Prelims Edge

Economic

Part-1

 

Index

 

1. BASE EROSION AND PROFIT SHIFTING (BEPS)
2. Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019
3. BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)
4. Turnover Ratio
5. ELECTORAL BONDS
6. MERCHANT DISCOUNT RATE
7. SERIOUS FRAUD INVESTIGATION OFFICE (SFIO)
8. LEVERAGE RATIO
9. DOMESTIC SYSTEMICALLY IMPORTANT BANK (D-SIB)
10. FINANCIAL STABILITY DEVELOPMENT COUNCIL (FSDC)
11. CURRENCY CHEST
12. REAL TIME GROSS SETTLEMENT
13. EQUALISATION LEVY
14. INSOLVENCY AND BANKRUPTCY CODE (IBC)
15. GENERALIZED SYSTEM OF PREFERENCES (GSP)
16. NON-BANKING FINANCE COMPANIES
17. DIFFERENTIAL VOTING RIGHTS
18. BOND YIELDS
19. INCREMENTAL CAPITAL OUTPUT RATIO
20. ANGEL TAX
21. DEPOSITORY RECEIPTS
22. ALTERNATIVE INVESTMENT FUNDS
23. DEVELOPMENT BANKS
24. RBI TO TRANSFER SURPLUS RESERVE TO GOVERNMENT
25. MERGING OF BANKS
26. Adjusted Gross Revenue
27. Bank recapitalization
28. Advance Pricing Agreements
29. Mobile trading
30. MCLR (Marginal Cost of Funds based Lending Rate)
31. India Post Payments Bank (IPPB)
32. Asset Reconstruction Company
33. Corporate tax
34. Side Pocketing
35. Sovereign Gold Bond Scheme
36. Minimum Alternative Tax (MAT)
37. Cooperative Banks
38. Gold exchange traded fund
39. CASA ratio
40. Universal Service Obligation Fund (USOF)
41. BHIM 2.0
42. Unified Payments Interface (UPI)
43. Teaser Loan
44. Government e-Marketplace (GeM)
45. National Company Law Tribunal (NCLT)
46. Bharat Bond Exchange Traded Fund
47. Independent Director’s Databank
48. Operation Twist
49. Bond Price
50. Benami Transactions (Prohibition) Amendment Act, 2016
51. RuPay card
52. Mobile Aided Note Identifier (MANI)
53. National Stock Exchange (NSE) knowledge Hub
54. Co-operative Banks
55. Small Finance Banks (SFB)
56. National Strategy for Financial Inclusion (NSFI)
57. Fund of Funds
58. Advisory Board for Banking Frauds (ABBF)
59. Deposit Insurance
60. Monetary Policy Committee (MPC)
61. Circuit Breaker in Stock Market
62. Targeted Long Term Repo Operations
63. Helicopter Money
64. Dollar Swap Agreement
65. Round-Tripping
66. Counter-cyclical Capital Buffers (CCyB)
67. Terms in the news

 

 

 

 

Banking

1-BASE EROSION AND PROFIT SHIFTING (BEPS)

Why in news?

• India has ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which was signed by the Finance Minister at Paris on 7th June, 2017 on behalf of India, along with representatives of more than 65 countries.

 What is it?

• Base Erosion and Profit Shifting (BEPS) refers to a situation where companies making profits in one jurisdiction, shift them to countries with lower tax rates taking advantage of gaps in tax laws.
• BEPS project is a joint initiative between G20countries and the OECD, works towards the development of a coherent global taxation system which addresses BEPS concerns.
• The project is headed by the OECD’s Centre for Tax Policy and Administration.
• The BEPS project consists of 15 action plans, agreed to by all participating countries who have committed to consistent implementation.
• In 2016, the OECD and G20 established an Inclusive Framework on BEPS to allow interested countries and jurisdictions to work with OECD and G20 members to develop standards on BEPS related issues and reviewing and monitoring the implementation of the whole BEPS Package.

 Objectives

• Securing revenues by realigning taxation with economic activities and value creation,
• Create single consensus-based international tax rules to address BEPS
• Offering increased certainty and predictability to taxpayers.

 What is MLI?

• The Multilateral Convention/MLI is an outcome of the OECD / G20 Project to tackle Base Erosion and Profit Shifting (the “BEPS Project”).
• BEPS is the tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.  The MLI will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
• The MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
• The date of entry into force of the MLI for India is 1st day of October, 2019.

2-Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019

Why in News

• An inter-ministerial committee headed by finance secretary Subhash Chandra Garg, set up by the government on virtual currencies has proposed banning of private cryptocurrencies in India by enacting a law and imposing fines and penalties for carrying on activities related to such cryptocurrencies

What is a Cryptocurrency?

• A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/ or (b) a unit of account, and/or (c) a store of value, but, unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government.
• A cryptocurrency is a digital or virtual currency that uses cryptography for security and is generally based on blockchain technology, a distributed ledger enforced by a disparate network of computers.
• Bitcoin is the most popular cryptocurrency in the world.
• Given the high chances of cryptocurrencies being misused for money laundering, various government bodies such as the Income Tax Department and the Central Board of Indirect Taxes and Customs (CBIC) had endorsed banning of cryptocurrency

Features of Draft Bill

• The panel recommended a fine of up to ₹25 crore for anyone found to be owning or handling private cryptocurrencies.
• This draft has proposed 10-year prison sentence for persons who “mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies.
• As an alternative to private cryptocurrencies, the panel recommended the introduction of a single cryptocurrency for the whole country that is backed by the Reserve Bank of India (RBI).
• Besides making it completely illegal, the bill makes holding of cryptos a non-bailable offence.

3-BASEL COMMITTEE ON BANKING SUPERVISION (BCBS)

Why in news?

• Basel finds some RBI large exposure rules stricter than required. 

 About BCBS

• The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.
• The Basel Committee on Banking Supervision (BCBS) was formed in 1974 by central bankers from the G10 countries aftermath of serious disturbances in international currency and banking markets.
• The committee is headquartered in the offices of the Bank for International Settlements (BIS) in Basel, Switzerland.  Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.
• Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability.

 Basel Accords

• The Basel Accords are three sets of banking regulations (Basel I, II and III) set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk.
• It is headquartered at the Bank for International Settlements (BIS) in Basel, Switzerland.
• BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
• The purpose of Basel accord is to ensure that financial institutions have enough capital on account to meet the obligations and absorb unexpected losses.
• India has accepted Basel accords for the banking system.
• Presently Indian banking system follows Basel II norms.
• These are not binding, and must be adopted by national policymakers in order to be enforced, but they have generally formed the basis of banks’ capital requirements in countries represented by the committee and beyond.

 Legal status

• The BCBS does not possess any formal supranational authority.
• Its decisions do not have legal force.
• Rather, the BCBS relies on its members’ commitments to achieve its mandate.

4-Turnover Ratio

• The turnover ratio, which is a universally accepted parameter to gauge trading volumes, is the total value of the shares traded in a specific period divided by the average market capitalisation of that period.
• Turnover ratios help assess the asset efficiency of a company. They are also known as Activity Ratios and determine how effectively a firm utilises its assets to generate revenue.

Context

• As per the latest analysis by the World Bank, the turnover ratio of the Indian stock market had fallen from 143 in 2008 to 58 in 2018.

Details

• India’s turnover ratio fell by nearly 60% between 2008 and 2018, as per the World Bank report, the fall had been the highest among most leading markets of the world, barring the U.S. and the European Union.
• The turnover ratio of China dipped less than 6% in the last 10 years, while Brazil and Korea registered a dip of 12.85% and 31.12%, respectively. Japan and Hong Kong saw the ratio dip between 40-50% between 2008 and 2018, as per the World Bank study.

5-ELECTORAL BONDS

Why in news?

• Electoral bonds worth Rs 5,850 crore sold so far.

 What is an Electoral Bond?

• Electoral Bond is a financial instrument for making donations to political parties
• It is designed to be a bearer instrument like a Promissory Note.
• It will be similar to a bank note that is payable to the bearer on demand and free of interest.

 Who can buy it?

• Electoral Bonds may be purchased by a person, who is a citizen of India or incorporated or established in India.
• A person being an individual can buy Electoral Bonds, either singly or jointly with other individuals.
• Only the Political Parties registered under Section 29A of the Representation of the People Act, 1951 (43 of 1951) and which secured not less than one per cent of the votes polled in the last General Election to the House of the People or the Legislative Assembly of the State, shall be eligible to receive the Electoral Bonds.
• The Electoral Bonds shall be encashed by an eligible Political Party only through a Bank account with the Authorized Bank.
• State Bank of India (SBI) has been authorised to issue and encash Electoral Bonds.

 Validity

• Electoral Bonds shall be valid for fifteen calendar days from the date of issue and no payment shall be made to any payee Political Party if the Electoral Bond is deposited after expiry of the validity period.
• The Electoral Bond deposited by an eligible Political Party in its account shall be credited on the same day.

6-MERCHANT DISCOUNT RATE

Why in news?

• The government has mandated that neither the customers nor the merchants will have to pay the socalled Merchant Discount Rate (or MDR) while transacting digital payments.

 About Merchant Discount Rate

• Merchant Discount Rate is the sum total of all the charges and taxes that a digital payment entails.
• It is alternatively referred to as the Transaction Discount Rate or TDR.
• For instance, the MDR includes bank charges, which a bank charges customers and merchants for allowing payments to be made digitally.
• Similarly, MDR also includes the processing charges that a payments aggregator has to pay to online or mobile wallets or indeed to banks for their service.

 Who will bear the MDR costs?

• Customers and merchants don’t have to pay MDR.
• RBI and Banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment.
• Necessary amendments are being made in the Income Tax Act and the Payments and Settlement Systems Act, 2007 to give effect to these provisions.

7-SERIOUS FRAUD INVESTIGATION OFFICE (SFIO)

Why in news?

• Timely intervention by the Reserve Bank could have led to the crisis at the Infrastructure Leasing & Financial Services Ltd (IL&FS) being detected earlier, the Serious Fraud Investigation Office has said.

About SFIO

• The Serious Fraud Investigation Office (SFIO) is a corporate fraud investigating agency in India.
• SFIO is a multi-disciplinary organization, consisting of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.
• It is under the jurisdiction of the Ministry of Corporate Affairs, Government of India.
• The SFIO is involved in major fraud probes and is the coordinating agency with the Income Tax Department and the Central Bureau of Investigation.
• Vajpayee Government decided to setup SFIO on 9 January 2003 based on the recommendation of Naresh Chandra Committee on corporate governance.
• SFIO has head office in New Delhi and regional offices in Maharashtra, Andhra Pradesh, Tamil Nadu and West Bengal.

8-LEVERAGE RATIO

Why in news?

• The Reserve Bank of India (RBI) on Thursday relaxed the leverage ratio (LR) for banks in a bid to help them expand their lending activities.

 About the news

• The leverage ratio stands reduced to 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks.
• The Basel Committee on Banking Supervision (BCBS) has set the minimum requirement for leverage ratio at 3%.
• A lowering of the ratio, with the capital staying fixed, would imply an expansion of the bank’s lending activity.

