Forest facilities for residents

Forex Facilities for Residents
(Individuals):::::

Introduction

The legal framework for administration of exchange control in India is provided by the Foreign Exchange Management Act, 1999. Under the Act, freedom has been granted for buying and selling of foreign exchange for undertaking current account transactions. However, the Central Government has been vested with powers in consultation with Reserve Bank to impose reasonable restrictions on current account transactions. Accordingly, the Government has issued Notifications GSR.381(E) dated May 3, 2000, and S.O. 301(E) dated March 30, 2001, imposing certain restrictions on current account transactions in public interest.

These details are available on the Bank’s website besides with the authorised dealers and regional offices of the Foreign Exchange Department. Our experience so far has been that the residents like to get information on several matters relating to various current account transactions and other incidental issues. This pamphlet attempts to answer to all such questions in simple language. While preparing replies to questions, special care has been taken to ensure that the replies are drafted in simple words and reference to technical details are avoided.

 The Foreign Exchange Management Act,1999 (FEMA), has come into force with effect from June 1, 2000. With introduction of the new Act (in place of FERA), certain structural changes have been introduced and now all transactions involving foreign exchange have been classified either as Capital or Current Account transactions. All transactions undertaken by a resident that do not alter his assets or liabilities outside India are current account transactions. In terms of Section 5 of the FEMA, persons are free to buy or sell foreign exchange for any current account transaction except for those transactions on which Central Government has imposed restrictions, vide its Notification No.G.S.R.381(E) dated May 3, 2000 (as amended from time to time). Full text of the said Notification is available in the Official Gazette. It is also available as annexure to our Master Circular on Miscellaneous remittances available at our website www.mastercirculars.rbi.org.in.Incidentally, no release of foreign exchange is admissible for any kind of travel to Nepal and Bhutan or for any transaction with persons resident in Nepal and Bhutan.

Some of the commonly or frequently asked questions by residents in connection with foreign exchange facilities or restrictions have been answered in the following paragraphs.

I. Guidelines on travel related matters

1. Who is a resident?

In terms of Section 2(v) of FEMA, 1999, a "person resident in India" means –

a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include –
(A) a person who has gone out of India or who stays outside India, in either case -

for or on taking up employment outside India, or
for carrying on outside India a business or vocation outside India, or
for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than –

for or on taking up employment in India, or
for carrying on in India a business or vocation in India, or
for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
any person or body corporate registered or incorporated in India,
an office, branch or agency in India owned or controlled by a person resident outside India,
an office, branch or agency outside India owned or controlled by a person resident in India;
2.From where one can buy foreign exchange?

Foreign exchange can be purchased from any authorised dealer. Besides authorised dealers, full-fledged money changers are also permitted to release exchange for business and private visits.

3.Who is an authorized dealer?

An authorized dealer is normally a bank specifically authorized by the Reserve Bank under Section 10(1) of FEMA,1999, to deal in foreign exchange or foreign securities.

4.How much exchange is available for a business trip?

Authorized dealers can release foreign exchange up to USD 25,000 for a business trip to any country other than Nepal and Bhutan. Release of foreign exchange exceeding USD 25,000 for a travel abroad (other than Nepal and Bhutan) for business purposes, irrespective of period of stay, requires prior permission from Reserve Bank. Visits in connection with attending of an international conference, seminar, specialised training, study tour, apprentice training, etc., are treated as business visits. Visit abroad for medical treatment and/or check up also falls within this category.

5. Can one obtain additional foreign exchange for medical treatment outside India?

Authorized dealers may release foreign exchange upto USD 100,000 or its equivalent to resident Indians for medical treatment abroad on self declaration basis of essential details, without insisting on any estimate from a hospital/doctor in India/abroad.

A person visiting abroad for medical treatment can obtain foreign exchange exceeding the above limit, provided the request is supported by an estimate from a hospital/doctor in India/abroad.

This exchange is to meet the expenses involved in treatment and in addition to the amount referred to in paragraph 1 above.

6. How much exchange is available for studies outside India?

Students going abroad for studies are treated as Non-Resident Indians (NRIs) and are eligible for all the facilities available to NRIs under FEMA. In addition, they can receive remittances upto USD 100,000 from close relatives from India on self-declaration, towards maintenance, which could include remittances towards their studies also. Educational and other loans availed of by students as resident in India can be allowed to continue. There is no dilution in the existing remittance facilities to students in regard to their academic pursuits.

7. How much foreign exchange can one buy when going for tourism to a country outside India?

In connection with private visits abroad, viz., for tourism purposes, etc., foreign exchange up to USD10,000, in any one calendar year may be obtained from an authorised dealer. The ceiling of USD10,000 is applicable in aggregate and foreign exchange may be obtained for one or more than one visit provided the aggregate foreign exchange availed of in one calendar year does not exceed the prescribed ceiling of US$10,000 {The facility was earlier called B.T.Q or F.T.S.}. This limit of USD10,000 can be availed of by a person along with foreign exchange for travel abroad for any purpose, including for employment or immigration or studies. However, no foreign exchange is available for visit to Nepal and/or Bhutan for any purpose.

8. How much foreign exchange is available to a person going abroad on employment?

Person going abroad for employment can draw foreign exchange upto USD100,000 from any authorised dealer in India on the basis of self-declaration.

9. How much foreign exchange is available to a person going abroad on emigration?

Person going abroad on emigration can draw foreign exchange upto USD100,000 on self- declaration basis from an authorized dealer in India. This amount is only to meet the incidental expenses in the country of emigration.

No amount of foreign exchange can be remitted outside India to become eligible or for earning points or credits for immigration. All such remittances require prior permission of the Reserve Bank.

10. Is there any purpose for which going abroad requires prior approval from the Reserve Bank or Govt. of India?

Dance troupes, artistes, etc., who wish to undertake cultural tours abroad, should obtain prior approval from the Ministry of Human Resources Development, Government of India, New Delhi.

