockholders
typically receive dividends. Both may experience capital gains or capital losses if
the price at which they sell their holdings is, respectively, higher or lower than
the price at which they bought them.
Coupon rates are most often fixed the rate of interest stays constant
throughout the life of the bond. However, some bonds have variable or floating
coupon rates (interest payments change from period to period based on a
predetermined schedule or formula). Some bonds pay no interest at all until
maturity.
Because bondholders are creditors rather than part owners, if a corporation
goes bankrupt, bondholders have a higher claim on assets than stockholders.
This provides added security to the bond investor but does not completely
eliminate risk.
Finally, bonds also trade differently from stocks. Bonds typically trade in
the over the-counter (OTC) market for example, from a broker to a broker at
another firm directly instead of on a stock exchange.
Coupon rate

The coupon rate is stated as a percentage of the face value of a bond (typically,
bonds pay interest semiannually) and is used to calculate the interest the
bondholder receives.
Example:
A bond with a Rs.1,000 face value and a six per cent coupon will pay its
bondholders Rs.30 every six months (or Rs.60 per year) until the bonds maturity
date. When the bond matures, the investor is repaid the full Rs.1,000 face value.
WHAT ARE THE BENEFITS OF INVESTING IN BONDS?
Income predictability
If your objective is to maintain a specific, steady level of income from your
portfolio, high quality bonds can provide a series of predictable cash flows with
minimal risk to your invested capital (the principal).
Safety
Depending on their quality, bonds can offer you a high degree of certainty that
the interest and principal repayment will be received in full if the bond is held to
maturity. The quality of the bond and the level of security that comes with it
is reflected in the credit rating of the issuer.
Diversification
Diversification means holding a mix of different asset classes in your portfolio.
For example, adding fixed-income securities like bonds to an equity portfolio
helps you achieve greater diversification. This is a way to reduce portfolio risk
the risk inherent in your combined investment holdings while potentially
increasing returns over time, since even if one class declines in value, there is
still an opportunity for an increase in one or more of the other classes.
Choice
A wide range of bond issuers with a variety of coupon rates and maturity dates
are available for you to choose from. This allows you to find the bond(s) with
cash flows that match your income needs while complementing your other
portfolio holdings.
Credit ratings
Credit ratings are assigned by various agencies based on how likely it is that the
issuer will fail to make its scheduled interest and principal payments. Most
agencies follow a letter-based rating scale. Typically, debt assigned a rating
ofAAA represents the lowest level of default risk. Debt ratedBBB or above is
normally considered investment grade, whereas debt with a rating of BB or
below is considered speculative or non-investment grade.
Asset classes

Investments are categorized into three main asset classes:

1. Equities
2. Debt (e.g., bonds)
3. Cash and cash equivalents (e.g., guaranteed investment certificates or GICs
and shorter term money market securities, such as treasury bills).
These different assets may be combined in different ways (for example, into
mutual funds) that allow investors to get the benefits of diversification without
buying individual securities directly.
WHAT ARE THE RISKS OF BOND INVESTING?
There are a number of risks to bond investing and, as a rule, investment returns
are lower when risk is low; higher returns mean higher risk. Two key risks are the
risk of default and price risk.
The risk of default (also known as credit risk)
An issuer of debt is said to be in default when the issuer is unable to repay the
principle or interest as scheduled. Government bonds / Government Securities
have virtually no risk of default. Corporate bonds are more exposed to default
risk because companies cannot raise taxes when there is a cash shortfall or take
advantage of other options available to governments.
Because the financial health of a company may change during the life of a bond,
it is important to watch for changes. Investors can assess the likelihood of
default inherent in a bond by watching its credit rating.
Price risk
If you sell your bonds prior to their maturity, their price or market value may be
lower than the price at which you bought them. Price fluctuates throughout a
bonds lifetime and may be greater or less than its face or principal value.
If you buy a bond below par, you can expect to realize a capital gain when the
bond matures; similarly, if you bought the bond at a premium, you will have a
capital loss at maturity.
A bonds price is a function of the bonds coupon rate as compared to the current
level of interest, its remaining term to maturity, its credit or default risk and any
special features it may have.
Price quotations
Bond prices are quoted in numbers that represent a percentage of their face
value. A bond quoted at 100 is trading at 100 per cent of its face value, or at par.
Example:
A bond quoted at 94.50 is trading at 94.5 per cent of its face value or par.

If the face value of the bond is Rs.1,000, it would only cost Rs.945.00 to
purchase (Rs.1,000 x .945). This bond is trading at a discount.
If the quote was 101.25, then the cost is 101.25 per cent of the face value, or
Rs.1,012.50. This bond is trading at a premium.

Coupon rate versus interest rate fluctuations

Fluctuations in interest rates usually have the biggest impact on the price of
bonds interest rates can be affected by many things, including a change in
inflation rates.
Generally speaking, bond prices move inversely to interest rates because the
coupon rate usually remains constant through to maturity. If current interest
rates are higher than the coupon rate, the bond is less attractive to investors and
drops in value, since investors arent willing to pay as much for a series of lower
coupon payments.
Bond prices increase when the coupon rate is higher than current interest rate
levels. To an investor who holds bonds through to maturity, price fluctuations
may seem irrelevant.
Not all bond prices react in the same way to interest rate changes. Usually, the
lower the coupon rate, the more sensitive the bond price is to any changes in
rates.
However, trading-oriented investors may take advantage of these fluctuations to
enhance their overall portfolio performance. As an example, a short-term interest
rate decrease may be an opportunity to sell bonds at a profit and move funds
into noninterest-bearing investments with anticipated higher returns.
Term to maturity
As bonds approach maturity, their market value approaches their face value. In
general, the longer the term to maturity and the lower the coupon rate, the more
sensitive a bond is to any changes in rate. When interest rates increase, bonds
with distant maturity dates and low coupon rates experience the greatest fall in
price.
Risk
As a rule, you can expect to receive a full repayment of a bonds face value on
the maturity date as long as the issuer is able to repay the debt, but if the credit
rating changes during the life of the bond, it may have an affect on the bonds
price. For example, if the credit rating of debt rated AAA the lowest level of
default risk changes due to large losses by the issuing company that could
affect the companys ability to repay interest or principal, the bond price will
drop even if there is no change in interest rates.

