1.

What is an '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. In an initial public offering, the issuer, or company raising capital,
brings in an underwriting firm or investment bank, to help determine the
best type of security to issue, offering price, amount of shares and
timeframe for the market offering.

When a company starts the IPO process, a specific set of events occurs.
The chosen underwriters facilitate these steps.

 An external initial public offering team is formed, comprising an

underwriter, lawyers, certified public accountants and Securities
and Exchange Commission experts.
 Information regarding the company is compiled, including
financial performance and expected future operations. This
becomes part of the company prospectus, which is circulated for
review.
 The financial statements are submitted for an official audit.
 The company files its prospectus with the SEC and sets a date for
the offering.

Example of an Initial Public Offering vs. a Direct Listing

A direct listing, such as the one completed by Spotify in 2018, occurs

when a company simultaneously lists its shares on an exchange and
offers ownership for the first time. Direct listings do not follow the
normal capital-raising route as an IPO because direct listings do not raise
additional capital for the company. In contrast, IPOs are capital raising
where new equity risk capital is issued to new owners, and the firm
keeps the value of the equity raise, less applicable fees, taxes and
expenses.

The act of raising investment capital during an IPO is known as

underwriting. Underwriting is the process of raising additional
investment capital using the services of an investment bank as the
underwriter. In an IPO, banks establish the market clearing price for an
IPO based on an aggregate of institutional investor indications of the
price they would pay for an equity allocation of the pre-IPO company.

2. What is 'Follow On Public Offer (FPO)'

A follow-on public offer (FPO) is the issuance of shares to investors by

a public company that is currently listed on a stock market exchange. An
FPO is a stock issue of additional shares made by a company that is
already publicly listed and has gone through the IPO process. FPOs are
popular methods for companies to raise additional equity capital in
capital markets through an issue of stock.

BREAKING DOWN 'Follow On Public Offer (FPO)'

Public companies can also take advantage of an FPO through an offer

document. FPOs should not be confused with IPOs, the initial public
offering of equity to the public. FPOs are additional issues made after a
company is established on an exchange.

Two Main Types of Follow-On Public Offers

There are two main types of follow-on public offers. The first is dilutive
to investors, as the company’s Board of Directors agrees to increase the
share float level or the number of shares available. This kind of follow-
on public offering seeks to raise money to reduce debt or expand the
business. Resulting is an increase in the number of shares outstanding.

The other type of follow-on public offer is non-dilutive. This approach is

useful when directors or substantial shareholders sell off privately held
shares. With a non-dilutive offer, all shares sold are already in existence.
Commonly referred to as a secondary market offering, there is no benefit
to the company or current shareholders.
By paying attention to the identity of the sellers on offerings, an investor
can determine whether the offering will be dilutive or non-dilutive to
their holdings.

Commonality of Follow-On Offerings

Follow-on offerings are common in the investment world. They provide

an easy way for companies to raise equity that can be used for common
purposes. Companies announcing secondary offerings may see their
share price fall as a result. Shareholders often react negatively to
secondary offerings because they dilute existing shares and many are
introduced below market prices.

In 2013, follow-on offerings produced $201.7 billion in equity raised for

companies. This marked the most significant amount in four years.
Facebook largest offerings, sold $3.9 billion in additional equity.
Secondary offerings are good for investment banks, due to the charging
of trading fees. Goldman Sachs managed $24.7 billion worth of
secondary offerings in 2013 to lead the way.

In 2015, many companies had follow-on offerings after going public less
than a year prior. Shake Shack was one company that saw shares fall
after news of a secondary offering. Shares fell 16% on news of a
substantial secondary offering that came in below the existing share
price.

1 & 2. FPO vs IPO

IPO is Initial Public Offering and FPO is Follow-up Public Offering.

IPO comes first to Follow-up Public Offering as an FPO can only be
given if there is an initial public offering.

IPOs are more profitable than FPOs. A company makes an IPO for
compiling money and an FPO for adding to the initial public offerings.
Initial Public Offering is the first sale whereas the Follow-up Public
Offering is the second sale for expanding businesses.

IPOs are risky investments as an individual investor cannot predict what

will happen to the initial trading in the coming days. But in the case of
FPOs, the risk is lower as an investor already has an idea about the
investment and future growth of the company.

An Initial Public Offering is considered to be a period of transitory

growth and so there is a certain uncertainty regarding the future.

A company brings out an FPO for further growth. If a company is

coming out with an FPO, it also means that the company is short of
funds. FPO is raised for more funds or money or for establishing new
projects. FPOs can be of two types – dilutive and non-dilutive. In a
dilutive FPO, the board of directors of a company agrees to increase the
shares by selling more equity. A non-dilutive FPO means selling
privately held shares of the directors or insiders of a company.

In IPO and FPO, the company never repays the capital but gives the
shareholders a right to future profits of the company.

Summary:

1.IPO is Initial Public Offering and FPO is Follow-up Public Offering.

2.A company makes an IPO for compiling money and an FPO for
adding to the initial public offerings.
3.If a company is coming out with an FPO, it also means that the
company is short of funds. An FPO is raised for more funds or money or
for establishing new projects.
4.Initial Public Offering is the first sale whereas the Follow-up Public
Offering is the second sale for expanding businesses.
5.IPOs are risky investments as an individual investor cannot predict
what will happen to the initial trading in the coming days.
6.In the case of FPOs, the risk is lower as an investor already has an idea
about the investment and future growth of the company.
7.Initial Public Offerings are more profitable than Follow up Public
Offerings.

3. What are 'Open Market Operations - OMO'

Open market operations (OMO) refer to the buying and selling of

government securities in the open market in order to expand or contract
the amount of money in the banking system. Securities' purchases inject
money into the banking system and stimulate growth, while sales of
securities do the opposite and contract the economy.

The Federal Reserve (Fed) facilitates this process and uses this
technique to adjust and manipulate the federal funds rate, which is the
rate at which banks borrow reserves from one another.

BREAKING DOWN 'Open Market Operations - OMO'

Open market operations (OMO) is the most flexible and most common
tool that the Fed uses to implement and control monetary policy in the
United States. However, the discount rate and reserve requirements are
also used.

The Fed can use various forms of OMO, but the most common OMO is
the purchase and sale of government securities. Buying and selling
government bonds allows the Fed to control the supply of reserve
balances held by banks, which helps the Fed increase or decrease short-
term interest rates as needed.

Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the Fed's committee

that decides on monetary policy. The FOMC enacts its monetary policy
by setting a target federal funds rate and then implementing OMO,
discount rate, or reserve requirement strategies to move the current
federal funds rate to target levels. The federal funds rate is extremely
important to control because it affects most other interest rates in the
United States, including the prime rate, home loan rates, and car loan
rates.

The FOMC normally uses Open Market Operations first when trying to
hit a target federal funds rate. It does this by enacting either an
expansionary monetary policy or a contractionary monetary policy.

Expansionary Monetary Policy

The Fed enacts an expansionary monetary policy when the FOMC aims
to decrease the federal funds rate. The Fed purchases government
securities through private bond dealers and deposits payment into the
bank accounts of the individuals or organizations that sold the bonds.
The deposits become part of the cash that commercial banks hold at the
Fed, and therefore increase the amount of money that commercial banks
have available to lend. Commercial banks actively want to loan cash
reserves and try to attract borrowers by lowering interest rates, which
includes the federal funds rate.

When the amounts of funds available to loan increases, interest rates go

down. A decrease in the cost of borrowing means that more people and
businesses have access to funds at a cheaper rate. This leads to less
savings and more spending. An increased spending fuels the economy,
leading to lower unemployment.

Contractionary Monetary Policy

The Fed enacts a contractionary monetary policy when the FOMC looks
to increase the federal funds rate and slow the economy. The Fed sells
government securities to individuals and institutions, which decreases
the amount of money left for commercial banks to lend. This increases
the cost of borrowing and increases interest rates, including the federal
funds rate.
When the cost of debt increases, individuals and businesses are
discouraged from borrowing, and will opt to save their money. The
higher interest rate means that the interest in savings accounts and
certificates of deposit (CDs) will also be higher. To take advantage of
the savings rates, entities will spend less in the economy and invest less
in the capital markets, thereby, slowing inflation and economic growth.

4. What is 'Arbitrage'

Arbitrage is the simultaneous purchase and sale of an asset to profit from

an imbalance in the price. It is a trade that profits by exploiting the price
differences of identical or similar financial instruments on different
markets or in different forms. Arbitrage exists as a result of market
inefficiencies and would therefore not exist if all markets were perfectly
efficient.

BREAKING DOWN 'Arbitrage'

Arbitrage occurs when a security is purchased in one market and

simultaneously sold in another market at a higher price, thus considered
to be risk-free profit for the trader. Arbitrage provides a mechanism to
ensure prices do not deviate substantially from fair value for long
periods of time. With advancements in technology, it has become
extremely difficult to profit from pricing errors in the market. Many
traders have computerized trading systems set to monitor fluctuations in
similar financial instruments. Any inefficient pricing setups are usually
acted upon quickly, and the opportunity is often eliminated in a matter of
seconds. Arbitrage is a necessary force in the financial marketplace.

To understand more about this concept and different types of arbitrage,

read Trading the Odds With Arbitrage.

A Simple Arbitrage Example

As a simple example of arbitrage, consider the following. The stock of
Company X is trading at $20 on the New York Stock Exchange (NYSE)
while, at the same moment, it is trading for $20.05 on the London Stock
Exchange (LSE). A trader can buy the stock on the NYSE and
immediately sell the same shares on the LSE, earning a profit of 5 cents
per share. The trader could continue to exploit this arbitrage until the
specialists on the NYSE run out of inventory of Company X's stock, or
until the specialists on the NYSE or LSE adjust their prices to wipe out
the opportunity.

A Complicated Arbitrage Example

Though this is not the most complicated arbitrage strategy in use, this
example of triangular arbitrage is more complex than the above
example. In triangular arbitrage, a trader converts one currency to
another at one bank, converts that second currency to another at a second
bank, and finally converts the third currency back to the original at a
third bank. The same bank would have the information efficiency to
ensure all of its currency rates were aligned, requiring the use of
different financial institutions for this strategy.

For example, assume you begin with $2 million. You see that at three
different institutions the following currency exchange rates are
immediately available:

 Institution 1: Euros/USD = 0.894

 Institution 2: Euros/British pound = 1.276
 Institution 3: USD/British pound = 1.432

First, you would convert the $2 million to euros at the 0.894 rate, giving
you 1,788,000 euros. Next, you would take the 1,788,000 euros and
convert them to pounds at the 1.276 rate, giving you 1,401,254 pounds.
Next, you would take the pounds and convert them back to U.S. dollars
at the 1.432 rate, giving you $2,006,596. Your total risk-free arbitrage
profit would be $6,596.
5. What is 'Cross-Sell'

To cross-sell is to sell related or complementary products to an existing

customer. Cross-selling is one of the most effective methods of
marketing. In the financial services industry, examples of cross-selling
include selling different types of investments or products to investors or
tax preparation services to retirement planning clients.

BREAKING DOWN 'Cross-Sell'

If done efficiently, cross-selling can translate into significant profits for

stockbrokers, insurance agents, and financial planners. Licensed income
tax preparers can offer insurance and investment products to their tax
clients, and this is among the easiest of all sales to make. Effective
cross-selling is a good business practice and is a useful financial
planning strategy, as well. Often, up-selling is confused with cross-
selling. Up-selling is the act of selling a more comprehensive or higher-
end version of the current product. Cross-selling is the act of selling a
different product than what exists to provide an additional benefit to the
customer.

The Emergence of Cross-Selling in Financial Services

Until the 1980s, the financial services industry was easy to navigate,
with banks offering savings accounts, brokerage firms selling stocks and
bonds, credit card companies pitching credit cards, and life insurance
companies selling life insurance. That changed when Prudential
Insurance Company, the most prominent insurance company in the
world at that time, acquired a medium-sized stock brokerage firm call
Bache Group Inc. Prudential’s purpose was to create cross-selling
opportunities for its life insurance agents and Bache’s stockbrokers. It
was the first significant effort at creating broad service offerings for
financial services. Subsequently, other big mergers followed, such as
Sears Roebuck (credit cards) and Dean Witter (stocks, bonds, and
money market funds), and American Express Company (credit cards)
with Shearson Loeb Rhoades (stocks and bonds).

The mergers of Wells Fargo & Co. with Wachovia Securities and Bank
of America with Merrill Lynch Wealth Management occurred at a time
of declining profits for both banks. The acquisitions held the intent of
achieving greater scale in the sale of their banking products. To a large
extent, they were aiming to expand their retail distribution arms by
buying large and established distribution channels. Both banks placed a
heavy emphasis on cross-selling as a strategy to regain profitability.

With few exceptions, cross-selling failed to catch on within many of the

merged companies. Conflicting sales cultures and resentment among
sales representatives, forced to sell outside their area of expertise, have
been challenging obstacles to overcome. As an example, Bank of
America lost Merrill Lynch brokers through insistence that the brokers
cross-sell bank products to their investment clients. Wells Fargo is more
effective instituting cross-selling, because its merger brought together
two similar cultures.

6. What is 'Suggestive Selling (Upselling)'

Suggestive selling (also known as add-on selling or upselling) is a sales

technique where the employee asks the customer if they would like to
include an additional purchase or recommends a product which might
suit the client. Suggestive selling is used to increase the purchase
amount of the client and revenues of the business. Often, the additional
sale is much smaller than the original purchase and is a complementary
product.

BREAKING DOWN 'Suggestive Selling (Upselling)'

The idea behind the technique is that it takes marginal effort compared
with the potential additional revenue. This is because getting the buyer
to purchase (often seen as the most difficult part) has already been done.
After the buyer is committed, an additional sale that is a fraction of the
original purchase is much more likely.

Examples of Suggestive Selling

Suggestive selling can take on many forms depending on the business

category. At a retail store, an employee could suggest accessories to
accompany a piece of apparel, such as a scarf and gloves to go with a
new coat. In the restaurant setting, the waitstaff could point out side
dishes to complement the main course a patron ordered. Similarly, at
bars where food is served, bartenders might recommend appetizers to
accompany drinks that were ordered, or vice versa. Bartenders may also
suggest higher-end, pricier brands of beverages that are comparable to
the type the patron has ordered.

This sales technique can be readily found in the automobile sales

industry. A salesperson, after securing a customer’s commitment to
purchase a vehicle, might offer to add supplements such as an extended
warranty and roadside service. Depending on the make and model, they
might also suggest including more features beyond the base model of the
car. This could include buying a vehicle with more advanced audio
equipment, a communications package that connects the driver’s phone
to the vehicle’s dashboard, a rearview camera, a more powerful engine,
or seat warmers. They might also try to convince them to upgrade a
different model that includes such features and other at a higher price
compared with the original model they considered.

Travel planning, whether done through an agency or online platform,

can feature suggestive selling. Typically, the travel booker will be
offered recommendations on package deals for lodging and airfare,
traveler's insurance, ground transportation at the destination, as well as
suggestions on tours to book and other sites to visit while on their
journey. For recurring events, the traveler may be offered special rates to
book in advance the same trip for the following year.
5 & 6. What is the difference between upselling and cross-selling?

Definition: Upselling is the practice

of encouraging customers to purchase a comparable higher-end product
than the one in question, while cross-selling invites customers to buy
related or complementary items. Though often used interchangeably,
both offer distinct benefits and can be effective in tandem. Upselling and
cross-selling are mutually beneficial when done properly, providing
maximum value to customers and increasing revenue without the
recurring cost of many marketing channels.

Cross-selling

Cross-selling identifies products that satisfy additional, complementary

needs that are unfulfilled by the original item. For example, a comb
could be cross-sold to a customer purchasing a blow dryer. Oftentimes,
cross-selling points users to products they would have purchased
anyways; by showing them at the right time, a store ensures they make
the sale.

Cross-selling is prevalent in every type of commerce, including banks

and insurance agencies. Credit cards are cross-sold to people registering
a savings account, while life insurance is commonly suggested to
customers buying car coverage.
In ecommerce, cross-selling is often utilized on product pages, during
the checkout process, and in lifecycle campaigns. It is a highly-effective
tactic for generating repeat purchases, demonstrating the breadth of a
catalog to customers. Cross-selling can alert users to products they didn't
previously know you offered, further earning their confidence as the best
retailer to satisfy a particular need.

Up-selling

Upselling often employs comparison charts to market higher-end

products to customers. Showing visitors that other versions or models
may better fulfill their needs can increase AOV and help users walk
away more satisfied with their purchase. Companies that excel at
upselling are effective at helping customers visualize the value they will
get by ordering a higher-priced item.

Cross-selling and upselling are similar in that they both focus on

providing additional value to customers, instead of limiting them to
already-encountered products. In both cases, the business objective is to
increase order value inform customers about additional product options
they may not already know about. The key to success in both is to truly
understand what your customers value and then responding with
products and corresponding features that truly meet those needs.

7. What is a 'Letter Of Credit'

A letter of credit is a letter from a bank guaranteeing that a buyer's

payment to a seller will be received on time and for the correct amount.
In the event that the buyer is unable to make payment on the purchase,
the bank will be required to cover the full or remaining amount of the
purchase. Due to the nature of international dealings, including factors
such as distance, differing laws in each country, and difficulty in
knowing each party personally, the use of letters of credit has become a
very important aspect of international trade.

BREAKING DOWN 'Letter Of Credit'

Because a letter of credit is typically a negotiable instrument, the issuing

bank pays the beneficiary or any bank nominated by the beneficiary. If a
letter of credit is transferrable, the beneficiary may assign another entity,
such as a corporate parent or a third party, the right to draw.

Funding a Letter of Credit

Banks typically require a pledge of securities or cash as collateral for

issuing a letter of credit. Banks also collect a fee for service, typically a
percentage of the size of the letter of credit. The International Chamber
of Commerce Uniform Customs and Practice for Documentary Credits
oversees letters of credit used in international transactions.

Example of a Letter of Credit

Citibank offers letters of credit for buyers in Latin America, Africa,

Eastern Europe, Asia and the Middle East who may have difficulty
obtaining international credit on their own. Citibank’s letters of credit
help exporters minimize the importer’s country risk and the issuing
bank’s commercial credit risk. Letters of credit are typically provided
within two business days, guaranteeing payment by the confirming
Citibank branch. This benefit is especially valuable when a client is
located in a potentially unstable economic environment.

Types of Letters of Credit

A commercial letter of credit is a direct payment method in which the

issuing bank makes the payments to the beneficiary. In contrast, a
standby letter of credit is a secondary payment method in which the
bank pays the beneficiary only when the holder cannot.
A revolving letter of credit lets the customer make any number of draws
within a certain limit during a specific time period. A traveler’s letter of
credit guarantees the issuing banks will honor drafts made at certain
foreign banks.

A confirmed letter of credit involves a bank other than the issuing bank
guaranteeing the letter of credit. The second bank is the confirming
bank, typically the seller’s bank. The confirming bank ensures payment
under the letter of credit if the holder and the issuing bank default. The
issuing bank in international transactions typically requests this
arrangement.

8. What is a 'Bank Guarantee'

A bank guarantee is a guarantee from a lending institution ensuring the

liabilities of a debtor will be met. In other words, if the debtor fails to
settle a debt, the bank covers it. A bank guarantee enables the customer,
or debtor, to acquire goods, buy equipment or draw down loans, and
thereby expand business activity.

BREAKING DOWN 'Bank Guarantee'

A bank guarantee is a lending institution’s promise to cover a loss if a

borrower defaults on a loan. The guarantee lets a company buy what it
otherwise could not, helping business growth and promoting
entrepreneurial activity. For example, Company A is a new restaurant
wanting to buy $3 million in kitchen equipment. The equipment vendor
requires Company A to provide a bank guarantee to cover payments
before shipping the equipment. Company A requests a guarantee from
the lending institution keeping its cash accounts. The bank essentially
cosigns the purchase contract with the vendor.

Types of Bank Guarantees

A direct guarantee is typically used in foreign or domestic business and

issued directly to the beneficiary. The guarantee applies when the bank’s
providing security is not reliant on the existence, validity and
enforceability of the main obligation. Guarantees are often chosen for
cross-border transactions since the beneficiary asserts claims rapidly due
to the general nature of the guarantee. A direct guarantee is easier to
adapt to foreign legal systems and practices due to not having form
requirements.

An indirect guarantee is often issued for export business, especially

when government agencies or public entities are beneficiaries. Many
countries do not accept foreign banks and guarantors because of legal
issues or other form requirements. With an indirect guarantee, a second
bank, typically a foreign bank with a head office in the beneficiary’s
country of domicile, is utilized.

Examples of Bank Guarantees

*A bid bond prevents companies from tendering bids and not accepting
or executing the awarded contract.

*A performance bond serves as collateral for the buyer’s costs incurred

if services or goods are not provided as agreed in the contract.

*An advance payment guarantee acts as collateral for reimbursing

advance payment from the buyer if the seller does not supply the
specified goods per the contract.

*A warranty bond serves as collateral ensuring ordered goods are

delivered as agreed.

*A payment guarantee assures a seller the purchase price is paid on a set

date.

*A credit security bond serves as collateral for repaying a loan.

*A rental guarantee serves as collateral for rental agreement payments.

*A confirmed payment order is an irrevocable obligation where the bank
pays the beneficiary a set amount on a given date on the client’s behalf.

9. Amortization

DEFINITION of 'Amortization'

Amortization is an accounting technique used to lower the cost value of

a finite life or intangible asset incrementally through scheduled charges
to income. Amortization is the paying off of debt with a fixed repayment
schedule in regular installments over time like with a mortgage or a car
loan. It also refers to the spreading out of capital expenses for intangible
assets over a specific duration — usually over the asset's useful life —
for accounting and tax purposes. Amortization can refer to the paying
off of debt, over time, in regular installments of interest and principal
adequate enough to repay the loan in full by maturity. Amortization can
also mean the deduction of capital expenses over the asset's useful life
where it measures the consumption of an intangible asset's value, such as
goodwill, a patent or copyright.