11. How much foreign exchange can be purchased in foreign currency notes while buying exchange for travel abroad?

Travellers are allowed to purchase foreign currency notes/coins only up to USD 2000. Balance amount can be taken in the form of traveller’s cheque or banker’s draft. Exceptions to this are (a) travellers proceeding to Iraq and Libya can draw foreign exchange in the form of foreign currency notes and coins not exceeding US$ 5000 or its equivalent; (b) travellers proceeding to the Islamic Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent States can draw entire foreign exchange released in form of foreign currency notes or coins.

12. Do same Rules apply to persons going for studies abroad?

For the purpose of studies abroad, exchange for maintenance expenses is released in the form of (i) currency notes up to US$ 2,000, (ii) the balance foreign exchange may be taken in form of traveller’s cheques or bank draft payable overseas.

13. How much in advance one can buy foreign exchange for travel abroad?

The foreign exchange acquired for any purpose has to be used within 60 days of purchase. In case it is not possible to use the foreign exchange within the period of 60 days it should be surrendered to an authorised dealer.

14. Can one pay by cash full rupee equivalent of foreign exchange being purchased for travel abroad ?

Foreign exchange for travel abroad can be purchased from banks against rupee payment in cash up to Rs.50,000/-. However, if the rupee equivalent exceeds Rs.50,000/-, the entire payment should be made by way of a crossed cheque/banker’s cheque/pay order/demand draft only.

15. Within what period a traveller who has returned to India is required to surrender foreign exchange?

On return from a foreign trip travellers are required to surrender unspent foreign exchange held in the form of currency notes within 90days and travellers’ cheques within 180 days of return. However, they are free to retain foreign exchange upto USD 2,000, in the form of foreign currency notes or TCs for future use or credit to their RFC(Domestic) Account without any limit.

16. On return to India can one retain some foreign exchange?

Residents are permitted to hold foreign currency up to USD 2,000 or its equivalent or credit to their RFC(Domestic) Account without any limit provided the foreign exchange was -

acquired by him while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or
acquired by him, from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation, or
acquired by him by way of honorarium or gift while on a visit to any place outside India; or
acquired by him from an authorised person for travel abroad and represents the unspent amount thereof.
17. Is one required to surrender foreign coins also to an authorised dealer?

There is no restriction on residents holding foreign coins.

18. How much foreign exchange can one send as gift / donation to a person resident outside India?

Any person resident in India can remit upto USD 5,000 in any one year as a gift to a person residing outside India or as donation to a charitable/educational/religious/ cultural organisation outside India. Remittances exceeding the limit require prior permission from the Reserve Bank.

19. Is one permitted to use International Credit Card (ICC) for undertaking foreign exchange transactions?

Use of the International Credit Cards (ICCs) / ATMs/ Debit Cards can be made for making personal payments like subscription to foreign journals, internet subscription, etc., and for travel abroad in connection with various purposes. Your entitlement of foreign exchange on International Credit Cards (ICCs) is limited by the credit limit fixed by the card issuing authority only. With ICCs you can i) meet expenses/make purchases while abroad ii) make payments in foreign exchange for purchase of books and other items through internet in India. If you have a foreign currency account in India or with a bank overseas, you can even obtain ICCs of overseas banks and reputed agencies.

Use of these instruments for payment in foreign exchange in Nepal and Bhutan is not permitted.

20. While coming into India how much Indian currency can be brought in?

A person coming into India from abroad can bring in with him Indian currency notes within the limits given below:

a.       upto Rs. 5,000 from any country other than Nepal or Bhutan, and

b.       any amount in denomination not exceeding Rs.100 from Nepal or Bhutan.

21. While going abroad how much foreign exchange, in cash, can a person carry?

Residents are free to carry the foreign exchange purchased from an authorised dealer or money changer in accordance with the Rules. They are, however, allowed to carry foreign exchange in the form of currency notes/coins upto USD 2,000 or its equivalent only. Balance amount can be carried in the form of traveller’s cheque or banker/s draft. (In this connection please see item No.9).

22. While coming into India how much foreign exchange can be brought in?

A person coming into India from abroad can bring with him foreign exchange without any limit. However, if the aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers cheques brought in exceeds USD 10,000/- or its equivalent and/or the value of foreign currency exceeds USD 5,000/- or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

23. While going abroad how much foreign exchange can a person carry?

Residents are free to carry the foreign exchange purchased from an authorised dealer or money changer in accordance with the Rules. In addition, they can also carry up to USD 2,000, or higher amounts representing the unutilized balance of a previous trip, if already held by them (see item13 above) in accordance with the Regulations.

24. Is one required to follow complete export procedure when a gift parcel is sent outside India?

A person resident in India is free to send (export) any gift article of value not exceeding Rs. 5,00,000 provided export of that item is not prohibited under the extant EXIM Policy.

25. How much jewellery one can carry while going abroad?

Taking personal jewellery out of India is governed by Baggage Rules framed under Export-Import Policy by the Government of India. No approval of Reserve Bank is required in this case.

26. Can a resident extend local hospitality to a non-resident?

A person resident in India is free to make any payment in Indian Rupees towards meeting expenses on account of boarding, lodging and services related thereto or travel to and from and within India of a person resident outside India who is on a visit to India.

27. Can residents purchase air tickets in India for their travel not touching India?

Residents may book their tickets in India for their visit to any third country. That is residents can book their tickets for travel for instance to London/New York through domestic/foreign airlines in India itself.

28. Can a resident open a foreign currency denominated account in India?

Persons resident in India are permitted to maintain foreign currency accounts in India under following two Schemes:

EEFC Accounts:-
To avoid exchange loss on conversion of foreign exchange into Indian Rupee & Rupee into foreign exchange, residents can retain upto 50% of foreign currency remittances received from abroad in a foreign currency account, viz., EEFC account, with an authorised dealer in India. Funds held in EEFC account can be utilised for current account transactions and also for approved capital account transactions as specified by the extant Rules/Regulations/Notifications/Directives issued by the Government/RBI from time to time.