 About Leverage Ratio

• The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures.
• Leverage ratio in simple terms is the relation between the amount of equity that a company has and the amount of debt that it is carrying in its books.
• It is a measurement of the capacity of the company to meet its financial obligations.
• Banks have been required to publicly disclose their Basel-III leverage ratio on a consolidated basis from 1 April, 2015.
• The leverage ratio is considered an important supplement to the risk-based capital requirements.
• Leverage ratio is also one the four indicators under the RBI’s prompt corrective action framework

9-DOMESTIC SYSTEMICALLY IMPORTANT BANK (D-SIB)

• D-SIB stands for Domestic Systemically Important Bank.
• It means that the bank is too big to fail.
• According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection.
• Banks whose assets exceed 2% of GDP are considered part of this group.
• The RBI stated that should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.
• The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks.
• Due to this perception, these banks enjoy certain advantages in funding.
• It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.

10-FINANCIAL STABILITY DEVELOPMENT COUNCIL (FSDC)

Why in news?

• The 20th Meeting of the Financial Stability and Development Council (FSDC) was held under the Chairmanship of the Union Minister of Finance

About FSDC

• FSDC is the apex regulatory body for regulating financial sector which is vital for bringing healthy and efficient financial system in the economy.
• FSDC was established in 2010 and the first meeting of the Council was held on 31st December, 2010.
• FSDC has replaced the High Level Coordination Committee on Financial Markets (HLCCFM), which was facilitating regulatory coordination, though informally, prior to the setting up of FSDC.

Composition

• The Chairman of the FSDC is the Finance Minister of India.
• Members include the RBI Governor, heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC), Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance), Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic Adviser.

 Mandate

• FSDC would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates.
• It will address inter-regulatory coordination issues and thus spur financial sector development.
• It will also focus on financial literacy and financial inclusion.
• What distinguishes FSDC from other such similarly situated organizations across the globe is the additional mandate given for development of financial sector.

11-CURRENCY CHEST

Why in news?

• The Reserve Bank of India allows large modern currency chests to increase the service charges on cash deposited by non-chest bank branches.

 What is Currency Chest?

• A currency chest is a depositary of RBI where the RBI keep all the excess money of banks under custody.
• They are branches of selected banks authorized by the RBI to stock rupee notes and coins.
• Whenever, RBI prints new currency notes, first it delivers to currency chests and then currency chests deliver these new currency notes to banks.
• The bank, however, must maintain separate account independently of the chest which is monitored by RBI.

 Currency Management

• The responsibility for managing the currency in circulation is vested in the RBI.
• The central bank advises the Centre on the number of notes to be printed, the currency denominations, security features and so on.
• The number of notes that need to be printed is determined using a statistical model that takes the pace of economic growth, rate of inflation and the replacement rate of soiled notes.
• The Government has, however, reserved the right to determine the amount of coins that have to be minted.

 New Guidelines

• Area of the strong room/ vault of at least 1,500 sq ft.
• For those situated in hilly/ inaccessible places, the strong room/ vault area of at least 600 sq ft.
• The new chests should have a processing capacity of 6 lakh pieces of banknotes per day.
• For those situated in the hilly/ inaccessible places, the capacity of 2.1 lakh pieces of banknotes per day.
• The currency chests should have Chest Balance Limit (CBL) of Rs 1,000 crore, subject to ground realities and reasonable restrictions, at the discretion of the Reserve Bank.

12-REAL TIME GROSS SETTLEMENT

Why in news?

• The Reserve Bank of India has increased the Real Time Gross Settlement (RTGS) time window for customer transactions (initial cut-off) from 4.30 pm to 6 pm.

 About Real Time Gross Settlement.

• It is a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction by transaction basis (without netting).
• ‘Real Time’ means the processing of instructions at the time they are received.
• ‘Gross Settlement’ means that the settlement of funds transfer instructions occurs individually.
• The payments under RTGS are final and irrevocable.

 Timing

• RTGS is not a 24×7 system.
• Currently, the RTGS service window for customer transactions is available to banks from 8 am to 4.30 pm on a working day for settlement at the RBI end, which now will be extended to 6 PM.

Limits

• The RTGS system is primarily meant for large value transactions
• The minimum amount to be remitted through RTGS is ₹2,00,000/-
• There is no upper limit or maximum ceiling.

 Difference with NEFT

• National Electronic Funds Transfer (NEFT) is an electronic fund transfer system in which the transactions received up to a particular time are processed in batches.
• Contrary to this, in RTGS, the transactions are processed continuously on a transaction by transaction basis throughout the RTGS business hours.

13-EQUALISATION LEVY

Why in news?

• Start-ups write to govt. on equalisation levy

Equalisation Levy:

• Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India.
• It is aimed at taxing business to business (B2B) transactions.
• Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to equalisation levy:
• The payment should be made to a non-resident service provider;
• The annual payment made to one service provider exceeds Rs. 1, 00,000 in one financial year.
• The following services covered:
• Online advertisement;
• Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;
• Currently the applicable rate of tax is 6% of the gross consideration to be paid.

14-INSOLVENCY AND BANKRUPTCY CODE (IBC)

Why in news?

• Insolvency & Bankruptcy Code was one of the success stories of India’s economic reforms says the Vice President.

 Insolvency and Bankruptcy Code:

• Insolvency and Bankruptcy Code (IBC) is the new bankruptcy law which seeks to consolidate the existing frame work by creating a single law for insolvency and bankruptcy.
• IBC, 2016 will override other existing laws on matters pertaining to Insolvency and Bankruptcy.

 Salient Features of the IBC, 2016:

• A unified code for greater legal clarity.
• Fixed a timeline of 180 days, extendable by another 90 days, to resolve cases of insolvency or bankruptcy.
• A new regulator — Insolvency and Bankruptcy Board of India (IBBI) [under the Ministry of Corporate Affairs] to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
• National Company Law Tribunal (NCLT) to adjudicate bankruptcy cases over companies, limited liability entities while Debt Recovery Tribunal (DRT) to adjudicate cases over individuals and unlimited liability partnership firms.
• It allows the debtor itself to initiate the insolvency-resolution process once it has defaulted on a debt.
• Prioritization of claims by different classes of creditors and enabling provisions for solving cross border insolvency.

Repo rate:

• Repo rate – is interest rate charged by the RBI on the overnight loans given to the commercial banks.
• The repo rate is now used as an interest rate indicator by the RBI and is frequently used by the central bank to counter inflation.

Reverse repo rate:

• Reverse repo rate is an interest rate given by the RBI to commercial banks when the latter parks one-day deposits with the RBI. The deposit is made by banks as they have temporary excess money with them.
• Usually, the reverse repo rate is changed in the same direction, when the repo rate is changed. The entire operation is done as a part of the RBI’s Liquidity Adjustment Facility (LAF).

 Marginal Cost based Lending Rate (MCLR):

• MCLR is the standard lending rate that banks have to set and publish on different maturities.
• The significance of MCLR is that it has replaced the base rate which has functioned as the standard lending rate from 2010 onwards.
• The MCLR came into effect from April 1, 2016 onwards. As per the RBI instruction, banks have to declare MCLR for different maturities on a monthly basis

15-GENERALIZED SYSTEM OF PREFERENCES (GSP)

Why in news?

• Exports of Indian goods, which were enjoying benefits under the preferential tariff system GSP, to the US registered a growth of 32 per cent in June, according to Trade Promotion Council of India (TPCI).

 Generalized System of Preferences (GSP):

• Generalized System of Preferences (GSP) is a preferential tariff system extended by developed countries to developing countries (also known as preference receiving countries or beneficiary countries). It is a preferential arrangement allows concessional low/zero tariff imports from developing countries.
• The GSP – launch in 1976, by the Trade Act of 1974.
• The Generalized System of Preference (GSP) is the largest and oldest US trade preference programme and is designed to promote economic development by allowing duty-free entry for thousands of products from designated beneficiary countries.

 Objective of GSP:

• The objective of GSP was to give development support to poor countries by promoting exports from them into the developed countries.
• GSP promotes sustainable development in beneficiary countries by helping these countries to increase and diversify their trade with the United States.

 Beneficiaries under GSP:

• The beneficiaries of GSP are around 120 developing countries. As of 2017, India and Brazil were the major beneficiaries in terms of export volume realized under GSP.
• Imports from China and some developing countries are ineligible for GSP benefits. The beneficiaries and products covered under the scheme are revised annually.

 Impact of GSP withdrawal on India:

• India exports nearly 50 products of the 94 products on which GSP benefits are stopped.
• The GSP removal will leave a reasonable impact on India as the country enjoyed preferential tariff on exports worth of nearly $ 5. 6 billion under the GSP route out of the total exports of $48 bn in 201718.
• India is the 11th largest trade surplus country for the US and India enjoyed an annual trade surplus of $ 21 bn in 2017-18.

Capital Gains Tax:

• Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the category of ‘income’.
• Hence, the capital gain tax will be required to be paid for that amount in the year in which the transfer of the capital asset takes place. This is called the capital gains tax, which can be both short-term and long-term.
• Long-term Capital Gains Tax: It is a levy on the profits from the sale of assets held for more than a year. The rates are 0%, 15%, or 20%, depending on tax bracket.
• Short-term Capital Gains Tax: It applies to assets held for a year or less and is taxed as ordinary income.
• Capital gains can be reduced by deducting the capital losses that occur when a taxable asset is sold for less than the original purchase price. The total of capital gains minus any capital losses is known as the “net capital gains”.
• Tax on capital gains is triggered only when an asset is sold, or “realized”. Stock shares that appreciate every year will not be taxed for capital gains until they are sold.

Capital Assets:

• Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets.
• This includes having rights in or in relation to an Indian company.
• It also includes the rights of management or control or any other legal right.
• Capital gains are not applicable to an inherited property as there is no sale but only a transfer of ownership.
• The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.

 Income Tax Appellate Tribunal (ITAT):

• ITAT is a quasi-judicial institution set up in 1941 and specializes in dealing with appeals under the Direct Taxes Acts.
• The orders passed by the ITAT are final, an appeal lies to the High Court only if a substantial question of law arises for determination.
• Starting in 1941 with six Members constituting three Benches – one each at Delhi, Kolkata (Calcutta) and Mumbai (Bombay), the numbers of Benches have progressively increased and presently ITAT has 63 Benches.

16-NON-BANKING FINANCE COMPANIES

Why in news?

• Government issues Scheme to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs.

About the Scheme:

• The Scheme would enable the public sector banks (PSBs) to purchase pooled assets of financially sound NBFCs amounting to Rs. one lakh crore.

Objective: 

• To address temporary asset liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets for meeting their commitments.

Validity of the scheme: 

• The window for one-time partial credit guarantee offered by GoI will open from the date of issuance of the Scheme by the Government for a period of six months, or till such date by which Rupees One lakh crore assets get purchased by banks, whichever is earlier.