BREAKING DOWN 'Amortization'

Amortization is like depreciation, which is used for tangible assets, and

depletion, which is used for natural resources. When businesses amortize
expenses, it helps tie the asset's costs to the revenues it generates. For
example, if a company buys a ream of paper, it writes off the cost in the
year of purchase and generally uses all the paper the same year.
Conversely, with a large asset, the business reaps the rewards of the
expense for years. Thus, it writes off the expense incrementally over the
useful life of that asset, tangible or intangible.

Amortization of Loans

With auto- and home-loan payments, most of the monthly payment goes
toward interest early in the loan. With each subsequent payment, a
greater percentage of the payment goes toward the loan's principal. For
example, on a five-year $20,000 auto loan at 6 percent interest, $286.66
of the first $386.66 monthly payment goes to principal while $100 goes
to interest. In the last monthly payment, $384.73 goes to principal and
$1.92 goes to interest. Mortgage amortization works a similar way.

Amortization and the Internal Revenue Service

The Internal Revenue Service allows taxpayers to take a deduction for

certain amortized expenses: geological and geophysical expenses
incurred in oil and natural gas exploration, atmospheric pollution control
facilities, bond premiums, research and development, lease acquisition,
forestation and reforestation, and certain intangibles such as goodwill,
patents, copyrights and trademarks. One can calculate amortization
using most modern financial calculators, spreadsheet software packages
such as Microsoft Excel, or amortization charts and tables.

To deduct amortization costs, the IRS requires tax filers to complete Part
VI of Form 4562. The IRS has schedules dictating which percentage of
an asset's cost a business should amortize each year. These schedules
break intangible assets into categories with slightly different
amortization rates.

10. What is a 'Moratorium'

A moratorium is a temporary suspension of an activity or a law until

future events warrant lifting the suspension or issues regarding the
activity have been resolved. A moratorium may be imposed by a
government or by a business.

Moratoriums are often enacted in response to financial hardships.

Financial moratoriums can include voluntarily imposed conditions set by
a business designed to lower costs for a period. They may also be as well
as legally mandated requirements to cease specific financial activities,
such as attempts to collect a debt.

Next Up
 1. Chapter 11
2. Housing And Economic Recovery Act ...
3. Bankruptcy Abuse Prevention And ...
4. Bankruptcy Trustee
5.

BREAKING DOWN 'Moratorium'

Usually taken in times of economic crisis, such as an earthquake or

flood, a moratorium provides people with time to stabilize their finances
before dealing with potential problems, such as a mortgage default and
foreclosure.

In bankruptcy law, a moratorium refers to a legally binding halt of the

right to collect a debt. The placement of a moratorium allows the
individual or entity filing for bankruptcy an opportunity to review
current standings. This time-out protects the debtor during the creation
of a plan for recovery. A moratorium of this type is typical in Chapter 13
bankruptcy filings where the debtor is looking to restructure the
repayments of any associated debt obligations.

Emergency Moratoriums

A government official may declare a moratorium on certain financial

activities in the event of a crisis. This can include protecting consumers
in cases where a state of emergency is declared after a natural disaster or
spending changes in response to a financial crisis.

For example, in 2016, the governor of Puerto Rico issued an order to

limit the withdrawal of funds from the Government Development Bank.
This emergency moratorium established a hold on all withdrawals that
were not related to bank principal or interest payments, thereby
lessening the risks associated with the bank's liquidity.
Examples of Voluntary Moratoriums in Business

If a company is experiencing financial difficulties, it can place a

moratorium on certain activities to lower costs. The business may limit
discretionary spending, or it may cut back on company-provided travel
benefits and non-essential training.

Moratoriums of this nature, designed solely to lessen unnecessary

spending, do not affect a business's intent to repay debts or manage all
necessary operational costs. These steps may be taken to counteract the
company's financial hardships without the need to default on debt
obligations. This voluntary moratorium provides a vehicle to get
spending in line with current company revenues.

Many insurance companies issue moratoriums for specific areas when

natural disasters or uprisings occur. Moratoriums help mitigate losses
when the probability of filed claims is abnormally high. For example, in
February 2011, MetLife issued a moratorium on writing new policies in
many Texas counties due to uncontrolled wildfires. In 2014, many
insurance companies issued moratoriums on writing new policies in
Ferguson, MO and surrounding areas due to rioting resulting from a
controversial verdict.

11. What is the 'Grace Period'

A grace period is the provision in most loan and insurance contracts that
allows payment to be received for a certain period of time after the
actual due date. During this period, no late fees are charged, and the late
payment does not result in default or cancellation of the loan. A typical
grace period is 15 days.

Next Up

1. Past Due
2. Deferred Billing
3. Interest Due
 4. Adequate Notice
5.

BREAKING DOWN 'Grace Period'

A grace period is usually the only feature of a loan on which interest is

calculated monthly, if it is calculated at all. Under some loan contracts,
payments outstanding during grace periods are interest free, but the
majority have interest compounding during the grace period. Borrowers
should check their loan contract for the specifics on any grace periods.
Credit cards, for which interest is calculated daily, may not have any
grace periods.

The grace period is generally applied to two scenarios in regards to

credit. The first involves a specified amount of time beyond the noted
due date when a borrower can make a required payment without
incurring a penalty for a late payment. The second covers any period of
time where interest is not charged on new purchases.

Example of a Grace Period

When the grace period relates to late payments, if a borrower has a due
date on the fifth of every month, and the lender has provided a five-day
grace period, the borrower can make a payment as late as the 10th of the
month and not incur any penalties associated with a late payment.

Alternatively, if the grace period refers to a period of time when new

charges do not incur interest, a common example is the provisions set
forth in the Credit Card Act of 2009, which requires all credit card
issuers to provide at least 21 days for the borrower to repay the
aforementioned charge without incurring any interest charges
specifically attributed to the purchase. It is important to note these
provisions do not necessarily apply to cash advances or balance
transfers, the details of which can be reviewed in the cardholder’s credit
card agreement.
Late Payment Penalties

Penalties for a late payment can vary. The details surrounding a

particular lender’s late payment policy must be provided to the borrower
as part of the lending process. Some examples of late payment penalties
can include a late payment fee, a penalty interest rate hike or
cancellation of the line of credit. In cases where an asset is pledged as
collateral, multiple missing payments can result in seizure of the asset by
the financial institution.

11. Foreign Exchange Management Act (FEMA) for Export Import

Foreign Exchange.

 Introduction
 Some Highlights of FEMA
 Buyers's /Supplier's Credit

Introduction

Foreign Exchange Management Act or in short (FEMA) is an act that

provides guidelines for the free flow of foreign exchange in India. It has
brought a new management regime of foreign exchange consistent with
the emerging frame work of the World Trade Organisation (WTO).
Foreign Exchange Management Act was earlier known as FERA
(Foreign Exchange Regulation Act), which has been found to be
unsuccessful with the proliberalisation policies of the Government of
India.
FEMA is applicable in all over India and even branches, offices and
agencies located outside India, if it belongs to a person who is a resident
of India.

Some Highlights of FEMA

 It prohibits foreign exchange dealing undertaken other than an

authorised person;
 It also makes it clear that if any person residing in India, received
any Forex payment (without there being a corresponding inward
remittance from abroad) the concerned person shall be deemed to
have received they payment from a nonauthorised person.
 There are 7 types of current account transactions, which are totally
prohibited, and therefore no transaction can be undertaken relating
to them. These include transaction relating to lotteries, football
pools, banned magazines and a few others.
 FEMA and the related rules give full freedom to Resident of India
(ROI) to hold or own or transfer any foreign security or immovable
property situated outside India.
 Similar freedom is also given to a resident who inherits such
security or immovable property from an ROI.
 An ROI is permitted to hold shares, securities and properties
acquired by him while he was a Resident or inherited such
properties from a Resident.
 The exchange drawn can also be used for purpose other than for
which it is drawn provided drawl of exchange is otherwise
permitted for such purpose.
 Certain prescribed limits have been substantially enhanced. For
instance, residence now going abroad for business purpose or for
participating in conferences seminars will not need the RBI's
permission to avail foreign exchange up to US$. 25,000 per trip
irrespective of the period of stay, basic travel quota has been
increased from the existing US$ 3,000 to US$ 5,000 per calendar
year.
Buyers's /Supplier's Credit

Trade Credit have been subjected to dynamic regulation over a period of

last two years. Now, Reserve Bank of India (RBI) vide circular number
A.P. (DIR Series) Circular No. 24, Dated November 1, 2004, has given
general permission to ADs for issuance of Guarantee/ Letter of
Undertaking (LoU) / Letter of Comfort (LoC) subject to certain terms
and conditions . In view of the above, we are issuing consolidated
guidelines and process flow for availing trade credit .

1. Definition of Trade Credit : Credit extended for imports of goods

directly by the overseas supplier, bank and financial institution for
original maturity of less than three years from the date of shipment
is referred to as trade credit for imports.
Depending on the source of finance, such trade credit will include
supplier's credit or buyers credit , Supplier 's credit relates to credit
for imports into India extended by the overseas supplier , while
Buyers credit refers to loans for payment of imports in to India
arranged by the importer from a bank or financial institution
outside India for maturity of less than three years.

It may be noted that buyers credit and suppliers credit for three
years and above come under the category of External Commercial
Borrowing (ECB), which are governed by ECB guidelines. Trade
credit can be availed for import of goods only therefore interest
and other charges will not be a part of trade credit at any point of
time.
2. Amount and tenor : For import of all items permissible under the
Foreign Trade Policy (except gold), Authorized Dealers (ADs)
have been permitted to approved trade credits up to 20 millions per
import transaction with a maturity period ( from the date of
shipment) up to one year.

Additionally, for import of capital goods, ADs have been permitted

to approved trade credits up to USD 20 millions transactions with a
 maturity period of more than one year and less than three years. No
roll over/ extension will be permitted by the AD beyond the
permissible period.
3. All in cost ceiling : The all in cost ceiling are as under: Maturity
period up to one year 6 months LIBOR +50 basis points.

Maturity period more than one year but less than three years 6
months LIBOR* + 125 basis point
* for the respective currency of credit or applicable benchmark like
EURIBOR., SIBOR, TIBOR, etc.
4. Issue of guarantee, letter of undertaking or letter of comfort in
favour of overseas lender : RBI has given general permission to
ADs for issuance of guarantee / Letter of Undertaking (LOU) /
Letter of Comfort (LOC) in favour of overseas supplier, bank and
financial instruction, up to USD 20 millions per transaction for a
period up to one year for import of all non capital goods
permissible under Foreign Trade Policy (except gold) and up to
three years for import of capital goods.

In case the request for trade credit does not comply with any of the
RBI stipulations, the importer needs to have approval from the
central office of RBI.

FEMA regulations have an immense impact in international trade

transactions and different modes of payments.RBI release regular
notifications and circulars, outlining its clarifications and
modifications related to various sections of FEMA.

What is 'Fiscal Deficit'

A fiscal deficit occurs when a government's total expenditures exceed

the revenue that it generates, excluding money from borrowings. Deficit
differs from debt, which is an accumulation of yearly deficits.
A fiscal deficit is regarded by some as a positive economic event. For
example, economist John Maynard Keynes believed that deficits help
countries climb out of economic recession. On the other hand, fiscal
conservatives feel that governments should avoid deficits in favor of a
balanced budget policy.

Next Up

1. Current Account Deficit

2. Budget Surplus
3. Balance Of Trade - BOT
4. Deficit Spending Unit
5.

BREAKING DOWN 'Fiscal Deficit'

Fiscal Deficits Through Time

Fiscal deficits have been occurring since the founding of the United
States. As the secretary of the Treasury in the 1790s, Alexander
Hamilton proposed that the debts incurred by the states during the
Revolutionary War be repaid by issuing bonds. The interest payments
created federal deficits that eventually disappeared when the debts were
fully paid in the 1860s. All subsequent wars were financed with debt,
creating large federal deficits. The largest federal deficits were created
during World War I and World War II, reaching 17% and 24% of gross
domestic product (GDP) respectively.

Presidents and Federal Deficits

In the modern era, Franklin D. Roosevelt holds the record for the highest
federal deficits. Between financing the war and implementing his New
Deal policies, the federal deficit grew to $568 billion in 1949,
representing a negative 29.6% of GDP. The federal deficit continued to
remain high through the war years, and was eventually reduced to $88
billion, or 4.6% of GDP under Harry S. Truman. For the next two
decades through 2008, the federal deficit averaged less than a negative
4% of GDP. In 2009, as part of his stimulus program to fight off a
recession, Barack Obama increased the deficit to more than $1 trillion
for the first time in history, where it remained for the first four years of
his presidency.

Rare Federal Surpluses

Since World War II, there have been just six federal surpluses. Truman
managed to overcome a massive amount of interest payments to produce
a $33 billion surplus in 1947, followed by an $88.6 billion surplus in
1948 and a $42.7 billion surplus in 1951. After a few years of small
deficits, Dwight Eisenhower brought small surpluses back in 1956 and
1957. The next federal surplus did not occur until 1998 under Bill
Clinton, through a landmark budget deal with Congress that created a
$87.9 billion surplus. The surplus grew to $290 billion in 2000. George
W. Bush benefited from a carryover of Clinton's surplus with a $154
billion surplus in 2001.

factoring
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Definition

The selling of a company's accounts receivable, at a discount, to a factor,

who then assumes the credit risk of the account debtors and receives
cash as the debtors settle their accounts. also called accounts receivable
financing.

Factoring, receivables factoring or debtor financing, is when a company

buys a debt or invoice from another company. Factoring is also seen as a
form of invoice discounting in many markets and is very similar but
just within a different context. In this purchase, accounts receivable are
discounted in order to allow the buyer to make a profit upon the
settlement of the debt. Essentially factoring transfers the ownership of
accounts to another party that then chases up the debt.

Factoring therefore relieves the first party of a debt for less than the total
amount providing them with working capital to continue trading, while
the buyer, or factor, chases up the debt for the full amount and profits
when it is paid. The factor is required to pay additional fees, typically a
small percentage, once the debt has been settled. The factor may also
offer a discount to the indebted party.

Factoring is a very common method used by exporters to help accelerate

their cash flow. The process enables the exporter to draw up to 80% of
the sales invoice’s value at the point of delivery of the goods and when
the sales invoice is raised.

What is a 'Hedge'

A hedge is an investment to reduce the risk of adverse price movements

in an asset. Normally, a hedge consists of taking an offsetting position in
a related security, such as a futures contract.

Next Up

1. Hedging Transaction
2. Natural Hedge
3. Hedge Accounting
4. Hedge Ratio
5.

BREAKING DOWN 'Hedge'

Hedging is analogous to taking out an insurance policy. If you own a

home in a flood-prone area, you will want to protect that asset from the
risk of flooding – to hedge it, in other words – by taking out
flood insurance. There is a risk-reward tradeoff inherent in hedging;
while it reduces potential risk, it also chips away at potential gains. Put
simply, hedging isn't free. In the case of the flood insurance policy, the
monthly payments add up, and if the flood never comes, the policy
holder receives no payout. Still, most people would choose to take that
predictable, circumscribed loss rather than suddenly lose the roof over
their head.

A perfect hedge is one that eliminates all risk in a position or portfolio.

In other words, the hedge is 100% inversely correlated to the vulnerable
asset. This is more an ideal than a reality on the ground, and even the
hypothetical perfect hedge is not without cost. Basis risk refers to the
risk that an asset and a hedge will not move in opposite directions as
expected; "basis" refers to the discrepancy.

[If you want to learn how to hedge to strengthen your portfolio,

check out our Investing for Beginners course on the Investopedia
Academy]

Hedging Through Derivatives

Derivatives are securities that move in terms of one or more underlying

assets; they include options, swaps, futures and forward contracts. The
underlying assets can be stocks, bonds, commodities, currencies, indices
or interest rates. Derivatives can be effective hedges against their
underlying assets, since the relationship between the two is more or less
clearly defined.

For example, if Morty buys 100 shares of Stock plc (STOCK) at $10 per
share, he might hedge his investment by taking out a $5 American put
option with a strike price of $8 expiring in one year. This option gives
Morty the right to sell 100 shares of STOCK for $8 any time in the next
year. If a year later STOCK is trading at $12, Morty will not exercise the
option and will be out $5; he's unlikely to fret, however, since his
unrealized gain is $200 ($195 including the price of the put). If STOCK
is trading at $0, on the other hand, Morty will exercise the option and
sell his shares for $8, for a loss of $200 ($205). Without the option, he
stood to lose his entire investment.
The effectiveness of a derivative hedge is expressed in terms of delta,
sometimes called the "hedge ratio." Delta is the amount the price of a
derivative moves per $1.00 movement in the price of the underlying
asset.

Hedging Through Diversification

Using derivatives to hedge an investment enables for precise

calculations of risk, but requires a measure of sophistication and often
quite a bit of capital. Derivatives are not the only way to hedge,
however. Strategically diversifying a portfolio to reduce certain risks can
also be considered a—rather crude—hedge. For example, Rachel might
invest in a luxury goods company with rising margins. She might worry,
though, that a recession could wipe out the market for conspicuous
consumption. One way to combat that would be to buy tobacco stocks or
utilities, which tend to weather recessions well and pay hefty dividends.

This strategy has its tradeoffs: if wages are high and jobs are plentiful,
the luxury goods maker might thrive, but few investors would be
attracted to boring counter-cyclical stocks, which might fall as capital
flows to more exciting places. It also has its risks: there is no guarantee
that the luxury goods stock and the hedge will move in opposite
directions. They could both drop due to one catastrophic event, as
happened during the financial crisis, or for unrelated reasons: floods in
China drive tobacco prices up, while a strike in Mexico does the same to
silver.

What is Ways and Means Advances (WMA)?

tojo jose
October 14, 2015

The Reserve Bank of India gives temporary loan facilities to the centre
and state governments as a banker to government. This temporary loan
facility is called Ways and Means Advances (WMA).
The WMF for the Central Government

The WMA scheme for the Central Government was introduced on April
1, 1997, after putting an end to the four-decade old system of adhoc
(temporary) Treasury Bills to finance the Central Government deficit.
The WMA scheme was designed to meet temporary mismatches in the
receipts and payments of the government. This facility can be availed by
the government if it needs immediate cash from the RBI. The WMA is
to be vacated after 90 days. Interest rate for WMA is currently charged
at the repo rate. The limits for WMA are mutually decided by the RBI
and the Government of India.

Overdraft

When the WMA limit is crossed the government takes recourse to

overdrafts, which are not allowed beyond 10 consecutive working days.
The interest rate on overdrafts would be 2 percent more than the repo
rate. The minimum balance required to be maintained by the
Government of India with the Reserve Bank of India will not be less
than Rs.100 crore on Fridays, on the date of closure of Government of
India’s financial year and on June 30, the date of closure of the annual
accounts of the RBI, and not less than Rs.10 crore on other days. The
cash management of GoI has considerably deteriorated in the recent
past, with situations of large surplus and large deficit. This has put
tremendous pressure of RBI with respect to liquidity management and
conduct of monetary policy.

WMA Scheme for State Governments

Under the WMA scheme for the State Governments, there are two types
of WMA – Special and Normal WMA. Special WMA is extended
against the collateral (mortgaging) of the government securities held by
the State Government. After the exhaustion of the special WMA limit,
the State Government is provided a normal WMA. The normal WMA
limits are based on three-year average of actual revenue and capital
expenditure of the state. The withdrawal above the WMA limit is
considered an overdraft. A State Government account can be in
overdraft for a maximum 14 consecutive working days with a limit of 36
days in a quarter. The rate of interest on WMA is linked to the Repo
Rate. Surplus balances of State Governments are invested in
Government of India 14-day Intermediate Treasury bills in accordance
with the instructions of the State Governments.

What is 'Money Laundering'

Money laundering is the process of creating the appearance that large

amounts of money obtained from criminal activity, such as drug
trafficking or terrorist activity, originated from a legitimate source. The
money from the illicit activity is considered dirty, and the process
"launders" the money to make it look clean.

Next Up

1. Structured Transaction
2. Concentration Account
3. Jurisdiction Risk
4. Financial Crimes Enforcement Network ...
5.

BREAKING DOWN 'Money Laundering'

Money laundering is essential for criminal organizations who wish to

use illegally earned money effectively. Dealing in large amounts of
illegal cash is inefficient and dangerous. The criminals need a way to
deposit the money in financial institutions, yet they can only do so if the
money appears to come from legitimate sources.

There are three steps involved in the process of laundering money:

placement, layering and integration. Placement refers to the act of
introducing "dirty money" (money obtained through illegitimate,
criminal means) into the financial system in some way. Layering is the
act of concealing the source of that money by way of a series of complex
transactions and bookkeeping tricks. Integration refers to the act of
acquiring that money in purportedly legitimate means.

Money-Laundering Tactics

There are many ways to launder money, ranging from simple to

complex. One of the most common ways to launder money is through a
legitimate cash-based business owned by a criminal organization. For
instance, if the organization owns a restaurant, it might inflate the daily
cash receipts to funnel its illegal cash through the restaurant and into the
bank. Then they can distribute the funds to the owners out of the
restaurant's bank account. These types of businesses are often referred to
as "fronts."

Another common form of money laundering is called smurfing, where a

person breaks up large chunks of cash into multiple small deposits, often
spread out over many different accounts, to avoid detection. Money
laundering can also be done through the use of currency exchanges, wire
transfers, and "mules" or cash smugglers, who smuggle large amounts of
cash across borders to deposit them in offshore accounts where money-
laundering enforcement is less strict. Other money-laundering methods
involve investing in commodities such as gems and gold that can be
easily moved to other jurisdictions, discretely investing in and selling
valuable assets such as real estate, gambling, counterfeiting and creating
shell companies.

While traditional money-laundering methods are still used, the internet

has put a new spin on an old crime. The use of the internet allows money
launderers to easily avoid detection. The rise of online banking
institutions, anonymous online payment services, peer-to-peer transfers
using mobile phones and the use of virtual currencies such as Bitcoin
have made detecting the illegal transfer of money even more difficult.
Moreover, the use of proxy servers and anonymizing software makes the
third component of money laundering, integration, almost impossible to
detect, as money can be transferred or withdrawn leaving little or no
trace of an IP address.
In many ways, the new frontier of money laundering and criminal
activity lays in cryptocurrencies. While not totally anonymous, these
forms of currencies are increasingly being used in currency blackmailing
schemes, drug trade and other criminal activities due to their anonymity
compared to other forms of currency.