RFC Accounts :-
Returning Indians, i.e., those Indians, who were non-residents earlier, and are returning now for permanent stay, are permitted to open, hold and maintain with an authorised dealer in India a Resident Foreign Currency (RFC) Account to keep their foreign currency assets. Assets held outside India at the time of return can be credited to such accounts. The foreign exchange (i) received or acquired as gift or inheritance from a person referred to sub-section (4) of section 6 of FEMA,1999 or (ii) referred to in clause (c) of section 9 of the Act or acquired as gift or inheritance therefrom may also be credited to this account.

The funds in RFC account are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment outside India. The facility is also available to residents provided foreign exchange to be credited to such account is received out of certain specified type of funds/accounts.

c. RFC (Domestic)Account:-

A person resident in India can open, hold and maintain with an authorized dealer in India, a Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, Bank notes and travellers cheques from any of the sources like, payment for services rendered abroad, as honorarium, gift, services rendered or in settlement of any lawful obligation from any person not resident in India.

The account may also be credited with/opened out of foreign exchange earned like proceeds of export of goods and/or services, royalty, honorarium, etc., and/or gifts received from close relatives (as defined in the Companies Act) and repatriated to India through normal banking channels by resident individuals.

29. Can a person resident in India hold assets outside India?

In terms of sub-section 4, of Section (6) of the Foreign Exchange Management Act, 1999, a person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. (Please also refer to the Liberalised Remittance Facility of USD 25,000 discussed below).

II. Liberalised Remittance Scheme of USD 25,000.

30. What is the liberalised Remittance Scheme of USD 25,000?

This is a new facility extended to all resident individuals under which they may freely remit upto USD 25,000 per calendar year for any permissible current or capital account transaction or a combination of both.

31.Who is eligible to avail of this Liberalised Remittance Facility?

The facility is available to resident individuals only.

32.Is there any frequency for the remittance?

Resident individuals can avail of the remittance facility under the Scheme once in a calendar year.

33. What are the purpose/s for which remittance can be made under the Scheme?

This facility is available for making remittance/s for any permissible current or capital account transaction or a combination of both. It is not available for purposes specifically prohibited (Schedule I) or regulated by the Government of India (Schedule II) of Foreign Exchange Management (Current Account Transactions) Rules, 2000.

34. Can residents avail of this facility for acquiring immovable property and other assets abroad?

Yes. Individuals are free to use this Scheme to acquire and hold immovable property, shares or any other asset outside India without prior approval of RBI.

35.Can individuals open a foreign currency account abroad for making remittance under the scheme?

Yes. Individuals are free to open, hold and maintain foreign currency accounts with a bank outside India for making remittances under the Scheme without the prior approval of RBI. The account can be used for putting through any transaction connected with or arising from remittances under the Scheme.

36.What is the impact of the Scheme on the existing facilities for private/business travel, gift, donation, studies, medical treatment etc./items covered in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000?.

The facility under the Scheme is in addition to those already available under Foreign Exchange Management (Current Account Transactions) Rules, 2000.

37. Can an individual send remittance under the Scheme to any country?

Remittance cannot be made directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan. The facility is also not available for making remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as ‘non-co-operative Countries or Territories' viz., Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Phillippines and Ukraine.

Further, remittance under the facility cannot be made to individuals and entities identified as posing significant risk or committing acts of terrorism as advised to banks by RBI from time to time.

38.What are the requirements to be complied with by the remitter?

The individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made. He has to furnish an application-cum-declaration in the specified format regarding the purpose of the remittance and declare that the funds belong to him and will not be used for purposes prohibited or regulated under the Scheme.

39.If an investment of USD 25,000 rises in value within the year, can one book profits and invest abroad again?

The investor is free to book profit or loss abroad and to invest abroad again. He is under no obligation to repatriate the funds sent abroad.

40. Can an individual, who has repatriated the amount sent during the calendar year, avail of the facility once again?

Once a remittance is made for an amount upto USD 25,000 during the calendar year, he would not be eligible to make any further remittances under this route, even if the proceeds of the investments have been brought back into the country.

41. Can remittances be made only in US Dollars?

The remittances can be in any currency equivalent to USD 25,000 in a calendar year.

42.Last year, resident investors could invest in equities of overseas listed firms that hold at least 10% in a listed Indian firm. Does this condition still apply?

The stipulation that investors could invest in equities of overseas listed firms that hold at least 10% in a listed Indian firm which was made in terms of our A.P.(DIR Series) Circular No.66 dated January 13, 2003 continues as an additional facility. Under the current Liberalised Remittance Scheme, no such stipulation has been made.

43.Can an individual investor sign-on with an international online brokerage and buy and sell stocks ( without exceeding the USD 25,000 limit)?

The Scheme does not restrict such transactions, provided the transactions are within the limit of USD 25,000 per calendar year and is otherwise in order.

III. Guidelines for Financial Intermediaries offering special schemes, protection under the Scheme.

44.Are intermediaries expected to seek specific approval for making overseas investments available to clients?

Banks including those not having operational presence in India are required to obtain prior approval from Reserve Bank for soliciting deposits for their foreign/overseas branches or for acting as agents for overseas mutual funds or any other foreign financial services company.

45.What restrictions have been placed on the scope of activity of the intermediaries?

It has been decided in public interest that all banks, both Indian and foreign, including those not having an operational presence in India, should seek prior approval from Reserve Bank for the schemes being marketed by them in India to Indian residents either for soliciting foreign currency deposits for their foreign/overseas branches or for acting as agents for overseas mutual funds or any other foreign financial services company.

46. Are there any restrictions on the kind/quality of debt or equity instruments an individual can invest in?

No ratings or guidelines have been prescribed under the Liberalised Remittance Scheme of USD 25,000 on the quality of the investment an individual can make. However, the individual investor is expected to exercise due diligence while taking a decision regarding the investments which he or she proposes to make.

47.Whether minor resident Individuals would be permitted to open, maintain and hold such foreign currency accounts if the same is permissible as per local law in the country of the overseas branch?

Banks may take necessary steps in the matter based on the settled legal position regarding enforcement of the declaration in case the remittance is made on behalf of a minor.

48.Whether credit facilities in Indian Rupees or foreign currency would be permissible against security of such deposits?

No. The Scheme does not envisage extension of credit facility against the security of the deposits.