Special features
Many bonds have special features that may have a significant impact on their
price, risk and the returns you may earn. They can be called (repaid) early or
they can be converted, for example, into shares of the issuing company. Bonds
can also be extended (repayment deferred from the original term to a later date)
or other special provisions can apply.
Demand and supply
The availability of bonds and the demand for them also affects the price of
bonds. As demand increases, prices rise, all other factors remaining the same.
Also, as the supply of bonds declines, for example, prices generally also rise. In
both cases, if you are holding bonds, their yield to maturity will increase.
Similarly, when demand falls or supply increases, prices fall and yield to maturity
declines.
Yield: Yield is the return you get on a bond.
The current yield is the annual return on the dollar amount paid for the bond. It is
calculated by dividing the dollar amount of the coupon rate by the
purchase price. For example, a bond with a Rs.1,000 face value and a 6.5
percent coupon, purchased at par, has a current yield of 6.5 per cent (annual
interest of Rs.65 divided by Rs.1,000 purchase price). The same bond purchased
at Rs.950 (i.e., purchased at a discount) would have a current yield of 6.84 per
cent (Rs.65 interest divided by Rs.950 purchase price). And, if the price rises to
Rs.1,100, the current yield drops to 5.90 percent (Rs.65 divided by Rs.1,100).
The Yield To maturity (YTM) is a more meaningful calculation that tells you the
total return you will receive by holding the bond until it matures. YTM equals all
the interest payments you will receive (assuming you reinvest these interest
payments at the same rate as the current yield on the bond), plus any gain (if
you purchased the bond at a discount) or loss (if you purchased the bond at a
premium) on the price of the bond. YTM is useful because it enables you to
compare bonds with different maturity dates and coupon rates.
Basis point
When you read or hear about bond quotes and yields, you may hear the words
basis point. A basis point is a unit of measure; it equals 1/100th of one per cent
or, alternatively, 100 basis points are equal to one per cent.
Example:
If a bonds yield increased from 5.10 per cent to 5.35 per cent, its yield is said to
have increased by 25 one-hundredth of a per cent or, more simply, by 25 basis
points.
FM Note 2 Functions of RBI
Functions of RBI

Monetary Policy
Issuer of Currency
Regulation
Financial Markets
Financial Inclusion and Development
Consumer Education and Protection
Banker and Debt Manager to Government
Banker to Banks
Foreign Exchange Management
Payment and Settlement Systems
Research and Data
1. Monetary Policy
The monetary authority, typically the central bank of a country, is vested with the
responsibility of conducting monetary policy.
Monetary policy refers to the use of instruments under the control of the central bank to
regulate the availability, cost and use of money and credit.
The goal(s) of monetary policy: Primarily price stability, while keeping in mind
the objective of growth.
In India, subsequent to the recommendations of the Dr. Urjit Patel Committee Report,
the Reserve Bank formally announced on January 28, 2014 a glide path for disinflation
that explicitly stated the objective of keeping CPI inflation below 8 per cent by January
2015 and below 6 per cent by January 2016.
The agreement on Monetary Policy Framework between the Government and the
Reserve Bank of India dated February 20, 2015 defines the price stability objective
explicitly in terms of the target for inflation as measured by the consumer price indexcombined (CPI-C) in the near to medium-term, i.e.,
(a) below 6 per cent by January 2016, and
(b) 4 per cent (+/-) 2 per cent for the financial year 2016-17 and all subsequent years.
Price stability is a necessary (if not sufficient) precondition to sustainable growth and
financial stability. The relative emphasis assigned to price stability and growth
objectives in the conduct of monetary policy varies from time to time depending on the
evolving macroeconomic environment.

Financial stability is important for smooth transmission of monetary policy and,

therefore, regulatory and financial market policies, including macro-prudential policies,
are often announced along with monetary policy under Part-B of monetary policy
statements.
2. Issuer of Currency
Along with Government of India, we are responsible for the design, production and
overall management of the nations currency, with the goal of ensuring an adequate
supply of clean and genuine notes.
The Government of India is the issuing authority of coins and supplies coins to the
Reserve Bank on demand. The Reserve Bank puts the coins into circulation on behalf of
the Central Government.
In consultation with the Government of India, we work towards maintaining confidence
in the currency by constantly endeavouring to enhance integrity of banknotes through
new design and security features.
3. Regulation
A. Commercial Banking
Mandate /Goals: Regulation aimed at protecting depositors interests, orderly
development and conduct of banking operations and fostering of the overall health of
the banking system and financial stability.
Evolution: Regulatory functions have evolved with the development of the Indian
banking system and adoption of prudential norms based on international best practices.
B. Cooperative Banking
The rural co-operative credit system in India is primarily mandated to ensure flow of
credit to the agriculture sector. It comprises short-term and long-term co-operative
credit structures. The short-term co-operative credit structure operates with a three-tier
system - Primary Agricultural Credit Societies (PACS) at the village level, Central
Cooperative Banks (CCBs) at the district level and State Cooperative Banks (StCBs) at
the State level.
PACS are outside the purview of the Banking Regulation Act, 1949 and hence not
regulated by the Reserve Bank of India. StCBs/DCCBs are registered under the
provisions of State Cooperative Societies Act of the State concerned and are regulated
by the Reserve Bank. Powers have been delegated to National Bank for Agricultural and
Rural Development (NABARD) under Sec 35 A of the Banking Regulation Act (As
Applicable to Cooperative Societies) to conduct inspection of State and Central
Cooperative Banks.
Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs),
cater to the financial needs of customers in urban and semi-urban areas. UCBs are
primarily registered as cooperative societies under the provisions of either the State
Cooperative Societies Act of the State concerned or the Multi State Cooperative

Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries
of one state. The sector is heterogeneous in character with uneven geographic spread of
the banks. While many of them are unit banks without any branch network, some of
them are large in size and operate in more than one state.
C. Non-Banking
India has financial institutions which are not banks but which accept deposits and
extend credit like banks. These are called Non-Banking Financial Companies (NBFCs) in
India.
NBFCs in India include not just the finance companies that the general public is largely
familiar with; the term also entails wider group of companies that are engaged in
investment business, insurance, chit fund, nidhi, merchant banking, stock broking,
alternative investments, etc., as their principal business. All are though not under the
regulatory purview of the Reserve Bank.
4. Financial Markets
Major market segments under the regulatory ambit of the Reserve Bank are interest rate
markets, including Government Securities market and money markets; foreign exchange
markets; derivatives on interest rates/prices, repo, foreign exchange rates as well as
credit derivatives.
In order to ensure the robustness and credibility of the financial system and to minimise
the risks, the Reserve Bank has designated industry bodies Fixed Income, Money
Markets and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers
Association of India (FEDAI) as the benchmark administrators for the Rupee interest rate
and foreign exchange benchmarks, respectively.
The FIMMDA, FEDAI and Indian Banks Association (IBA) have since jointly floated an
independent company for benchmark administration. Benchmark submission activities
of banks and PDs including their governance framework for submission are proposed to
be brought under the Reserve Banks on-site and off-site supervision
5. Financial Inclusion and Development
Credit flow to priority sectors: Macro policy formulation to strengthen credit flow to
the priority sectors. Ensuring priority sector lending becomes a tool for banks for
capturing untapped business opportunities among the financially excluded sections of
society.
Financial inclusion and financial literacy: Help expand Prime Ministers Jan Dhan
Yojana (PMJDY) to become a sustainable and scalable financial inclusion initiative.
Credit flow to MSME: Stepping up credit flow to micro, small and medium enterprises
(MSME) sector, rehabilitation of sick units through timely credit support.
Institutions: Strengthening institutional arrangements, such as, State Level Bankers
Committees (SLBCs), Lead bank scheme, etc., to facilitate achievement of above
objectives.