Other Key Facts:

• The assets shall be purchased by banks at fair value.
• The NBFCs/HFCs can have the option to buy back their assets after a specified period of 12 months as a repurchase transaction, on a right of first refusal basis.
• The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those registered as Micro Finance Institutions and Core Investment Companies, HFCs registered with National Housing Bank (NHB) under the National Housing Bank Act are eligible for the scheme.
• NBFCs/HFCs will pay a fee equivalent to 0.25% per annum of the fair value of assets being purchased by the bank under this Scheme to GoI

Non-Banking Finance Companies:

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc.
• A non-banking institution which is a company and has a principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner is also a non-banking financial company (Residuary Non-banking Company).

 Difference between Banks & NBFCs:

• NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:
• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
• Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD.
• The norm of Public Sector Lending does not apply to NBFCs.
• The Cash Reserve Requirement also does not apply to NBFCs.

17-DIFFERENTIAL VOTING RIGHTS

Why in news?

• The Ministry of Corporate Affairs has amended the provisions relating to issue of shares with Differential Voting Rights (DVRs) provisions under the Companies Act.

 Amendments:

• The main objective of this change is to enable the promoters of Indian companies to retain control of their companies in their pursuit for growth and creation of long-term value for shareholders, even as they raise equity capital from global investors.
• The key change brought about through the amendments to the Companies (Share Capital & Debentures) Rules brings in an enhancement in the previously existing cap of 26% of the total post issue paid up equity share capital to a revised cap of 74% of total voting power in respect of shares with Differential Voting Rights of a company.
• Another key change brought about is the removal of the earlier requirement of distributable profits for 3 years for a company to be eligible to issue shares with Differential Voting Rights.

 Differential Voting Rights:

• Promoters or founders who are instrumental in starting up a company often lose control of the firm when they dilute their stakes to raise multiple rounds of funding.
• Differential Voting Rights (DVRs), which do not follow the common rule of one share-one vote, enable promoters to retain control over the company even after many new investors come in, by allowing shares with superior voting rights or lower or fractional voting rights to public investors.
• But the issuance of DVRs with superior voting rights was prohibited by the SEBI.
• This was to prevent the possible misuse of power by the promoters detrimental to the interests of small shareholders

18-BOND YIELDS

Why in news?

• Bond yields have featured in news reports both globally and within India in recent months. In India, government bond yields fell sharply in the wake of the Union Budget.

 What is a Bond?

• A bond is an instrument that could be issued by a country’s government or by a company to raise funds.
• Since government bonds (referred to as G-secs in India) come with the sovereign’s guarantee, they are considered one of the safest investments.
• As a result, they also give the lowest returns on investment (or yield).

 Yield of a bond:

• The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond.
• Every bond has a face value and a coupon payment. There is also the price of the bond, which may or may not be equal to the face value of the bond.
• Suppose the face value of a 10-year G-sec is Rs 100, and its coupon payment is Rs 5. Buyers of this bond will give the government Rs 100 (the face value); in return, the government will pay them Rs 5 (the coupon payment) every year for the next 10 years, and will pay back their Rs 100 at the end of the tenure.
• In this case, the bond’s yield, or effective rate of interest, is 5%.
• The yield is the investor’s reward for parting with Rs 100 today, but for staying without it for 10 years

Why and how do yields go up and down?

• Imagine a situation in which there is just one bond, and two buyers.
• In such a scenario, the selling price of the bond may go from Rs 100 to Rs 105 or Rs 110 because of competitive bidding by the two buyers.
• Importantly, even if the bond is sold at Rs 110, the coupon payment of Rs 5 will not change. Thus, as the price of the bond increases from Rs 100 to Rs 110, the yield falls to 4.5%.

Why and how do yields go up and down?

• Imagine a situation in which there is just one bond, and two buyers.
• In such a scenario, the selling price of the bond may go from Rs 100 to Rs 105 or Rs 110 because of competitive bidding by the two buyers.
• Importantly, even if the bond is sold at Rs 110, the coupon payment of Rs 5 will not change. Thus, as the price of the bond increases from Rs 100 to Rs 110, the yield falls to 4.5%.

 Yield curve:

• A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons.
• Typically, the term is used for government bonds — which come with the same sovereign guarantee.
• The steepness of this yield curve is determined by how fast an economy is expected to grow.
• The faster it is expected to grow the more the yield for longer tenures.
• When the economy is expected to grow only marginally, the yield curve is “flat”.
• Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond.

19-INCREMENTAL CAPITAL OUTPUT RATIO

 Why in news?

• The term was frequently occurring in news.

 Incremental Capital Output Ratio:

• The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in GDP.
• Capital output ratio is the amount of capital needed to produce one unit of output.
• ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.
• Overall, a higher ICOR value is not preferred because it indicates that the entity’s production is inefficient.
• A lower capital output ratio shows that only low level of investment is needed to produce a given growth rate in the economy. This is considered as a desirable situation.

 Limitation:

• Its uses are restricted as there is a limit to how efficient countries can become as their processes become increasingly advanced

20-ANGEL TAX

Why in news?

• Finance Minister Nirmala Sitharaman has provided the much-needed relief for the start-up community by announcing that angel tax will not be applicable on entities registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

Angel Tax: Background:

• Angel tax was introduced in the 2012 budget by the then finance minister Pranab Mukherjee to arrest laundering of funds.
• Misuse of the incentives given to the start-ups was the main factor that tempted the government to impose tax on fresh investments over fair price of shares.

What is Angel Tax?

• Angel tax is an income tax payable on capital raised by unlisted companies from investors (mostly angel investors) via issue of shares if the sold share price is excess of the fair market value of the shares.
• The excess of share price over the fair market price and the amount raised is treated as income and taxed accordingly.
• The tax was applicable on angel investments that are supposed to make investment in start-ups, hence it is known as angel tax.

 Who is an Angel Investor?

• An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
• It is also known as a business angel, informal investor, angel funder, private investor, or seed investor.

 Why is Angel tax problematic?

• There is no definitive way to measure the ‘fair market value’ of a startup.
• Investors pay a premium for the idea and the business potential at the angel funding stage.
• However, tax officials seem to be assessing the value of the startups based on their net asset value at one point.

21-DEPOSITORY RECEIPTS

Why in news?

• The Depository Receipt Scheme 2014 is expected to be operationalised soon by SEBI. This will give Indian companies increased access to foreign funds

Depository Receipts:

• A depositary receipt (DR) is a negotiable certificate issued by a bank representing shares in a foreign company traded on a local stock exchange.
• The depositary receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market.
• Depositary receipts can be attractive to investors because they allow investors to diversify their portfolios and purchase shares in foreign companies in a more convenient and less expensive manner than purchasing stocks in foreign markets.

 Depository Receipts Scheme 2014:

• In India, any company, whether private limited or public limited or listed or unlisted are capable of issuing DRs.
• The issue of DRs is regulated by Ministry of Finance’s “The Depository Receipts Scheme, 2014″.
• Depending upon the location in which DRs are issued, they are called as ADRs (American Depository Receipts), IDR (Indian Depository Receipts) or in general as GDR (Global Depository Receipt).

IDR 

• An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian Securities Markets.

 ADR

• A certificate issued in the United States in lieu of a foreign security.
• The original securities are lodged in Bank/Custodian abroad, and the American Depository Receipts (ADRs) are traded in the US for all intents and purposes as if they were a domestic stock.

 GDR

• Any instrument in the form of a depository receipt or certificate created by the Overseas Depository Bank outside India.
• It issued to non-resident investors against the issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.

Types of DRs General Classification: 

• Sponsored: Under this type, there is a formal agreement between Indian issuer and foreign depository for creation or issue of DRs.
• Unsponsored: Under this type, there exists no formal agreement between the foreign depository and the Indian issuer.
• Listed: They are traded on organised exchanges. For example, American Depository Receipts (ADRs) are traded on the New York Stock Exchange (NYSE).
• Unlisted: They are traded over the counter (OTC) between parties and are not traded on organised exchanges.

22-ALTERNATIVE INVESTMENT FUNDS

Why in news?

• On Friday, Finance Minister said that the surcharge that was announced in the Union Budget would not be applicable on foreign portfolio investors (FPIs).
• But made no mention of AIFs, many of whom are also structured as trusts and so would be subjected to the surcharge.

 Alternative Investment Funds (AIFs):

• AIFs refers to any privately pooled investment fund – a trust or a company or a body corporate or an LLP (Limited Liability Partnership) which are not presently covered by any Regulation of RBI, SEBI, IRDA and PFRDA.
• A notable general feature of AIFs is that they are tailor made investment arrangements like Private Equities that aims to utilize investment opportunities.
• Thus, AIFs includes Private Equities, Venture Capital Fund, Hedge funds, Commodity funds, Debt Funds, infrastructure funds, etc.
• Most of these investment entities are owned by big corporate houses or wealthy individuals.
• Venture Capital Funds and Angel Investors are also categorized as AIFs.

Regulation of AIFs

• Under SEBI guidelines, AIFs are classified into three categories.
• The SEBI rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.

1. The Category-I AIFs are the ones who can produce positive spillovers in the economy and for that they get incentives from the government, SEBI or other regulators.

• They include Social Venture Funds, Infrastructure Funds, Venture Capital Funds including Angel Investors, etc.

2. The Category-II For these funds, no specific incentives and concessions are given by the government or any regulator.

• The institutions under this category are: Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III. These funds shall be close ended and shall not engage in leverage.

3. The Category-III AIFs are institutions like Hedge Funds that trade with a view to make short term returns.

They employ diverse or complex trading strategies and do leverage including investment in listed or unlisted derivatives.

23-DEVELOPMENT BANKS

Why in news?

• Finance Minister Nirmala Sitharaman announced a slew of measures to boost the economy and financial market sentiments, one among it was about setting up a development bank.

Development banks:

• Development banks are financial institutions that provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.
• They often lend at low and stable rates of interest to promote long-term investments with considerable social benefits.
• Development banks are also known as term-lending institutions or development finance institutions.
• To lend for long term, development banks require correspondingly long-term sources of finance, usually obtained by issuing long-dated securities in capital market, subscribed by long-term savings institutions such as pension and life insurance funds and post office deposits.
• Development banks are often supported by governments or international institutions, support can be in the form of tax incentives and administrative mandates for private sector banks and financial institutions to invest in securities issued by development banks.
• Development banks are different from commercial banks which mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch — a potential cause for a bank’s liquidity and solvency.
• Industrial Finance Corporation of India (IFCI), set up in 1949 was probably India’s first development bank for financing industrial investments.

24-RBI TO TRANSFER SURPLUS RESERVE TO GOVERNMENT

Why in news?

• The Central Board of the Reserve Bank of India (RBI) decided to transfer a sum of 1,76,051 crore to the Government of India.
• It comprises of 1,23,414 crore of surplus for the year 2018-19 and 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board.

More about:

• RBI, in consultation with the Government of India, had constituted an Expert Committee to Review the Extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan).
• The Committee has submitted its report to the Governor of the RBI.
• The Committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved.