49.Can bankers open foreign currency accounts in India for residents under the Scheme?

No. Banks in India can not open a foreign currency account in India for residents under the Scheme.

50.Can OBU in India be treated on par with a branch of the bank outside India for the purpose of opening of foreign currency accounts by residents under the Scheme?

No. For the purpose of the Scheme, an OBU in India is not treated as an overseas branch of a bank in India.

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Treasury Products

Treasury Products

Treasury Products are of 3 types:
 Products of Forex Market
 Products of Money Market
 Products of Security Market

Forex Market Products: It is virtual market without boundaries, highly volatile and liquid and
most transparent. It includes the following products.
1. Spot Trades: Currencies are generally bought and sold at spot rates when payment and
settlement takes place on 2nd working day. Cash and Tom rates are quoted at discount
from Spot rate.
2. Forward Trades : Purchase or sale of currency at future rates. Exchange takes place
after few days/months. Importers and Exporters cover risks by Forward trades. Forward
rates are arrived at on the basis of interest rate differentials of two currencies.
3. Swaps: Foreign Exchange transactions where one currency is sold and purchased for
another simultaneously is called Swap. Swap Deal may involve:Simultaneous purchase
of spot and sale of forward or vice versa. It may also involve Simultaneous sale and
purchase, both forward but for different maturities. It is called ―Forward to Forward
Swap‖.
4. Investment in Foreign Currencies: If forex is surplus with bank, it makes investment.
Surplus arises from profits of treasury business, overseas operations, forex borrowings,
NRE, FCNR and EEFC deposits. Investment can be of following 3 types:
 Interbank loans- normally not more than 1 year
 Short term investments in T-bills and CPs issued by multinational agencies
 Some Correspondent banks offer automatic investment facility in Nostro
Accounts subject to minimum balance.
5. Foreign Currency Loans: Banks extend WC loans in foreign currency and for this
purpose, clearance of Treasury is required.
6. Rediscounting of Foreign Bills :Treasury refinances the Foreign currency bills
purchased/negotiated by another bank. The advance covers Usance period 15-360
days.

Money Market Products: Money market products relate to raising and deploying short
term resources with maturity Maximum 1 year. The money market products are:
1. Call Money: It refers to Overnight placement. It needs to be repaid on Next Working
Day. O/N MIBOR Rate is the indicative rate. Non bank players (FIs/MFs) are not
eligible to participate.
2. Notice Money: It is placement of funds beyond overnight up to maximum period of
14 days.
3. Term Money: It deals with placement of funds in excess of 14 days up to 1 year.
1 to 6 month products are very common.
Other Money Market Products:
1. Treasury Bills:
 These are issued by Govt. of India through RBI.
 Tenure is 91Days, 182 Days and 364 Days.
 These are issued at Discount in auction.
 Banks and PDs participate in the auction.
 The auction is also available to all financial players (FIs/MFs/Corporate).
 Auction takes place on Wednesday every week in case of 91 days bills.
 It takes place on Wednesday every Fortnight in case of 182 D and 364 D bills.
2. Commercial Papers & 3. Certificates of Deposits
CP and CD Commercial Papers – CP:
 CP is issued by Corporate with Net Worth minimum 4
Crore, Rating min.P2 (now A2) and availing WC limit from
any bank.
 CP is issued with tenure 7 Days to 1 year.
 CP is issued in multiples of Rs. 5.00 lac.
 CP is Promissory Note and is Negotiable and also attracts
Stamp Duty.
 It is fairly active in Secondary market.
 It is in Demat form and the price is less than Face Value.
Certificate of Deposit – CD
 CD is issued by banks
 CD is issued with tenure 7 Days to 1 year.
 CD is issued in multiples of Rs. 1.00 lac
 CD is Promissory Note and is Negotiable and also attracts
Stamp Duty.
 CD is not very active in Secondary market
 .
3. LAF – Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in order to
Inject Liquidity. Presently, Govt. securities are dealt with. All Repo transactions are
routed through CCIL. RBI has permitted Repo in Corporate securities for only ―AA‖ rated
companies. But the market is yet to be activated.
Under Reverse Repo, RBI sells securities with a commitment to buy at a later date in
order to Contain Liquidity.

Repo and Reverse Repo transactions are generally conducted for Overnight period
through Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and its multiples.
Margin is normally 5%.
(Total available funds to a bank under LAF will be capped at 0.5% of NDTL w.e.f.
24.7.2013)
Latest Repo Guidelines as per Monetary policy dt. 3.6.2014
 Cap of Overnight Repo reduced from 0.5 % to 0.25% of NDTL
 Continuation of Term Repo up to 0.75% (cap) of NDTL under 7 days to 14 days
term repos.
4. CBLO : Collateralized Borrowings and Lending Obligations:
It is money market instrument launched by CCIL. Borrower can deposit G-sec with CCIL
and borrow funds from others who have surplus funds subject to re-purchase of
securities. The tenure is 1 day to 1 year.
Bills Rediscounting:
Treasury re-discounts bills which are already discounted by other banks. The tenure is
3-6 months.
Security Market Products: Securities constitute Shares, Debentures, Bonds, and Govt
Securities etc. The various types of securities are:
1. Govt. Securities
 These are issued by PDO (Public Debt Office) of RBI.
 Price is determined in auction
 There is active trading in Secondary market.
 If Yield rate is more than coupon rate, these are issued at a discount.
 Open Market Operations are conducted by GOI to maintain liquidity position.
 SLR requirements are met by banks by investing in HTM securities.
2. Corporate Debt Papers
 These are medium and long term Bonds and Debentures issued by Corporate
and FIs.
 These are non-SLR securities.
 These form part of Tier –II Capital.
 Yield is more than that of Govt. Securities.
3. Debentures and Bonds: Both are Debt instruments and form part of Tier-II Capital.
SEBI has control over issuance and redemption.