6. Consumer Education and Protection

The Reserve Banks initiatives in the field of customer service include the setting up of a
Customer Redressal Cell, creation of a Customer Service Department in 2006 which has
been recently rechristened as Consumer Education and Protection Department and the
setting up of the Banking Codes and Standards Board of India (BCSBI), an autonomous
body for promoting adherence to self-imposed codes by banks for committed customer
service.
In order to strengthen the institutional mechanism for dispute resolution, the Reserve
Bank in the year 1995 introduced the Banking Ombudsman (BO) scheme. The BO is a
quasi-judicial authority for resolving disputes between a bank and its customers. There
are 15 Banking Ombudsman offices in the country at present.
The scheme covers grievances of the customers against Commercial Banks, Scheduled
Primary Cooperative Banks and Regional Rural Banks. In 2006, the Reserve Bank revised
the BO scheme. Under the revised scheme, the BO and the attached staff are drawn
from the serving employees of the Reserve Bank. The new scheme is fully funded by the
Reserve Bank and virtually covers all banking transactions related grievances except
credit decision of banks.
7. Banker and Debt Manager to Government
Since its inception, the Reserve Bank of India has undertaken the traditional central
banking function of managing the governments banking transactions. The Reserve Bank
of India Act, 1934 requires the Central Government to entrust the Reserve Bank with all
its money, remittance, exchange and banking transactions in India and the management
of its public debt. The Government also deposits its cash balances with the Reserve
Bank. The Reserve Bank may also, by agreement, act as the banker and debt manager
to State Governments.
Currently, the Reserve Bank acts as banker to all the State Governments in India
(including Union Territory of Puducherry), except Sikkim. For Sikkim, it has limited
agreement for management of its public debt.
The Reserve Bank has well defined obligations and provides several banking services to
the governments. As a banker to the Government, the Reserve Bank receives and pays
money on behalf of the various Government departments. The Reserve Bank also
undertakes to float loans and manage them on behalf of the Governments.
It provides Ways and Means Advances a short-term interest bearing advance to the
Governments, to meet temporary mismatches in their receipts and payments. Besides,
like a portfolio manager, it also arranges for investments of surplus cash balances of the
Governments. The Reserve Bank acts as adviser to Government, whenever called upon
to do so, on monetary and banking related matters.
The Central Government and State Governments may make rules for the receipt,
custody and disbursement of money from the consolidated fund, contingency fund, and
public account. These rules are legally binding on the Reserve Bank as accounts for
these funds are with the Reserve Bank .

The banking functions for the governments are carried out by the Public Accounts
Departments at the offices/branches of the Reserve Bank. As it has offices and suboffices in 29 locations, the Reserve Bank appoints other banks to act as its agents for
undertaking the banking business on behalf of the governments.
The Reserve Bank pays agency bank charges to the banks for undertaking the
government business on its behalf. As of now, management of public debt, including
floatation of new loans, is done by the Internal Debt Management Department at the
Central Office and Public Debt Office at offices/branches of the Reserve Bank. Final
compilation of Government accounts, of the Centre and the States, is done at Nagpur
office of the Reserve Bank which has a Central Accounts Section.
8. Banker to Banks
Banks are required to maintain a portion of their demand and time liabilities as cash
reserves with the Reserve Bank. For this purpose, they need to maintain accounts with
the Reserve Bank. They also need to keep accounts with the Reserve Bank for settling
inter-bank obligations, such as, clearing transactions of individual bank customers who
have their accounts with different banks or clearing money market transactions between
two banks, buying and selling securities and foreign currencies.
In order to facilitate a smooth inter-bank transfer of funds, or to make payments and to
receive funds on their behalf, banks need a common banker. By providing the facility of
opening accounts for banks, the Reserve Bank becomes this common banker, known as
Banker to Banks function. The function is performed through the Deposit Accounts
Department (DAD) at the Reserve Banks Regional offices. The Department of
Government and Bank Accounts oversees this function and formulates policy and issues
operational instructions to DAD.
9. Foreign Exchange Management
For a long time, foreign exchange in India was treated as a controlled commodity
because of its limited availability. The early stages of foreign exchange management in
the country focussed on control of foreign exchange by regulating the demand due to its
limited supply. Exchange control was introduced in India under the Defence of India
Rules on September 3, 1939 on a temporary basis.
The statutory power for exchange control was provided by the Foreign Exchange
Regulation Act (FERA) of 1947, which was subsequently replaced by a more
comprehensive Foreign Exchange Regulation Act, 1973. This Act empowered the
Reserve Bank, and in certain cases the Central Government, to control and regulate
dealings in foreign exchange payments outside India, export and import of currency
notes and bullion, transfer of securities between residents and non-residents, acquisition
of foreign securities, and acquisition of immovable property in and outside India, among
other transactions.
Extensive relaxations in the rules governing foreign exchange were initiated, prompted
by the liberalisation measures introduced since 1991 and the Act was amended as a
new Foreign Exchange Regulation (Amendment) Act 1993. Significant developments in
the external sector, such as, substantial increase in foreign exchange reserves, growth
in foreign trade, rationalisation of tariffs, current account convertibility, liberalisation of
Indian investments abroad, increased access to external commercial borrowings by

Indian corporates and participation of foreign institutional investors in Indian stock

market, resulted in a changed environment.
Keeping in view the changed environment, the Foreign Exchange Management Act
(FEMA) was enacted in 1999 to replace FERA. FEMA became effective from June 1, 2000.
10. Payment and Settlement Systems
The central bank of any country is usually the driving force in the development of
national payment systems. The Reserve Bank of India as the central bank of India has
been playing this developmental role and has taken several initiatives for Safe, Secure,
Sound, Efficient, Accessible and Authorised payment systems in the country.
The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a
sub-committee of the Central Board of the Reserve Bank of India is the highest policy
making body on payment systems in the country. The BPSS is empowered for
authorising, prescribing policies and setting standards for regulating and supervising all
the payment and settlement systems in the country.
The Department of Payment and Settlement Systems of the Reserve Bank of India
serves as the Secretariat to the Board and executes its directions. In India, the payment
and settlement systems are regulated by the Payment and Settlement Systems Act,
2007 (PSS Act) which was legislated in December 2007. The PSS Act as well as the
Payment and Settlement System Regulations, 2008 framed thereunder came into effect
from August 12, 2008.
In terms of Section 4 of the PSS Act, no person other than the Reserve Bank of India
(RBI) can commence or operate a payment system in India unless authorised by RBI.
The Reserve Bank has since authorised payment system operators of pre-paid payment
instruments, card schemes, cross-border in-bound money transfers, Automated Teller
Machine (ATM) networks and centralised clearing arrangements.
11. Research and Data
The Reserve Banks economic research work is designed to:
Provide reliable, data-driven information for policy and decision-making
Supply accurate and timely data for academic research as well as to the general public
Provide support for collaborative research to research institutions/universities
To develop and maintain statistical data reporting systems
To conduct forward-looking surveys for monetary policy
Educate the public
The Reserve Banks economic research focusses on study and analysis of domestic and
international macroeconomic issues. This is mainly done by the Department of Economic
and Policy Research and the Department of Statistics and Information Management.