Committee’s recommendations

• RBI’s economic capital: The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance.
• A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was also recommended by the Committee.
• Realized equity, which is a form of a contingency fund for meeting all risks/losses primarily built up from retained earnings. It is also called the Contingent Risk Buffer (CBR).
• Revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable.
• Risk provisioning for market risk: The Committee has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk
• Size of Realized equity: This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.
• The Surplus Distribution Policy of RBI that was finalized is in line with the recommendations of the Bimal Jalan committee.
• Adhering to the recommendations, the RBI has decided to set the CRB level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth 52,637 crore to the government.
• If CRB is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government.
• 5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks.
• The Surplus Distribution Policy of RBI that was finalized is in line with the recommendations of the Bimal Jalan committee.
• Adhering to the recommendations, the RBI has decided to set the CRB level at 5.5% of the balance sheet, while transferring the remaining excess reserves worth 52,637 crore to the government.
• If CRB is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government.

Components of RBI’s capital reserve:

• There are five components in the RBI’s capital reserve.
• Contingency Fund (CF)
• Asset Development Fund (ADF)
• Currency and Gold Revaluation Account (CGRA)
• Investment Revaluation Account (IRA) and
• Foreign Exchange Forward Contracts Valuation Account (FCVA).
• CF and ADF are Funds created to meet specific purposes and provisions are made yearly to add money to these funds.
• The CF is a fund set apart for meeting the unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations etc.
• The other three (CGRA, IRA and FCVA) are valuation accounts shows the gain or losses in foreign exchange, government securities or foreign currency contracts handled by the RBI.
• The Currency & Gold Revaluation Account (CGRA) makes the biggest share in RBI reserve. This represents the value of the gold and foreign currency that RBI holds on behalf of India.
• All these five components are recorded in the liability side of the RBI’s balance sheet

25-MERGING OF BANKS

Why in news?

• 10 PSBs merged into 4 large entities to revive economic growth.

About the news:

• Finance Minister announced amalgamation of 10 public sector banks into four big banks.
• After this the total number of Public Sector Banks in the country will come down to 12 from 27 banks in 2017.
• Apart from this the government announced Rs 55,250 crore upfront capital infusion in the PSBs.

Why were these banks merged?

• Merged with the objective making them “global-sized banks”.
• The merger will also help in consolidating strong national presence and global reach of these banks.

Banks Merged:

• Punjab National Bank (PNB) will take over Oriental Bank of Commerce (OBC) and United Bank of India (UBI) to become the country’s largest lender after State Bank of India (SBI) in terms of business. It will also become the second-largest bank in India in terms of its branch network.
• The second merger announced was that of Canara Bank and Syndicate Bank, which would render the merged entity the fourth-largest public sector bank.
• The third merger is of Union Bank of India with Andhra Bank and Corporation Bank, which would make the merged entity the fifth largest public sector bank. This merger would have the potential to increase the post-merger bank’s business by 2-4.5 times.
• The fourth merger is of Indian Bank and Allahabad Bank. It would lead to a doubling of the size of the business and also lead to a huge potential for scaling up due to the complementary networks of the two banks.

Governance reforms:

• To make the management accountable to the directors, the board committee of nationalised banks will assess the performance of General Managers and above, including Managing Directors.
• Also, the size of the board committees can be reduced or rationalised. There will be longer term for the directors.
• To make control easier post-consolidation, the boards will be allowed to introduce the post of CGMs (Chief General Managers).
• A Chief Risk Officer is to be appointed from the market at market-linked salaries to attract the best talent.
• Another significant move is that only officers with at least two years of service left will be appointed to the post of General Manager and above.
• The loan sanctioning authority of the board management committee will be doubled to give focussed attention to higher loan value proposals.

 

26-Adjusted Gross Revenue

Why in news?

• The Supreme Court has upheld the definition of Adjusted Gross Revenue (AGR) calculation as stipulated by the Department of Telecommunications.

What is AGR?

• Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
• The AGR is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 percent respectively.

How it is calculated?

• As per DoT, the charges are calculated based on all revenues earned by a telecoms – including non-telecom related sources such as deposit interests and asset sales.
• Telcos, on their part, insist that AGR should comprise only the revenues generated from telecom services.

 

27-Bank recapitalization

Why in news?

• The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has approved the Infusion of Rs 4,557 crore by Government in IDBI Bank.

 More about:

• Following Cabinet’s approval in August 2018, LIC acquired 51% stake in IDBI Bank. Government continues to be a promoter and holds 46.46% stake.( The Reserve Bank reclassified IDBI Bank as a private sector lender for regulatory purposes in January, after LIC acquired a 51% stake in the bank)

• The capital for the recapitalisation has to come from its shareholders.
• Of the Rs. 9,300 crore needed, LIC would meet 51% (Rs. 4,743 crore). Remaining 49%, amounting to Rs. 4,557 crore, is proposed from Government as its share on one time basis.
• After this infusion, IDBI Bank expects to be able to subsequently raise further capital on its own and expects to come out of RBI’s Prompt Corrective Action (PCA) framework next year.
• This cash neutral infusion will be through recap bondse. Government infusing capital into the bank and the bank buying the recap bond from the Government the same day, with no impact on liquidity or current year’s Budget.

Bank recapitalization:

• Bank recapitalisation, as the name suggests, means recapitalising banks with new capital to improve their balance sheet.
• Since the government is the biggest shareholder in public sector banks, the responsibility of infusing capital majorly lies with the government.
• The recapitalisation plan comes into action when banks get caught in a situation where their liabilities are comparatively higher than their assets.

What are recapitalisation bonds?

• A government bond is an instrument to raise money from the market with a promise to pay to repay the face value of the maturity date and a periodic interest.
• A bond issued for the purpose of recapitalisation is called recapitalisation bonds.

How recapitalisation bonds work?

• The government will issue recapitalisation bonds, which banks will subscribe and enter it as an investment in their books.
• The banks will lend money to the government for subscribing the bonds.
• This money raised by the government through these bonds will go back to banks as capital.
• This will immediately strengthen the balance-sheet of the banks and show capital-adequacy.
• Since the government is always solvent, the money lent to the government for subscribing recap bonds is free from becoming a bad loan.

 

28-Advance Pricing Agreements

Why in news?

• The Central Board of Direct Taxes (CBDT) has entered into 26 Advance Pricing Agreements (APAs) in the first 5 months of the current financial year (April to August, 2019).
• Out of these 26 APAs, 1 is a BAPA entered into with the United Kingdom and the remaining 25 are Unilateral Advance Pricing Agreements (UAPAs).

Advance Pricing Agreements:

• The Advance Pricing Agreement (APA) program allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement.
• Once the APA is sealed, the methodology is to be applied for a certain period of time-based on the fulfilment of certain terms and conditions.
• The agreement helps in addressing complex transfer pricing issues in a fair and transparent manner.
• Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities (may be situated in different countries) within an enterprise.
• An APA can be unilateral, bilateral, or multilateral.
• Unilateral APA: An APA that involves only the taxpayer and the tax authority of the country where the taxpayer is located.
• Bilateral APA: An APA that involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located, and the foreign tax authority.
• Multilateral APA: An APA that involves the taxpayer, two or more AEs of the taxpayer in different foreign countries, tax authority of the country where the taxpayer is located, and the tax authorities of AEs.
• Several APA’s are signed during this period pertain to various sectors and sub-sectors of the economy like Information Technology, Banking, Semiconductor, Power, Pharmaceutical, Hydrocarbon, Publishing, Automobile, etc.
• The progress of the APA scheme strengthens the Government’s resolve of fostering a non-adversarial tax regime.
• The Indian APA programme has been appreciated nationally and internationally for being able to address complex transfer pricing issues in a fair and transparent manner.

 

29-Mobile trading

Why in news?

• Share of mobile trading rise significantly in the last few years

What is mobile trading?

• Mobile trading refers to trading in the stock market using a mobile phone.

• Leading brokerages now offer apps to their clients who can use them to trade in shares, invest in mutual funds or in initial public offers, and even monitor their portfolio.
• While the Securities and Exchange Board of India (SEBI) approved trading through mobile phones way back in 2010, traction was hardly visible in the initial years as investors preferred to trade through their dealers or relationship managers.
• But the last few years have seen the share of mobile trading rise significantly, though it still accounts only for a small portion of the overall trading volume.

Why is mobile trading becoming popular?

• First, the increased penetration of smartphones, along with the availability of cheaper data plans, has made the cellphone a popular platform for investors, especially retail, to trade in the stock markets.
• Second, most newage discount broking entities prefer that their clients trade using their mobile apps, which also help the brokerages lower their overhead costs by maintaining fewer dealers and relationship managers.
• Trading apps of brokerages like Zerodha, 5paisa, ICICI Direct, Upstox, HDFC Securities, Angel Broking, Sharekhan and Kotak Securities feature among the top apps in the finance category in both Android and iOS.

Is trading on the mobile safe?

• Brokerages invest a lot in technology nowadays and hence, most trading apps have strong encryption and other security features so as to make the trading experience quite secure.

30-MCLR (Marginal Cost of Funds based Lending Rate)

Why in news?

• State Bank of India (SBI), the country’s largest lender, reduced its benchmark lending rate — the MCLR — by 10 basis points (bps). 

MCLR (Marginal Cost of Funds based Lending Rate):

• The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
• It is an internal benchmark or reference ratefor the bank.
• MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank.
• It is on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.

The main components of MCLR:

• Negative carry on account of CRR: is the cost that the banks have to incur while keeping reserves with the RBI. 

• Operating costs: is the operating expenses incurred by the banks
• Tenor premium: denotes that higher interest can be charged from long term loans
• Marginal cost of funds: It is the novel element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth. 
• According to the RBI, the Marginal Cost should be charged on the basis of following factors:
• Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
• Return on networth – in accordance with capital adequacy norms.

How MCLR determined?

• The MCLR is determined largely by the marginal cost for funds and especially by the deposit rate and by the repo rate. Any change in repo rate brings changes in marginal cost and hence the MCLR should also be changed.

How MCLR is different from base rate?

Base Rate	MCLR
Based on average cost of funds	Based on marginal/incremental cost of funds
Calculated by considering minimum rate of return/profit margin	Calculated by considering tenor premium
Base is also governed by operating expenses, and expenses needed to maintain cash reserve ratio.	The MCLR is also determined by considering deposit rates and repo rates, along with operating costs and cost of maintaining cash reserve ratio.

 

31-India Post Payments Bank (IPPB)

Why in news?

• India Post Payments Bank Announces Rollout of Aadhaar Enabled Payment Services at the First Anniversary of its Business Operations.

India Post Payments Bank (IPPB):

• India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India.
• IPPB was launched by the Hon’ble Prime Minister on September 1, 2018.
• The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India.
• The fundamental mandate of India Post Payments Bank is to remove barriers for the unbanked & underbanked and reach the last mile leveraging the Postal network comprising 155,000 Post Offices (135,000 in rural areas) and 300,000 Postal employees.

More information

Payment Banks:

• Payment Bank was established to provide payments/remittance services to migrant labour workforce, low income households, small businesses and other unorganized sector entities.
• Nachiket Mor Committee recommended creation of Payment Banks.
• India’s first payments bankwas launched by Airtel.
• It cannot offer all the services that a commercial bank offers.
• It can take deposits upto 1 lakh per account and it can issue debit cards but not credit cards.
• It cannot lend.
• It has to maintain Cash Reserve Ratio (CRR).
• RBI has mandated the minimum paid-up equity capital for payments bank at 100 crore.
• These entities have to invest a minimum 75% of demand deposit balances in Statutory Liquidity Ratio (SLR) – eligible government securities or treasury bills with maturity of up to one year.
• It can hold a maximum of 25% in current and time/fixed deposits with other commercial banks for operational purposes and liquidity management.
• A payments bank can work as a business correspondent (BC) of another bank.
• They can also distribute simple financial products like mutual fund units and insurance products.