Money can also be laundered through online auctions and sales,

gambling websites and even virtual gaming sites, where ill-gotten
money is converted into gaming currency, then transferred back into
real, usable and untraceable "clean" money.

Anti-money-laundering laws (AML) have been slow to catch up to these

types of cybercrimes, since most AML laws attempt to uncover dirty
money as it passes through traditional banking institutions. As money
launderers attempt to remain undetected by changing their approach,
keeping one step ahead of law enforcement, international organizations
and governments are working together to find new ways to detect them.

Combating Money Laundering

The government has become increasing vigilant in its efforts to combat

money laundering over the years by passing anti-money-laundering
regulations. These regulations require financial institutions to have
systems in place to detect and report suspected money-laundering
activities.

In 1989, the Group of Seven (G-7) formed an international committee

called the Financial Action Task Force (FATF) in an attempt to fight
money laundering on an international scale. In the early 2000s, its
purview was expanded to combating the financing of terrorism.

The United States passed the Banking Security Act in 1970, requiring
financial institutions to report certain transactions to the Department of
the Treasury, such as cash transactions above $10,000 or any
transactions they deem suspicious, on a suspicious activity report (SAR).
The information these banks provide to the Treasury Department is used
by the Financial Crimes Enforcement Network (FinCEN), where it can
then be sent to domestic criminal investigators, international bodies or
foreign financial intelligence units.

While these laws were helpful in tracking criminal activity through

financial transactions, money laundering itself wasn't made illegal in the
United States until 1986, with the passage of the Money Laundering
Control Act. This law removed limits on the amount of money involved
and individual intent to give the federal government more room to
prosecute money laundering.

Shortly after the 9/11 terrorist attacks, The USA Patriot Act strengthened
money-laundering prevention by allowing the use of investigative tools
designed for organized crime and drug trafficking prevention for
terrorist investigations. Title III of the Patriot Act, called the
"International Money Laundering Abatement and Financial Anti-
Terrorism Act of 2001," seeks to prevent the exploitation of the
American financial system by parties suspected of terrorism, terrorist
financing and money laundering. The law imposes strict bookkeeping
requirements and also authorizes the Secretary of the U.S. Treasury to
develop regulations that encourage better communication between
financial institutions with the goal of making it more difficult for money
launderers to hide their identities. The Treasury can also halt the merger
of two banking institutions if both entities have a history of failing to put
adequate anti-money-laundering procedures in place.

The Association of Certified Anti-Money Laundering Specialists

(ACAMS) offers a professional designation known as a Certified Anti-
Money Laundering Specialist (CAMS). Requirements to gain CAMS
certification include obtaining 40 qualifying credits based on education,
work experience and other professional certifications, and passing the
CAMS examination. Professionals who earn CAMS certification may
work as brokerage compliance managers, Bank Secrecy Act officers,
financial intelligence unit managers, surveillance analysts and financial
crimes investigative analysts.

Impact of Money Laundering

According to a 2016 survey from PwC, global money laundering

transactions account for roughly 2% to 5% of global GDP, or roughly $1
trillion to $2 trillion annually.

Although the act of money laundering itself is a victimless, white-collar

crime, it is often connected to serious and sometimes violent criminal
activity. Being able to stop money laundering is, in effect, being able to
stop the cash flows of criminals, including international organized crime.

Money laundering also impacts legitimate business interests by making

it much more difficult for honest businesses to compete in the market
since money launderers often provide products or services at less than
market value. Where a financial institution or business is also regulated
by the government, money laundering, or a failure to put reasonable
anti-laundering policies in place, can result in a revocation of a business
charter or government licenses.

Businesses that associate with people, countries or entities that launder

money face the possibility of fines. Deutsche Bank, ING, the Royal
Bank of Scotland, Barclays and Lloyds Banking Group are among
institutions that have been fined for being involved with transactions
associated with money-laundering activities in countries such as Iran,
Libya, Sudan and Russia.

In one famous money-laundering case, international bank HSBC was

fined for a failure to put proper anti-money laundering measures in
place. According to the U.S. federal government, HSBC was guilty of
little or no oversight of transactions by its Mexican unit that included
providing money-laundering services to various drug cartels involving
bulk movements of cash from HSBC's Mexican unit to the Unites States.
The government said HSBC failed to maintain proper records as part of
its AML measures. This included a huge backlog of unreviewed
accounts and a failure by HSBC to file suspicious activity reports. After
a year-long investigation, the federal government indicated HSBC had
failed to comply with U.S. banking laws and consequently subjected the
United States to Mexican drug money, suspicious traveler's checks and
bearer share corporations. In 2012, the bank agreed to pay $1.92 billion
in fines to U.S. authorities.

What is a Currency Chest?

Distribution of notes and coins throughout the country is done through

designated bank branches, called chests. Chest is a receptacle in a
commercial bank to store notes and coins on behalf of the Reserve Bank.
Deposit into chest leads to credit of the commercial bank’s account and
withdrawal, debit.

Functions of Currency Chests

The Functions of the Currency Chests are:

1. The major functions of the currency chests are:

2. To meet currency requirement of public
3. To withdraw unfit notes
4. To provide exchange facility from one denomination to another
5. To make payment requirement of the Government
6. To exchange the mutilated notes
7. To avoid frequent movement of cash

Apart from having its own chests at certain places, RBI also has
arrangements with other banks which are entrusted with custody of the
currency notes and coins for the same purpose.

What is an 'Overdraft'

An overdraft is an extension of credit from a lending institution when an

account reaches zero. An overdraft allows the individual to continue
withdrawing money even if the account has no funds in it or not enough
to cover the withdrawal. Basically, overdraft means that the bank allows
customers to borrow a set amount of money.

Next Up

1. Overdraft Protection
2. Linked Transfer Account
3. Evergreen Loan
4. Facility
5.

BREAKING DOWN 'Overdraft'

With an overdraft account, your bank covers checks that would

otherwise bounce and get returned without payment. As with any loan,
you pay interest on the outstanding balance of an overdraft loan. Often,
the interest on the loan is lower than credit cards. In many cases, there
are additional fees for using overdraft protection that reduce the amount
available for overdraft protection, such as insufficient funds fees per
check or withdrawal.

Overdraft and Your Credit Score

Your bank can opt to use its own funds to cover your overdraft. Another
option is to link the overdraft to a credit card. If the bank uses its own
funds to cover your overdraft, then it typically won't affect your credit
score. When a credit card is used for the overdraft protection, it's
possible that you can increase your debt to the point where it could
affect your credit score. However, this won't show up as a problem with
overdrafts on your checking accounts.

If you don't pay your overdrafts back in a predetermined amount of time,

your bank can turn your account over to a collection agency. This
collection action can affect your credit score and get reported to the
three main credit agencies. It depends on how the account is reported to
the agencies as to whether it shows up as a problem with an overdraft on
a checking account.

Overdraft Protection as a Useful Tool

Overdraft protection provides you with a valuable tool to manage your

checking account. If you forget to take out money for a trip to Starbucks,
overdraft protection ensures that you don't have a check returned and
reflect poorly on your ability to pay. However, banks charge a fee and
make money from this service; make sure you use the overdraft
protection sparingly and only in an emergency situation.

The dollar amount of overdraft protection varies by account and by

bank. In some cases, the customer needs to request the addition of
overdraft protection. If the overdraft protection is used excessively, the
financial institution can remove the protection from the account.

What is a 'Subprime Loan'

A subprime loan is a type of loan offered at a rate above prime to

individuals who do not qualify for prime rate loans. Quite often,
subprime borrowers are turned away from traditional lenders because of
their low credit ratings or other factors that suggest they have a
reasonable chance of defaulting on the debt repayment.

Next Up

1. Subprime Lender
2. Subprime
3. Loan
4. Prime
5.

BREAKING DOWN 'Subprime Loan'

Subprime loans tend to have a higher interest rate than the prime rate
offered on conventional loans. On large term loans such as mortgages,
the additional percentage points of interest often translate to tens of
thousands of dollars' worth of additional interest payments over the life
of the loan.

This can make paying off subprime loans difficult for most low-income
subprime loan borrowers as it did in the late 2000s. In 2007, high rates
of subprime mortgages began to default, and ultimately this subprime
meltdown was a significant contributor to the financial crisis of the late
2000s. (For more insight on the subprime crisis, see: Who is to Blame for
the Subprime Crisis?)

However, getting a subprime loan can still be an option if the loan is

meant to pay off debts with higher interest rates, such as credit cards or
if the borrower has no other means of obtaining credit.

What Interest Rates Do Subprime Loans Have?

The specific amount of interest charged on a subprime loan is not set in

stone. Different lenders may not evaluate a borrower's risk in the same
manner. This means a subprime loan borrower has an opportunity to
save some additional money by shopping around. However, by
definition, all subprime loans have rates higher than the prime rate.

How Does the Prime Rate Affect Subprime Loans?

The prime rate is the interest rate set by the Federal Reserve.
Representatives of the Fed meet several times per year to set the prime
rate, and from 1947 to 2018, the prime rate has fluctuated from 1.75% to
21.5% to 4.5% (as of January 2018).

When banks lend each other money in the middle of the night to cover
their reserve requirements, they charge each other the prime rate. As a
result, this rate plays a large role in determining what banks charge their
borrowers. Traditionally, corporations and other financial institutions
receive rates equal or very close to the prime rate. Retail customers
taking out mortgages, small business loans, and car loans receive rates
slightly higher than but based on, the prime rate. Lenders offer
applicants with low credit scores or other risk factors loans with rates
significantly higher than the prime rate, called subprime loans.

Who Offers Subprime Loans?

Any financial institution could offer a loan with subprime rates, but
there are subprime lenders that focus on loans with high rates. Arguably,
these lenders give borrowers who have trouble accessing low interest
rates the ability to access capital to invest, grow their businesses or buy
homes. However, subprime lenders have been accused of predatory
lending, which is the practice of giving borrowers loans with
unreasonable rates and locking them into debt or increasing their
likelihood of defaulting. (For more on the dangers of subprime loans and
to gain insights on the subprime mortgage crisis, see: Subprime
Meltdown.)

What is 'Retail Banking'

Retail banking, also known as consumer banking, is the typical mass-

market banking in which individual customers use local branches of
larger commercial banks. Services offered include savings and checking
accounts, mortgages, personal loans, debit/credit cards and certificates of
deposit (CDs). In retail banking, the focus is on the individual consumer.

Next Up

1. Branch Banking
2. Limited Service Bank
3. Home Banking
4. State Bank
5.

BREAKING DOWN 'Retail Banking'

Retail banking aims to be the one-stop shop for as many financial
services as possible on behalf of individual retail clients. Consumers
expect a range of basic services from retail banks, such as checking
accounts, savings accounts, personal loans, lines of credit, mortgages,
debit cards, credit cards and CDs. Most consumers utilize local branch
banking services, which provide onsite customer service for all of a
retail customer's banking needs. Through local branch locations,
financial representatives provide customer service and financial advice.
Financial representatives are also the lead contact for underwriting
applications related to credit-approved products.

Expanded Services in Retail Banking

Banks are adding to their product offerings to provide a greater range of

services for their retail clients. In addition to basic retail banking
accounts and customer service from local branch financial
representatives, banks are also adding teams of financial advisors with
broadened product offerings, with investment services such as wealth
management, brokerage accounts, private banking and retirement
planning. Some of these ancillary services are also offered through
outsourced third-party affiliations. All of the expanded offerings allow
for increased convenience through greater connectivity of accounts,
which helps customers to access funds and make personal transactions
more quickly and easily.

Internet Finance and Retail Banking

In the 21st century, a movement towards internet finance banking

operations has also broadly expanded the offerings for retail banking
customers. Several online banks now provide banking services to
customers purely through internet and mobile applications. These banks
offer nearly all of the accounts and services provided by traditional
banks, often with lower fees from reduced banking branch expenses.
Examples of these banks include Simple, Moven and GoBank.

U.S. Banking Landscape Profile

In 2015, the top five largest U.S. commercial banks held over half of the
industry's customer deposits. As of 2015, the top five largest commercial
banks are JPMorgan, Bank of America, Wells Fargo, Citibank and U.S.
Bank. In the banking industry, consumers also rely on the Federal
Deposit Insurance Corporation (FDIC) to insure their bank deposits. As
a leading U.S. government entity, the FDIC was responsible for insuring
deposits at 6,638 banking institutions in 2014.

What is 'Wholesale Banking'

Wholesale banking refers to banking services between merchant banks

and other financial institutions. This type of banking deals with larger
clients, such as large corporations and other banks, whereas retail
banking focuses more on the individual or small business. Wholesale
banking services include currency conversion, working capital
financing, large trade transactions and other types of services.

Next Up

1. Wholesale Money
2. Bank
3. Retail Banking
4. Open Banking
5.

BREAKING DOWN 'Wholesale Banking'

Wholesale banking is meant to describe the financial practice of lending

and borrowing between two large institutions. Banking services that are
considered "wholesale" are reserved only for government agencies,
pension funds, corporations with strong financials and other institutional
customers of similar size and stature. These services are made up of cash
management, equipment financing, large loans, merchant banking and
trust services, among others.
Wholesale banking also refers to the borrowing and lending between
institutional banks. This type of lending occurs on the interbank market
and often involves extremely large sums of money.

Most standard banks operate as merchant banks and offer wholesale

banking services in addition to traditional retail banking services. This
means that an individual looking for wholesale banking wouldn't have to
go to a special institution and could instead engage the same bank in
which he conducts his personal retail banking.

Example of Wholesale Banking

The easiest way to conceptualize wholesale banking is to think of it as a

discount superstore — like Costco — that deals in such large amounts
that it can offer special prices or reduced fees, on a per-dollar basis. It
becomes advantageous for large organizations or institutions with a high
amount of assets or business transactions to engage in wholesale
banking services rather than retail banking services.

For example, there are many occasions where a business with multiple
locations needs a wholesale banking solution for cash management.
Technology companies with satellite offices are a prime candidate for
these services. Let's say that a SaaS company has 10 sales offices
distributed around the United States, and each of its 50 sales team
members has access to a corporate credit card. The owners of the SaaS
company also requires that each sales office keeps $1 million in cash
reserves, totaling $10 million across the business. It's easy to see that a
company with this profile is too large for standard retail banking.

Instead, the business owners can engage a bank and request a corporate
facility that keeps all of the company's financial accounts. Wholesale
banking services act like a facility that offers discounts if a business
meets minimum cash reserve requirements and minimum monthly
transaction requirements, both of which the SaaS company will hit. It is
therefore beneficial for the business to engage in a corporate facility that
consolidates all of its financial accounts and reduces its fees, rather than
keeping 10 retail checking accounts and 50 retail credit cards open.

What is 'Net Interest Margin'

Net interest margin is a ratio that measures how successful a firm is at

investing its funds in comparison to its expenses on the same
investments. A negative value denotes that the firm has not made an
optimal investment decision because interest expenses exceed the
amount of returns generated by investments.

Net interest margin is calculated as:

Next Up

1. Net Interest Income

2. Net Interest Rate Spread
3. Buying On Margin
4. Interest Rate
5.

BREAKING DOWN 'Net Interest Margin'

Net interest margin is typically used for a bank or investment firm that
invests depositors' money, allowing for an interest margin between what
is paid to the bank’s client and what is made from the borrower of the
funds.

A positive net interest margin indicates that an entity has invested its
funds efficiently while a negative return implies that the bank or
investment firm has not invested efficiently. In a negative net interest
margin scenario, the company would have been better served by
applying the investment funds toward outstanding debt or utilizing the
funds for more profitable revenue streams.
For example, assume ABC Corp has a return on investment of
$1,000,000, an interest expense of $2,000,000 and average earning
assets of $10,000,000. ABC Corp's net interest margin would then be -
10%. This reflects the fact that ABC Corp has lost more money due to
interest expenses than it's earned from investments. In this case, ABC
Corp would have fared better had it used the investment funds to pay off
debts rather than to make this investment.

Net Interest Margin and Retail Banking

Net interest margin is well explained by illustrating how a retail bank

earns interest from customers' deposits. Most banks offer interest on
customer deposits, generally in the range of 1% annually. The retail
bank, at that point, turns around and lends an aggregate of multiple
clients’ deposits as a loan to small business clients at an annual interest
rate of 5%. The margin between these two amounts is considered the net
interest spread. In this case it works out to an even 4% spread between
the cost of borrowing the funds from bank customers and the value of
interest earned by loaning it out to other clients.

Net interest margin adds another dimension to the net interest spread by
basing the ratio over its entire asset base. If the bank has $1 million in
deposits with a 1% annual interest to depositors, and it loans out
$900,000 at an interest of 5% with earning assets of $1.2 million, the net
interest margin is 2.92% [(interest revenue — interest expenses) /
average earning assets].

Historical Net Interest Margins

The Federal Financial Institutions Examination Council (FFIEC)

releases an average net interest margin figure for all U.S. banks on a
quarterly basis. Historically, this figure has trended downward while
averaging about 3.8% since first being recorded in 1984. Recessionary
periods have coincided with dips in average net interest margins while
periods of economic expansion have witnessed sharp initial increases in
the figure followed by gradual declines; the overall movement of the
average net interest margin has moderately tracked, at a delay, the
movement of the federal funds rate over time — although Fed
economists have released research challenging the idea that banks
perform better during periods of tight monetary policy.

After the financial crisis of 2008, banks in the United States were
operating under decreasing net interest margins due to the falling federal
funds rate, a benchmark interest rate that reached near-zero levels from
2008 to 2016. The markedly low federal funds rate forced the net
interest spreads of banking institutions to decrease, and during this
recession, the average net interest margin for banks in the U.S. shed
nearly a quarter of its value before finally picking up in 2015.

What is 'Disinvestment'

Disinvestment is the action of an organization or government selling or

liquidating an asset or subsidiary. Absent the sale of an asset,
disinvestment also refers to capital expenditure reductions, which can
facilitate the re-allocation of resources to more productive areas within
an organization or government-funded project. Whether a disinvestment
action results in divestiture or the reduction of funding, the primary
objective is to maximize the return on investment (ROI) on expenditures
related to capital goods, labor and infrastructure.

Next Up

1. Hands-On Investor
2. Capital Expenditure (CAPEX)
3. Commoditize
4. Natural Monopoly
5.

BREAKING DOWN 'Disinvestment'

Disinvestments, in most cases, are primarily motivated by the

optimization of resources to deliver maximum returns. To achieve this
objective, disinvestment may take the form of selling, spinning off or
reducing capital expenditures. Disinvestments may also be undertaken
for political or legal reasons.

Commoditization and Segmentation

Within the target market for commoditized goods, a company may

identify product segments delivering higher profitability than others,
while expenditures, resources and infrastructure required for
manufacturing remain the same for both products. For example, a
company may determine that its industrial tool division is growing faster
and generating higher profit margins than its consumer tool division. If
the difference in profitability of the two divisions is large enough, the
company may consider selling the consumer division. After the
disinvestment, the company could allocate both the sales proceeds and
recurring capital expenditures to the industrial division to maximize its
ROI.

Disinvestment of Ill-fitting Assets

A company may opt for the disinvestment of certain assets of a company

it has acquired, particularly if those assets do not fit with its overall
strategy. For example, a company focused on domestic operations may
sell the international division of a company it has purchased, due to the
complexities and costs of integration, as well as operating it on an
ongoing basis. As a result of the disinvestment, the acquiring company
can reduce the total cost of the purchase and determine the optimal use
of the proceeds, which may include reducing debt, keeping the cash on
the balance sheet, or making capital investments.

Political and Legal Disinvestments

Organizations may decide on the disinvestment of holdings that no

longer fit with their social, environmental or philosophical positions. For
example, the Rockefeller Family Foundation, which derived its wealth
from oil, divested its energy holdings in 2016 due to false statements
from oil companies regarding global warming. Companies considered to
be monopolies may be legally required to disinvest holdings to ensure
fair competition. For example, after being found to be a monopoly after
eight years in court, AT&T divested its seven regional operating
companies in 1984. After disinvestment, AT&T retained its long
distance services, while the operating companies, referred to as the Baby
Bells, provided regional services.

What is 'Underwriting'

Underwriting is the process by which investment bankers raise

investment capital from investors on behalf of corporations and
governments that are issuing either equity or debt securities. The word
"underwriter" originated from the practice of having each risk-taker
write his name under the total amount of risk he was willing to accept at
a specified premium. This centuries-old practice continues, in a way, as
new issues are usually brought to market by an underwriting syndicate,
in which each firm takes the responsibility, as well as the risk, of selling
its specific allotment.

Next Up

1. Underwriting Fees
2. Underwriting Risk
3. Underwriting Group
4. Advanced Life Underwriting
5.

BREAKING DOWN 'Underwriting'

Underwriters also research and assess the risk each applicant presents.
This helps to create the market for securities by accurately pricing risk
and setting fair premium rates that adequately cover the true cost of
insuring policyholders. If a specific applicant's risk is deemed too high,
underwriters may refuse coverage.

Underwriting Risk

Insurance is the most common example of underwriting that most people

encounter. In order for insurance to work well, risk must be spread
among as many people as possible. Underwriting helps insurance
companies manage the risk of too many policyholders filing claims at
once by spreading out the risk among outside investors. Once an
underwriter has been found for a given policy, the capital the
underwriter presents at the time of investment acts as a guarantee that
the claim can be paid, which allows the company to issue more
insurance to other customers. In exchange for assuming this risk, the
underwriter is entitled to payments drawn from the policyholder's
premiums.

How Underwriting Sets the Market

Making a market for securities is the chief function of an underwriter.