Debenture Bond
Issued by Corporate in Private sector Issued by institutions in Public sector
It is Secured by Floating charge It is not secured
Provisions of Company Law applies It is governed by Indian Contract Act
It can be transferred through registration It is negotiable instrument
It can be convertible or non-convertible  Bond, if given option can be
convertible into equity shares.
It can be
 Zero Coupon Bond
 Perpetual Bond
 Floating Bond
 Deep Discount
4. Equities: It is Share Capital issued by both Private sector and Public sector Companies
to raise funds from public. The people who invest are called Shareholders:
 Bank can invest subject to limit exposure set by RBI for Capital Market
 SEBI has full control and these are traded in Stock Exchanges.
 Derivative products are also available.
 If offered by Company, it is called Primary Market. If purchased through Stock
Exchanges, it is called Secondary market.
Equity Share Preference Share
It is permanent capital and is not
redeemed. It forms part of Tier-I Capital.
It may be redeemable or non-redeemable.
If redeemable, forms part of Tier-II Capital
Dividend is paid out of profits after making
payment to Preference Share-holders.
Preference is given while paying
dividend.Unpaid dividend can be carried
forward. This is why these are called
Cumulative Preference shares.
The Company, if liquidated, pays to Equity
Shares at last.
Preference Shares are given preference
for payment at the time of liquidation.
These carry Voting Rights. These don’t carry Voting rights.
Generally Preference Shares are
Cumulative and Redeemable.

TT Rates and bill Rates

TT Rates and Bill Rates

Following 4 types of buying and selling rates are important:
1. TT Buying rate
2. Bill Buying rate
3. TT Selling rate
4. Bill Selling rate
In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g.
1USD=53.5625/5650
For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g. 1
USD =Rs. 55.54.
Amount being paid or received will be rounded off to nearest Rupee.

TT Buying Rate
It is required to calculate when our Nostro account is already credited or
being credited without delay e.g. Receipt of DD, MT, TT or collection of
Foreign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate – Exchange Margin
Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before
receipt of Foreign Exchange in the Nostro account i.e. Nostro account is
credited after the purchase transaction. In such cases.
Examples are:
 Export Bills Purchased/Discounted/Negotiated.
 Cheques/DDs purchased by the bank.
Calculation
Spot Rate + Forward Premium (or deduct forward discount) – Exchange
margin.
TT Selling Rate Any sale transaction where no delay is involved is quoted at TT selling rate.
It is desired in issue of TT, MT or Draft. It is also desired in crystallization of
Export bills and Cancellation of Forward purchase contract.
Calculation
Spot Rate + Exchange Margin
Bill Selling Rate It is applied where handling of documents is involved e.g. Payment against
Import transactions:
Calculation
Spot Rate + Exchange Margin for TT selling + Exchange margin for Bill
Selling

TT rates and bill Rates

TT Rates and Bill Rates:;

Following 4 types of buying and selling rates are important:
1. TT Buying rate
2. Bill Buying rate
3. TT Selling rate
4. Bill Selling rate
In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g.
1USD=53.5625/5650
For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g. 1
USD =Rs. 55.54.
Amount being paid or received will be rounded off to nearest Rupee.

TT Buying Rate:::

It is required to calculate when our Nostro account is already credited or
being credited without delay e.g. Receipt of DD, MT, TT or collection ofForeign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate – Exchange Margin

Bill Buying Rate::

Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before
receipt of Foreign Exchange in the Nostro account i.e. Nostro account is
credited after the purchase transaction. In such cases.
Examples are:
 Export Bills Purchased/Discounted/Negotiated.
 Cheques/DDs purchased by the bank.
Calculation

Spot Rate + Forward Premium (or deduct forward discount) – Exchange margin.

TT Selling Rate::

TT Selling Rate Any sale transaction where no delay is involved is quoted at TT selling rate.
It is desired in issue of TT, MT or Draft. It is also desired in crystallization of
Export bills and Cancellation of Forward purchase contract.
Calculation
Spot Rate + Exchange Margin

Bill Selling Rate:::

Bill Selling Rate It is applied where handling of documents is involved e.g. Payment against
Import transactions:
Calculation
Spot Rate + Exchange Margin for TT selling + Exchange margin for Bill
Selling

Examples::

Q. 1
Bank received MT of USD 5000 on 15th Sep. The Nostro account was already credited. What
amount will be paid to the customer: Spot Rate 34.25/30. Oct Forward Differential is 22/24.
Exchange margin is .80%
Solution
TT buying Rate will be applied
34.25 - .274 = 33.976 Ans.

Q. 2
On 15th July, Customer presented a sight bill for USD 100000 for Purchase under LC. How
much amount will be credited to the account of the Exporter. Transit period is 20 days and
Exchange margin is 0.15%. The spot rate is 34.75/85. Forward differentials:
Aug: .60/.57 Sep:1.00/.97 Oct: 1.40/1.37
Solution
Bill Buying rate of August will be applied.
Spot Rate----34.75 Less discount .60 = 34.15
Less Exchange Margin O.15% i.e. .0512 =34.0988 Ans.
( Transit period is rounded to next month since currency will be cheaper as it is buy transaction)

Q. 3
Issue of DD on New York for USD 25000. The spot Rate is IUSD = 34.3575/3825 IM forward
rate is 34.7825/8250
Exchange margin: 0.15%

Solution:
TT Selling Rate will Apply
Spot Rate = 34.3825 Add Exchange margin (.15%) i.e. 0.0516
TT Selling Rate = Spot Rate + Exchange Margin = 34.4341 Ans.

Q. 4
On 12th Feb, received Import Bill of USD-10000. The bill has to retired to debit the account of
the customer. Inter-bank spot rate =34.6500/7200. The spot rate for March is 5000/4500. The
exchange margin for TT selling is .15% and Exchange margin for Bill selling is .20%. Quote rate
to be applied.
Solution
Bill Selling Rate will be applied.
Spot Rate + Exchange margin for TT Selling + Exchange margin for Bill selling =
34.7200+.0520+.0695 = 34.8415 Ans.