The Reserve Bank has over time established a sound and rich tradition of policy-oriented
research and an effective mechanism for disseminating data and information. Like other
major central banks, the Reserve Bank has also developed its own research capabilities
in the field of economics, finance and statistics, which contribute to a better
understanding of the functioning of the economy and the ongoing changes in the policy
transmission mechanism.

FM Note 3 Conduct of Monetary Policy

Conduct of Monetary Policy
The Reserve Banks Monetary Policy Department (MPD) assists the Governor in
formulating the monetary policy. Views of all key stakeholders in the economy, advice of
the Technical Advisory Committee (TAC), and analytical work of the Reserve Bank
contribute to the conduct of Monetary Policy.
The Financial Markets Committee (FMC) meets daily to review the consistency between
policy rate, money market rates, and liquidity conditions.
Monetary policy refers to the use of instruments under the control of the central bank to
regulate the availability, cost and use of money and credit.
Monetary policy refers to the policy of the central bank with regard to the use of
instruments under its control to achieve the goals specified in the Act.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary
policy with the primary objective of maintaining price stability while keeping in mind the
objective of growth. This responsibility is explicitly mandated under the Reserve Bank of
India Act, as amended in 2016 and notified in the official Gazette on May 14, 2016.
The goal(s) of monetary policy
Primarily price stability, while keeping in mind the objective of growth.
In India, subsequent to the recommendations of the Dr. Urjit Patel Committee
Report, the Reserve Bank formally announced on January 28, 2014 a glide
pathfor disinflation that explicitly stated the objective of keeping CPI inflation below
8 per cent by January 2015 and below 6 per cent by January 2016.
The Agreement on Monetary Policy Framework between the Government and the
Reserve Bank of India dated February 20, 2015 defines the price stability objective
explicitly in terms of the target for inflation as measured by the consumer price indexcombined (CPI-C) in the near to medium-term, i.e., (a) below 6 per cent by January
2016, and (b) 4 per cent (+/-) 2 per cent for the financial year 2016-17 and all
subsequent years.
The amended RBI Act, has replaced the Agreement on Monetary Policy Framework,
which provides for inflation target to be set by the Government, in consultation with the

Reserve Bank, once in every five years. The Government shall notify the inflation target
in the official Gazette.
Price stability is a necessary precondition to sustainable growth. The relative
emphasis assigned to price stability and growth objectives in the conduct of monetary
policy varies from time to time depending on the evolving macroeconomic environment.
Policy Framework
The framework aims at setting the policy (repo) rate based on a forward looking
assessment of inflation, growth and other macroeconomic risks, and modulation of
liquidity conditions to anchor money market rates at or around the repo rate. Repo rate
changes transmit through the money market to alter the interest rates in the financial
system, which in turn influence aggregate demand - a key determinant of inflation and
growth.
Once the repo rate is announced, the operating framework envisages liquidity
management on a day-to-day basis through appropriate actions, which aim at anchoring
the operating target the weighted average call rate (WACR) around the repo rate.
The operating framework is fine-tuned and revised depending on the evolving financial
market and monetary conditions, while ensuring consistency with the monetary policy
stance. The liquidity management framework accordingly was revised significantly in
September 2014 and again in April 2016.
The Monetary Policy Process
The Reserve Banks Monetary Policy Department (MPD) assists the Governor in
formulating the monetary policy. Views of key stakeholders in the economy, advice of
the Technical Advisory Committee (TAC), and analytical work of the Reserve Bank
contribute to the process for arriving at the decision on policy repo rate.
The Financial Markets Operations Department (FMOD) operationalises the
monetary policy, mainly through day-to-day liquidity management operations. The
Financial Markets Committee (FMC) meets daily to review the consistency between
policy rate, money market rates, and liquidity conditions.
The amended RBI Act, 2016 provides a statutory basis for constitution of
anempowered monetary policy committee (MPC). The Central Government shall
notify the constitution of the Monetary Policy Committee. The Governor, one Deputy
Governor and one officer of the Bank would be the ex-officio members of the
Committee. The other three members shall be appointed by the Central Government as
per the procedure laid down in the amended RBI Act. The Committee will determine the
policy interest rate required to achieve the inflation target.
Instruments of Monetary Policy
There are several direct and indirect instruments that are used in the implementation of
monetary policy.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides short-term
(overnight) liquidity to banks against the collateral of government and other approved
securities under the liquidity adjustment facility (LAF). The LAF consists of overnight and
term repo auctions. Progressively, the Reserve Bank has increased the proportion of
liquidity injected in the LAF through term-repos (of up to 56 days) at variable rates. The
aim of term repo is to help develop inter-bank term money market, which in turn can set
market based benchmarks for pricing of loans and deposits, and through that improve
transmission of monetary policy.
Reverse Repo Rate: The (fixed) interest rate (currently 50 bps below the repo rate) at
which the Reserve Bank absorbs short-term liquidity, generally on an overnight basis,
from banks against the collateral of government and other approved securities under
the LAF. The Reserve Bank also conducts variable interest rate reverse repo auctions, as
necessary.
Marginal Standing Facility (MSF): A facility under which scheduled commercial
banks can borrow additional amount of overnight money from the Reserve Bank by
dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit (currently two per
cent of their net demand and time liabilities deposits) at a penal rate of interest,
currently 50 basis points above the repo rate. This provides a safety valve against
unanticipated liquidity shocks to the banking system. MSF rate and reverse repo rate
determine the corridor for the daily movement in the weighted average call money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the MSF rate changes alongside policy
repo rate changes.
Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks
must maintain as cash balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that
banks must maintain in safe and liquid assets, such as, unencumbered government
securities, cash and gold. Changes in SLR often influence the availability of resources in
the banking system for lending to the private sector.
Open Market Operations (OMOs): These include both outright purchase/sale of
government securities for injection/absorption of durable liquidity, respectively.
Refinance facilities: Sector-specific refinance facilities aim at achieving sector specific
objectives through provision of liquidity at a cost linked to the policy repo rate. The
Reserve Bank has, however, been progressively de-emphasising sector specific policies
as they interfere with the transmission mechanism.
Market Stabilisation Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital
inflows is absorbed through sale of short-dated government securities and treasury bills.
The mobilised cash is held in a separate government account with the Reserve Bank.
Open and Transparent Monetary Policy-Making

The MPC will determine the policy rate required to achieve the inflation target.
The MPC will meet at least four times in a year.
The questions which come up before the MPC will be decided by majority of votes by the
members present in voting.
The resolution adopted by the MPC will be published after conclusion of every meeting
of the MPC.
On the 14th day, the minutes of the proceedings of the MPC will be published
which include:
1. The resolution adopted by the MPC;
2. The vote of each member on the resolution, ascribed to such member; and
3. The statement of each member on the resolution adopted.
Once in every six months, the bank will publish a document called the
Monetary Policy Report which will explain:
1. The source of inflation; and
2. The forecast of inflation for 6-18 months ahead.
Legal Framework
Reserve Bank of India Act, 1934 as amended from time to time.