Every insurance policy or debt instrument, such as a mortgage, carries a
certain risk that the end customer will either default or file a claim. This
potentially represents a loss to the insurer or the lender. A big part of the
underwriter's job is to weigh the known risk factors and investigate the
truthfulness of an applicant's application for coverage in order to
determine the minimum price for providing coverage. In this way,
underwriters help find the true market price of risk by deciding on a
case-by-case basis which policies they are willing to cover and what
rates they need to charge to make a profit. They also help exclude
unacceptably risky applicants, such as people in very poor health who
want life insurance or unemployed people asking for expensive
mortgages, by rejecting coverage in some cases. This substantially
lowers the overall risk of expensive claims or defaults and allows the
agent to offer more competitive rates to the less risky members of the
risk pool.
What is 'Endorsement'

Endorsement is a term that has various definitions depending on the

context of its use. For example, a signature authorizing the legal transfer
of a negotiable instrument between parties is an endorsement.
Endorsements can be an amendment to a contract or document such as a
life insurance policy or a driver's license. A public declaration of support
for a person, product, or service is also an endorsement.

Next Up

1. Endorser
2. Pay to Order
3. Accommodation Endorser
4. Alternate Employer Endorsement
5.

BREAKING DOWN 'Endorsement'

Signature Endorsements

When an employer signs a payroll check, it authorizes or endorses the

transfer of money from the business account to the employee. The act of
signing the check is considered an endorsement, which serves as proof
of the payer's intent to transfer funds to the payee.

Insurance Endorsements

Insurance endorsements are amendments in the form of modifications of

or additions to the original policy. For example, a policy provision
continuing monthly income to a beneficiary after the death of the insured
is an example of an endorsement and is also known as a rider. Typically,
this type of endorsement increases the policy premium due to the added
benefits to the policyholder and beneficiary(ies) and the increased risk to
the insurer.
License Endorsements

License endorsements give additional rights or privileges to a licensee.

For example, a driver who obtains a motorcycle endorsement on a
driver’s license is permitted to operate a motorcycle on public roads.
License endorsements also refer to the types of authorized vehicles or to
the type of cargo a vehicle may carry.

The opposite of a license endorsement is a restriction. A restriction

places a caution on the person’s right to operate a vehicle, such as with
corrective eyewear restrictions. Eyewear restrictions are for those people
whose natural vision does not meet minimum requirements for
vehicle operation without the use of corrective lenses.

Endorsements as Support

For endorsements as forms of approval, a person or entity makes a

public declaration of support for a person, product, or service. Most
commonly, this is in the form of a government official or influential
person supporting a political candidate or an industry expert supporting
a new product, service, or concept.

Definition of 'Base Rate'

Definition: Base rate is the minimum rate set by the Reserve Bank of
India below which banks are not allowed to lend to its customers.

Description: Base rate is decided in order to enhance transparency in

the credit market and ensure that banks pass on the lower cost of fund to
their customers. Loan pricing will be done by adding base rate and a
suitable spread depending on the credit risk premium.
WHAT IS A GARNISHEE ORDER?

The obligation of a banker to honour his customer’s cheque is

extinguished on receipts of an order of the court known as garnishee
order issued under order 21 Rule 46 of civil procedure code. Such an
order attaches the debts not secured by a negotiable instrument by
prohibiting from recovering the debt and the debtor from making
payment thereof. The creditor at whose request the order is issued is
called the judgement creditor the debtor whose money is frozen is called
the judgement debtor. And the banker who is the debtor of the
judgement debtor is called the garnishee.

This order is issued in two parts. First the court directs the banker to stop
payment out of the account of the called as ORDER NISI. On receipt of
the confirmation of the banker court issued another order known as order
absolute whereby the entire balance in the account or a specified amount
is attached.

GARNISHI ORDER IS APPLICABLE

a. Where there is a credit balance
b. Attaches the amount drawn by a cheque but payment not yet effected.
c. All bank branches of a bank are treated as one entity.
d. Attaches future maturing term deposits also.
e. attaches joint account if issued so
f. Attaches personal account of partners if an order is served on a
partnership account.

WHERE THE ORDER IS NOT APPLICABLE

a. Where a cheque has been marked for good payment.
b. Attaches the amount specified only
c. Not applicable to sanctioned limit.
d. Where any assignment of balance has been made and acknowledged
e. Not applicable to deceased and insolvents
f. Salary is not attached.
g. Bank can exercise the right of set off before complying with
Garnishee Order.

OMBUDSMAN SCHEME 2006

Ombudsman within whose territorial jurisdiction the billing address of

the customer is located.
(2) (a) The complaint in writing shall be duly signed by the complainant
or his authorized representative and shall be, as far as possible, in the
form specified in Annexure ‘A’ or as near as thereto as
circumstances admit, stating clearly:
(i) the name and the address of the complainant,
(ii) the name and address of the branch or office of
the bank against which the complaint is made,
(iii) the facts giving rise to the complaint,
(iv) the nature and extent of the loss caused to
the complainant, and
(v) the relief sought for.
(b) The complainant shall file along with the complaint, copies of the
documents, if any, which he proposes to rely upon and a declaration that
the complaint is maintainable under sub-clause (3) of this clause.
(c) A complaint made through electronic means shall also be accepted
by the Banking Ombudsman and a print out of such complaint shall be
taken on the record of the Banking Ombudsman.
(d) The Banking Ombudsman shall also entertain complaints covered by
this Scheme received by Central Government or Reserve Bank and
forwarded to him for disposal.
(3) No complaint to the Banking Ombudsman shall lie unless:-
(a) the complainant had, before making a complaint to the Banking
Ombudsman, made a written representation to the bank and the bank had
rejected the complaint or the complainant had not received any reply
within a period of one month after the bank received his repres
entation or the complainant is not satisfied with the reply given to him
by the bank;
(b) the complaint is made not later than one year after t
he complainant has received the reply of the bank to his representation
or, where no reply is received, not later than one year and one month
after the date of the representation to the bank;
(c) 4 the complaint is not in respect of the same cause of action which
was settled or dealt with on merits by the Banking Ombudsman in any
previous proceedings whether or not received from the same
complainant or along with one or more complainants or one or more of
the parties concerned with the cause of action ;
(d)5 the complaint does not pertain to the same cause of action, for
which any proceedings before any court, tribunal or arbitrator or any
other forum is pending or a decree or Award or order has been passed by
any such court, tribunal, arbitrator or forum;
(e) the complaint is not frivol ous or vexatious in nature; and
(f) the complaint is made before the expiry of the period of limitation
prescribed under the Indian Limitation Act, 1963 for such claims.
10. POWER TO CALL FOR INFORMATION
(1) For the purpose of carrying out his duties under this Scheme, a
Banking Ombudsman may require the bank against whom the complaint
is made or any other bank concerned with the complaint
to provide any information or furnish certified copies of any document
relating to the complaint which is or is alleged to
be in its possession. Provided that in the event of the failure of a bank to
comply with the requisition without sufficient cause, the Banking
Ombudsman may, if he deems fit, draw the inference that the
information if provided or copies if furnished would be
unfavourable to the bank.
(2) The Banking Ombudsman shall maintain confidentiality of any
information or document that may come into his know ledge or
possession in the course of discharging his duties and shall not disclose
such information or document to any person except with the consent of
the person furnishing such information or document. Provided that
nothing in this clause shall prevent the Banking Ombudsman from
disclosing information or document furnished by a party in a complaint
to the other party or parties to the extent considered by him to be
reasonably required to comply with any legal requirement or the
principles of natural justice and fair play in the proceedings.

11. SETTLEMENT OF COMPLAINT BY AGREEMENT

(1) As soon as it may be practicable to do, the Banking Ombudsman
shall send a copy of the complaint to the branch or office of the bank
named in the complaint, under advice to the nodal officer referred to
in sub-clause (3) of clause 15, and endeavour to promote a settlement of
the complaint by agreement between the complainant and the bank
through conciliation or mediation.
(2) For the purpose of promoting a settlement of the complaint, the
Banking Ombudsman may follow such procedure as he may consider
just and proper and he shall not be bound by any rules of evidence.
(3) The proceedings before the Banking Ombudsman shall be summary
in nature.
12. AWARD BY THE BANKING OMBUDSMAN
(1) If a complaint is not settled by agreement within a period
of one month from the date of receipt of the complaint or such further
period as the Banking Ombudsman may allow the parties, he may, after
affording the p arties a reasonable opportunity to present their case, pass
an Award or reject the complaint.
(2) The Banking Ombudsman shall take into account the evidence
placed before him by the parties, the principles of
banking law and practice, directions, instructions and guidelines issued
by the Reserve Bank from time to time and
such other factors which in his opinion are relevant to the complaint.
(3) The award shall state briefly the reasons for passing the award.

The Award passed under sub-clause (1) shall contain the direction/s, if
any, to the bank for specific performance of its obligations and in
addition to or otherwise, the amount, if any , to be paid by the bank to =
the complainant by way of compensation for any loss suffered by the
complainant, arising directly out of the act or omission of the bank.
(5) Notwithstanding anything contained in sub-clause (4), the Banking
Ombudsman shall not have the power to pass an award directing
payment of an amount which is more than the actual loss suffered by the
complainant as a direct consequence of the act of omission
or commission of the bank, or ten lakh rupees whichever is lower.
(6)In the case of complaints, arising out of credit card operations, the
Banking Ombudsman may also award compensation not exceeding Rs 1
lakh to the complainant, taking into account the loss of the complainant's
time, expenses incurred by the complainant, harassment and mental
anguish suffered by the complainant.
(7) A copy of the Award shall be sent to the complainant and the bank.
(8)An award shall lapse and be of no effect unless the complainant
furnishes to the bank concerned within a period of 30 days from the date
of receipt of copy of the Award, a letter of acceptance of the
Award in full and final settlement of his
claim. Provided that no such acceptance may
be furnished by the complainant if he has filed an appeal under sub.
clause (1) of clause 14.
(9)The bank shall, unless it has preferred an appeal under sub. clause (1)
of clause 14, within one month from the date of receipt by
it of the acceptance in writing of the Award by the complainant under
sub-clause (8), comply with the Award and intimate compliance
to the Banking Ombudsman.
13.REJECTION OF THE COMPLAINT
The Banking Ombudsman may reject a complaint at any stage
if it appears to him that the complaint made is;
(a) not on the grounds of complaint referred to in clause 8 or otherwise
not in accordance with sub clause (3) of clause 9; or
(b) beyond the pecuniary jurisdiction of Banking Ombudsman
prescribed under clause 12 (5) and 12 (6) or
(c) requiring consideration of elaborate documentary and oral evidence
and the proceedings before the Banking Ombudsman are not appropriate
for adjudicate on of such complaint; or
(d) without any sufficient cause; or
(e) that it is not pursued by the complainant with reasonable diligence;
or
(f) in the opinion of the Banking Ombudsman there is no loss or damage
or inconvenience caused to the complainant.

14. APPEAL BEFORE THE APPELLATE AUTHORITY:

(1)Any person aggrieved by an Award under clause 12 or rejection of a
complaint for the reasons referred to in sub clauses (d) to (f) of clause
13, may within 30 days of the date of receipt of communication of
Award or rejection of complaint, prefer an appeal before the Appellate
Authority; Provided that in case of appeal by a bank, the period of thirty
days for filing an appeal shall commence from the date on which the
bank receives letter of acceptance of Award by complainant under sub.
clause (6) of clause 12; Provided that the Appellate Authority may, if he
is satisfied that the applicant had sufficient cause for not making the
appeal within time, allow a further period not exceeding 30 days;
Provided further that appeal may be filed by a bank only with the
previous sanction of the Chairman or, in his absence, the Managing
Director or the Executive Director or the Chief Executive Officer or any
other officer of equal rank.”
(2) The Appellate Authority shall, after giving the parties a reasonable
opportunity of being heard
(a) dismiss the appeal; or
(b) allow the appeal and set aside the Award; or
(c) remand the matter to the Banking Ombudsman for fresh disposal in
accordance with such directions as the Appellate Authority may consider
necessary or proper; or
(d) modify the Award and pass such directions as may be necessary to
give effect to the Award so modified; or
(e) pass any other order as it may deem fit.
3) The order of the Appellate Authority shall have the same effect as the
Award passed by Banking Ombudsman under clause 12 or the order
rejecting the complaint under clause 13, as the case may be.

BANKS TO DISPLAY SALIENT

FEATURES OF THE SCHEME
FOR COMMON KNOWLEDGE OF PUBLIC.
(1) The banks covered by the Scheme shall ensure that the purpose of
the Scheme and the contact details of the Banking Ombudsman to whom
the complaints are to be made by the aggrieved party are displayed
prominently in all the offices and branches of the bank in such manner
that a person visiting the office or branch has adequate information of
the Scheme.
(2) The banks covered by the Scheme shall ensure that a copy of the
Scheme is available with the designated officer of the bank for perusal in
the office premises of the bank, if anyone, desires to do so and notice
about the availability of the Scheme with such designated officer shall
be displayed along with the notice under sub-clause (1) of this clause
and shall place a copy of the Scheme on their
websites.
(3) The banks covered by the Scheme shall appoint Nodal Officers at
their Regional/Zonal Offices and inform the respective Office of the
BankingOmbudsman under whose jurisdiction the Regional/Zonal
Office falls. The Nodal Officer so appointed shall be responsible for
representing the bank and furnishing information to the Banking
Ombudsman in respect of complaints filed against the bank. Wherever
more than one zone/region of a bank are falling within the jurisdiction of
a Banking Ombudsman, one of the Nodal Officers shall be designated as
the 'Principal Nodal Officer' for such zones or regions.
CHAPTER V
MISCELLANEOUS
16. REMOVAL OF DIFFICULTIES
If any difficulty arises in giving effect to the provisions of this Scheme,
the Reserve Bank may make such provisions not inconsistent with the
Banking Regulation Act, 1949 or the Scheme, as it appears to it to be
necessary or expedient for removing the difficulty.
17. APPLICATION OF THE BANKING OMBUDSMAN SCHEMES,
1995 AND 2002
The adjudication of pending complaints and execution of the Awards
already passed, before coming into force of the Banking Ombudsman
Scheme, 2006, shall continue to be governed by the provisions of the
respective Banking Ombudsman Schemes and instructions of the
Reserve Bank issued thereunder.

Credit Rating Agencies in India

Banking NotesBanking and Finance ConceptsBanking Organizations
By AC Team Last updated Jun 2, 2016

A credit rating agency is a company which rates the debtors on the

basis of their ability to pay back the debt in timely manner. They rate
large scale borrowers, whether companies or governments.
There are three big credit rating agencies in the world which are
Standard and Poor’s (S&P), Moody’s and Fitch Ratings.

There are mainly 4 credit rating agencies in India which are

Credit Rating and Information Services of India Limited (CRISIL)

 It is India’s first credit rating agency which was incorporated and

promoted by the erstwhile ICICI Ltd, along with UTI and other
financial institutions in 1987.
 After 1 year, i.e. in 1988 it commenced its operations.
 It has its head office in Mumbai.
 It is India’s foremost provider of ratings, data and research,
analytics and solutions, with a strong track record of growth and
innovation.
 It delivers independent opinions and efficient solutions.
 CRISIL’s businesses operate from 8 countries including USA,
Argentina, Poland, UK, India, China, Hong Kong and Singapore.
 CRISIL’s majority shareholder is Standard & Poor’s.
 It also works with governments and policy-makers in India and
other emerging markets in the infrastructure domain.

Investment Information and Credit rating agency (ICRA)

  The second credit rating agency incorporated in India was ICRA in
1991.
 It was set up by leading financial/investment institutions,
commercial banks and financial services companies as an
independent and professional investment Information and Credit
Rating Agency.
 It is a public limited company.
 It has its head office in New Delhi.
 ICRA’s majority shareholder is Moody’s.

Credit Analysis & Research Ltd. (CARE)

 The next credit rating agency to be set up was CARE in 1993.

 It is the second-largest credit rating agency in India.
 It has its head office in Mumbai.
 CARE Ratings is one of the 5 partners of an international rating
agency called ARC Ratings.

ONICRA

 It is a private sector agency set up by Onida Finance.

 It has its head office in Gurgaon.
 It provides ratings, risk assessment and analytical solutions to
Individuals, MSMEs and Corporates.
 It is one of only 7 agencies licensed by NSIC (National Small
Industries Corporation) to rate SMEs.
 They have Pan India Presence with offices over 125 locations.

Apart from these credit rating agencies, there are three more credit rating
agencies which are also registered with SEBI. These are Fitch Ratings
India Private Ltd., Brickwork Ratings India Private Limited, SME
Rating Agency of India Ltd. (SMERA).

Note:
  Out of four credit rating agencies, CRISIL, ICRA, CARE and
ONICRA, ONICRA is a private sector agency, all others are public
sector companies.
 There are 6 credit rating agencies which are registered with SEBI.
These are CRISIL, ICRA, CARE, Fitch India, Brickwork Ratings,
and SMERA.
 A Credit Rating Agency is a company that assigns ratings to the
debtors according to their ability to pay back the debt in a timely
manner. These agencies provide highly essential risk assessment
reports and analytical solutions and assign a definitive credit score
to both individuals as well as organizations. These reports are
considered important for getting the loan.

 Credit Rating Agencies in India has developed over a period of
time. The most popular Credit Rating Agencies in India are
CRISIL, ICRA, CARE, ONICRA, and SMERA.

 Any individual, corporation, state or provincial authority, or
sovereign government that seeks to borrow money are assigned
with a Credit Rating.



 “Prepare Smartly with Eduncle! Read Important GK &

Current Affair. Download Monthly GK Eduwrap for FREE!”



 Below are the top and most popular Credit Rating Agencies in
India which are important for UPSC IAS Prelims, SSC CGL,
Bank PO exams etc.


S.No. Name of Logo Year of Headquarters

Credit Rating
 Agency Establishment

Credit
Information
1. Bureau India
Limited
(CIBIL)

2000 Mumbai, India

Credit Rating Information

2. Services of India Limited
(CRISIL)

1987 Gurgaon, India

Investment
Information and
3. Credit Rating
Agency of India
(ICRA)

1991 Mumbai, India

Credit Analysis &

4.
Research Limited (CARE)

1993 Mumbai, India

Onida Individual Credit

5. Rating Agency of India
(ONICRA)
1993 Mumbai, India

Small and Medium

6. Enterprises Rating Agency
of India Limited (SMERA)

2005 Mumbai, India

Brickwork Ratings India

7.
Private Limited

2007 Bangalore, India

Equifax Credit
Information
8.
Services Private
Limited (ECIS)

2010 Mumbai, India

9. Experian India

2006 Mumbai, India

CIBIL

Full Form: Credit Information Bureau India Limited.

Year of Establishment: 2000.

Headquarters: Mumbai, India.

 Role of CIBIL in Rating Debtors: Important Details

 CIBIL is a Credit Rating Agency operating in India, founded

in August 2000.
 TransUnion CIBIL is one of the four credit bureaus operating
in India.
 It maintains credit files of over 550 million individuals and 32
million businesses.
 Their main objective is to create information solutions that enable
businesses to grow and give consumers faster, cheaper access to
credit and other services.
 CRISIL

Full Form: Credit Rating Information Services of India Ltd.

Year of Establishment: 1987

Headquarters: Gurgaon, India

 CRISIL, A Trusted Rating for Debtors, Investors,

Intermediaries in India: Important Details
 CRISIL is India’s first credit rating agency, with a market share of
more than 60%.
 It was promoted by ICICI Ltd, UTI, and other financial
institutions.
 In 1988, it commenced its operations.
 In 1995, in partnership with National Stock Exchange, CRISIL
developed CRISIL500 Equity Index.
 CRISIL’s businesses operate from 8 countries: USA, Argentina,
Poland, UK, India, China, Hong Kong and Singapore.
 In 1996, it allied with the Standard & Poor’s (S&P) Ratings Group
and in the next year, Standard & Poor’s (S&P) Ratings Group
acquired 9.68% shares in it.
 ICRA
 Full Form: Investment Information and Credit Rating Agency of
India
 Year of Establishment: 1991
 Headquarters: Mumbai, India
 ICRA as an Indian Credit Rating Agency: Important Details
 ICRA originally named as Investment Information and Credit
Rating Agency of India Limited (IICRA India) is an independent
and professional investment information and credit rating agency
in India.
 It is India’s second credit rating agency.
 It was promoted by Industrial Finance Corporation of India (IFCI),
and other leading financial/investment institutions.
 Role of ICRA: Corporate debt rating, Financial sector rating,
Issuer rating, Bank loan credit rating, Public finance rating,
Corporate governance rating, Structured finance rating, SME
rating, Mutual fund rating, Infrastructure sector rating, Project
finance rating and Insurance sector rating are the types of ratings
offered by ICRA.
 CARE
 Full Form: Credit Analysis & Research Limited.
 Year of Establishment: 1993.
 Headquarters: Mumbai, India.
 CARE as an Indian Credit Rating Agency: Important Details
 CARE is India’s third Credit Rating Agency.
 It commenced its operations in April 1993.
 It was mainly promoted by IDBI along with Canara Bank, UTI and
other financial and lending institutions.
 Role of CARE: It offers credit ratings in the following areas: Debt
ratings, Bank loan ratings, Issuer ratings, Corporate governance,
Recovery ratings, Financial sector, and Infrastructure ratings.
 It is the second-largest Credit Rating Agency in India.
 ONICRA
 Full Form: Onida Individual Credit Rating Agency of India
 Year of Establishment: 1993
 Headquarters: Gurgaon, India
 ONICRA As an Indian Credit Rating Agency: Important
Details
 ONICRA is a private sector agency which was set up by Onida
Finance.
 It performs a wide range of areas such as Accounting, Finance,
Back-end Management, Analytics, and Customer Relations.
 ONICRA have Pan India Presence with offices over 125 locations.
 It investigates data and arranges for possible rating solutions for
Small and Medium Enterprises and Individuals.
 Role of ONICRA: Risk assessment reports and analytical
solutions for individuals, MSME’s as well as for well-established
corporate organizations are offered by ONICRA.
 “Prepare Smartly with Eduncle! Read Important GK &
Current Affair. Download Monthly GK Eduwrap for FREE!”