 

 

32-Asset Reconstruction Company

Why in news?

• Public sector banks have increased the pace of sale of non-performing assets (NPAs) to asset reconstruction companies in order to trim their NPAs. 

Asset Reconstruction Company:

• An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
• ARCs clean up the balance sheets of banks when the latter sells these to the ARCs.
• This helps banks to concentrate in normal banking activities.

SARFAESI Act 2002 – Legal basis for ARCs:

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002 provides the legal basis for the setting up ARCs in India.
• The SARFAESI Act helps reconstruction of bad assets without the intervention of courts.

Capital needs for ARCs: Reserve Bank of India has hiked the capital requirement for asset reconstruction companies to Rs 100 crore from Rs 2 crore effective April 1, 2019.

 

33-Corporate tax

Why in news?

• Government issued an ordinance to reduce the corporate tax rate for domestic firms and new manufacturing units by 10 to 12 percentage points.

More about the News:

• Government issued ordinance to amend the Income Tax Act of 1961 and the Finance Act of 2019.
• For new manufacturing firms set up after October 1, 2019, and commencing operations by March 31, 2023, the effective tax rate will fall from 29.1% to 17%.
• New provision has been inserted in the Income Tax law to allow any domestic company to pay income tax at the rate of 22% (from 30%), subject to the condition that it won’t avail any other (tax) incentives or exemptions.
• For new manufacturing companies incorporated after October 1, 2019, and commencing production by March 31, 2023, the income tax rate will be 15%, from 25% at present.
• The effective tax rate for these companies will be 17.01%, compared to 29.1% presently.
• Listed companies that have announced buyback before July 5, 2019, tax on buyback of shares will not be charged.
• Higher surcharge will also not apply on capital gains on sale of security including derivatives held by FPIs.
• Enhanced surcharge will not apply to capital gains arising on equity sale or equity-oriented funds liable to STT stabilise flow of funds into capital markets.
• To provide relief to companies availing of concessions and benefits, a MAT relief by reducing it from 18% to 15%.
• CSR 2% spending to include government, PSU incubators and public funded education entities, IITs.

Corporate tax:

• Corporation tax is a tax imposed on the net income of the company.
• Companies, both private and public which are registered in India under the Companies Act 1956, are liable to pay corporate tax.
• Corporate tax is the largest tax revenue of the government despite the merger and emergence of the GST.

Rationale behind Governments action:

• The lowering of corporate tax rates will widen the tax net and gradually bring in more revenues to the government.
• It will make Indian companies globally competitive and will boost investment and also aid to private cycle capex.

 

34-Side Pocketing

Why in news?

• UTI Credit Risk Fund and Reliance Ultra Short Duration Fund announced their intent to side pocket bonds issued by Altico Capital after it as rated default grade by an agency.

What is a Side Pocket?

• A side pocket is a type of account utilized in hedge funds to differentiate illiquid assets from more liquid investments.
• The Securities and Exchange Board of India (SEBI)introduced the side pocketing framework on the back of IL&FS fallout, putting a lot of pressure on the net asset value of most debt funds that owned IL&FS group papers in their portfolio.
• Once an investment enters a side pocket account, only the current participants in the hedge fund are entitled to a share of it.
• All existing investors in the scheme are allotted equal number of units in the segregated portfolioas held in the main portfolio and no redemption or subscription is allowed in the segregated portfolio.
• Future investors will not receive a share of the proceeds if the asset’s returns become realized.

More about Side Pocketing:

• SEBI rules allow debt funds to side pocket only those bonds that are downgraded below investment grade by rating agencies.
• When a bond rated BBB or above is pegged down, it turns from an investment grade bond to a noninvestment grade one.
• Fund houses are required to decide on side pocketing and secure the approval of their trustees for it, on the day the downgrade happens.

Benefits of side pocketing:

• Holding illiquid assets in a standard hedge fund portfolio can cause a great deal of complexity when investors wish to take distributions or leave the fund altogether—If risky assets are separated in a different account, that will be easier.
• Putting side pocket funds off-limits helps reduce too many early exits from the hedge fund.

 

35-Sovereign Gold Bond Scheme

Why in news?

• Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds.

Sovereign Gold Bond Scheme:

• Sovereign Gold Bonds are government securities or bonds denominated in fixed grams of gold.
• The Sovereign Gold Bonds are issued by Reserve Bank India on behalf of the Government of India.
• Bonds Sold through: Scheduled Commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange Limited.

The features of the Bond are:

• Eligibility: The Bonds will be restricted for sale to resident individuals, HUFs, Trusts, Universities and Charitable Institutions.
• Denomination: The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
• Tenor: The tenor of the Bond will be for a period of 8 years with exit option after 5^th year to be exercised on the interest payment dates.
• Minimum size: Minimum permissible investment will be 1 gram of gold.
• Maximum limit: The maximum limit of subscribed shall be 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal (April-March) notified by the Government from time to time.
• Joint holder: In case of joint holding, the investment limit of 4 KG will be applied to the first applicant only.
• Interest rate: The investors will be compensated at a fixed rate of 2.50 per cent per annum payable semi-annually on the nominal value. Payment: Payment for the Bonds will be through cash payment (up to a maximum of Rs 20,000) or demand draft or cheque or electronic banking.

 

36-Minimum Alternative Tax (MAT)

Why in news

• The Finance Ministry said companies opting for the lower corporate tax rate of 22% will not be allowed to reduce their tax liability by claiming deductions towards additional depreciation and Minimum Alternative Tax (MAT) credits.

Minimum Alternative Tax (MAT):

• It is the minimum tax imposed on book profit of companies who record nil or negligible profit to pay the usual corporate income tax.
• Book profit means the net profit as shown in the profit & loss account for the relevant previous.
• It is applicable to all companies, except those engaged in infrastructure and power.
• The income arising from free trade zones, charitable activities, and investments by venture capital companies are also excluded from the purview of MAT.
• Foreign companies with income sources in India are liable to pay MAT.
• All companies that record a book profit shall have to pay a minimum alternate tax of 5% (plus surcharge and cess as applicable) under the Companies Act.

Why it is imposed?

• There were several companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act.
• The Income Tax Act allows companies to claim certain exemptions, deduct certain expenses and make various provisions to while calculating taxable income.
• Because of these exemptions and deductions, the taxable profit may become zero despite having substantial book profit.
• These companies are popularly known as Zero Tax companies.
• The MAT brings them under tax net by imposing a tax on their book profit as an alternative minimum tax.

• So, even if there is no payment of the usual income tax, the zero tax companies have to pay the MAT which is a based upon the book profit.

• MAT provisions says that a company has to pay MAT if the normal tax (income tax) payable by it is less than the MAT and that the MAT is to be computed with reference to its Book Profit as per Profit and Loss Account.

 

37-Cooperative Banks

Why in news?

• This case against former chairman of the Punjab and Maharashtra Cooperative (PMC) Bank raises the concern over the cooperative bank’s governing structure once again.

Cooperative Banks

• Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business. Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
• Co-operative banks in India are registered under the States Cooperative Societies Act.The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949
• Banking Laws (Co-operative Societies) Act, 1955.

How Cooperative banks are different from other joint stock banks?

 

Cooperative banks	Joint stock banks
Issue shares of unlimited liability	Issue shares of limited liability
One shareholder has one vote whatever the number of shares	Voting right of a shareholder is determined by the number of shares he possesses
Generally concerned with the rural credit and provide financial assistance for agricultural activities.	Primarily concerned with the credit requirements of trade and industry.
Federal in structure.	Do not have such a federal structure.
Board of directors is appointed based on election by the shareholders	Governance structure is professionally managed.

History

• The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904. Then the act was amended several times.
• The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help and cooperation among agriculturists, artisans and persons of limited means.”Why in news?

• Holdings in gold-backed exchange traded funds and similar products hit an all-time high, worries about the escalating US-China trade war and uncertainty over monetary policy led to increased demand for the precious metal.

What is gold ETF?

• A gold exchange traded fund (Gold ETF) is a passive investment fund that aims to track the price of physical gold.
• Each unit of gold ETF represents one gram of gold as the fund invests in physical gold and investors get the units in dematerialized form.
• Since it’s an ETF, the units are listed on stock exchanges and investors can buy or sell units on the exchange platform like any equity instrument.
• Simply put gold ETF is like buying gold in an electronic form.
• While selling a gold ETF unit, an investor will not get physical gold but the cash equivalent.

Who will buy gold ETFs?

• Any investor who wants to hold gold for purely investment purposes can look at gold ETFs.
• For those who want to accumulate physical gold, such ETFs are not the right instrument.

What are the benefits?

• First, one gets to invest in gold without worrying about factors such as purity of gold, transparency of pricing, making charges, lockers and theft, among other things.
• Second, one can purchase as little as one unit — representing one gram — at a time and still have the flexibility of buying more units depending on liquidity and prevailing gold prices.
•  Since it’s an ETF, it’s a liquid investment and can be sold at any time on the exchanges.

• It also offers many benefits in terms of tax, as income earned is treated as long term capital gain and there is no other levy such as wealth tax.

 

38-CASA ratio

Why in news?

• Private sector lender HDFC Bank reported a deposit growth of 22.6% year on year, driven by current and savings account growth of 14.7% and fixed deposit growth of 28.3%. CASA deposits were 39.3% of the total deposits.

What is a current account savings account (CASA)?

• A current account savings account (CASA) is aimed at combining the features of savings and checking accounts to entice customers to keep their money in the bank.
• A CASA operates like a normal bank account in which funds may be utilized at any time. 

What is CASA ratio?

• CASA is an important metric to determine the profitability of a bank.
• CASAratio of a bank is the ratio of deposits in current and saving accounts to total deposits.
• A higher CASAratio indicates a lower cost of funds, thus higher profit; because banks do not usually give any interests on current account deposits and the interest on saving accounts is usually very low 3-4%.

Current Account vs. Savings Account

Current Account	Savings Account
Does not earn any interest	Generally low interest
Generally no limits on deposits	No restrictions on the number of deposits
No limits on withdrawals	It has restrictions on the number of withdrawals a person can make.

 

39-Universal Service Obligation Fund (USOF)

Why in news?

• Telecoms likely to get more time to pay ₹42,000 cr in spectrum dues.

Universal Service Obligation Fund (USOF):

• It is a non-lapsable fund and deposited into the Consolidated Fund of India, hence it requires prior parliamentary approval to be dispatched.
• It is the part of inclusive development strategy of the government.
• Idea behind the fund and levy is to provide universal access to telecom services to rural and remote areas at affordable and reasonable prices.
• Universal Service Levy (USL) is collected from the Service Providers at a defined percentage of Adjusted Gross Revenue (AGR) as a component of Licence Fee (now it is 5% of the AGR).
• The fund was created under department of telecommunications, Ministry of communication and information technology.
• It is headed by the USOF Administrator who reports to the Secretary, Department of Telecommunications (DoT).