FM Note 4 Financial Sector Reforms

Financial Sector Reforms
A vibrant financial sector is of critical importance to the growth of every economy.
Following are the reform measures then in the Union Budget 2016-17.
(i) A systemic vacuum exists with regard to bankruptcy situations in financial firms. A
comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in
the Parliament during 2016-17. This Code will provide a specialized resolution
mechanism to deal with bankruptcy situations in banks, insurance companies and
financial sector entities. This Code, together with the Insolvency and Bankruptcy
Code 2015, when enacted, will provide a comprehensive resolution mechanism for our
economy.
(ii) The RBI Act 1934, is being amended to provide statutory basis for a Monetary
Policy Framework and a Monetary Policy Committee through the Finance Bill

2016. A committee-based approach will add lot of value and transparency to monetary
policy decisions.
(iii) A Financial Data Management Centre under the aegis of the Financial
Stability Development Council (FSDC) will be set up to facilitate integrated data
aggregation and analysis in the financial sector.
(iv) To improve greater retail participation in Government securities, RBI will facilitate
their participation in the primary and secondary markets through stock exchanges and
access to NDS-OM trading platform.
(v) New derivative products will be developed by SEBI in the Commodity Derivatives
market.
(vi) To facilitate deepening of corporate bond market, a number of measures will be
undertaken. The enactment of Insolvency and Bankruptcy Code would provide a major
boost to the development of the corporate bond market.
MEASURES FOR DEEPENING OF CORPORATE BOND MARKET
(a) LIC of India will set up a dedicated fund to provide credit enhancement to
infrastructure projects. The fund will help in raising the credit rating of bonds floated by
infrastructure companies and facilitate investment from long term investors.
(b) RBI will issue guidelines to encourage large borrowers to access a certain portion of
their financing needs through market mechanism instead of the banks.
(c) Investment basket of foreign portfolio investors will be expanded to include unlisted
debt securities and pass through securities issued by securitisation SPVs.
(d) For developing an enabling eco system for the private placement market in
corporate bonds, an electronic auction platform will be introduced by SEBI for primary
debt offer.
(e) A complete information repository for corporate bonds, covering both primary and
secondary market segments will be developed jointly by RBI and SEBI.
(f) A framework for an electronic platform for repo market in corporate bonds will be
developed by RBI.
(vii) To tackle the problem of stressed assets in the banking sector, Asset Reconstruction
Companies (ARCs) have a very important role. Therefore, Finance Minister proposed to
make necessary amendments in the SARFAESI Act 2002 to enable the sponsor of
an ARC to hold up to 100% stake in the ARC and permit noninstitutional investors to invest in Securitization Receipts.
(viii) In the recent past, there have been rising instances of people in various parts of
the country being defrauded by illicit deposit taking schemes. The worst victims of
these schemes are the poor and the financially illiterate. The operation of such
schemes are often spread over many States. Therefore Finance Minister proposed to

bring in comprehensive Central legislation in 2016-17 to deal with the menace of such
schemes.
(ix) I also propose to amend the SEBI Act 1992 in the coming year to provide for more
members and benches of the Securities Appellate Tribunal.

FM Note 5 SIDBI and MUDRA

SIDBI (Small Industries Development Bank of India)
Mission
"To facilitate and strengthen credit flow to MSMEs and address both financial and
developmental gaps in the MSME eco-system"
Vision
To emerge as a single window for meeting the financial and developmental needs of the
MSME sector to make it strong, vibrant and globally competitive, to position SIDBI Brand
as the preferred and customer - friendly institution and for enhancement of share holder wealth and highest corporate values through modern technology platform
History
Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an
Act of Indian Parliament, acts as the Principal Financial Institution for thePromotion,
Financing and Development of the Micro, Small and Medium
Enterprise (MSME) sector and for Co-ordination of the functions of the institutions
engaged in similar activities.
Business Domain of SIDBI
The business domain of SIDBI consists of Micro, Small and Medium Enterprises (MSMEs),
which contribute significantly to the national economy in terms of production,
employment and exports. MSME sector is an important pillar of Indian economy as it
contributes greatly to the growth of Indian economy with a vast network of around 4.6
crore units, creating employment of about 11 crore, manufacturing more than 6,000
products, contributing about 45% to manufacturing output and about 40% of exports in
terms of value, about 37% of GDP, directly and indirectly.
The business strategy of SIDBI is to address the financial and non-financial gaps in
MSME eco-system. Financial support to MSMEs is provided by way of
(a) Indirect refinance to banks / Financial Institutions for onward lending to MSMEs and
(b) direct finance in the niche areas like risk capital/equity, sustainable finance,
receivable financing, service sector financing, etc. As on March 31, 2015, SIDBI has
made cumulative disbursements of over Rs.3.90 lakh crore benefitting about 346 lakh

persons. By this way, SIDBI would be complementing and supplementing efforts of

banks/ FIs in meeting diverse credit needs of MSMEs.
Development Outlook
In order to promote and develop the MSME sector, SIDBI adopts a Credit+approach,
under which, besides credit, SIDBI supports enterprise development, skill upgradation,
marketing support, cluster development, technology modernisation, etc., in the MSME
sector through its promotional and developmental support to MSMEs.
MUDRA
MUDRA Vision
To be an integrated financial and support services provider par excellence benchmarked
with global best practices and standards for the bottom of the pyramid universe for their
comprehensive economic and social development.
MUDRA Mission
To create an inclusive, sustainable and value based entrepreneurial culture, in
collaboration with our partner institutions in achieving economic success and financial
security.
MUDRA Purpose
Our basic purpose is to attain development in an inclusive and sustainable manner by
supporting and promoting partner institutions and creating an ecosystem of growth for
micro enterprises sector.
The Genesis of MUDRA
The Union Budget presented by the Honble Finance Minister Shri Arun Jaitley, for FY
2015-16, announced the formation of MUDRA Bank. Accordingly MUDRA was registered
as a Company in March 2015 under the Companies Act 2013 and as a Non Banking
Finance Institution with the RBI on 07 April 2015. MUDRA was launched by the Honble
Prime Minister Shri Narendra Modi on 08 April 2015 at a function held at Vigyan Bhawan,
New Delhi.
Micro Enterprises
Micro enterprises constitute a major economic segment in our country and provides
large employment after agriculture. This segment include micro units engaged in
manufacturing, processing, trading and services sector. It provides employment to
nearly 10 crore people. Many of these units are proprietary/ single ownership or Own
Account enterprises and many a time referred as Non Corporate Small Business sector.
The Non Corporate Small Business Sector