 SMERA
 Full Form: Small and Medium Enterprises Rating Agency of
India Limited.
 Year of Establishment: 2005.
 Headquarters: Mumbai, India.
 SMERA As an Indian Credit Rating Agency: Important
Details
 SMERA is a credit rating agency in India which was set up for
micro, small and medium enterprises (MSME).
 It was established in 2005 by SIDBI, Dun & Bradstreet
Information Services India Private Limited (D&B) and some chief
banks in India.
 In 1999, SMERA has been registered under Securities and
Exchange Board of India and is only the sixth rating agency in
India to rate issues such as IPO, bonds, commercial papers,
security receipts and others.
 Role of SMERA: As an external credit assessment institution
(ECAI), Reserve Bank of India (RBI) accredited SMERA to rate
bank loan ratings under Basel II guidelines.
 BWR
 Full Form: Brickwork Ratings India Private Limited.
 Year of Establishment: 2007
 Headquarters: Bangalore, India.
 BWR as an Indian Credit Rating Agency: Important Details
 Brickwork Ratings is a credit rating agency in India which was
established in 2007.
 It also plays a significant role in the grading of real estate
investments, hospitals, educational institutions, tourism, NGOs,
IREDA, MFI, and MNRE.
 It is also accredited by Reserve Bank of India (RBI) and
empaneled by NSIC.
 It offers Bank Loan, NCD, Commercial Paper, MSME ratings and
grading services.
 Role of BWR: BWR is responsible for rating bank loans,
municipal corporation, capital market instrument, financial
institutions, SME’s and corporate governance ratings.
 ECIS
 Full Form: Equifax India (Equifax Credit Information Services
Private Limited).
 Year of Establishment: 2010
 Headquarters: Mumbai, India.
 ECIS as an Indian Credit Rating Agency: Important Details
 Equifax India is a subsidiary of Equifax US which was established
in 2010.
 It formed a joint venture between the parent company and seven
prime financial institutions in India (UBI, SBI, Bank of Baroda,
Bank of India, Kotak Mahindra, Sundaram Finance and Religare).
 Equifax India has an energetic team of experts and leaders who
come from the Banking and Financial services of the world.
 Role of ECIS: Reports provided by Equifax India includes Basic
or Enhanced consumer information report, Equifax alerts, and
Microfinance institution credit information.
 Experian India
 Full Form: Experian India.
 Year of Establishment: 2006
 Headquarters: Mumbai, India
 Experian India As an Indian Credit Rating Agency: Important
Details
 In February 2010, Experian India became the first Credit
Information Company to be awarded a license to the new Credit
Information Companies (Regulation) Act (CICRA) 2005.
 Experian India also became the first CICRA licensed credit bureau
on 12th August 2010, to go live with its operations.
  Role of Experian India: Experian India is a Credit Rating Agency
in India which consists of two types of companies: Experian Credit
Information Company of India Private Limited (provides credit
information) and Experian Services India Private Limited
(provides relevant data for organizations to minimize risk and
maximize revenue).

WHAT IS CIBIL™?

Credit Information Bureau (India) Limited, commonly known as

CIBIL™, is India’s first Credit Information Company or Credit Bureau.
It maintains records of all credit-related activity of individuals and
companies including loans and credit cards . The records are submitted
to CIBIL™ by registered member banks and other financial institutions
on a periodic (usually monthly) basis. Based on this data, CIBIL™
issues a Credit Information Report or CIR (commonly referred to as a
credit report) and a credit score.

CIBIL™ was founded in 2000 in order to bring greater efficiency and

transparency in the credit space. TransUnion International (a global
credit bureau) and Dun and Bradstreet (a global provider of credit
information) are technical partners of CIBIL™ in India. CIBIL™’s
mission is “To catalyze growth of Credit in India through: solutions that
enable well informed Credit decisions; technology that enables superior
information availability; and people that provide high quality services.”
It has an ISO 27001 rating, which is the highest security standard in the
world.

Shareholders in CIBIL™ include TransUnion International, ICICI, SBI,

IOB, HSBC, Union Bank of India, Bank of India, Bank of Baroda, and
Allahabad Bank.

CIBIL™ has two focus areas: A Consumer Bureau that deals with
consumer credit records and a Commercial Bureau that deals with the
records of companies and institutions.
It is important to note that CIBIL™ is a database of credit information.
It does not make any lending decisions. It provides data to banks and
other lenders who use it as a quick and efficient resource to filter loan
applications.

ECS

ECS is an electronic mode of funds transfer from one bank account to

another. It can be used by institutions for making payments such as
distribution of dividend interest, salary, pension, among others. It can
also be used to pay bills and other charges such as telephone, electricity,
water or for making equated monthly installments payments on loans as
well as SIP investments. ECS can be used for both credit and debit
purposes.

How do you avail of an ECS scheme?

You need to inform your bank and provide a mandate that authorises the
institution, who can then debit or credit the payments through the bank.
The mandate contains details of your bank branch and account
particulars. It is the responsibility of the institution to communicate the
details of the amount being credited or debited to their account,
indicating the date of credit and other relative particulars of the payment.
You will know the money has been debited from your account through
mobile alerts or messages from the bank.The ECS user can set the
maximum amount one can debit from the account, specify the purpose
of debit, as well as set a validity period for every mandate given.

What are the processing or service charges levied on the customer?

The Reserve Bank of India has deregulated the charges to be levied by
sponsor banks from institutions. Destination bank branches have been
directed to afford ECS credit free of charge to the beneficiary account
holders. So, it costs you nothing.
How do you discontinue an ECS scheme?
There are two steps you have to follow to ensure appropriate closure.
Firstly, the service provider, which is the beneficiary of the payment,
will have to be given a written communication in the way stipulated by
them, in order to discontinue the services. And next, the bank, which is
the channel of payment, will also have to be given a written application
stating you would like to discontinue.

Electronic Clearing Services

1. What is Electronic Clearing Service (ECS)?

Ans : ECS is an electronic mode of payment / receipt for transactions

that are repetitive and periodic in nature. ECS is used by institutions for
making bulk payment of amounts towards distribution of dividend,
interest, salary, pension, etc., or for bulk collection of amounts towards
telephone / electricity / water dues, cess / tax collections, loan
instalment repayments, periodic investments in mutual funds, insurance
premium etc. Essentially, ECS facilitates bulk transfer of monies from
one bank account to many bank accounts or vice versa. ECS includes
transactions processed under National Automated Clearing House
(NACH) operated by National Payments Corporation of India (NPCI).

Q.2. What are the variants of ECS? In what way are they different from
each other?

Ans : Primarily, there are two variants of ECS - ECS Credit and ECS
Debit.

ECS Credit is used by an institution for affording credit to a large

number of beneficiaries (for instance, employees, investors etc.) having
accounts with bank branches at various locations within the jurisdiction
of a ECS Centre by raising a single debit to the bank account of the user
institution. ECS Credit enables payment of amounts towards
distribution of dividend, interest, salary, pension, etc., of the user
institution.

ECS Debit is used by an institution for raising debits to a large number

of accounts (for instance, consumers of utility services, borrowers,
investors in mutual funds etc.) maintained with bank branches at
various locations within the jurisdiction of a ECS Centre for single
credit to the bank account of the user institution. ECS Debit is useful for
payment of telephone / electricity / water bills, cess / tax collections,
loan installment repayments, periodic investments in mutual funds,
insurance premium etc., that are periodic or repetitive in nature and
payable to the user institution by large number of customers etc.

Q.3. At how many places in the country is ECS Scheme available?

Ans : Based on the geographical location of branches covered, there are

three broad categories of ECS Schemes – Local ECS, Regional ECS
and National ECS.These schemes are either operated by RBI or by the
designated commercial banks. NACH is also one of the form of ECS
system operated by NPCI and further details about NACH is available
at NPCI web site under the link
http://www.npci.org.in/clearing_faq.aspx.

Local ECS – this is operating at 81 centres / locations across the

country. At each of these ECS centres, the branch coverage is restricted
to the geographical coverage of the clearing house, generally covering
one city and/or satellite towns and suburbs adjoining the city.

Regional ECS – this is operating at 9 centres / locations at various parts

of the country. RECS facilitates the coverage all core-banking-enabled
branches in a State or group of States and can be used by institutions
desirous of reaching beneficiaries within the State / group of States. The
system takes advantage of the core banking system in banks.
Accordingly, even though the inter-bank settlement takes place
centrally at one location in the State, the actual customers under the
Scheme may have their accounts at various bank branches across the
length and breadth of the State / group of States.

National ECS – this is the centralized version of ECS Credit which was
launched in October 2008. The Scheme is operated at Mumbai and
facilitates the coverage of all core-banking enabled branches located
anywhere in the country. This system too takes advantage of the core
banking system in banks. Accordingly, even though the inter-bank
settlement takes place centrally at one location at Mumbai, the actual
customers under the Scheme may have their accounts at various bank
branches across the length and breadth of the country. Banks are free to
add any of their core-banking-enabled branches in NECS irrespective of
their location. Details of NECS Scheme are available on the website of
Reserve Bank of India at
http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2345

The list of centres where the ECS facility is available has been placed
on the website of Reserve Bank of India at
http://www.rbi.org.in/Scripts/ECSUserView.aspx?Id=26. Similarly, the
centre-wise list of bank branches participating at each location is
available on the website of Reserve Bank of India at
http://www.rbi.org.in/scripts/ECSUserView.aspx?Id=27

ECS (CREDIT)

Q.4. Who can initiate an ECS Credit transaction?

Ans : ECS Credit payments can be initiated by any institution (called

ECS Credit User) which needs to make bulk or repetitive payments to a
number of beneficiaries. The institutional User has to first register with
an ECS Centre. The User has to also obtain the consent of beneficiaries
(i.e., the recipients of salary, pension, dividend, interest etc.) and get
their bank account particulars prior to participation in the ECS Credit
scheme.

ECS Credit payments can be put through by the ECS User only through
his / her bank (known as the Sponsor bank). ECS Credits are afforded to
the beneficiary account holders (known as destination account holders)
through the beneficiary account holders’ bank (known as the destination
bank). The beneficiary account holders are required to give mandates to
the user institutions to enable them to afford credit to their bank
accounts through the ECS Credit mechanism.

Q.5. How does the ECS Credit Scheme work?

Ans : The User intending to effect payments through ECS Credit has to
submit details of the beneficiaries (like name, bank / branch / account
number of the beneficiary, MICR code of the destination bank branch,
etc.), date on which credit is to be afforded to the beneficiaries, etc., in a
specified format (called the input file) through its sponsor bank to one
of the ECS Centres where it is registered as a User.

The bank managing the ECS Centre then debits the account of the
sponsor bank on the scheduled settlement day and credits the accounts
of the destination banks, for onward credit to the accounts of the
ultimate beneficiaries with the destination bank branches.

Further details about the ECS Credit scheme are contained in the
Procedural Guidelines and available on the website of Reserve Bank of
India at http://www.rbi.org.in/Scripts/ECSUserView.aspx?Id=1

Q.6. What is a MICR Code?

Ans : MICR is an acronym for Magnetic Ink Character Recognition.

The MICR Code is a numeric code that uniquely identifies a bank-
branch participating in the ECS Credit scheme. This is a 9 digit code to
identify the location of the bank branch; the first 3 characters represent
the city, the next 3 the bank and the last 3 the branch. The MICR Code
allotted to a bank branch is printed on the MICR band of cheques issued
by bank branches.

Q.7. How does a beneficiary participate in ECS Credit Scheme?

Ans : The beneficiary has to furnish a mandate to the user institution
giving consent to avail the ECS Credit facility. The mandate contains
details of his / her bank branch, account particulars and authorises the
user institution to afford credit to his / her account with the destination
bank branch.

Q.8. Is it necessary for user institutions to collect the mandates from

beneficiaries?

Ans : Yes, in addition to the consent of the beneficiaries, the mandate

also provides important information related to bank account details etc.
which are useful for the user institution to transfer funds to the right
accounts . A model mandate form has been prescribed for the purpose
and is available in the ECS Credit Procedural Guidelines.

Q.9. Is there scope for the beneficiary to alter the mandate under the
ECS Credit Scheme?

Ans : Yes. In case the information / account particulars contained in the

mandate undergo any change, the beneficiary has to notify the changes
to the User Institution so that the correct information can be
incorporated in its records. This will ensure that transactions do not get
rejected at the beneficiary’s bank branch due to inconsistencies/
mismatch in the data sent by the user institution.

Q.10. Can ECS be used to transfer funds to Non Resident External

(NRE) and Non Resident Ordinary (NRO) accounts?

Ans: Yes. ECS can be used to transfer funds to NRE and NRO accounts
in the country. This, however, is subject to the adherence to the
provisions of the Foreign Exchange Management Act, 2000 (FEMA)
and Wire Transfer Guidelines.

Q.11. Will beneficiaries be intimated of credits afforded to their account

under the ECS Credit Scheme?
Ans : It is the responsibility of the user institution to communicate to
the beneficiary the details of credit that is being afforded to his / her
account, indicating the proposed date of credit, amount and related
particulars of the payment. Destination banks have been advised to
ensure that the pass books / statements given to the beneficiary account
holders reflect particulars of the transaction / credit provided by the
ECS user institutions. The beneficiaries can match the entries in the
passbook / account statement with the advice received by them from the
User Institutions. Many banks also give mobile alerts / messages to
customers after credit of such funds to accounts.

Q.12. What will happen if credit is not afforded to the account of the
beneficiary?

Ans: If a Destination Bank is not in a position to credit the beneficiary

account due to any reason, the same would be returned to the ECS
Centre to enable the ECS Centre to pass on the uncredited items to the
User Institution through the Sponsor Bank. The User Institution can
then initiate payment through alternate modes to the beneficiary.

In case of delayed credit by the destination bank, the destination bank

would be liable to pay penal interest (at the prevailing RBI LAF Repo
rate plus two percent) from the due date of credit till the date of actual
credit. Such penal interest should be credited to the Destination Account
Holder’s account even if no claim is lodged to the effect by the
Destination Account Holder.

Q.13. What are the advantages of the ECS Credit Scheme to the
beneficiary

Ans : ECS Credit offers many advantages to the beneficiary –

 The beneficiary need not visit his / her bank for depositing the
paper instruments which he would have otherwise received had he
not opted for ECS Credit.
 The beneficiary need not be apprehensive of loss / theft of
 physical instruments or the likelihood of fraudulent encashment
thereof.
 Cost effective.
 The beneficiary receives the funds right on the due date.

Q.14. How does the ECS Credit Scheme benefit User Institutions?

Ans : User institutions enjoy many advantages as well. For instance,

 Savings on administrative machinery and costs of printing,

dispatch and reconciliation of paper instruments that would have
been used had beneficiaries not opted for ECS Credit.
 Avoid chances of loss / theft of instruments in transit, likelihood
of fraudulent encashment of paper instruments, etc. and
subsequent correspondence / litigation.
 Efficient payment mode ensuring that the beneficiaries get credit
on a designated date.
 Cost effective.

Q.15. Are there any advantages of the ECS Credit Scheme to the
banking system?

Ans : Yes, the banking system too benefits from ECS Credit Scheme
such as –

 Freedom from paper handling and the resultant disadvantages of

handling, presenting and monitoring paper instruments presented
in clearing. Ease of processing and return for the destination bank
branches.
 Smooth process of reconciliation for the sponsor banks.
 Cost effective.

Q.16. Is there any limit on the value of individual transactions in ECS

Credit?

Ans : No. There is no value limit on the amount of individual

transactions.

Q.17. What are the processing / service charges levied under ECS
Credit?

Ans : The Reserve Bank of India has deregulated the charges to be

levied by sponsor banks from user institutions. The sponsor banks are,
however, required to disclose the charges in a transparent manner. With
effect from 1st July 2011, originating banks are required to pay a
nominal charge of 25 paise per transaction to the Clearing house and
destination bank respectively. Destination bank branches have been
directed to afford ECS Credit free of charge to the beneficiary account
holders.

ECS (DEBIT)

Q.18. Who can initiate a ECS Debit transaction?

Ans : ECS Debit transaction can be initiated by any institution (called

ECS Debit User) which has to receive / collect amounts towards
telephone / electricity / water dues, cess / tax collections, loan
installment repayments, periodic investments in mutual funds, insurance
premium etc. It is a Scheme under which an account holder with a bank
branch can authorise an ECS User to recover an amount at a prescribed
frequency by raising a debit to his / her bank account.

The User institution has to first register with an ECS Centre. The User
institution has to also obtain the authorization (mandate) from its
customers for debiting their account along with their bank account
particulars prior to participation in the ECS Debit scheme. The mandate
has to be duly verified by the beneficiary’s bank. A copy of the mandate
should be available on record with the destination bank where the
customer has a bank account.

Q.19. How does the ECS Debit Scheme work?

Ans : The ECS Debit User intending to collect receivables through ECS
Debit has to submit details of the customers (like name, bank / branch /
account number of the customer, MICR code of the destination bank
branch, etc.), date on which the customer’s account is to be debited,
etc., in a specified format (called the input file) through its sponsor bank
to the ECS Centre.

The bank managing the ECS Centre then passes on the debits to the
destination banks for onward debit to the customer’s account with the
destination bank branch and credits the sponsor bank's account for
onward credit to the User institution. Destination bank branches will
treat the electronic instructions received from the ECS Centre on par
with the physical cheques and accordingly debit the customer accounts
maintained with them. All the unsuccessful debits are returned to the
sponsor bank through the ECS Centre (for onward return to the User
Institution) within the specified time frame.

For further details about the ECS Debit scheme, the ECS Debit
Procedural Guidelines – available on the website of Reserve Bank of
India at http://www.rbi.org.in/Scripts/ECSUserView.aspx?Id=25 may
be referred to.

Q.20. What are the advantages of ECS Debit Scheme to the customers?

Ans : The advantages of ECS Debit to customers are many and include,

 ECS Debit mandates will take care of automatic debit to customer

accounts on the due dates without customers having to visit bank
branches / collection centres of utility service providers etc.
 Customers need not keep track of due date for payments.
 The debits to customer accounts would be monitored by the ECS
Users, and the customers alerted accordingly.
 Cost effective.

Q.21. How does the ECS Debit Scheme benefit user institutions?
Ans : User institutions enjoy many benefits from the ECS Debit Scheme
like,

 Savings on administrative machinery and costs of collecting the

cheques from customers, presenting in clearing, monitoring their
realisation and reconciliation.
 Better cash management because of realisation / recovery of dues
on due dates promptly and efficiently.
 Avoids chances of loss / theft of instruments in transit, likelihood
of fraudulent access to the paper instruments and encashment
thereof.
 Realisation of payments on a uniform date instead of fragmented
receipts spread over many days.
 Cost effective.

Q.22. What are the advantages of ECS Debit Scheme to the banking
system?

Ans : The banking system has many benefits from ECS Debit such as –

 Freedom from paper handling and the resultant disadvantages of

handling, receiving and monitoring paper instruments presented in
clearing.
 Ease of processing and return for the destination bank branches.
Destination bank branches can debit the customers’ accounts after
matching the account number of the customer in their database
and due verification of existence of valid mandate and its
particulars. With core banking systems in place and straight-
through-processing, this process can be completed with minimal
manual intervention.
 Smooth process of reconciliation for the sponsor banks.
 Cost effective.

Q.23. Can the mandate once given by a customer be withdrawn or

stopped?
Ans : Yes. In case of any need to withdraw or stop a mandate the
customer can do so by approaching the user institution to withdraw the
mandate. The account holder / customer can also withdraw the mandate
/ debit instruction directly from his / her banker without involvement of
the User institution. The withdrawal instructions of a customer in such
cases would be treated equivalent to a ‘stop payment’ instruction in
cheque clearing system. However, as a matter of best practice, the
customer may also provide prior notice or intimation of mandate
withdrawal to the ECS user institution well in time, so as to ensure that
the input files submitted by the user institution does not include the
ECS Debit details in respect of the withdrawn / stopped mandates,
leading to avoidable returns/rejections etc.

Q.24. Can a customer stipulate any ceiling on the amount of debit,

purpose or validity period of the mandate under the ECS Debit Scheme?

Ans : Yes. It is left to the choice of the individual customer and the ECS
user to decide these aspects. The mandate can contain a ceiling on the
maximum amount of debit, specify the purpose of debit and validity
period of the mandate.

Q.25. Is there any limit on the value of Individual transactions in ECS

Debit?

Ans : No. There is no value limit on the amount of individual

transactions that can be collected by ECS Debit.

Q.26. What are the processing / service charges levied under ECS
Debit?

Ans : The Reserve Bank of India has deregulated the charges to be

levied by sponsor banks from user institutions. The sponsor banks are,
however, required to disclose the charges in a transparent manner. With
effect from 1st July 2011, originating banks are required to pay a
nominal charge of 25 paise and 50 paise per transaction to the Clearing
house and destination bank respectively. Bank branches do not
generally levy processing / service charges for debiting the accounts of
customers maintained with them.

External commercial borrowing

From Wikipedia, the free encyclopedia
(Redirected from External commercial borrowing (India))
Jump to navigation Jump to search

External commercial borrowing (ECBs) are loans in India made by

non-resident lenders in foreign currency to Indian borrowers. They are
used widely in India to facilitate access to foreign money by Indian
corporations and PSUs (public sector undertakings). ECBs include
commercial bank loans, buyers' credit, suppliers' credit, securitised
instruments such as floating rate notes and fixed rate bonds etc., credit
from official export credit agencies and commercial borrowings from the
private sector window of multilateral financial Institutions such as
International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
ECBs cannot be used for investment in stock market or speculation in
real estate. The DEA (Department of Economic Affairs), Ministry of
Finance, Government of India along with Reserve Bank of India,
monitors and regulates ECB guidelines and policies.