Network security equipment s

Network Security Equipment - Firewalls, NIDS, HIDS, IPS
Firewalls:
A firewall is a part of a computer system or network that is designed to block unauthorized access while permitting authorized communications. It is a device or set of devices which is configured to permit or deny computer based application upon a set of rules and other criteria.
Firewalls can be implemented in either hardware or software, or a combination of both. Firewalls are frequently used to prevent unauthorized Internet users from accessing private networks connected to the Internet, especially intranets. All messages entering or leaving the intranet pass through the firewall, which examines each message and blocks those that do not meet the specified security criteria.
There are different types of firewalls which serve nearly same purpose but for different audiences. The two most common types are: 1) Network level firewalls: These are standalone boxes & are much more sophisticated with loads of features. To mention a few, SPI[Stateful Packet Inspection],Deep Packet Inspection, Logging Capabilities etc. They usually run on proprietary Operating system such as the Cisco series, they run on the Cisco IOS[Internetwork Operating System. 2) Application level firewalls: Software firewalls, application level proxies come under this category. Apart from the regular huff & puff they offer a few nifty features such as content filtering, blocking unwanted hosts.
Generally, firewalls are configured to protect against unauthenticated interactive logins from the outside world. This helps prevent hackers from logging into machines on your network. More sophisticated firewalls block traffic from the outside to the inside, but permit users on the inside to communicate a little more freely with the outside.

NIDS (Network Intrusion Detection System) & HIDS (Host Intrusion Detection System):
An intrusion detection system (IDS) is designed to monitor all inbound and outbound network activity and identify any suspicious patterns that may indicate a network or system attack from someone attempting to break into or compromise a system. IDS is considered to be a passive-monitoring system, since the main function of an IDS product is to warn you of suspicious activity taking place − not prevent them. An IDS essentially reviews your network traffic and data and will identify probes, attacks, exploits and other vulnerabilities. IDSs can respond to the suspicious event in one of several ways, which includes displaying an alert, logging the event or even paging an administrator. In some cases the IDS may be prompted to reconfigure the network to reduce the effects of the suspicious intrusion.
An IDS specifically looks for suspicious activity and events that might be the result of a virus, worm or hacker. This is done by looking for known intrusion signatures or attack signatures that characterize different worms or viruses and by tracking general variances which differ from regular system activity. The IDS is able to provide notification of only known attacks.
Network-based vs. Host-based IDS:
Intrusion detection systems are network or host based solutions. Network-based IDS systems (NIDS) are often standalone hardware appliances that include network intrusion detection capabilities. It will usually consist of hardware sensors located at various points along the network or software that is installed to system computers connected to your network, which analyzes data packets entering and leaving the network.
Host-based IDS systems (HIDS) do not offer true real-time detection, but if configured correctly are close to true real-time. Host-based IDS systems consist of software agents installed on individual computers within the system. HIDS analyze the traffic to and from the specific computer on which the intrusion detection software is installed on. HIDS systems often provide features you can't get with network-based IDS. For example, HIDS are able to monitor activities that only an administrator should be able to implement. It is also able to monitor changes to key system files and any attempt to overwrite these files. Attempts to install Trojans or backdoors can also be monitored by a HIDS and stopped. These specific intrusion events are not always seen by a NIDS.
While it depends on the size of the network and the number of individual computers which require intrusion detection system, NIDS are usually a cheaper solution to implement and it requires less administration and training − but it is not as versatile as a HID.
IPS (Intrusion Prevention System):
IDS (Intrusion Detection System) and IPS (Intrusion Prevention System) both increase the security level of networks, monitoring traffic and inspecting and scanning packets for suspicious data. Detection in both systems is mainly based on signatures already detected and recognized.
The main difference between one system and the other is the action they take when an attack is detected in its initial phases (network scanning and port scanning).
a) The Intrusion Detection System (IDS) provides the network with a level of detective and alertive security against any suspicious activity. The IDS achieves this objective through early warnings aimed at systems administrators. However, unlike IPS, it is not designed to block attacks.
b) An Intrusion Prevention System (IPS) is a device that controls access to IT networks in order to protect systems from attack and abuse. It is designed to inspect attack data and take the corresponding action, blocking it as it is developing and before it succeeds.
While many in the security industry believe IPS is the way of the future and that IPS will take over IDS, it is somewhat of an apples and oranges comparison. The two solutions are different in that one is a passive detection monitoring system and the other is an active prevention system.

Types of customers

TYPE OF CUSTOMERS

In this Chapter, for the convenience of study, types of Borrowers have been classified as under:

1. Individual

2. Partnership firm.

3. Hindu Undivided Family

4. Companies

5. Statutory Corporations

6. Trusts and Co-op Societies

7. Limited liability Patnership

One of the essential elements of a contract is “capacity of the parties to Contract”.

The Bank while dealing with an individual should ensure that he is competent to enter into contract. An individual is not competent to contract and money lent to him cannot be recovered in the following circumstances:

a) If an individual is a minor:

A person is minor in the eyes of the law if has not attained the age of 18 years under Indian Majority Act and the age of 21 years, if he/she is a ward, under the Guardians and Wards Act. The money lent to a minor cannot be recovered, if the minor fails to repay. Exception to this is a contract with a minor for supply of necessaries to the minor. If a Bank lends money to a minor to meet expenses for purchasing necessaries of life, then bank can recover the money from the estate of the minor.

b) If an individual is not of sound mind:

According to the Contract Act, if a person is not of sound mind, then he is incompetent to enter into a contract. The Act says that a person at the time when he makes the contract, he is not capable of understanding it and of forming a rational judgment as to its effect upon his interests, will be considered that he is ‘not of sound mind’. Hence, a contract would be invalid if it is proved that the time of entering into contract, the person was not in sound state of mind and could not understand what he was doing and could not understand the implications of entering into the contract.

c) Disqualified persons:

If a person is disqualified by the law in respect of his capacity to contract, then the contract entered into by such a person cannot be enforced. For example, a person might have been declared as insolvent under the Insolvency law. As long as the person continues to be undischarged insolvent, he cannot enter into contract.

2. PARTNERSHIP FIRM

‘Partnership Firm’ is another entity with which a Banker deals with in the course of his business. Partnership firm is governed by Indian Partnership Act 1932. A partnership is the relation between persons who have agreed to share the profits of a business, carried on by all or any of them acting for all. The relationship between partners is governed by partnership deed which can be written or unwritten.