Non-Corporate Small Business Sector (NCSBS) is the economic foundation of India. It is

perhaps one of the largest disaggregated business ecosystems in the world sustaining
around 50 crore lives.
The sector comprises of myriad of small manufacturing units, shopkeepers, fruits /
vegetable vendors, truck & taxi operators, food-service units, repair shops, machine
operators, small industries, artisans, food processors, street vendors and many others.
Formal or institutional architecture has not been able to reach out to them to meet the
financial requirements of this sector. They are largely self financed or rely on personal
networks or moneylenders. Addressing this need will give a big boost to the economy
otherwise this segment would remain unfunded and a portion of the productive labour
force would remain unemployed.
Small business is big business. According to NSSO Survey (2013), there are 5.77 crore
small business units, mostly individual proprietorship. Most of these 'own account
enterprises' (OAE) are owned by people belonging to Scheduled Caste, Scheduled
Tribe or Other Backward Classes. They get very little credit, and that too mostly from
non-formal lenders, or friends and relatives. Providing access to institutional finance to
such micro/small business units would turn them into strong instruments of GDP growth
and also employment.
The Non Corporate Small Business Sector (NCSBS) accounts for a large share of
industrial units. They feed large local and international value chains as well as domestic
consumer markets as suppliers, manufacturers, contractors, distributors, retailers and
service providers. The gross value addition of this sector is 6.28 lakh crore annually.
Mainstreaming these enterprises will not only help in improving the quality of life of
these entrepreneurs but will also contribute substantially to job creation in the economy
thereby achieving higher GDP growth.
The Micro Constraints
The major constraints faced by the myriad of the micro enterprises along the length and
breadth of the country include :
Access to Finance
Skill Development Gaps
Knowledge Gaps
Infrastructure Gaps
Policy Advocacy Needs
Information Asymmetry
Lack of growth orientation
Lack of Market Development / Market Making Entry Level Technologies

The biggest bottleneck to the growth of entrepreneurship in the NCSBS is lack of

financial support to this sector. The support from the Banks to this sector is meagre,
with less than 15% of bank credit going to Micro, Small and Medium Enterprises
(MSMEs).
A vast part of the non-corporate sector operates as unregistered enterprises. They do
not maintain proper Books of Accounts and are not formally covered under taxation
areas. Therefore, the banks find it difficult to lend to them. Majority of this sector does
not access outside sources of finance.
The MUDRA
In the above backdrop the Micro Units Development & Refinance Agency Ltd
(MUDRA) was set up by the Government of India (GoI). MUDRA has been initially
formed as a wholly owned subsidiary of Small Industries Development bank of
India (SIDBI) with 100% capital being contributed by it. Presently, theauthorized
capital of MUDRA is 1000 crores and paid up capital is 750 crore, fully
subscribed by SIDBI. More capital is expected to enhance the functioning of MUDRA.
This Agency would be responsible for developing and refinancing all Micro-enterprises
sector by supporting the finance Institutions which are in the business of lending to
micro / small business entities engaged in manufacturing, trading and service activities.
MUDRA would partner with Banks, MFIs and other lending institutions at state level /
regional level to provide micro finance support to the micro enterprise sector in the
country
Micro Finance is an economic development tool whose objective is to provide income
generating opportunities to the people at the bottom of the pyramid. It covers a range
of services which include, in addition to the provision of credit, many other credit plus
services , financial literacy and other social support services.
Roles and Responsibilities of MUDRA
MUDRA has been formed with primary objective of developing the micro enterprise
sector in the country by extending various support including financial support in the
form of refinance, so as to achieve the goal of funding the unfunded. The GOI Press
release of 2 March 2015 has laid down the roles and responsibilities of MUDRA.
Subsequently GOI has also decided that MUDRA will provide refinance support, monitor
the PMMY data by managing the web portal, facilitate offering guarantees for loans
granted under PMMY and take up other activities assigned to it from time to time.
Accordingly MUDRA has been carrying out these functions over the last one year.
Monitoring of PMMY
Pradhan Mantri Mudra Yojana (PMMY) was launched along with the launching of MUDRA
on 08 April 2015 and the detailed guidelines were issued by Government of India to all
banks and MFIs. MUDRA was given the responsibility of monitoring the programme by
collecting the information on regular basis. Accordingly, MUDRA has put in place a
monitoring portal which captures the data on lending under PMMY, in a granular fashion.

FM Note 6 EXIM
EXIM Bank
Objectives
for providing financial assistance to exporters and importers, and for functioning as
the principal financial institution for coordinating the working of institutions engaged in
financing export and import of goods and services with a view to promoting the
countrys international trade
shall act on business principles with due regard to public interest
: The Export-Import Bank of India Act, 1981
Export-Import Bank of India is the premier export finance institution of the country. It
commenced operations in 1982 under the Export-Import Bank of India Act
1981. Government of India launched the institution with a mandate to not just enhance
exports from India, but also to integrate the countrys foreign trade and investment with
the overall economic growth.
Exim Bank of India has been both a catalyst and a key player in the promotion of cross
border trade and investment. Commencing operations as a purveyor of export credit,
like other Export Credit Agencies in the world, Exim Bank of India has evolved into an
institution that plays a major role in partnering Indian industries, particularly the Small
and Medium Enterprises through a wide range of products and services offered at all
stages of the business cycle, starting from import of technology and export product
development to export production, export marketing, pre-shipment and post-shipment
and overseas investment.
FLAG SHIP PROGRAMS
1. Overseas Investment Finance
2. Project Finance
3. Line of Credit
4. Corporate Banking
5. Buyer's Credit Under NEIA
THE LEADERSHIP (Remember only latest)
Since its inception, Exim Bank has had, at the helm of its affairs, leading banking
professionals as Chief Executive Officers. Shri R.C. Shah, a seasoned banker, with
vast commercial and international banking experience, was the first Chairman and
Managing Director of Exim Bank during January 1982-January 1985. His vision
helped the setting up of the institution as a unique organizational model, with a flat,
non-hierarchical culture, multi-disciplinary approach to problem solving, access to the
latest technology and a climate for innovation.

He was succeeded by Shri Kalyan Banerji, who was the Chairman and Managing
Director during February 1985-April 1993. Shri Banerji had long years of
commercial banking experience, with exposure to international banking. Ms. Tarjani Vakil
took over as the Chairperson and Managing Director of the Bank in August 1993 and
guided the institution in its endeavors for export capability creation, till October 1996.
She was succeeded by Shri Y.B. Desai, who was the Managing Director of the Bank
during August 1997-April 2001. Shri T.C. Venkat Subramanian then took over as
Chairman and Managing Director of Exim Bank in May 2001 and retired in October 2009.
Smt. Ravneet Kaur, then Joint Secretary (IF) Department of Financial Services, Ministry of
Finance headed the institution from November 2009 to March 2010. She was succeeded
by Shri T.C.A. Ranganathan in April 2010 who headed the institution for over 3 years and
retired in November 2013. After the retirement of Shri Ranganathan, Shri Anurag Jain,
Joint Secretary, Department of Financial Services, Ministry of Finance held the interim
charge of CMD till mid-February.
Present Chairman and Managing Director
Shri. Yaduvendra Mathur has been appointed by the Government of India as
Chairman and Managing Director of Export-Import Bank of India (Exim Bank). Prior to
this appointment, Shri. Mathur was Chairman and Managing Director, Rajasthan
Financial Corporation, since 2011.
Shri. Mathur is an Indian Administrative Service Officer of the 1986 batch. A First
Class Graduate in Economics and an MBA in Finance, Shri. Mathur has worked with
Golden Tobacco and Associated Cement Companies in Mumbai between 1982 1984
before joining the Indian Revenue Services (Income Tax) in 1984 and then the IAS in
1986, topping his batch.
He has had long stints in various positions in the Finance Department including Principal
Secretary Finance, Government of Rajasthan. During his postings under the Department
of Economic Affairs (2001-2003) at Cote d'Ivoire and Tunisia, Shri. Mathur worked as
Assistant to the Executive Director. He has had long stints (representing India, Norway,
Denmark, Sweden, Finland and Switzerland) of African Development Bank. He was then
actively engaged with the Export-Import Bank of India in enhancing and promoting
business opportunities for Indian companies in the African continent through Technical
Cooperation Agreements. As Energy Secretary of Rajasthan for over three years, Shri.
Mathur contributed in the setting up of three greenfield power plants in the state. He
was also Planning Secretary, PHED Secretary and Director General Revenue Intelligence
in Government of Rajasthan. He also has experience as Managing Director of a Textile
Mill at Bhilwara and as Chairman of Indira Gandhi Canal Board. Shri. Mathur was
Collector & District Magistrate of search search Search Bhilwara and Bharatpur and has
also served for over three years as Senior Deputy Director at
the Lal Bahadur Shastri National Academy of Administration, Mussoorie.
Shri. Mathur has interests in entrepreneurship development, infrastructure
financing, regulatory issues and in behavioral sciences.
THE BOARD
Exim Bank of India has been guided by expertise at the Board level, by senior policy
makers, expert bankers, leading players in industry and international trade as well as
professionals in exports or imports or financing thereof. As per the Exim Bank Act, at a