Most of these loans are provided by foreign commercial banks and other
institutions. During the 2012, contribution of ECBs was between 20 to
35 percent of the total capital flows into India. Large number of Indian
corporate and PSUs have used the ECBs as sources of investment.[1]

For infrastructure and greenfield projects, funding up to 50% (through

ECB) is allowed. According to a report in The Hindu in January 2013,
the Reserve Bank of India raised the ECB limit "for non-banking finance
companies (NBFCs) classified as infrastructure finance companies
(IFCs) ... from 50 per cent to 75 per cent of owned funds, including
outstanding ECBs".[2] In telecom sector too, up to 50% funding through
ECBs is allowed. Recently Government of India[3] allowed borrowings
in Chinese currency yuan.Corporate sectors can mobilize USD 750
million via automatic route,whereas service sectors and NGO's for
microfinance can mobilize USD 200 million and 10 million
respectively.[4]

Borrowers can use 25 per cent of the ECB to repay rupee debt and the
remaining 75 per cent should be used for new projects. A borrower can
not refinance its entire existing rupee loan through ECB. The money
raised through ECB is cheaper given near-zero interest rates in the US
and Europe, Indian companies can repay part of their existing expensive
loans from that.

Inflation: Meaning, Types, Causes, Effects and Remedies

Category: Economics By Gyan

What is Inflation? – Meaning

Inflation refers to a situation when there is an overall increase in the

prices of goods leading to a general decline in the value of money.

Inflation is phenomena marked by an excess of money supply over the

demand for it, that is to say, an excess of the supply of currency and
credit over the actual requirements of trade, commerce and industry.

We have inflation when there is an increase in the value of total money

supply multiplied by its velocity of circulation without a corresponding
increase in goods and services.

Inflation is characterized by a fall in the purchasing power of money and

an extraordinary rise in the cost of living. As a result of increased money
supply in the hands of people and the consequent competition for
purchasing goods which are in scarcity, there is a general increase in the
price indices.
Types

We will discuss the two major types of inflation:

1. Demand Pull Inflation: Inflation arises when there is an increase in

the supply of money but there is no corresponding increase in the supply
of goods useful to the community.

Accumulation of more money than before raises the purchasing power

of people and stimulates the demand for goods but the supply of the
latter being limited, the necessary consequence will be the inflation of
the price level. Demand Pull Inflation thus means, in plain words, too
much money chasing too few goods.

2. Cost Push Inflation: When the prices of goods increases because of

an increase in the cost of production, it is known as cost push inflation.

What causes Inflation?

Additional money put in the hands of people naturally creates in them a

desire to spend more on goods. The sellers these commodities get more
money and they too feel an urge to add something to what they already
possess, and the new purchases made with additional money will
correspondingly benefit other producers and sellers too in an ever-
widening circle. In this way, the demand for various commodities and
services will go on rising in a spiral order in times of inflation.

The activities of speculators, hoarders, and profiteers also contribute

much to the upward trend of prices.

The selling prices of good also increases if there is an overall increase in

manufacturing cost.

If the production of industrial and agricultural goods did not multiply in

proportion to the increase in demand, the prices of commodities
increases by leaps and bounds resulting into steep inflation.
The underdeveloped countries, in particular, in trying to industrialize
themselves and advance materially, resort to deficit financing when
other monetary resources have been completely tapped. There will be a
tremendous increase in money supply and its velocity of circulation due
to greater public borrowing and printing of more currency notes, and as
it is not accompanied by a corresponding increase in agricultural and
industrial production and services there is every possibility of an
inflationary trend setting in the economy.

What are the effects of Inflation?

It is not always true that additional purchasing power in the hands of

people will develop inflationary tendencies. If the resources of a country
are in an undeveloped condition, an addition to the purchasing power
may stimulate investment leading to an increased supply of
commodities. Money will be available at lower rates of interest and it
will be a powerful factor in increasing the production of goods through
larger investments of capital.

Unemployed labor will get wider opportunities for gainful occupations

and the standard of living for all classes of people will necessarily go
higher.

However, the evil effects of inflation are particularly noticeable in those

highly industrialized countries where there is hardly any surplus or
unemployed labor. Any increase in the supply of money cannot further
widen the scope for employment or raise the productive capacity of the
nation. The limits of productive capacity having been reached already,
any increase in the supply of money can only result in pushing up the
level of prices.

The value of money fell rapidly and its depreciation affected particularly
the interests of people with fixed incomes and investing classes.

Inflation does incalculable harm to planning also. Once the prices are
allowed to raise their ugly heads, all the calculations of the Government
fail. If there is an increase in the general price level and it has its being
on the projects, undertaken. Consequently, the Government needs more
money to fulfill the targets. The Government must either resort to further
deficit financing or must cut down the objectives as originally planned.

The bright side of the picture it that an increase in the supply of money
often creates opportunities for employment largely and considerably
relieves the burden of unemployment.

The resources of the country are more fully exploited and production is
stepped up in all spheres of industrial activities.

Thus, it is seen that inflation does some positive good to a backward

country whose resources are undeveloped and where a large section of
people remain idle for want of employment.

Remedial Measures:

However, the harmful tendencies of inflation should be minimized. In

countries where inflation prevails, the Government must take effective
steps to keep it under check.

 Inflation can be combated by reducing the purchasing power of the

people through imposition of additional taxes. The Governments
sought to minimize the evil of inflation by resorting to taxation,
controls, bans on speculation and encouragement to savings.
Income tax, tobacco tax, entertainment tax and excess profit tax are
all meant to withdraw currency from the money-market. A high
rate of taxation may, however, prove annoying and take away the
initiative for enterprise.
 The Government sometimes raises public loans, which also
effectively restricts the purchasing power of people.
 It may also be necessary to impose a system of control on
production and distribution of many goods. Rationing systems are
introduced and prices of consumer goods are controlled.
  Governments encourage people to invest in bank deposits, and
government securities, thus withdrawing the currency in excess.

However, these measures, we must remember, can gain only a limited

measure of success. They can check further rise in prices but cannot
effectively bring them down.

Conclusion

While controls and the monetary measures enumerated above, have gone
a long way to check inflation they alone are not sufficient. Inflationary
tendency have to be fought on the production front. Although deficit
financing increases the risks of inflation in economy for the time being,
it would tend to check inflation in the long run when the investment
would begin to yield results. While on one side money in circulation
would be withdrawn by higher taxation and in the form of savings,
greater production in agriculture and industrial spheres would place
more commodities in the market to be purchased for the same amount of
money.

Inflation: Types, Causes and Effects (With Diagram)

Inflation and unemployment are the two most talked-about words in the
contemporary society.

These two are the big problems that plague all the economies.

Almost everyone is sure that he knows what inflation exactly is, but it
remains a source of great deal of confusion because it is difficult to
define it unambiguously.

1. Meaning of Inflation:

Inflation is often defined in terms of its supposed causes. Inflation exists

when money supply exceeds available goods and services. Or inflation is
attributed to budget deficit financing. A deficit budget may be financed
by the additional money creation. But the situation of monetary
expansion or budget deficit may not cause price level to rise. Hence the
difficulty of defining ‘inflation’.

Inflation may be defined as ‘a sustained upward trend in the general

level of prices’ and not the price of only one or two goods. G. Ackley
defined inflation as ‘a persistent and appreciable rise in the general level
or average of prices’. In other words, inflation is a state of rising prices,
but not high prices.

It is not high prices but rising price level that constitute inflation. It
constitutes, thus, an overall increase in price level. It can, thus, be
viewed as the devaluing of the worth of money. In other words, inflation
reduces the purchasing power of money. A unit of money now buys less.
Inflation can also be seen as a recurring phenomenon.

While measuring inflation, we take into account a large number of goods

and services used by the people of a country and then calculate average
increase in the prices of those goods and services over a period of time.
A small rise in prices or a sudden rise in prices is not inflation since they
may reflect the short term workings of the market.

It is to be pointed out here that inflation is a state of disequilibrium when

there occurs a sustained rise in price level. It is inflation if the prices of
most goods go up. Such rate of increases in prices may be both slow and
rapid. However, it is difficult to detect whether there is an upward trend
in prices and whether this trend is sustained. That is why inflation is
difficult to define in an unambiguous sense.

Let’s measure inflation rate. Suppose, in December 2007, the consumer

price index was 193.6 and, in December 2008, it was 223.8. Thus, the
inflation rate during the last one year was

223.8- 193.6/ 193.6 x 100 = 15.6

As inflation is a state of rising prices, deflation may be defined as a state
of falling prices but not fall in prices. Deflation is, thus, the opposite of
inflation, i.e., a rise in the value of money or purchasing power of
money. Disinflation is a slowing down of the rate of inflation.

2. Types of Inflation:

As the nature of inflation is not uniform in an economy for all the time,
it is wise to distinguish between different types of inflation. Such
analysis is useful to study the distributional and other effects of inflation
as well as to recommend anti-inflationary policies. Inflation may be
caused by a variety of factors. Its intensity or pace may be different at
different times. It may also be classified in accordance with the reactions
of the government toward inflation.

Thus, one may observe different types of inflation in the

contemporary society:

A. On the Basis of Causes:

(i) Currency inflation:

This type of inflation is caused by the printing of currency notes.

(ii) Credit inflation:

ADVERTISEMENTS:

Being profit-making institutions, commercial banks sanction more loans

and advances to the public than what the economy needs. Such credit
expansion leads to a rise in price level.

(iii) Deficit-induced inflation:

The budget of the government reflects a deficit when expenditure

exceeds revenue. To meet this gap, the government may ask the central
bank to print additional money. Since pumping of additional money is
required to meet the budget deficit, any price rise may the be called the
deficit-induced inflation.

(iv) Demand-pull inflation:

An increase in aggregate demand over the available output leads to a rise

in the price level. Such inflation is called demand-pull inflation
(henceforth DPI). But why does aggregate demand rise? Classical
economists attribute this rise in aggregate demand to money supply. If
the supply of money in an economy exceeds the available goods and
services, DPI appears. It has been described by Coulborn as a situation
of “too much money chasing too few goods.”

Keynesians hold a different argument. They argue that there can be an

autonomous increase in aggregate demand or spending, such as a rise in
consumption demand or investment or government spending or a tax cut
or a net increase in exports (i.e., C + I + G + X – M) with no increase in
money supply. This would prompt upward adjustment in price. Thus,
DPI is caused by monetary factors (classical adjustment) and non-
monetary factors (Keynesian argument).

DPI can be explained in terms of Fig. 4.2, where we measure output on

the horizontal axis and price level on the vertical axis. In Range 1, total
spending is too short of full employment output, YF. There is little or no
rise in the price level. As demand now rises, output will rise. The
economy enters Range 2, where output approaches towards full
employment situation. Note that in this region price level begins to rise.
Ultimately, the economy reaches full employment situation, i.e., Range
3, where output does not rise but price level is pulled upward. This is
demand-pull inflation. The essence of this type of inflation is that “too
much spending chasing too few goods.”
(v) Cost-push inflation:

Inflation in an economy may arise from the overall increase in the cost
of production. This type of inflation is known as cost-push inflation
(henceforth CPI). Cost of production may rise due to an increase in the
prices of raw materials, wages, etc. Often trade unions are blamed for
wage rise since wage rate is not completely market-determinded. Higher
wage means high cost of production. Prices of commodities are thereby
increased.

A wage-price spiral comes into operation. But, at the same time, firms
are to be blamed also for the price rise since they simply raise prices to
expand their profit margins. Thus, we have two important variants of
CPI wage-push inflation and profit-push inflation.

Anyway, CPI stems from the leftward shift of the aggregate supply
curve:
B. On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation:

If the speed of upward thrust in prices is slow but small then we have
creeping inflation. What speed of annual price rise is a creeping one has
not been stated by the economists. To some, a creeping or mild inflation
is one when annual price rise varies between 2 p.c. and 3 p.c. If a rate of
price rise is kept at this level, it is considered to be helpful for economic
development. Others argue that if annual price rise goes slightly beyond
3 p.c. mark, still then it is considered to be of no danger.

(ii) Walking Inflation:

If the rate of annual price increase lies between 3 p.c. and 4 p.c., then we
have a situation of walking inflation. When mild inflation is allowed to
fan out, walking inflation appears. These two types of inflation may be
described as ‘moderate inflation’.

Often, one-digit inflation rate is called ‘moderate inflation’ which is not

only predictable, but also keep people’s faith on the monetary system of
the country. Peoples’ confidence get lost once moderately maintained
rate of inflation goes out of control and the economy is then caught with
the galloping inflation.

(iii) Galloping and Hyperinflation:

Walking inflation may be converted into running inflation. Running

inflation is dangerous. If it is not controlled, it may ultimately be
converted to galloping or hyperinflation. It is an extreme form of
inflation when an economy gets shattered.”Inflation in the double or
triple digit range of 20, 100 or 200 p.c. a year is labelled “galloping
inflation”.

(iv) Government’s Reaction to Inflation:

Inflationary situation may be open or suppressed. Because of anti-infla-

tionary policies pursued by the government, inflation may not be an
embarrassing one. For instance, increase in income leads to an increase
in consumption spending which pulls the price level up.

If the consumption spending is countered by the government via price

control and rationing device, the inflationary situation may be called a
suppressed one. Once the government curbs are lifted, the suppressed
inflation becomes open inflation. Open inflation may then result in
hyperinflation.

3. Causes of Inflation:

Inflation is mainly caused by excess demand/ or decline in aggregate

supply or output. Former leads to a rightward shift of the aggregate
demand curve while the latter causes aggregate supply curve to shift left-
ward. Former is called demand-pull inflation (DPI), and the latter is
called cost-push inflation (CPI). Before describing the factors, that lead
to a rise in aggregate demand and a decline in aggregate supply, we like
to explain “demand-pull” and “cost-push” theories of inflation.

(i) Demand-Pull Inflation Theory:

There are two theoretical approaches to the DPI—one is classical and

other is the Keynesian.

According to classical economists or monetarists, inflation is caused by

an increase in money supply which leads to a rightward shift in negative
sloping aggregate demand curve. Given a situation of full employment,
classicists maintained that a change in money supply brings about an
equiproportionate change in price level.

That is why monetarists argue that inflation is always and everywhere a

monetary phenomenon. Keynesians do not find any link between money
supply and price level causing an upward shift in aggregate demand.

According to Keynesians, aggregate demand may rise due to a rise in

consumer demand or investment demand or government expenditure or
net exports or the combination of these four components of aggreate
demand. Given full employment, such increase in aggregate demand
leads to an upward pressure in prices. Such a situation is called DPI.
This can be explained graphically.

Just like the price of a commodity, the level of prices is determined by

the interaction of aggregate demand and aggregate supply. In Fig. 4.3,
aggregate demand curve is negative sloping while aggregate supply
curve before the full employment stage is positive sloping and becomes
vertical after the full employment stage is reached. AD1 is the initial
aggregate demand curve that intersects the aggregate supply curve AS at
point E1.
The price level, thus, determined is OP1. As aggregate demand curve
shifts to AD2, price level rises to OP2. Thus, an increase in aggregate
demand at the full employment stage leads to an increase in price level
only, rather than the level of output. However, how much price level will
rise following an increase in aggregate demand depends on the slope of
the AS curve.

(ii) Causes of Demand-Pull Inflation:

DPI originates in the monetary sector. Monetarists’ argument that “only

money matters” is based on the assumption that at or near full
employment excessive money supply will increase aggregate demand
and will, thus, cause inflation.

An increase in nominal money supply shifts aggregate demand curve

rightward. This enables people to hold excess cash balances. Spending
of excess cash balances by them causes price level to rise. Price level
will continue to rise until aggregate demand equals aggregate supply.

Keynesians argue that inflation originates in the non-monetary sector or

the real sector. Aggregate demand may rise if there is an increase in
consumption expenditure following a tax cut. There may be an
autonomous increase in business investment or government expenditure.
Government expenditure is inflationary if the needed money is procured
by the government by printing additional money.

In brief, increase in aggregate demand i.e., increase in (C + I + G + X –

M) causes price level to rise. However, aggregate demand may rise
following an increase in money supply generated by the printing of
additional money (classical argument) which drives prices upward.
Thus, money plays a vital role. That is why Milton Friedman argues that
inflation is always and everywhere a monetary phenomenon.

There are other reasons that may push aggregate demand and, hence,
price level upwards. For instance, growth of population stimulates
aggregate demand. Higher export earnings increase the purchasing
power of the exporting countries. Additional purchasing power means
additional aggregate demand. Purchasing power and, hence, aggregate
demand may also go up if government repays public debt.

Again, there is a tendency on the part of the holders of black money to

spend more on conspicuous consumption goods. Such tendency fuels
inflationary fire. Thus, DPI is caused by a variety of factors.

(iii) Cost-Push Inflation Theory:

In addition to aggregate demand, aggregate supply also generates

inflationary process. As inflation is caused by a leftward shift of the
aggregate supply, we call it CPI. CPI is usually associated with non-
monetary factors. CPI arises due to the increase in cost of production.
Cost of production may rise due to a rise in cost of raw materials or
increase in wages.

However, wage increase may lead to an increase in productivity of

workers. If this happens, then the AS curve will shift to the right- ward
not leftward—direction. We assume here that productivity does not
change in spite of an increase in wages.

Such increases in costs are passed on to consumers by firms by raising

the prices of the products. Rising wages lead to rising costs. Rising costs
lead to rising prices. And, rising prices again prompt trade unions to
demand higher wages. Thus, an inflationary wage-price spiral starts.
This causes aggregate supply curve to shift leftward.
This can be demonstrated graphically where AS1 is the initial aggregate
supply curve. Below the full employment stage this AS curve is positive
sloping and at full employment stage it becomes perfectly inelastic.

Intersection point (E1) of AD1 and AS1 curves determine the price level
(OP1). Now there is a leftward shift of aggregate supply curve to AS2.
With no change in aggregate demand, this causes price level to rise to
OP2 and output to fall to OY2. With the reduction in output, employment
in the economy declines or unemployment rises. Further shift in AS
curve to AS3 results in a higher price level (OP3) and a lower volume of
aggregate output (OY3). Thus, CPI may arise even below the full
employment (YF) stage.

(iv) Causes of Cost-Push Inflation:

It is the cost factors that pull the prices upward. One of the important
causes of price rise is the rise in price of raw materials. For instance, by
an administrative order the government may hike the price of petrol or
diesel or freight rate. Firms buy these inputs now at a higher price. This
leads to an upward pressure on cost of production.
Not only this, CPI is often imported from outside the economy. Increase
in the price of petrol by OPEC compels the government to increase the
price of petrol and diesel. These two important raw materials are needed
by every sector, especially the transport sector. As a result, transport
costs go up resulting in higher general price level.

Again, CPI may be induced by wage-push inflation or profit-push

inflation. Trade unions demand higher money wages as a compensation
against inflationary price rise. If increase in money wages exceed labour
productivity, aggregate supply will shift upward and leftward. Firms
often exercise power by pushing prices up independently of consumer
demand to expand their profit margins.

Fiscal policy changes, such as increase in tax rates also leads to an

upward pressure in cost of production. For instance, an overall increase
in excise tax of mass consumption goods is definitely inflationary. That
is why government is then accused of causing inflation.

Finally, production setbacks may result in decreases in output. Natural

disaster, gradual exhaustion of natural resources, work stoppages,
electric power cuts, etc., may cause aggregate output to decline. In the
midst of this output reduction, artificial scarcity of any goods created by
traders and hoarders just simply ignite the situation.

Inefficiency, corruption, mismanagement of the economy may also be

the other reasons. Thus, inflation is caused by the interplay of various
factors. A particular factor cannot be held responsible for any
inflationary price rise.

4. Effects of Inflation:

People’s desires are inconsistent. When they act as buyers they want
prices of goods and services to remain stable but as sellers they expect
the prices of goods and services should go up. Such a happy outcome
may arise for some individuals; “but, when this happens, others will be
getting the worst of both worlds.”
When price level goes up, there is both a gainer and a loser. To evaluate
the consequence of inflation, one must identify the nature of inflation
which may be anticipated and unanticipated. If inflation is anticipated,
people can adjust with the new situation and costs of inflation to the
society will be smaller.

In reality, people cannot predict accurately future events or people often

make mistakes in predicting the course of inflation. In other words,
inflation may be unanticipated when people fail to adjust completely.
This creates various problems.

One can study the effects of unanticipated inflation under two broad
headings:

(a) Effect on distribution of income and wealth; and

(b) Effect on economic growth.

(a) Effects of Inflation on Distribution of Income and Wealth:

During inflation, usually people experience rise in incomes. But some

people gain during inflation at the expense of others. Some individuals
gain because their money incomes rise more rapidly than the prices and
some lose because prices rise more rapidly than their incomes during
inflation. Thus, it redistributes income and wealth.

Though no conclusive evidence can be cited, it can be asserted that

following categories of people are affected by inflation differently:

(i) Creditors and debtors:

Borrowers gain and lenders lose during inflation because debts are fixed
in rupee terms. When debts are repaid their real value declines by the
price level increase and, hence, creditors lose. An individual may be
interested in buying a house by taking loan of Rs. 7 lakh from an in-
stitution for 7 years.
The borrower now welcomes inflation since he will have to pay less in
real terms than when it was borrowed. Lender, in the process, loses since
the rate of interest payable remains unaltered as per agreement. Because
of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’
rupees. However, if in an inflation-ridden economy creditors chronically
loose, it is wise not to advance loans or to shut down business.

Never does it happen. Rather, the loan-giving institution makes adequate

safeguard against the erosion of real value. Above all, banks do not pay
any interest on current account but charges interest on loans.

(ii) Bond and debenture-holders:

In an economy, there are some people who live on interest income—

they suffer most. Bondholders earn fixed interest income: These people
suffer a reduction in real income when prices rise. In other words, the
value of one’s savings decline if the interest rate falls short of inflation
rate. Similarly, beneficiaries from life insurance programmes are also hit
badly by inflation since real value of savings deteriorate.

(iii) Investors:

People who put their money in shares during inflation are expected to
gain since the possibility of earning of business profit brightens. Higher
profit induces owners of firm to distribute profit among investors or
shareholders.

(iv) Salaried people and wage-earners:

Anyone earning a fixed income is damaged by inflation. Sometimes,

unionised worker succeeds in raising wage rates of white-collar workers
as a compensation against price rise. But wage rate changes with a long
time lag. In other words, wage rate increases always lag behind price
increases. Naturally, inflation results in a reduction in real purchasing
power of fixed income-earners.

On the other hand, people earning flexible incomes may gain during
inflation. The nominal incomes of such people outstrip the general price
rise. As a result, real incomes of this income group increase.