Legal Position of a partnership:

A partnership is not distinct from its partners. The liability is joint and several. It means that they responsible for the act of the partnership firm in their capacity as partner as well as individual. The Indian Partnership Act 1932, provides for registration of the partnership and it is necessary that a Banker dealing with partnership firm, should verify as to whether the firm is registered or not. This would help him to know all the names of the partners and their relationship.

Authority of the Partners:

Section 19 of the Indian Partnership Act 1932 deals with the implied authority of a partner as an agent of the firm; and Section 22 deals with the mode of doing act to bind the firm. In view of the provisions of Section 19 and 22, it should be noted that the act of a partner shall be binding on the firm if done:

a) in the usual business of the partnership;

b) in the usual way of the business; and

c) as a partner, i.e. on behalf of the firm and not solely on his own behalf.

Business of partnership firm: Mode of Operation

Rights and duties of the partners are determined by Partnership Deed. It provides for opening of bank accounts, borrowing powers, signing of cheques etc. Generally there may be a managing partner, who conducts business on behalf of other partners. While dealing with partnership firms it should be ensured that business is conducted as per partnership deed. If the Managing Partner does not have power to conduct certain transaction, then it should be ensured that consent of all partners is obtained.

Partnership firm and transaction in immovable property:

Section 19 of the Indian Partnership Act 1932 states that a partner cannot effect transfer of immovable property of the firm unless expressly authorized. While taking mortgage security of firm’s immovable property, it should be ensured that the partner creating mortgage is expressly authorized to create mortgage. If the partner has no authority to create mortgage, then the banker should ensure that all the partners jointly create the mortgage.

Insolvency of the firm:

The banker on receiving notice of insolvency of the firm must immediately stop further transaction in the account irrespective of the fact that the account is in credit or debit. In case there is a credit balance, and the banker does not intend to set off the same against the dues in any other account, then the balance has to be handed over to the official receiver appointed by the Court or as directed by the Court. In case the account is in debit then the banker would be required to prove his debt before the Court and thereafter will be entitled to receive the same from the Official Receiver either in full or as per the dividend declared by the Court.

Insolvency of the Partner:

If at the time of insolvency of one of the partners the firms account is in credit then the same can be operated by the other partners, but the banker should obtain a fresh mandate and all previous cheques issued by the insolvent partner may be paid provided the other partners confirm the same. In case the account is in debit then further transactions in the account should be stopped.

Death of a partner:

In case of death, the principles, as stated* in the case of Insolvency of a partner, applies.

3. JOINT HINDU FAMILY (JHF) or HINDU UNDIVIDED FAMILY (HUF)

Joint Hindu Family is an entity of customary law among Hindus. This is governed by personal laws. In Bengal and other parts of erstwhile Bangal province, a Hindu Undivided Family is governed by Dayabhaga Law. In other parts of India, it is governed by Mitakshara Law.

Constitution of a Joint Hindu Family:

A Joint Hindu Family consists of male members descended lineally from a common male ancestor, together with their mothers, wives or widows and unmarried daughters bound together by fundamental principle of family relationship. The Joint Hindu Family is purely a creature of Law and cannot be created by act of parties.

in so far as he manages the family property or business or looks after the family interests on behalf of the other members. The Managership of the JHF property comes to a person by birth and he does not owe his position as Manager on consent of the other co-parceners. The liability of the Karta is unlimited, whereas the liability of the co-parceners is limited to their shares in the Joint Family Estate.

Powers and Duties of the Manager

A Manager or Karta of a Joint Hindu Family has the following powers and duties:

Powers:

i. Right to possession and management of the joint family property.

ii. Right to income from the joint family property

iii. Right to represent the joint family

iv. Right to sell the joint family property for family purpose.

Duties:

v. Duty to run the family business and manage the property for the benefit of the family

vi. Duty to account the income from the joint family business and property.

Banker and his dealings with Joint Hindu Family

i. A banker dealing with JHF, should know the Karta of the family.

ii. Banker should ensure that Karta of the Joint Hindu Family deals with the Bank and borrows only for the benefit of Joint Family Business.

iii. The application to open the account must be signed by all the members and all adult members should be made jointly and severally liable for any borrowings or if the account gets overdrawn.

4. COMPANIES

A Company is another type of customer, which a banker deals with. A company is a juristic person created by law, having a perpetual succession and Common Seal distinct from its members. A Company depending upon its constitution is governed by various laws.

Basic Law Governing Company:

In India Companies are governed by Companies Act, 1956. All the companies are required to be registered under Companies Act, 1956.

The Business and objectives of a company are known by two important documents called Memorandum of Association and Article of Association. Therefore for the formation of company these documents are essential.

Memorandum of Association

The Memorandum of Association is charter of a company. Its purpose is to enable the shareholders, creditors and those dealing with the company to know its permitted range of business.

Memorandum of Association of a company contains the following details among others:

i. Name of the company

ii. Place of the business of the company

iii. Objects of the Company

iv. Name of the first Directors of the company

v. Share capital of the company

Articles of Association

Articles of Association are rules and regulations governing the internal management of the company. They define the powers of the officers of the company. Articles of Association are subordinate to Memorandum of Association and it contains the following details among other things:

i. Number of Directors of the company

ii. Procedure for conducting meeting of shareholders, Board of Directors etc.

iii. Procedure for transfer and transmission of shares.

iv. Borrowing powers of the company

v. Officers of the company and other details

Types of Companies:

A. Private Company:

According to Section 3 (1) (iii), a Private Company is one which contains following provisions in its Articles of Association:

i. Restriction on the right to transfer its shares.

ii. ii. Limitation on number of members to fifty excluding the people, who are employees and ex-employees of the company.

iii. iii. Prohibition as to participation by General public in its capital requirements.

iv. B. Public Company:

v. A Public Company is one which is not a Private Company i.e. a Public Company does not have any restrictions of the Private Company and its main features are as follows:

vi. i. Shares are freely transferable.