• The Indian Telegraph (Amendment) Act, 2003 giving statutory status to the Universal Service Obligation Fund (USOF).
• The USOF works through a bidding process, where funds are given to the enterprise quoting the lowest bid for providing services in rural area-(minimum subsidy maximum service).

Objectives of the fund:

• Provide widespread and non-discriminatory access to quality ICT services at affordable prices to people in rural and remote areas.
• Provide an effective and powerful linkage to the hinterland thereby mainstreaming the population of rural and remote parts of the country.
• Ensure that universal services are provided in an economically efficient manner.
• Ensure that by developing hitherto unconnected areas, the benefits of inclusive growth are reaped by our nation, bringing in its wake rapid socio-economic development and improved standards of living.

Important Projects under USOF:

• BharatNet – It is planned to connect all the 2, 50,000 Gram Panchayats in the country for providing broadband connectivity in the Gram Panchayats.
• Services in Left Wing Extremist Areas (LWE).
• 25000 Wi-Fi Hotspots: – The objective of the scheme is to set up 25,000 public Wi-Fi hotspots at rural telephone exchanges of BSNL.
• Submarine OFC Connectivity between Mainland India and A & N Islands.

 Spectrum Auction:

• Energy travels in the form of waves known as electromagnetic waves, these waves differ from each other in terms of frequencies, and this whole range of frequencies is called the spectrum.
• In Telecom electromagnetic waves of different wavelengths are used, they are divided into bands based on frequencies.
• A spectrum auction is a process whereby a government uses an auction system to sell the rights (licences) to transmit signals over specific bands of the electromagnetic spectrum and to assign scarce spectrum resources.
• Spectrum auctions make use of natural resources for revenue raising and ensuring economic development.

 

40-BHIM 2.0 

Why in news?

• Government launches BHIM 2.0 with new functionalities, additional language support.

Bharat Interface for Money (BHIM):

• BHIM is a UPI based payment interface application that allows real time fund transfer.
• It is developed by National Payments Corporation of India (NPCI) and was launched in December 2016.
• It is in line with government’s vision of Digital India.
• BHIM can be used currently on all handsets with iOS (version 9.0 & above) & Android OS (version 5.0 & above).

BHIM 2.0 Features:

• BHIM 2.0 – supports additional languages and has increased transaction limits. The new version of BHIM also supports three additional languages — Konkani, Bhojpuri and Haryanvi.

• Increased transaction limits for high value transactions – increasing the existing cap of Rs. 20,000 and now up to Rs. 1,00,000 from verified merchants.
• Other features marking BHIM 2.0: ‘Donation’ gateway, linking multiple bank accounts, offers from merchants, option of applying in IPO, gifting money.

More information

National Payments Corporation of India (NPCI):

• National Payments Corporation of India (NPCI) is an umbrella organization for all retail payments in India.
• It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks Association (IBA).

 

41-Unified Payments Interface (UPI)

Why in news

• The UPI hit a landmark of one billion in September, three years after its launch.

Unified Payments Interface (UPI):

• Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. 
• Launched in 2016.
• It is a payment system that allows money transfer between any two bank accounts by using a smart phone.
• UPI is standardized across banks- it will help you to pay directly from your bank account to different merchants without the hassle of typing your net-banking password, credit card details or IFSC code.
• UPI can be used as a digital payment option along with cards, net-banking and wallets.
• It allows both payment and receipt of money.

Technology development:

• UPI was developed by National Payment Corporation of India (NPCI) under the guidelines of RBI.
• It is based on the Immediate Payment Service (IMPS) platform.

Funds Transfer limit and Availability:

• 1 lakh / transaction.
• Being a digital payment system it is available 24×7 and across public holidays.

 

42-Teaser Loan

Why in News?

• State Bank of India’s (SBI) plan to offer teaser loans is likely to hit a regulatory hurdle as the Reserve Bank of India (RBI) is uncomfortable with such products.

Meaning

• Teaser loans are fixed-cum-floating home loan rates.
• Teaser loans are those which charge comparatively lower rates of interest in the first few years after which the rates are increased.

What is the issue?

• SBI’s decision to ponder over such products came after RBI mandated banks to link floating rate retail and MSME loans to an external benchmark.
• RBI is of the view that some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.
• In addition, a bank, while extending the loan, does not take into account the borrowers’ repayment capacity after lending rates increase.
• While such teaser products are not banned by the regulator, the standard asset provisioning requirement is higher for such loans.
• RBI had increased the provisioning by five times for such loans since these loans are perceived as more risky.
• Higher provisioning discourages banks from offering such products. Following the introduction of higher risk weights, banks had discontinued those products.

 

43-Government e-Marketplace (GeM)

Why in news

• Government e-Marketplace (GeM) signed an MoU with Central Bank of India.

More about

• Through this partnership, Central Bank of India will be able to offer an array of services including;
• Transfer of funds through GeM Pool Accounts (GPA)
• Advising of electronic Performance Bank Guarantees (e-PBG)
• Earnest Money Deposit (EMD) to the registered users on the portal.
• Integration for payments and various banking services is one of the priorities for GeM towards the goal of paperless, contactless and cashless system.
• GeM has already signed MoU with 18 Public Sector and Private Banks to enable this.
• Government e Marketplace (GeM) is now going to on board self-help groups (SHGs) and artisan clusters on GeM.

Background:

Government e-Marketplace

• GeM is an initiative of the Government of India which offers a one stop platform for facilitating online procurement of goods and services by Central and State government organizations.
• GeM provides tools for Direct Purchase, bidding and reverse auction for ensuring transparent and efficient procurement.

44-National Company Law Tribunal (NCLT)

Why in news

• Realtors’ body demands amendment to NCLT Act.

National Company Law Tribunal (NCLT):

• The National Company Law Tribunal NCLT is a quasi-judicial body, exercising equitable jurisdiction, which was earlier being exercised by the High Court or the Central Government.
• The Tribunal has powers to regulate its own procedures.
• The Central Government has constituted National Company Law Tribunal (NCLT) under section 408 of the Companies Act, 2013.
• The establishment of the National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of the following authorities:
• Company Law Board
• Board for Industrial and Financial Reconstruction (BIFR).

National Company Law Appellate Tribunal (NCLAT):

• It was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the orders of National Company Law Tribunal.
• NCLAT is also the Appellate Tribunal for hearing appeals against the orders passed by NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC).
• NCLAT is also the Appellate Tribunal for hearing appeals against the orders passed by Insolvency and Bankruptcy Board of India under Section 202 and Section 211 of IBC.
• NCLAT is also the Appellate Tribunal to hear and dispose of appeals against any direction issued or decision made or order passed by the Competition Commission of India (CCI).

45-Bharat Bond Exchange Traded Fund

Why in news?

• The Cabinet Committee on Economic Affairs has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF).

More about

• It creates an additional source of funding for Central Public Sector Undertakings (CPSUs) Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other Government organizations. 
• Bharat Bond ETF would be the first corporate Bond ETF in the country.

 Bharat Bond ETF Structure:

• Each ETF will have a fixed maturity date
• The ETF will track the underlying Index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
• As of now, it will have 2 maturity series – 3 and 10 years. Each series will have a separate index of the same maturity series.
• Index will be constructed by an independent index provider – National Stock Exchange

 Benefits of Bharat Bond ETF to investors:

• Bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns (target maturity structure).
• It will also provide access to retail investors to invest in bonds with smaller amount (as low as Rs. 1,000) thereby providing easy and low-cost access to bond markets.
• This will increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.

Bharat Bond ETF Benefits for CPSEs:

• Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.
• It will expand their investor base through retail participation which can increase demand for their bonds.
• Further, Bond ETF trading on the exchange will help in better price discovery of the underlying bonds.

Developmental impact on Bond Markets:

• This is expected to eventually increase the size of bond ETFs in India leading to achieving key objectives at a larger scale – deepening bond markets, enhancing retail participation and reducing borrowing costs.

What is an ETF?

• Exchange Traded Funds (ETFs) are essentially index funds that are listed and traded on exchanges like stocks.
• They track indexes like the nifty, sensex or banking index.

46-Independent Director’s Databank

Why in news?

• The Ministry of Corporate Affairs, with the objective of strengthening the institution of Independent Directors under the Companies Act, launched the Independent Director’s Databank.

Independent Director’s Databank:

• Launched by the Ministry of Corporate Affairs.
• The Indian Institute of Corporate Affairs (IICA) would be maintaining the databank portal.
• It is aimed at providing access and navigate platform for the registration of existing independent directors as well as individuals aspiring to become independent directors.

Applications:

• It provides for a wide array of e-learning courses on various topics including the Companies Act, securities laws, basic accountancy, board practices, board ethics and board effectiveness.
• Provide an easy to access & navigate platform for the registration of existing Independent Directors as well as individuals aspiring to become independent directors.
• Companies may register themselves with the databank to search, select and connect with individuals who possess the right skills and attitude for being considered for appointment as independent directors.

47-Operation Twist

Why in news?

• RBI has conducted a special open market operation (OMO) similar to the ‘Operation Twist’ carried out in the United States near the start of the decade.

More about:

• RBI will conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for ₹10,000 crore each.
• It will purchase the longer-term maturities (i.e. government bonds maturing in 2029), and simultaneously sell the shorter duration ones (i.e. short-term bonds maturing in 2020).
• The eligible participants can bid or submit offers in electronic format on RBI’s Core Banking Solution (E-Kuber).

Operation Twist:

• Operation Twist is when the central bank uses the proceeds from the sale of short-term securities to buy long-term government debt papers, leading to easing of interest rates on the long term papers.
• Operation Twist first appeared in 1961 as a way to strengthen the S. dollar and stimulate cash flow into the economy.
• In June 2012, Operation Twist was so effective that the yield on the 10-year U.S. Treasury dropped to a 200-year low.

Open Market Operations (OMO):

• It is one of the quantitative i.e. to regulate or control the total volume of money, monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
• OMOs are conducted by the RBI by way of sale or purchase of government securities to adjust money supply conditions.
• The central bank sells government securities to remove liquidity from the system and buys back government securities to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

48-Bond Price

Why in news?

• Definition of ‘Bond Price’

Bonds

• Bonds and equities are two important instruments issued by corporate to mobilize funds.
• Bonds are debt, whereas stocks are equity. By purchasing equity (stock), an investor becomes an owner in the issuing entity.
• By purchasing a debt instrument like bond, an investor becomes a creditor to the corporation (or government).
• The primary advantage of being a creditor (by purchasing bonds) is that he has a higher claim on assets than shareholders do.
• In the case of bankruptcy, a bondholder will get his money back before a shareholder.

Terms related to bonds

• Face Value of Bond: In bond investing, face value, or par value, is commonly referred to the amount paid to a bondholder at the maturity date, given the issuer doesn’t default. The face value is also known as the repayment amount.
• Coupon: A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.
• Maturity Date: Maturity date is the date when the principal (face value) is paid back. The final coupon and the face value of a debt security is repaid to the investor on the maturity date.