particular point in time, the Bank can have a maximum of 16 directors on its Board.
Including Chairman and Managing Director, the Banks Board constitutes of 13 directors
who are appointed by the Government of India, they are five top level Government of
India functionaries, three directors from scheduled commercial banks and four directors
who are industry/trade experts. Three other directors are nominated by the
Reserve Bank of India (RBI), Industrial Development Bank of India (IDBI) and
ECGC Ltd respectively.

FM Note 7 NABARD
NABARD
Genesis
At the instance of Government of India and Reserve Bank of India
(RBI),constituted a committee to review the arrangements for institutional credit for

agriculture and rural development (CRAFICARD) on 30 March 1979, under

theChairmanship of Shri B.Sivaraman, former member of Planning
Commission,Government of India to review the arrangements for institutional credit for
agriculture and rural development.
The Committee, in its interim report, submitted on 28 November 1979, felt the need
for a new organisational device for providing undivided attention, forceful direction and
pointed focus to the credit problems arising out of integrated rural development and
recommended the formation of National Bank for Agriculture and Rural
Development(NABARD).
The Parliament, through Act,61 of 1981, approved the setting up of NABARD. The
bank came into existence on 12 July 1982 by transferring the agricultural credit
functions of RBI and refinance functions of the then Agricultural Refinance and
Development Corporation (ARDC). NABARD was dedicated to the service of the
nation by the late Prime Minister Smt. Indira Gandhi on 05 November 1982.
NABARD was set up with an initial capital of 100 crore. Consequent to the revision in
the composition of share capital between Government of India and RBI, the paid up
capital as on 31 March 2015, stood at 5000 crore with Government of India holding
4,980 crore (99.60%) and Reserve Bank of India 20.00 crore (0.40%).
Mission
Promote sustainable and equitable agriculture and rural prosperity through effective
credit support, related services, institution development and other innovative initiatives.
Functions of NABARD
1. Financial
2. Developmental
3. Supervisory
1. Financial
A. Refinance
Short and Medium Term Loans
Long Term Loans
Eligible schemes for Refinance under Non-farm Sector Automatic Refinance Scheme
(ARF)
B. Direct Finance
Loans for Food Parks and Food Processing Units in Designated Food Parksnew
Loans to Warehouses, Cold Storage and Cold

Chain Infrastructure
Credit Facilities to Marketing Federations
Rural Infrastructure Development Fund
Direct Refinance to Cooperative Banks
Financing and Supporting Producer Organisations
More Direct Finance
2. Developmental
Financial
Developmental
Supervisory
Institutional Development
Farm Sector
Non-Farm Sector
Financial Inclusion
Micro Credit Innovations
Research and Development
Core Banking Solution to
Co-operative Banks
Climate Change
3. Supervisory
Supervisory Function
Objectives of Supervision
Supervisory Process
Credit Monitoring Arrangements (CMA)
Board of Supervision (for SCBs, DCCBs and RRBs)
Other Initiatives

Penalties imposed on CCBs 2011

Latest Updates
Supervisory Interventions and other initiatives
Recent initiatives taken by NABARD in the following areas
Loans for Food Parks and Food Processing
Units in Designated Food Parksnew
Loans to Warehouses, Cold Storage and Cold
Chain Infrastructure
RuPay KCC
Participatory Watershed Management
Self Help Group-2
Core Banking Solution to CCBs
PACS as Multi-Service Societies
Producers Organisation
Venture Capital Fundnew
Warehousing Infrastructure
Financial Literacy Material for Financial Inclusion
Government Sponsored Schemes of NABARD
1. Investment Credit
Dairy Enterpreneurship Development Scheme
Commercial production units of organic inputs
Rural godowns
Agriculture Marketing and Infrastructure Grading and Standardisations
Agriclinic and Agribusiness Centres Scheme
Solar Schemes
Capital Investment Subsidy Scheme

Pending List
Agricultural Marketing Infrastructure
National Livestock Missionnew
GSS- Complaints received from Publicnew
2. Production Credit
Sugar Package
Interest subvention Scheme
Weavers Package
Revival, Reform, Restructuring of the Handloom Sector
3. Farm Sector
Cattle Development Programme
Multi Activity Approach for Poverty Alleviation(MAAPA)
4. Non Farm Sector
Swarojgar Credit Card Scheme
Credit Linked Capital Subsidy Scheme (CLCSS)
Livelihood Advancement Business School (LABS)

FM Note 8 NHB and Housing Indices

National Housing Bank (NHB)
National Housing Bank (NHB), a wholly owned subsidiary of Reserve Bank of India
(RBI), was set up by an Act of Parliament in 1987. NHB is an apex financial
institution for housing. It commenced its operations in 9th July 1988. NHB has
been established with an objective to operate as a principal agency to promote housing
finance institutions both at local and regional levels and to provide financial and other
support incidental to such institutions and for matters connected therewith
NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps
surveillance through On-site & Off-site Mechanisms and co-ordinates with other
Regulators.
Genesis