(v) Profit-earners, speculators and black marketers:

It is argued that profit-earners gain from inflation. Profit tends to rise

during inflation. Seeing inflation, businessmen raise the prices of their
products. This results in a bigger profit. Profit margin, however, may not
be high when the rate of inflation climbs to a high level.

However, speculators dealing in business in essential commodities

usually stand to gain by inflation. Black marketers are also benefited by
inflation.

Thus, there occurs a redistribution of income and wealth. It is said that

rich becomes richer and poor becomes poorer during inflation. However,
no such hard and fast generalisation can be made. It is clear that
someone wins and someone loses during inflation.

These effects of inflation may persist if inflation is unanticipated.

However, the redistributive burdens of inflation on income and wealth
are most likely to be minimal if inflation is anticipated by the people.
With anticipated inflation, people can build up their strategies to cope
with inflation.

If the annual rate of inflation in an economy is anticipated correctly

people will try to protect them against losses resulting from inflation.
Workers will demand 10 p.c. wage increase if inflation is expected to
rise by 10 p.c.

Similarly, a percentage of inflation premium will be demanded by

creditors from debtors. Business firms will also fix prices of their
products in accordance with the anticipated price rise. Now if the entire
society “learn to live with inflation”, the redistributive effect of inflation
will be minimal.

However, it is difficult to anticipate properly every episode of inflation.

Further, even if it is anticipated it cannot be perfect. In addition,
adjustment with the new expected inflationary conditions may not be
possible for all categories of people. Thus, adverse redistributive effects
are likely to occur.

Finally, anticipated inflation may also be costly to the society. If

people’s expectation regarding future price rise become stronger they
will hold less liquid money. Mere holding of cash balances during
inflation is unwise since its real value declines. That is why people use
their money balances in buying real estate, gold, jewellery, etc. Such
investment is referred to as unproductive investment. Thus, during
inflation of anticipated variety, there occurs a diversion of resources
from priority to non-priority or unproductive sectors.

(b) Effect on Production and Economic Growth:

Inflation may or may not result in higher output. Below the full
employment stage, inflation has a favourable effect on production. In
general, profit is a rising function of the price level. An inflationary
situation gives an incentive to businessmen to raise prices of their prod-
ucts so as to earn higher volume of profit. Rising price and rising profit
encourage firms to make larger investments.

As a result, the multiplier effect of investment will come into operation

resulting in a higher national output. However, such a favourable effect
of inflation will be temporary if wages and production costs rise very
rapidly.

Further, inflationary situation may be associated with the fall in output,

particularly if inflation is of the cost-push variety. Thus, there is no strict
relationship between prices and output. An increase in aggregate
demand will increase both prices and output, but a supply shock will
raise prices and lower output.

Inflation may also lower down further production levels. It is commonly

assumed that if inflationary tendencies nurtured by experienced inflation
persist in future, people will now save less and consume more. Rising
saving propensities will result in lower further outputs.

One may also argue that inflation creates an air of uncertainty in the
minds of business community, particularly when the rate of inflation
fluctuates. In the midst of rising inflationary trend, firms cannot
accurately estimate their costs and revenues. That is, in a situation of
unanticipated inflation, a great deal of risk element exists.

It is because of uncertainty of expected inflation, investors become

reluctant to invest in their business and to make long-term commitments.
Under the circumstance, business firms may be deterred in investing.
This will adversely affect the growth performance of the economy.

However, slight dose of inflation is necessary for economic growth.

Mild inflation has an encouraging effect on national output. But it is
difficult to make the price rise of a creeping variety. High rate of
inflation acts as a disincentive to long run economic growth. The way
the hyperinflation affects economic growth is summed up here. We
know that hyper-inflation discourages savings.

A fall in savings means a lower rate of capital formation. A low rate of

capital formation hinders economic growth. Further, during excessive
price rise, there occurs an increase in unproductive investment in real
estate, gold, jewellery, etc. Above all, speculative businesses flourish
during inflation resulting in artificial scarcities and, hence, further rise in
prices.

Again, following hyperinflation, export earnings decline resulting in a

wide imbalances in the balance of payment account. Often galloping
inflation results in a ‘flight’ of capital to foreign countries since people
lose confidence and faith over the monetary arrangements of the
country, thereby resulting in a scarcity of resources. Finally, real value
of tax revenue also declines under the impact of hyperinflation.
Government then experiences a shortfall in investible resources.

Thus economists and policymakers are unanimous regarding the dangers

of high price rise. But the consequence of hyperinflation are disastrous.
In the past, some of the world economies (e.g., Germany after the First
World War (1914-1918), Latin American countries in the 1980s) had
been greatly ravaged by hyperinflation.

The German inflation of 1920s was also catastrophic:

During 1922, the German price level went up 5,470 per cent. In 1923,
the situation worsened; the German price level rose 1,300,000,000 (1.3
billion) times. By October of 1923, the postage in the lightest letter sent
from Germany to the United States was 200,000 marks. Butter cost 1.5
million marks per pound, meat 2 million marks, a loaf of bread 200,000
marks, and an egg 60,000 marks! Prices increased so rapidly that waiters
changed the prices on the menu several times during the course of a
lunch!! Sometimes, customers had to pay the double price listed on the
menu when they observed it first!!! A photograph of the period shows a
German housewife starting the fire in her kitchen stove with paper
money and children playing with bundles of paper money tied together
into building blocks!

Currently (September 2008), Indian economy experienced an inflation

rate of almost 13 p.c.—an unprecedented one over the last 16 or 17
years. However, an all-time record in price rise in India was struck in
1974-75 when it rose more than 25 p.c. Anyway, people are ultimately
harassed by the high dose of inflation. That is why, it is said that ‘infla-
tion is our public enemy number one.’ Rising inflation rate is a sign of
failure on the part of the government.
Teaser Loan

What is a 'Teaser Loan'

A teaser loan can refer to any loan that offers a teaser rate of interest.
Credit cards will often offer 0% introductory teaser rate loans.
Adjustable rate mortgages (ARM) are also known for using teaser rates
in their loan structuring to target a broader variety of borrowers.

BREAKING DOWN 'Teaser Loan'

Teaser loans can be a popular promotional loan product that entices a

broad array of borrowers. Having the flexibility to offer a teaser rate can
increase the customization and structuring options for all types of loans.
Credit cards with 0% introductory rates are some of the most common
teaser loans. Adjustable rate mortgages also use teaser rates to structure
loans in various ways.

Credit Cards

Credit cards that come with 0% introductory teaser rates are some of the
most popular products in the market. These loans will offer borrowers a
maximum credit limit for borrowing with no interest charged throughout
an introductory period, typically for approximately one year. Credit
cards have simple teaser rate structuring. With a teaser rate credit card,
the 0% interest rate applies for a specified period of time and then
standard rate detailed in the credit agreement begins to take affect.

Adjustable Rate Mortgages

Adjustable rate mortgages can use teaser rates in a few different ways.
Some ARM mortgages will begin with the teaser rate, which is a low
promotional interest rate. This rate can be charged during all of or a
portion of the fixed rate part of the mortgage. Some adjustable rate
mortgages may also use variations of teaser rates in the variable portion
of the loan. One example includes the payment options in a payment
option ARM. In a payment option ARM the borrower can choose from
multiple payment choices each month. Oftentimes one of these choices
will be a payment which includes the teaser rate of interest.

Adjustable rate mortgages also have the flexibility to structure a loan

with interest rate caps which can also integrate the teaser rate concept.
These loans will typically be structured as either a 2-2-6 or a 5-2-5.
These quotes refer to the incremental increases that can apply at various
times during the loan.

Teaser Rate Considerations

Teaser rates can help a borrower to save considerable amounts of money

on interest costs, however borrowers should be aware of the rates that
will apply after a teaser rate expires. Thus, borrowers should clearly
understand the payment terms and requirements detailed in their loan
contract before agreeing to a teaser loan’s terms.

What is gold monetisation scheme?

It is a scheme that facilitates the depositors of gold to earn interest on

their metal accounts. Once the gold is deposited in metal account, it will
start earning interest on the same.

How it generally works?

When a customer brings in gold to the counter of bank, the purity of

gold is determined and exact quantity of gold is credited in the metal
account. Customers may be asked to complete KYC (know-your-
customer) process. The deposited gold will be lent by banks to jewellers
at an interest rate little higher than the interest paid to customer.

How is the interest rate calculated?

Both principal and interest to be paid to the depositors of gold, will be
‘valued’ in gold. For example if a customer deposits 100 gm of gold and
gets one per cent interest, then, on maturity he has a credit of 101 gram.

The interest rate is decided by the banks concerned.

What is the tenure?

The tenure of gold deposits is likely to be for a minimum of one year.

The minimum quantity of deposits is pegged at 30 gram to encourage
even small deposits. The gold can be in any form, bullion or jewellery.

How the redemption takes place?

Customer will have the choice to take cash or gold on redemption, but
the preference has to be stated at the time of deposit.

Development Banks in India (Explained With Diagram)

ADVERTISEMENTS:

An outstanding financial development of the post-independence period

has been the rapid growth of development banks in the country. These
banks are specialised financial institutions which perform the twin
functions of providing medium and long-term finance to private
entrepreneurs and of performing various promotional roles conducive to
economic development.

As the name clearly suggests, they are development-oriented banks. As

banks, they provide finance. But they are unlike ordinary commercial
banks in three ways.

First, they do not seek or accept deposits from the public as ordinary
banks do.
ADVERTISEMENTS:

Second, they specialize in providing medium-and long- term finance,

whereas commercial banks have specialized in the provision of short-
term finance.

Third and most important, they are not mere purveyors of long-term
finance like any ordinary term- lending institution.

As development banks (with emphasis on the word ‘development’) their

chief distinguishing role is the promotion-of economic development by
way of promoting investment and enterprise (the two most scarce inputs
in LDCs) in their chosen (or allotted) spheres, whether manufacturing,
agriculture, or some other.

This promotional role may take a variety of forms, like provision of risk
capital, underwriting of new issues, arranging for foreign (exchange)
loans, identification of investment projects, preparation and evaluation
of project reports, provision of technical advice, market information
about both domestic and export markets, and management services.

ADVERTISEMENTS:

How much of these services a development bank is in a position to

render depends upon the technical expertise it has been able to build up,
the competence of its staff and their experience. The Indian development
banks have as yet not developed so much as to be able to provide a
whole gamut of development services. But their contribution in the
channeling of finance has been sizeable and large-scale industry in the
private sector has been the main beneficiary.

The financial assistance to industry is given in the following four

main forms:

(i) Term loans and advances,

(ii) Subscription to shares and debentures,

(iii) Underwriting of new issues, and

(iv) Guarantees for term loans and deferred payments.

The first two forms place funds directly in the hands of companies as
subscriptions to shares and debentures are subscriptions to new issues.
The last two forms facilitate the raising of funds from other sources. For
attracting risk capital into the industry, such underwriting of shares by
development banks is at least as important as the direct subscription to
these shares.

Guarantees from development banks assure creditors (banks and others)

that their credit to industry whether in the form of loans or deferred
payments is secured. For development banks, it only involves
‘contingent liabilities,’ that is liabilities which become payable only
when the underlying agreements are not fulfilled. Therefore, such
liabilities do not lock up funds of development banks, but are
instrumental in attracting funds from other sources.

The development banks in India are a post-independence phenomenon

(except the land development banks). Their structure is indicated in
Figure 8.1. Some of them are for promoting industrial development;
some for the development of agriculture; and one for foreign trade.
Some are all-India institutions; others are state or lower level
institutions.

ADVERTISEMENTS:

At present, at the all-India level, there are five industrial development

banks, one agricultural development bank and one export-import bank.
The development banks for the industry are the Industrial Development
Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI),
the Industrial Credit and Investment Corporation of India (ICICI), and
the Industrial Reconstruction Corporation of India (IRCI) for large
industries and the National Small Industries Development Bank of India
(SIDBI) for small-scale industries. For agriculture, it is the National
Bank for Agriculture and Rural Development (NABARD).

The National Industrial Development Corporation (NIDC), which was

set up by the Government of India in 1954 for the promotion and
development of industries, had also provided some finance till 1963. But
since then it has been acting as only a consulting agency.

The “state level industrial development banks are the State Financial
Corporation’s (SFCs), the State Industrial Development Corporation
(SIDCs) and the State Industrial Investment Corporations (SIICs). For
promoting agricultural development, there are main district-level banks,
called land development banks. The present article is devoted to a
discussion of these several development banks.

List of 8 Important Development Banks in India

List of eight important development banks in India:-

1. Industrial Finance Corporation of India (IFCI)

2. Industrial Development Bank of India (IDBI)

3. Industrial Credit and Investment Corporation of India (ICICI)

4. Industrial Investment Bank of India (IIBI)

5. Small Industries Development Bank of India (SIDBI)

6. Export-Import Bank of India (EXIM) and Others.

Development Bank # 1. Industrial Finance Corporation of India

(IFCI):

The IFCI was the first development bank established in India in 1948. It
has been converted into a public limited company with effect from 1
July, 1993. Its main objective is to make medium and long term credit to
industrial concerns in the private, public, joint and co-operative sectors
in India.

It is a subsidiary of the IDBI which holds 50 per cent of its share capital
and the remaining 50 per cent is held by banks, insurance companies,
and co-operative banks. It augments its resources by borrowing from the
Government of India, RBI, IDBI, UT1, LIC and by issuing its bonds and
debentures in the market, and by borrowing in foreign currency from the
World Bank and other foreign organisations.

Its Functions:

The IFCI performs the dual function of a financier and promoter.

These functions reveal its multifaceted activities:

(1) As a Financier:

As a financier, the IFCI performs the following functions:

(a) It grants loans and advances both in rupee and foreign currencies to
individual concerns which are repayable within a period of 25 years.

(b) It subscribes to the issue of shares, bonds and debentures by

industrial concerns.
(c) It underwrites the issue of shares, bonds and debentures by industrial
concerns which must be disposed by the IFCI within seven years of their
acquisition.

{d) It guarantees loans both in rupee and foreign currencies and deferred
payments in connection with machinery imported from abroad or
purchased within India.

(e) It provides financial assistance for setting up new industrial projects,

expansion of existing units, and modernisation, renovation and
modification of existing units.

(f) It can convert in full or part its rupee loan into equity capital of the
industrial concern assisted by it. But it cannot acquire more than 40 per
cent of the share capital except in case of persistent default of repayment
of loan when its shareholding may go up to 51 per cent or more. But this
conversion clause is not applicable to loans sanctioned in foreign
currency, to co-operative banks and for modernisation and rehabilitation
of sick units, etc.

(g) As part of its financial services, it provides equipment financing,

equipment leasing, equipment procurement, suppliers’ credit, buyers’
credit, merchant banking and hire-purchase services to industrial
concerns.

(h) It also provides financial support to other financial concerns.

(i) It has introduced Instalment Credit Scheme in November 1991.

(j) It has entered into a Memorandum of Understanding (MoU) with

Housing and Urban Development Corporation Ltd (HUDCO) for joint
financing of infrastructure projects.

(2) As a Promoter:

(a) The promotional activities of the IFCI cover funds supplied for
technical consultancy, risk capital, venture capital, technical
development, tourism, housing, development of securities market,
entrepreneurship development and subsidy support to help entrepreneurs
and enterprises in the village and small industries sector.

(b) It sanctions assistance to industrial units in backward areas for

balanced regional development.

(c) The IFCI sponsored the Risk Capital and Technology Finance
Corporation (RCTC) in January 1988 after reconstituting the Risk
Capital Foundation set up by it in 1975. The RCTC operates two
schemes viz. first, Risk Capital Scheme, and second, Technology
Finance and Development Scheme. Under these schemes, assistance is
available to first generation entrepreneurs, particularly technocrats and
professionals who have proposals for technology oriented ventures.

Assistance is available for funding innovative technologies,

technological upgradation, energy conservation processes, systems,
environment protection, infrastructural support for advanced/complex
technologies, setting up of pilot plants, etc. Assistance is provided on
soft terms by way of conventional loans on predetermined interest rates,
grace period, repayment period, etc.

(d) It set up a credit rating agency known as the Investment-Information

and Credit Rating Agency of India (IICRA) in January 1991, as a public
limited company with an authorised capital of Rs.10 crores.

(e) It established the Merchant Banking and Allied Services Department

(MB&AD) in 1986 which handles merchant banking assignments
relating to public issue management.

(f) It has recently promoted three subsidiary companies, viz, IFCI

Financial Services Ltd., IFCI Investors Services Ltd., and IFCI Custodial
Services Ltd.

Its Working:
During 2002-03, the IFCI sanctioned financial assistance under its
various schemes amounting to Rs. 2,031 crores. Component wise,
sanctions of rupee loans amounted to Rs16.38 crores., Sanctions by way
of underwriting and direct subscriptions amounted to Rs. 394 crores and
others nil.

The IFCI is required to achieve 9 per cent capital adequacy norm since
2000 which it has been maintaining on an average of more than 8 per
cent. Thus the IFCI has helped in industrial development through
financial and promotional assistance and through diversification of
industries in backward areas and states. The criticisms levelled against it
for delay in sanctioning loans, favour shown to big industrial houses and
neglect of backward regions and industries are unwarranted.

Development Bank # 2. Industrial Development Bank of India (IDBI):

The IDBI was established in July 1964 as a wholly owned subsidiary of

the Reserve Bank but was made an autonomous institution in February
1976. At the time of its formation, it took over the Refinance
Corporation for Industry which was set up in June 1958. At present, the
IFCI, UTI and Small Industries Development Bank of India (SIDBI) are
its subsidiaries.

Since 1986, the authorised capital of IDBI has been raised to Rs. 1,000
crores which can be further increased to Rs. 2,000 crores. It mobilises
funds through borrowings from the Government of India, the RBI, by
way of bonds/debentures, by selling capital bonds, through investment
deposit account scheme, foreign currency borrowings, etc.

Its Functions:

The IDBI is an apex institution in the sphere of development banking in

India which performs financing, coordination and promotional functions.
It renders assistance to small, medium and large scale industries in
public, private, joint and co-operative sectors.
(1) As a Financier.

As a financier, the IDBI renders direct and indirect assistance to all

types of industrial concerns:

(a) Schemes of Direct Assistance:

It extends direct assistance to industry under its Project Finance Scheme

and the Technical Development Fund Scheme. The Project Finance
Scheme also covers assistance under the Textile Modernisation Fund,
Venture Capital Fund, Technology Upgradation, Energy Audit Subsidy,
and Equipment Finance for Energy Conservation Schemes.

The Project Finance Scheme of the IDBI mainly covers project loans to
industries, underwriting and direct subscriptions to shares and bonds or
debentures of industrial concerns, guarantees for loans/deferred
payments due from industrial concerns, and equipment finance, asset
credit, and equipment leasing.

(b) Schemes of Indirect Assistance:

The IDBI renders the following types of indirect assistance to industrial

concerns.

(i) Refinance of Industrial Loans:

It renders indirect assistance by refinancing in term loans extended by

SFCs, SIDCs, commercial/cooperative banks and RRBs to industrial
concerns.

(ii) Bills Rediscounting Scheme:

This scheme is meant to help the use of indigenous machinery by

industrial concerns. Under this scheme, the purchaser draws the bill in
favour of the manufacturer of machinery who discounts it with his
banker who in turn gets it rediscounted from the IDBI. This facility is
provided mainly to sugar, jute, cotton textiles, cement and engineering
industries.

(iii) Seed Capital Scheme:

Under this scheme, financial assistance is available to new entrepreneurs

for meeting the gap in promoters’ contribution as well as equity where
no issue of public shares is done.

(iv) Assistance to Leasing Companies:

Financial assistance is also sanctioned to leasing companies for

refinancing their hire-purchase and leasing schemes.

(v) Resources Support to Other Institutions:

The IDBI provides resource support to other financial institutions by

subscribing to their shares and bonds/debentures such as IFCI, ICICI,
SFCs, SIDCs, NSIC, TCOc, etc.

(vi) Merchant Banking:

It carries out merchant banking activities and helps the industry in

raising capital from the market and renders advice.

(vii) Commercial Banking:

It has set up the IDBI Bank Ltd. since 1995 as a private commercial
bank.

(2) As a Coordinator:

The primary objective of the IDBI is to act as a coordinator. As such, it

coordinates the activities and operations of other term lending
institutions engaged in financing, promoting or developing industries.
Coordination is achieved through the inter-institutional meetings and
uniform policies and code of conduct in formulation of policies. This has
led to the emergence of consortium financing.
(3) As a Promoter:

This is an important function of the IDBI which includes planning,

promoting and developing industries to fill the gaps in the industrial
structure of the country. For this purpose, it provides technical and
administrative assistance, undertakes market and investment research
and surveys, and also technical and economic studies related to
development of industry. We discuss its following promotional
activities.

(a) Development of Backward Areas:

The IDBI conducts surveys of backward areas for assessing their

industrial growth potential and publishes reports. It then identifies
projects which can be implemented in specific backward areas. It gives
both direct and indirect financial assistance for the implementation of
such projects in backward areas. The IDBI also undertakes follow-up of
those projects on a selective basis.

(b) Promotion of Institutions for SSI:

The IDBI promoted the Small Industries Development Fund (SIDF) and
National Equity Fund (NEF) for assistance to the small scale sector. In
1990, the IDBI created the Small Industries Development Bank of India
(SIDBI) as its wholly owned subsidiary. From April 1990 the SIDBI
took over the operations of the two Funds.

(c) The IDBI has sponsored credit rating agency CARE.

(d) It has entered into corporate trusteeship by accepting assignments as

mortgage trustee and trustee to odd-lot shareholders.

(e) It has also started stock broking.

(f) It has set up a mutual fund.

(g) Establishment of Technical Consultancy Organisations (TCOs):

The IDBI has set up a network of TCOs in collaboration with Stale level
financial and development institutions and commercial banks to provide
inexpensive consultancy services to small and new entrepreneurs in the
country. The activities of TCOs include preparing project profiles and
feasibility studies, undertaking industrial potential surveys, conducting
entrepreneurship development programmes and rendering technical and
administrate e assistance.