Bond Price

• Bond price is the present discounted value of future cash stream generated by a bond.
• It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity.
• To calculate the bond price, one has to simply discount the known future cash flows.
• The price of a bond and its yield-to-maturity are negatively correlated to each other.
• When the yield-to-maturity is higher than the coupon rate, the price of a bond is less than the face value and vice-versa.
• Usually bonds are issued at coupon rates close to the prevailing interest rate, so that they can be sold close to their face values.

Note: The yield to maturity (YTM) is the estimated annual rate of return for a bond assuming that the investor holds the asset until its maturity date.

• The coupon rateis the earnings an investor can expect to receive from holding a particular bond.

49-Benami Transactions (Prohibition) Amendment Act, 2016

Why in news

Sasikala’s assets attached under Benami Act

Benami Transactions (Prohibition) Amendment Act, 2016

• Parent act-Benami Transaction (Prohibition) Act,
• The Act defines a benami transaction as a transaction where:
• A property is held by or transferred to a person, but has been provided for or paid by another person.
• The transaction is made in a fictitious name.
• The owner is not aware of denies knowledge of the ownership of the property.
• The person providing the consideration for the property is not traceable.
• Assets of any kind — movable, immovable, tangible, intangible, any right or interest, or legal documents. As such, even gold or financial securities could qualify to be benami
• Provides for an Appellate Tribunal to hear appeals against any orders passed by the Adjudicating Authority.
• Appeals against orders of the Appellate Tribunal will lie to the high court.
• The special court should conclude the trial within six months from the date of filing of the complaint.
• The act seeks to establish four authorities to conduct inquiries or investigations regarding benami transactions:
• Initiating Officer
• Approving Authority
• Administrator
• Adjudicating Authority
• If an Initiating Officer believes that a person is a benamidar, he may issue a notice to that person.
• The Initiating Officer may hold the property for 90 days from the date of issue of the notice, subject to permission from the Approving Authority.
• At the end of the notice period, the Initiating Officer may pass an order to continue the holding of the property.
• If an order is passed to continue holding the property, the Initiating Officer will refer the case to the Adjudicating Authority.
• The Adjudicating Authority will examine all documents and evidence relating to the matter and then pass an order on whether or not to hold the property as benami.
• Based on an order to confiscate the benami property, the Administrator will receive and manage the property in a manner and subject to conditions as prescribed.
• The amended law empowers the specified authorities to provisionally attach benami properties which can eventually be confiscated.
• Besides, if a person is found guilty of offence of benami transaction by the competent court, he shall be punishable with rigorous imprisonment for a term not less than one year but which may extend to 7 years and shall also be liable to fine which may extend to 25% of the fair market value of the property.

50-RuPay card

Why in news

• RuPay card to be accepted in Saudi Arabia.

About the news:

• India signed an agreement with Saudi Arabia to launch the RuPay card in the country.
• The Rupay card lunch has made Saudi Arabia the third nation in West Asia to initiate India’s digital payment system.
• India has already launched the RuPay card in the UAE, Bahrain and Singapore.

RuPay card:

• RuPay is India’s indigenous card scheme created by the National Payments Corporation of India.
• It was conceived to fulfil RBI’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments.
• It is made in India, for every Indian to take them towards a “less cash” society.
• RuPay is the first-of-its-kind domestic Debit and Credit Card payment network of India, with wide acceptance at ATMs, POS devices and e-commerce websites across India.
• It is a highly secure network that protects against anti-phishing. 

Features and Benefits of RuPay Card:

• Complimentary Lounge Access Program – Domestic & International
• 24X7 Concierge Services
• Earn Cash back time after time
• Comprehensive Insurance Cover
• Exclusive Merchant Offers

About National Payments Corporation of India (NPCI):

• NPCI is an umbrella organization for operating retail payments and settlement systems in India.
• It is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment and Settlement Infrastructure in India.

 

51-Mobile Aided Note Identifier (MANI)

Why in news?

• RBI’s new app MANI to help visually-impaired identify currency notes.

More Information

• This new application will help the visually-impaired people to identify the denomination of the Indian banknotes of the Mahatma Gandhi Series and Mahatma Gandhi (New) Series by capturing the image of the notes placed in front of the mobile’s rear camera.
• The app will generate audio and non-sonic notification intimating the currency note denomination to the user.
• The new RBI app will resolve the issues and also allow users to choose/change the language, select/change impairment, voice commands, currency identification using the camera, the history of identified currency for last 30 days, etc.
• RBI app can be freely downloaded from Android Play store or iOS App Store.

NOTE: The Mahatma Gandhi series of Notes were introduced in 1996. The currency was called so as the notes prominently displays portrait of Gandhiji. These notes replaced the Lion Capital Series. These notes have several security features.

 

52-National Stock Exchange (NSE) knowledge Hub

Why in news?

• Leading stock exchange NSE launched Knowledge Hub, an artificial intelligence-powered learning eco-system which will assist banking and financial services sector in enhancing skills for their employees.

More about

• It is launched by NSE Academy, a wholly owned subsidiary of the National Stock Exchange (NSE).
• It is an artificial intelligence-powered learning eco-system which will assist banking and financial services sector in enhancing skills for their employees.
• It will bring world class content closer to learners in a personalized and community learning environment which allows aggregation, curation, creation and targeting of content, making it both learner centric and learner driven.
• It will help academic institutions in preparing future ready talent skilled for the financial services industry hence creating an adequate work force.
• The learning modules in the hub will help in understanding the stock exchange and its functioning better.

Note: India ranks third in the world in terms of high quality research publications in artificial intelligence (AI) (in AI ranking by research agency Itihaasa).

53-Co-operative Banks

Why in news?

• RBI revises supervisory framework for UCBs to expedite resolution of Urban Co-operative Banks (UCBs) in financial stress.

More about the news

• The revised framework released by the RBI stipulates the thresholds for various parameters that could trigger a corrective action by the Urban Co-operative Banks (UCB)s or a supervisory action by the central bank.

• A Urban Co-operative Bank (UCB) may be placed under supervisory action framework when its
• Net Non-Performing Assets (NPAs)exceed 6% of its net advances;
• Its Capital to Risk (Weighted) Assets Ratio(CRAR) falls below 9%,
• When it incurs losses for two consecutive financial years or has accumulated losses on its balance sheet.

Co-operative Banks

• Co-operative banks are financial entities established on a co-operative basis and belonging to their members.
• This means that the customers of a co-operative bank are also its owners.
• These banks provide a wide range of regular banking and financial services.
• Co-operative Banks are broadly classified into Urban and Rural co-operative banks based on their region of operation.
• Rural Co-operative Banks (RCBs)could either be short-term or long-term in nature.
• Short-Term Co-operative Banks are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies.
• The long-term institutions are either State Cooperative Agriculture or Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
• Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled.
• Scheduled and non-scheduled UCBs are again of two kinds- multi-state and those operating in single state.

Who oversees these banks?

• In India, co-operative banks are registered under the States Cooperative Societies Act.
• They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws;
• Banking Regulations Act, 1949
• Banking Laws (Co-operative Societies) Act, 1955.

 

54-Small Finance Banks (SFB)

Why in news?

• Shivalik, first UCB to convert into SFB

More about the news

• The Reserve Bank of India (RBI) granted ‘in-principle’ approval to Saharanpur-based Shivalik Mercantile Cooperative Bank to convert into a Small Finance Bank (SFB), making it the first such lender to have opted for the transition.
• The move comes after the RBI had announced a scheme on voluntary transition of UCB into a SFB on September 27, 2018.
• The ‘in-principle’ approval will be valid for 18 months, within which Shivalik Mercantile Co-operative Bank had to comply with the norms of a SFB.

Small Finance Banks (SFB)

• They are a specific segment of banking created by RBI under the guidance of Government of India with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized entities.

Features

• Minimum paid-up voting equity capital / net worth requirement shall be ₹ 200 crore.
• for Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into Small Finance Banks (SFBs) initial requirement of net worth shall be at ₹ 100 crore, which will have to be increased to ₹ 200 crore within five years from the date of commencement of business.
• SFBs will be given scheduled bank status immediately upon commencement of operations.
• SFBs will have general permission to open banking outlets from the date of commencement of operations.
• Payments Banks can apply for conversion into SFB after five years of operations, if they are otherwise eligible as per these guidelines.

 

55-National Strategy for Financial Inclusion (NSFI)

Why in news?

• The Reserve Bank of India (RBI) has chalked out an ambitious strategy for financial inclusion till 2024.

More about the strategy

• It is an ambitious strategy which aims to strengthen the ecosystem for various modes of digital financial services in all Tier-II to Tier VI centres to create the necessary infrastructure to move towards a less-cash society by March 2022.
• Financial inclusion is a key driver of economic growth and poverty alleviation in the whole world.
• The strategy aims to provide access to formal financial services in an affordable manner, broadening & deepening financial inclusion and promoting financial literacy & consumer protection.

Note: Classification of Centres (tier-wise) Population (as per 2011 Census)

• Tier I – 1, 00,000 and above
• Tier II – 50,000 to 99,999
• Tier III – 20,000 to 49,999
• Tier IV – 10,000 to 19,999
• Tier V – 5,000 to 9,999
• Tier VI – Less than 5000

Objectives:

• Create awareness and educate consumers on access to financial services, availability of various types of products and their features.
• A target has been set that every willing and eligible adult, who has been enrolled under the Prime Minister Jan Dhan Yojana, will be enrolled under an insurance scheme and a pension scheme by March 2020.
• Change attitudes to translate knowledge into behavior.
• Make consumers understand their rights and responsibilities as clients of financial services.
• Increase outreach of banking outlets to provide banking access to every village within a 5-km radius or a hamlet of 500 households in hilly areas by March 2020.
• Ensure that every adult had access to a financial service provider through a mobile device by March
• The plan is also to make the Public Credit Registry (PCR) fully operational by March 2022 so that authorized financial entities could leverage the same for assessing credit proposals from all citizens.

 

56-Fund of Funds

Why in news?

• Axis mutual fund have announced new fund of fund scheme.

What is a Fund of Funds?

• A Fund of Funds (FoF) is a scheme that invests in units of other MF schemes.ie FoF is a MF scheme that does not invest directly in stocks or securities but in other MF schemes.

What are the advantages of investing in a FoF?

• The biggest advantage is, it gives the investor an opportunity to invest in different schemes managed by different fund managers.
• With a single FoF, the investor will be able to benefit from the diverse investment approach.

How are gains from FoF investments taxed?

• FoF is treated as a nonequity fund for tax purposes, even though most FoF schemes invest in equity oriented funds.
• As a result, gains arising out of FoF investments do not get the benefits that an equity scheme gains derive.

57-Advisory Board for Banking Frauds (ABBF)

Why in news?

• The Finance Minister has repeatedly assured Bankers that adequate measures would be taken to protect honest commercial decisions taken by them and distinction would be made between genuine commercial failures and culpability.

• As part of this endeavor of Government, Section 17A was incorporated in Prevention of Corruption Act requiring prior permission before initiating investigation against a public servant.