The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985
90)identified the non-availability of long-term finance to individual households on any
significant scale as a major lacuna impeding progress of the housing sector and
recommended the setting up of a national level institution.
The Committee of Secretaries considered' the recommendation and set up the High
Level Group under the Chairmanship of Dr. C. Rangarajan, the then Deputy
Governor, RBI to examine the proposal and recommended the setting up of
National Housing Bank as an autonomous housing finance institution. The
recommendations of the High Level Group were accepted by the Government of India.
The Honble Prime Minister of India, while presenting the Union Budget for 1987-88 on
28 February 1987 announced the decision to establish the National Housing Bank (NHB)
as an apex level institution for housing finance. Following that, the National Housing
Bank Bill (91 of 1987) providing the legislative framework for the establishment of NHB
was passed by Parliament in the winter session of 1987 and with the assent of the
Honble President of India on 23 December 1987, became an Act of Parliament.
The National Housing Policy, 1988 envisaged the setting up of NHB as the Apex level
institution for housing.
In pursuance of the above, NHB was set up on 9 July 1988 under the National Housing
Bank Act, 1987. NHB is wholly owned by Reserve Bank of India, which contributed the
entire paid-up capital. The general superintendence, direction and management of the
affairs and business of NHB vest, under the Act, in a Board of Directors. The Head Office
of NHB is at New Delhi.
Objectives
NHB has been established to achieve, inter-Alia, the following objectives:
To promote a sound, healthy, viable and cost effective housing finance system to cater
to all segments of the population and to integrate the housing finance system with the
overall financial system.
To promote a network of dedicated housing finance institutions to adequately serve
various regions and different income groups.
To augment resources for the sector and channelise them for housing.
To make housing credit more affordable.
To regulate the activities of housing finance companies based on regulatory and
supervisory authority derived under the Act.
To encourage augmentation of supply of buildable land and also building materials for
housing and to upgrade the housing stock in the country.
To encourage public agencies to emerge as facilitators and suppliers of serviced land, for
housing.

RESIDEX
RESIDEX is the first index of residential property prices in India. It was launched
byNational Housing Bank (NHB) of India in 2007 for tracking prices of residential
properties in India, in view of the prominence of housing and real estate in creating both
physical and financial assets and its role in overall National wealth. RESIDEX started with
a pilot study in 5 major cities, subsequently expanded to include more cities and by Q4:
2012-13 the coverage was extended to 26 cities of India.
NHB collects primary data on housing prices from real estate agents by commissioning
the services of private consultancy/research organizations of national repute. NHB also
collects house price data from housing finance companies and banks based on housing
loans contracted by these institutions. Off-late, NHB initiated collection of property price
data from Central Registry of Securitization, Asset Reconstruction and Security
Interest of India (CERSAI). Actual transactions prices are considered for construction
of RESIDEX. The housing prices for various administrative zones/property tax zones in
each city are compiled and RESIDEX is constructed for each city using the weighted
average methodology with Price Relative Method using 2007 as base year.
Presently, the All India RESIDEX is not constructed. NHB is in an attempt to expand
RESIDEX to 63 cities which are covered under the Jawaharlal Nehru National Urban
Renewal Mission, in a phased manner. It is envisaged to develop a residential property
price index for select cities and subsequently an all India composite index by suitably
combining these city level indices to capture the relative temporal change in the prices
of houses at different levels.
House Price Index (HPI)
In India, it is mandatory to register all properties with the concerned registration
authorities and hence these authorities have transaction details of properties in their
jurisdictions. The Reserve Bank compiles House Price Index based on property
transaction registration data obtained from Department of Registration and
Stamps of State Governments of select ten cities. The transaction level data collected
from various centres include, date of registration, registration number, address, survey
no., area, sellers name, buyers name, consideration amount (transacted price) and
market value
Residential Property Price Index (RPPI)
Reserve Bank of India initiated a Residential Asset Price Monitoring Survey (RAPMS) to
collect sale/resale prices of residential properties from select scheduled banks and
housing finance companies based on their housing loan transactions.
The survey is conducted on a quarterly basis and it collects data related to individual
housing loan transactions disbursed by select 35 banks/HFCs in select 13 cities. The
information collected includes floor space area of the structure, date of first
disbursement of loan, cost of property, valuated/ estimated price of the property by the
bank, first borrower (male/ female/ partnership firm/proprietary
concerns/company/others), occupation of first borrower (employed/self-employed/
others), gross assessed monthly income, loan amount, maturity period, Equated
Monthly Installment (EMI) are also collected in the survey.

The survey data is used to compile City-wise and All-India Residential Property
Price Index (RPPI) and other useful indicators such as Loan-to-Value Ratio (LTV), EMIto-Income ratio, House Price-to-Income ratio and Loan-to-Income ratio, which have
internal usage with policy implications. The main advantage of this survey is the
availablity of electronic data in a much shorter time span and thereby quicker
compilation of RPPI vis--vis other indices. Further, availability of data required for
computation of LTV, EMI-to-Income ratio, House Price-to-Income ratio etc. is a unique
feature of RAPMS.
FM Note 9 The banking system in India
The banking system in India is significantly different from other countries.
1. Reserve Bank of India:
Reserve Bank of India is the Central Bank of our country. It was established on 1st April
1935 under the RBI Act of 1934. It holds the apex position in the banking structure. RBI
performs various developmental and promotional functions.
It has given wide powers to supervise and control the banking structure. It occupies the
pivotal position in the monetary and banking structure of the country. In many countries
central bank is known by different names.
For example, Federal Reserve Bank of U.S.A, Bank of England in U.K. and Reserve Bank
of India in India. Central bank is known as a bankers bank. They have the authority to
formulate and implement monetary and credit policies. It is owned by the government of
a country and has the monopoly power of issuing notes.
2. Commercial Banks:
Commercial bank is an institution that accepts deposit, makes business loans and offer
related services to various like accepting deposits and lending loans and advances to
general customers and business man.
These institutions run to make profit. They cater to the financial requirements of
industries and various sectors like agriculture, rural development, etc. it is a profit
making institution owned by government or private of both. Commercial bank includes
public sector, private sector, foreign banks and regional rural banks:
a. Public sector banks:
It includes SBI, associate banks of SBI (merger process started) and nationalized banks.
b. Private sector banks:
Private sector banks are those whose equity is held by private shareholders. For
example, ICICI, HDFC etc. Private sector bank plays a major role in the development of
Indian banking industry.
c. Foreign Banks:

Foreign banks are those banks, which have their head offices abroad. CITI bank, HSBC,
Standard Chartered etc. are the examples of foreign bank in India.
d. Regional Rural Bank (RRB):
These are state sponsored regional rural oriented banks. They provide credit for
agricultural and rural development. The main objective of RRB is to develop rural
economy. Their borrowers include small and marginal farmers, agricultural labourers,
artisans etc. NABARD holds the apex position in the agricultural and rural development.
3. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act in 1904. They are organised
and managed on the principal of co-operation and mutual help. The main objective of
co-operative bank is to provide rural credit.
The cooperative banks in India play an important role even today in rural co-operative
financing. The enactment of Co-operative Credit Societies Act, 1904, however, gave the
real impetus to the movement. The Cooperative Credit Societies Act, 1904 was amended
in 1912, with a view to broad basing it to enable organisation of non-credit societies.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
iii. Primary cooperative banks and the base or local level.
4. Scheduled and Non-Scheduled banks:
A bank is said to be a scheduled bank when it has a paid up capital and reserves as per
the prescription of RBI and included in the second schedule of RBI Act 1934. Nonscheduled bank are those commercial banks, which are not included in the second
schedule of RBI Act 1934.
5. Development banks and other financial institutions:
A development bank is a financial institution, which provides a long term funds to the
industries for development purpose. This organisation includes banks like IDBI, ICICI,
IFCI etc. State level institutions like SFCs SIDCs etc. It also includes investment
institutions like UTI, LIC, and GIC etc.
Current developments related will be covered in respective test as well as in
full syllabus tests.