They also provide consultancy services for modernisation and

rehabilitation of industrial units, transfer of technology, design and
engineering services, management and export consultancy, rural
industrial development, retainer consultancy services, turnkey
assignments, and energy and conservation services.

(h) In association with other all-India financial institutions and the

Department of Biotechnology of the Government of India, it has set up
the Bio-tech Consortium India Ltd. to help commercialisation of
processes and products in the field of biotechnology developed in the
research institutes of the country. It aims at the transfer of technology,
product development, feedback from market, minimisation of
investment risk, and to supplement the efforts of existing research and
development institutes in the field of biotechnology.

Its Working:

During 2002-03, the ‘IDBI sanctioned financial assistance to industrial

concerns amounting to Rs.3,889 crores. Out of this, Rs.2,924 crores
were disbursed. Of the total financial assistance disbursed, rupee loans,
foreign currency loans and guarantees amounted to Rs. 7,853 crores;
underwriting and direct subscriptions Rs.140 crores; and others Rs.117
crores. The IDBI is required to achieve 9 per cent capital adequacy norm
which it has been maintaining on an average of 11 per cent. The IDBI
has been merged with IDBI Bank in 2004.

Critical Appraisal of its Working:

The IDBI is an apex development bank in the country. Its performance
has been quite impressive in terms of the range and pattern of assistance
rendered by it. Despite the fact that it has to work under the prevailing
economic policy and environment, it has certain flaws.

1. Its emphasis has been on providing project loans. It has therefore been
giving less importance to underwriting of shares and debentures of
industrial concerns. It has thus failed to develop the capital market.

2. The IDBI’s assistance to industries has been mainly of the financial

type. As a result, it has paid less attention to promotional and
consultancy services.

3. The major portion of its financial assistance has gone to the large
scale industries and hardly 28 per cent of the total assistance has gone to
the small scale industries.

4. The major portion of its assistance has gone to the already developed
states and that too only to a few states. It has thus failed to foster
balanced development of all states.

5. Its financial assistance to backward areas has been hardly 42 per cent
and that has also been provided to such areas mostly in developed states.
This has not been a healthy trend.

6. The major portion of its financial assistance has gone to the private
sector which already has access to a variety of sources. It has, therefore,
neglected the other sectors, especially the cooperative.

In fact, there is not much weight in these criticisms because the

assistance to be provided by the IDBI to different industries, areas, and
purposes depends upon the criteria laid down by it. Therefore, those who
meet these criteria are sanctioned assistance.
Development Bank # 3. Industrial Credit and Investment Corporation
of India (ICICI):

The ICICI was established in January 1955 as a public limited company.

It is a private sector development bank in India. The World Bank played
a key role in its formation. Its authorised capital is Rs. 100 crores. About
11 per cent of its share capital is held by the World Bank and other
foreign financial institutions, and the remaining by Indian Banks, UTI,
GIC, LIC, etc. During 1990-91 for the first time, ICICI entered the
capital market with a public issue and raised Rs. 100 crores.

Its Objectives:

The ICICI was established to fulfill the following main objectives:

(a) To finance the foreign exchange component of industrial projects;

(b) To provide assistance in the creation, expansion and modernisation

of industrial enterprises;

(c) To encourage and promote industrial development and investment;

and

(d) To expand capital markets in the country.

Its Functions:

The ICICI renders both financial and promotional assistance to private,

joint, public and cooperative sector industrial concerns.

(1) Financial Assistance:

The ICICI provides financial assistance of the following types:

(a) Project Finance:

Assistance for project finance is by way of rupee and foreign currency
loans, underwriting and direct subscriptions to shares and debentures,
and guarantees.

(b) Financial Services:

Assistance by way of financial services to industry includes assistance

under schemes of deferred credit since 1982-83, equipment leasing since
1983-84, venture capital during 1986-87 to 1987-88, instalment sale
since 1988-89 and asset credit facility since 1989-90.

(c) Merchant Banking:

The ICICI also renders merchant banking services.

(d) Commercial Banking:

It has set up the ICICI Banking Corporation as a commercial bank since

1994.

(2) Promotional Assistance:

The ICICI renders the following promotional assistance to

industrial concerns:

(a) Assistance to Backward Areas:

It provides project finance assistance on concessional terms to industries

in backward areas. It also gives loans on soft terms to suitable rural
development schemes sponsored by corporate bodies. It extends
financial assistance in the form of seed money/margin money or interest
rate subsidy in backward areas.

(b) Project Assistance:

The ICICI provides assistance to new projects and to

expansion/diversification projects. It renders assistance for
modernisation/rehabilitation/balancing equipment projects. Further, it
provides supplementary assistance to industrial concerns which includes
equipment finance and finance for meeting cost overrun and for various
other purposes like energy conservation, pollution control, etc.

(c) Technology Upgradation:

The ICICI has promoted a number of institutions for technology

upgradation. It has promoted TCQs in a number of states in
collaboration with IDBI, IFCI and state level institutions. It provides
assistance to Indo-US collaboration projects under the US-aided
Programme for the Advancement of Commercial Technology (PACT)
for development of innovative products and processes in such areas as
informatics, biotechnology, engineering, etc.

It also renders assistance for R & D projects under the Programme for
Acceleration of Commercial Energy Research (PACER) funded by
USAID with a grant of S 20 million. In July 1988, the ICICI established
the Technology Development and Information Company of India
(TDICI) to finance technology-intensive development activities,
including commercial R&D schemes.

During 1992-93, the ICICI introduced two new projects with the help of
USAID: First, Agricultural Commercialisation and Enterprise (ACE)
Project, and second. Trade in Environmental Services and Technologies
(TEST) Programme with grants of S 20 million and $ 25 million
respectively.

(d) Venture Capital:

The venture capital operations of the ICICI have been taken over by the
TDICI since July 1988. However, in association with UTI and corporate
sector, the ICICI floated a second Venture Capital Fund (VECAUS-II)
of Rs.100 crores in April 1990.

(e) It has promoted a new company for providing share registry and
transfer services to investors.
(f) It has promoted a mutual fund.

Its Working:

“Financial assistance sanctioned and disbursed by the ICICI during

2001-02 amounted to Rs.36,229 crores and 25,831 crores respectively.
Of the total disbursed amount, rupee loans, foreign currency loans and
guarantees amounted to Rs. 14,475 crores; underwriting and direct
subscriptions Rs. 3,348 crores; and others Rs. 8,009 crores. The ICICI is
required to achieve 9 per cent capital adequacy norm which it has been
maintaining on an average of 13 per cent. The ICICI has been merged
with the ICICI Bank in April 2002.

Development Bank # 4. Industrial Investment Bank of India (IIBI):

Earlier the IIBI was known as the Industrial Reconstruction Corporation

of India and renamed as Industrial Investment Bank of India from March
27,1997. It is the principal credit and reconstruction institution for
rehabilitation of sick and closed industrial units in the public, joint and
cooperative sectors and those units in the private sector whose
management has been taken over under the Industrial (Development &
Regulation) Act.

It mobilises funds for its use from:

(a) External sources which include borrowings from the Government of

India, RBI and by way of subscription of bonds and debentures of
Industrial concerns; and

(b) Internal sources which include repayments by borrowers, and interest

and dividend received. Its total financial assets in 1980- 81 were Rs 924
crores which increased to Rs. 4,526 crores in 2002-03.
Its Functions:

The IIBI Performs the following functions:

1. It grants term loans and advances to sick industrial concerns tor

modernisation/rehabilitation/ balancing equipment.

2. It provides supplementary assistance for (a) meeting cost overrun, (b)

correcting imbalances, and (c) other purposes.

3. It underwrites stocks, shares, bonds and debentures and gives

guarantees for loans/deferred payments of such industrial concerns.

4. It provides infrastructural facilities, consultancy, managerial and

merchant banking facilities.

5. It makes available machinery and other equipment on lease and hire-

purchase basis.

Its Working:

Sanctions and disbursements by the IIBI during 2002-03 aggregated to

Rs.1,207 crores and Rs.1,045 crores respectively. Of the total sanctioned
amount, term loans amounted to Rs. 163 crores, underwriting and direct
subscriptions Rs.1,043 crores. The IIBI is required to achieve capital
adequacy ratio of 9 per cent per annum since 2,000 which it has been
maintaining at a higher level.

Development Bank # 5. Small Industries Development Bank of India

(SIDBI):

The SIDBI was established in April 1990 as a wholly owned subsidiary

of the IDBI. The authorised capital of the Bank is Rs. 250 crores which
can be increased up to Rs. 1,000 crores. The Small Industries
Development Fund (SIDF) and National Equity Fund (NEF) were taken
over by it. Apart from these funds and its share capital, its other sources
of funds comprise loans from the IDBI, short-term and long-term funds
from the RBI, loans from the Government of India, etc.

Its Functions:

The SIDBI performs the following functions:

(i) It is the principal financial institution for the promotion, financing

and development of small scale industries.

(ii) It coordinates the functioning of existing institutions engaged in

similar activities.

(iii) It renders assistance to small scale industries through refinance of

loans and advances, bills finance, seed capital/soft loans, direct
assistance, providing services like factoring, leasing, etc.

(iv) It refinances National Industries Development Corporation, State

Industrial Development Corporations, State Small Industries
Corporations, scheduled banks, state cooperative banks, etc.

(v) It subscribes or purchases stocks, shares, bonds or debentures of

State Financial Corporations, State Industrial Development
Corporations, etc.

(vi) It renders assistance to small scale industries by way of resource

support to NSIC and SSIDCs for their hire purchase, raw material
supply and marketing support schemes.

(vii) It initiates steps for technological upgradation and modernisation of

existing units.

(viii) It expands channels for marketing products of SSI sector in

domestic and overseas markets.
(ix) It promotes employment-oriented industries, especially in semi-
urban areas, to create more employment opportunities and thereby check
migration of population to urban and metropolitan areas.

Since 1991-92, the SIDBI has introduced the following new schemes:

(1) A scheme of direct assistance to widen the supply base of small-scale

ancillary units;

(2) A scheme to provide resource support to factoring companies against

factored debts of SSIs;

(3) A refinance scheme for acquisition of computers including their

accessories;

(4) A scheme for refinancing assistance to qualified professionals for

setting up their own business enterprises;

(5) An equipment financing scheme to assist existing small-scale units;

(6) A refinance scheme to resettle voluntarily retired workers of

National Textile Corporation (NTC) and to help them in purchasing up
to four looms at the maximum;

(7) A venture capital fund was created with an initial corpus of Rs.10
crores;

(8) A special Self-Employment Scheme for Ex-servicemen;

(9) Mahila Udyam Nidhi Scheme to help women entrepreneurs;

(10) It is enrolled as member of the Over-The-Counter Exchange of

India (OTCEI) to help SSIs to get access to capital market through
SIDBI.

(11) Under the Single Window Scheme (SWS) in operation since the
inception of SIDBI, the limit of refinance against cash credit sanctioned
by banks has been raised to 75 per cent. The limit of term loans under
the Automatic Refinance Scheme (ARS) has been raised to Rs.50 lakh
and the limit of refinance to 90 per cent.

(12) During 1993-94, SIDBI took new initiatives such as the extension
of foreign currency loans to Export Oriented Units (EOUs) and support
to Non-Government Organisations (NGOs) for promoting self-help by
the rural poor.

(13) It has signed MoUs with 5 public sector banks for jointly extending
direct assistance to SSI units.

(14) The SIDBI has started a venture capital fund with a corpus of Rs.20
crores.

(15) During 1994-95, it introduced new schemes such as direct equity

investment in SSIs and financial assistance to enable well-run EOUs to
acquire ISO-9000 series certification.

(16) It has set up a Technology Bureau for SSI units in New Delhi in
collaboration with Asia Pacific Centre for Transfer of Technology.

Its Working:

The SIDBI sanctioned and disbursed Rs. 10,904 crores and Rs 6,789
crores respectively during 2002-03. Of the total disbursed amount, term
loans amounted to Rs. 6,789 crores; underwriting and direct
subscriptions; and others nil.

Development Bank # 6. Export-Import Bank of India (EXIM):

The Export-Import Bank of India was established in January 1982 as a

statutory corporation wholly owned by the Government of India.

Its Objectives:

The main objectives of the Exim Bank are:

1. To ensure an integrated arid coordinated approach to solve the
problems of exporters;

2. To provide special attention to the export of capital goods;

3. To encourage project exports;

4. To finance Indian joint ventures abroad;

5. To undertake and finance the export of technical consultancy services;

6. To deal in foreign exchange;

7. To render international merchant banking services;

8. To provide refinance facilities;

9. To extend buyers credit and lines of credit to parties outside India;

and

10. To tap domestic and overseas markets for resources for undertaking
developmental and financing activities in the sphere of exports.

Its Functions:

The Exim Bank performs the following promotional and

developmental functions:

1. To undertake and finance research, surveys, techno-economic or any

other study in connection with the promotion and development of
international trade;

2. To provide technical, administrative and financial assistance of any

kind for export or import;

3. To plan, promote, develop and finance export-oriented concerns; and

4. To collect, compile and disseminate market and credit information in
respect of international trade.

Its Resources:

The authorised capital of the Exim Bank is Rs.200 crores which can be
raised to Rs.500 crores. Its paid-up capital is Rs.75 crores. The Central
Government sanctioned a loan of Rs.20 crores repayable in equal annual
instalments, commencing on the expiry of fifteen years from the date of
receipt of loan. The Exim Bank can also raise resources by issuing and
selling bonds and debentures, borrowing from the Reserve Bank,
Government of India, and domestic and international markets.

The Exim Bank maintains three funds: the Export Development Fund
(EDF), the General Fund, and the Export Marketing Fund (EMF).

The EDF is a special fund in which the following can be credited:

(a) All amounts received by way of loans, gifts, grants, donations from
the Government or any other source in or outside India;

(b) Repayments or recoveries in respect of loans, advances or facilities

granted the Fund;

(c) Income or profits from investments made from the Fund; and

(d) Income accruing or arising to the Fund by way of interest or

otherwise.

The Fund is used for the grant of loans or advances for its export
development activities. All receipts of the Exim Bank, except those
which are credited to the EDF, are credited to the General Fund, and all
payments, other than those which are debited to the EDF are made out of
the General Fund.

The Exim Bank set up the EMF in June 1986. It consists of a component
of World Bank loan to India which is managed by the Bank on behalf of
the Government of India. This Fund provides grants and loans for the
promotion of select group of engineering products for export to
developed countries.

Its Working:

The Exim Bank provides both funded and non-funded assistance to

promote Indian exports. It provides funded assistance in the following
forms: direct financial assistance, export credit refinance, buyers’ credit,
lines of credit, overseas investment finance, finance for export oriented
units, finance for computer software exports, agency credit lines, pre-
shipment credit, export bills rediscounting, small scale industry export
bills rediscounting, bulk import finance, etc. During 1999-2000,
sanctions of funded assistance under various programmes amounted to
Rs. 2831.8 crores.

New Export Promotion Programmes:

The Exim Bank has recently introduced a number of programmes and

schemes for export promotion. They are:

(i) Africa Project Development Facility (APDF) which is meant to

promote private sector investment in Africa through financial support for
consultancy studies. It has started generating business for Indian
consultants in African countries,

(ii) Project Preparatory Services Overseas Programme (PPSOP) provides

finance for feasibility studies in other countries for Indians,

(iii) Financing Market Entry Costs Programme which provides

assistance to Indian exporters to cover the costs of entry into new
markets abroad,

(iv) Pre-shipment Export Credit Scheme Denominated in Foreign

Currency which provides exporters access to imports of raw material
components,
(v) Post-shipment Export Credit Denominated in Foreign Currency
Scheme which enables exporters to avail of this scheme and pay interest
at rates applicable to foreign currency concerned,

(vi) Production Equipment Finance Programme which ensures rupee

term finance to eligible export-oriented units for acquiring equipment,

(vii) European Community International Investment Partners (ECIIP)

which aims at promoting and financing joint ventures in India with
private sector small and medium enterprises in the EC.

(viii) Forfeiting is meant to provide to Indian exporters facilities for

discounting of their medium and long term export receivables with
forfeiting international agencies,

(ix) Business Advisory and Technical Assistance (BATA) programme

which provides services of Indian exports to the International Finance
Corporation (IFC) sponsored BATA programme for the Caribbean,
Central America, South Pacific, and East European countries,

(x) Export Marketing Finance programme which provides financial

assistance to Indian manufacturing companies to undertake strategic
export marketing activities with industrialised country markets, (xi)
Export Vendor Development Finance (EVDF) programme which
provides integrated financing packages to manufacturer/exporters and
export/trading houses to implement strategic vendor development
schemes.

Thus, the Exim Bank’s programmes cover various stages of exports

from the development of export markets to expansion of production
capacity for exports, production for exports, consultancy and feasibility
studies for exports and pre-and post-shipment financing.
Development Bank # 7. State Financial Corporations (SFCs):

SFCs are the state-level development banks for the development of

small and medium scale industries in 18 States of India. They aim at
bringing about balanced regional development by wider dispersal of
industries, promoting greater investment and generating larger
employment opportunities.

Besides their paid-up capital, SFCs augment their funds by borrowings

from the Governments, RBI, IDBI, banks and by way of bonds/
debentures, by accepting deposits and sale of investment in shares and
debentures of industrial concerns.

Their Functions:

SFCs perform the following functions:

(i) They provide financial assistance to industries by way of term loans,

direct subscription to equity/ debentures, discounting of bills of
exchange and guarantees.

(ii) They meet the term loan requirements of small and medium scale
industries for acquisition of fixed assets like land, building, machinery
and equipment.

(iii) They provide loans for setting up new industrial units as well as for
expansion and modernisation of the existing units.

(iv) They also promote the development of medium and small scale
industries in backward areas of the country.

(v) Under the Special Capital Scheme, SFCs provide equity type support
of up to Rs. 4 lakhs on soft terms to entrepreneurs for bridging the gap in
equity or promoters’ contribution. Entrepreneurs with viable projects but
lacking adequate own funds are assisted under the scheme.
(vi) SFCs operate a number of schemes on behalf of the IDBI. These
include composite loan scheme, schemes for women entrepreneurs,
modernisation scheme, equipment finance scheme, schemes for hospitals
and nursing homes, scheme for ex-servicemen, single window scheme,
and special capital and seed capital schemes.

Their Working:

SFCSs sanctioned an amount of Rs. 2,210 crores in 2001-02 and their

disbursements amounted to Rs. 1,750 crores. Top four SFCs in terms of
annual sanctions were Gujarat, Uttar Pradesh, Maharashtra, and
Karnataka. These four SFCs together accounted for about 50 per cent of
the total sanctions by all SFCs up to the end of March 1999. Industry-
wise five industries were viz. services, food products, textiles, chemicals
and chemical products, and metal products together accounted for more
than 54 per cent of the cumulative sanctions of all SFCs to industries.

Cumulative sanctions to backward areas by SFCs accounted for more

than 51 per cent of total sanctions. Small scale sector accounted for more
than 76 per cent of cumulative sanctions. New projects claimed the bulk
of sanctions from SFCs and accounted for about 84 per cent of total
sanctions, followed by expansion/ diversification, supplementary
assistance, and modernisation/rehabilitation/balancing equipment.

Development Bank # 8. State Industrial Development Corporations

(SIDCs):

SIDCs were set up during the sixties and early seventies as wholly-
owned State Government undertakings for the promotion and
development of medium and large scale industries. Their main objective
is to act as catalytic agents for the development of industries in their
respective States.

There are at present 26 SIDCs in the country. Nine of them also function
as SFCs and provide assistance to small scale units and act as
promotional agencies in their respective areas of operation. Seven
SIDCs are also involved in infrastructure development and other
extension services for promotion of small sector.

Besides increase in paid-up capital, SIDCs borrow funds from the

Government, IDBI, banks and other financial institutions. They also
borrow by way of bonds, by accepting deposits, sale of investments in
shares and debentures of industrial concerns, and repayments by
borrowers.

Their Functions:

SIDCs perform the following functions:

(i) They provide financial assistance to industrial units by way of term

loans, underwriting and direct subscriptions to shares/debentures and
guarantees.

(ii) They undertake a variety of promotional activities like preparation of

feasibility reports, industrial potential surveys; entrepreneurship
development programmes and developing industrial areas/estates.

(iii) They are engaged in setting up of medium and large industrial

projects in joint sector in collaboration with private entrepreneurs or as
wholly-owned subsidiaries.

(iv) Some SIDCs also administer the incentive schemes of Central/State

Governments and participate in risk capital.

(v) Some SIDCs extend assistance by way of interest free sales tax /
unsecured loans on behalf of respective State Governments.

(vi) SIDCs are agents of IDBI for operating its seed capital scheme.
Under the scheme, equity type assistance is provided to deserving first
generation entrepreneurs who possess necessary skills but lack adequate
resources required towards promoter contribution.

Their Working:
Assistance sanctioned by SIDCs (excluding sales tax, loans) amounted
to Rs. 1,594 crores during 2001-02. Out of this, Rs. 1,718 crores were
disbursed. Component-wise, term loans accounted for 96.63 per cent of
total disbursements of SIDCs during 2001- 02.

Assistance by way of underwriting/direct subscriptions, others

constituted 3.37 per cent of total disbursements. Cumulatively, seven
SIDCs in the States of Uttar Pradesh, Maharashtra, Gujarat, Karnataka,
Andhra Pradesh, Punjab and Tamilnadu together constituted nearly 66
per cent of the total sanctions of all SIDCs.

In the industry wise cumulative assistance, chemicals and chemical

products, textiles, food products, basic metals and services together
accounted for 48 per cent of total sanctions by SIDCs. Assistance
sanctioned to backward areas accounted for a share of 62 per cent in the
cumulative sanctions of SIDCs up to the end of March 1999. Of the
sector-wise assistance, private sector accounted for 79.5 per cent of the
cumulative sanctions of SIDCs followed by joint sector, public sector
and cooperative sector (0.5 per cent).

Under the purpose-wise assistance, new projects constituted about 70

per cent of the cumulative sanctions followed by
expansion/diversification, modernisation/rehabilitation/balancing
equipment and supplementary assistance.