Advisory Board for Banking Frauds (ABBF)

• Central Vigilance Commission has constituted an ‘Advisory Board for Banking Frauds (ABBF)’ in August 2019, headquartered in Delhi to examine bank fraud of over 50 crore and recommend action.
• The Board consists of four members including chairman.
• The tenure of the Chairman and members would be for a period of two years.

Functions:

• Examine the cases involving the level of officers of General Manager and above in the Public Sector Banks in respect of an allegation of fraud in a borrowal account.
• It would function as the first level of examination of all large fraud cases before recommendations or references are made to the investigative agencies by the respective public sector banks (PSBs).
• Lenders would refer all large fraud cases above 50 crore to the board and on receipt of its recommendation or advice, the bank concerned would take further action in such matter.
• The Central Bureau of Investigation may also refer any case or matter to the board where it has any issue or difficulty or in technical matters with the PSB concerned.
• It would also periodically carry out frauds analysis in the financial system and give inputs for policy formulation related to the fraud to the RBI.

58-Deposit Insurance

Why in news?

• Union Finance Minister in her budget speech 2020 has proposed to hike the bank deposit insurance in scheduled commercial banks.

About the news:

• Union Finance Minister in her budget speech 2020 has proposed to hike the bank deposit insurance in scheduled commercial banks to Rs 5 lakh per depositor from the current Rs 1 lakh.
• This is the first time since 1993 that the deposit insurance cover has been raised.

About:

• Currently, as per the RBI guidelines, deposits with all commercial banks and cooperative banks are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• Only Primary Cooperative Societies are not covered under DICGC.

What kind of deposits are covered?

• DICGC covers all deposits such as savings, fixed, current, recurring and

Deposits not covered by the Corporation:

• Deposits of foreign governments;
• Deposits of Central/State Governments;
• Inter-bank deposits;
• Deposits of the State Land Development Banks with the State co-operative bank;
• Any amount due on account of and deposit received outside India
• Any amount specifically exempted by the corporation with the previous approval of Reserve Bank of India.

What about joint accounts?

• As per the RBI, both single and joint accounts will be separately covered under the DICGC scheme.

Which all banks covered by DICGC?

• Deposit insurance covers all commercial banks and foreign banks operating in India.
• State, Central and Urban Cooperative Banks,
• Local area banks and
• Regional rural banks

59-Monetary Policy Committee (MPC)

Why in news?

• The six-member Monetary Policy Committee (MPC) will kick off three-day monetary policy meet.

Monetary Policy Committee (MPC):

• The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016,  to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
• The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
• A Committee-based approach for determining the Monetary Policy will add lot of value and transparency to monetary policy decisions.

Composition:

• Altogether, the MPC will have six members
• The RBI Governor (Chairperson)
• The RBI Deputy Governor in charge of monetary policy
• One official nominated by the RBI Board
• Three members representing the Government of India
• The Members of the Monetary Policy Committee appointed by the Central Government shall hold office for a period of four years,with immediate effect or until further orders, whichever is earlier.
• The meetings of the Monetary Policy Committee shall be held at least 4 times a year and it shall publish its decisions after each such meeting.

What is RBI Monetary Policy?

• Monetary policy is the macroeconomic policy laid down by the Reserve Bank of India. It involves the management of money supply and interest rates.
• The central bank tweaks interest rates to achieve macroeconomic objectives such as liquidity, consumption and inflation.

What is the objective of Monetary Policy Committee?

• The objective of the Monetary Policy Committee is to fix the benchmark interest rate i.e repo rate.

What are repo rate and reverse repo rate?

• Repo rate is the rate at which RBI lends money to the commercial banks. The rate is used by monetary authorities to control inflation.
• On the other hand, reverse repo is the rate at which commercial banks park their money with the central bank.
• At present, repo rate and reverse repo rate stand at 5.15 per cent and 4.90 per cent, respectively.

 

60-Circuit Breaker in Stock Market

Why in news?

• The Bombay Stock Exchange (BSE) experienced the second biggest single-day fall in its history as it fell by 8.2 per cent, slightly lower than the 11 per cent fall it saw during the 2008 financial crisis.

More about the news

• Since the indexes plunged more than 10 per cent each day earlier, a circuit breaker was triggered for the first time since 2009 halting trading for 45 minutes.

What are circuit breakers?

• Circuit breakers are triggered to prevent markets from crashing, which happens when market participants start to panic induced by fears that their stocks are overvalued and decide to sell their stocks.
• In June 2001, the Securities and Exchange Board of India (SEBI) implemented index-based market-wide circuit breakers
• This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent.
• When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.
• For instance, if the S&P BSE Sensex were to fall more than 10 per cent before 1 pm on a given day, circuit breakers would be triggered for a period of 45 minutes; in case it fell more than 15 per cent on or after 2 pm, circuit breakers would be triggered for the remainder of the day and in case it fell more than 20 per cent at any time of the day, the trading would be halted for the remainder of the day.

 

61-Targeted Long Term Repo Operations

Why in News?

• The Reserve Bank of India (RBI) recently introduced the Targeted Long Term Repo Operations (TLTROs), as a tool to enhance liquidity in the system, particularly the corporate bond market, in the wake of the COVID-19 crisis.

LTRO:

• It is a tool under which the central bank provides one-year to three-year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
• While the RBI’s current windows of liquidity adjustment facility (LAF) and marginal standing facility (MSF) offer banks money for their immediate needs ranging from 1-28 days, the LTRO supplies them with liquidity for their 1- to 3-year needs.
• LTRO operations are intended to prevent short-term interest rates in the market from drifting a long way away from the policy rate, which is the repo rate.

Significance:

• As banks get long-term funds at lower rates, their cost of funds falls. In turn, they reduce interest rates for borrowers.
• LTRO helped RBI ensure that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.
• LTRO also showed the market that RBI will not only rely on revising repo rates and conducting open market operations for its monetary policy, but also use new tools to achieve its Intended Objectives.

 

62-Helicopter Money

Why in News?

• Telangana Chief Minister K. Chandrashekhar Rao has urged that RBI should implement quantitative easing policy by modifying FRBM Act and allow helicopter money.

More information

• Observing that there is a fall in revenues of both the state and central governments against the backdrop of the coronavirus pandemic, Rao said a policy of Quantitative Easing (QE) is the only way to deal with the situation.
• Explaining the issue, he said if funds are pumped into the society, there is a possibility of getting some relief and reviving the system.
• This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis.
• Release 5 percent of funds from the GDP through Quantitative Easing Policy.

Helicopter Money:

• This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
• It involves printing large sums of money and distributing it to the public.
• Unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.
• Under such a policy, a central bank directly increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation.
• Quantitative easing also involves the use of printed money by central banks to buy government bonds. But not everyone views the money used in QE as helicopter money.
• It sure means printing money to monetise government deficits, but the govt has to pay back for the assets that the central bank buys.

 

63-Dollar Swap Agreement

Why in News?

• Recently, India is working with the United States to secure a dollar (currency) swap line that would help in providing an additional comfort in an event of any abrupt outflow of funds.
• India already has a currency swap facility with other central banks like Japan, UAE etc.

More Information

• The economic effects of COVID-19 hit investor sentiment, Foreign institutional investors (FIIs) have been large sellers of Indian equity and debt markets in March and April so far. This has led to outflow of funds from the country.
• India liquidated its forex assets, to stabilise the rupee which recently fell below the 76 level against the dollar.
• India’s foreign currency assets had declined by around $7.50 billion in two weeks to $ 439.66 billion as on March 27.
• According to Reserve Bank of India (RBI) data, 63.7 per cent of India’s foreign currency assets — or $256.17 billion — is invested in overseas securities, mainly in the US treasury.
• But India is expected to comfortably tide over any challenge posed by continued outflows of funds from the markets, given the adequacy of foreign exchange reserves, a swap line with the US Fed provides an additional comfort to the forex markets.

Dollar Swap Arrangement

• Dollar swap: It is a kind of currency swap. The word swap means exchange.
• A currency swap between the two countries is an agreement to exchange currencies with predetermined terms and conditions.
• The US Federal Reserve will provide dollars to a foreign central bank. At the same time, the foreign central bank provides the equivalent amount of funds in its currency to the Fed, based on the market exchange rate at the time of the transaction.
• The parties agree to swap back these quantities of their two currencies at a specified date in the future, which is the next day or as far ahead as three months, using the same exchange rate as in the first transaction.
• It carries no exchange rate or other market risks as transaction terms are set in advance.
• The Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.

Forex Reserves (Foreign Exchange Assets):

• They are assets held on reserve by a central bank in Foreign Currencies.
• It includes foreign currencies, bonds, treasury bills and other government securities.
• These are held to ensure that a central bank has enough funds if its national currency weakens/ devalues rapidly.

 

64-Round-Tripping

Why in News?

• Recently, the Supreme Court has quashed an income tax re-assessment notice issued by revenue authorities against the premier news broadcasting company.
• Income Tax department had accused NDTV of “round-tripping” finances in connection with a July 2007 issuance of step-up coupon bonds amounting to $100 million through its U.K. subsidiary.

About Round Tripping:

• It refers to money that leaves the country though various channels and makes its way back into the country often as foreign investment. This mostly involves black money and is allegedly often used for stock price manipulation.
• It is often done through a series of transactions that don’t have any substantial commercial purposes, which makes it fall within the trappings of GAAR.
• It mainly used for Tax concessions allowed in the foreign country encourages individuals to park money there and then reroute in to the country.
• The money returns to India by investing in offshore funds that in turn invest in Indian assets.
• Some of the other routes that have been used in the past are The Global Depository Receipts (GDR) and Participatory Notes (P-Notes).

65-Counter-cyclical Capital Buffers (CCyB)

Why in News?

• The RBI has announced that banks need not activate countercyclical capital buffers (CCyB)amid slowdown due to COVID-19 outbreak.

Countercyclical Capital Buffer (CCyB):

• A capital buffer is a mandatory capital that financial institutions are required to hold in addition to other Minimum Capital Requirements.
• CCyB is the capital to be kept by a bank to meet business cycle related risks. It is aimed to protect the banking sector against losses from changes in economic conditions.
• Banks may face difficulties in phases like recession when the loan amount doesn’t return.
• To meet such situations, banks should have own additional capital. This is an important theme of the Basel III norms.

CCyB Framework in India:

• The framework on CCyB was put in place by the RBI in terms of guidelines issued in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
• The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.
• It requires banks to build up a buffer of capital in good times, which may be used to maintain flow of credit to the real sector in difficult times.
• The buffer was also meant to restrict the banking sector from indiscriminate lending in the periods of excess credit growth, which have often been associated with the building up of system-wide risk.

 

66-Terms in the news

Bank Guaranty

• Bank Guaranty is a promise from a financial institution that a borrower will be able to repay a debt to another party, no matter what the debtor’s financial circumstances. 

Earnest Money Deposit (EMD)

• Earnest Money deposit is the amount a buyer pays to show that his interest in a said property is genuine.
• The money is often paid once a verbal acceptance upon an offer has been made.
• The Earnest Money deposit is also known as a binder, token money or good-faith deposit.