vii. ii. No restriction on number of members

viii. iii. Public at large can participate in its share capital.

ix. The Public Company can be further classified as

x. (a) Limited Liability Company – Liability is limited to the share in capital.

xi. (b) Unlimited Liability Company – Liability of the members is unlimited

xii. (c) Limited by Guarantee - liability is limited to the amount guaranteed

xiii. C. Government Company:

xiv. A company in which Central Government or State Government or both has not less than 51 % of share capital.

xv. D. Statutory Companies:

xvi. There are some companies established by an act of Parliament. These are called Statutory Corporations. For example, State Bank of India is established under State Bank of India Act, 1955. Nationalised Banks are established under Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

xvii. E. Other Companies:

xviii. Besides the above, Companies Act, 1956 classifies companies on the basis of time, place of incorporation and nature of working into the following categories:

xix. i.Existing Company:A company existing already before the coming into force of Companies Act, 1956.

xx. ii.Foreign Company: A company registered in a Foreign Country.

xxi. iii.Holding Company: A company owning more than 50 % of share capital in another company or a company which can appoint majority of Directors in another company.

xxii. iv. Subsidiary Company: it can be seen that when there is a holding company the other company is called Subsidiary Company.

xxiii. 5. OTHER TYPE OF CUSTOMERS

xxiv. (i) Clubs, Societies, Schools:

xxv. These bodies are usually governed by Companies Act or co-operative Societies Act and function within the ambit of those laws. For example clubs can be registered either under the Companies Act, 1956 or under Societies Registration Act or Co- operative Societies Act. In the case of lending to these bodies a Banker should study the bye-laws, rules and regulations applicable to them and ascertain the legality of lending to them.

xxvi. (ii) Trusts:

These are governed by Indian Trusts Act, 1882, if they are Private Trusts and if they are public trust, they are governed by Public Trusts Act or Religious and Charitable Endowments Act, if they are Trusts of Hindus and in the case of Muslims they are governed by Wakf Act.

A Banker dealing with Trusts should acquaint himself with the respective laws applicable to them and shall ensure that his lending is within the ambit of those laws.

(iii) Trustee:

The Trusts are managed by Trustees. The powers and duties of the Trustees are either provided in Trust deed or regulated by the respective laws applicable to such Trusts. For example in the case of Public Trusts, Charity Commissioners, or Commissioner of Endowments appointed by Government has power to supervise the activities of the Trusts. The Trustee of Muslim Wakf is called Mutawali and his conduct and function is regulated by Wakf Board. Therefore a Banker dealing with a Trust should ensure that all the permissions required for taking a loan is obtained from the respective Government authorities.

7. Limited Liability Partnership :

Limited Liability Partnership (LLP) is a new corporate structure that combines the

flexibility of a partnership and the advantages of limited liability of a company at a low

compliance cost. In other words, it is an alternative corporate business vehicle that

provides the benefits of limited liability of a company, but allows its members the

flexibility of organizing their internal management on the basis of a mutually arrived

agreement, as is the case in a partnership firm.

Owing to flexibility in its structure and operation, it would be useful for small and

medium enterprises, in general, and for the enterprises in services sector, in particular.

Internationally, LLPs are the preferred vehicle of business, particularly for service

industry or for activities involving professionals.

Correlation and regression

Correlation and regression::

CORRELATION
Correlation is a statistical technique that shows the degree and direction of relationship between two or more variables. It is
important because of the following:
· It measures extent of relationship between two or more variables which is important in statistics
· Predictions about expectations can be made. (say if there is proper rain, the food position is likely to be rood)
· Where value of one variable is known. the value of other variable can be worked out.
Types of correlation :
The important types of correlation may be positive (direct) and negative (indirect) OR linear and non-linear correlation. Other
may be simple and multiple correlation OR partial and total correlation, OR logical and illogical Correlation.
Positive correlation : Where two variables move in the same direction i.e. if there is decline in one variable and 2 nd
variable also shows decline, the correlation- is direct or positive. For example at increasing price of a commodity, the
supply of the commodity is likely to be increasing. Hence, between price and supply, the
correlation is positive..

Negative correlation : Where two variables move in the opposite direction i.e. if there is decline in one variable and 2" variable
shows increase, the correlation is -indirect or negative. For example, at increasing price of a . commodity, the demand of the
commodity is-likely to be decreasing.
Linear correlation : If change in one variable brings change in the other variable constantly at the same rate. over the entire range
of values
Two variables are linearly related if there is a relation of the form Y = a + b X, between them.
Linear correlation is positive when the curve moves from left to right upward and negative when the curve moves from /ell to right
downward.
N o n - L i n e a r ( o r c u r v i - l i n e a r ) c o r r e l a t i o n : I f c h a n g e i n o n e v a r i a b l e b r i n g s c h a n g e i n t h e o t h e r
v a r i a b l e c o n s t a n t l y a t t h e d i f f e r e n t r a t e , o v e r t h e e n t i r e r a n g e o f v a l u e s Two variables are non-linearly
related if there is a 'elation of the form y = ax 2
 bx .-c = a.b' between them.
Non-linear correlation may be positive when the curve moves from left to right upward and negative when the curve moves from
left to right downward.
Degree and interpretation of correlation coefficient:
The coefficient of correlation lies between two limits i.e. + or— I. For perfect positive correlation, the value would be +1 and for
perfect negative, the value would be -I . When value is 0, there is no relationship.
Methods for studying correlation:
There are broadly two methods i.e. scattered diagram method and graphic method.
Scattered diagram method: Under this method (which is also called dot diagram, datagram or scatter gram), the data is plotted in a
graph in the form of dots. The term scatter means dispersion or spread of dots on the graph. Based on the spread of these dots, the
correlation may be interpreted as under:
· Where the points are .close to each other, this shows high correlation but where these are not close, it means poor
correlation.
· If the points show upward or downward trend, this means there is correlation. But if there is no trend, it means variables not
related or uncorrelated. Graphic method: Under this method (which is also called correlogram), the data is plotted in a graph paper
on the basis of which two curves will be drawn. By observing the direction and closeness of these curves, it can be concluded
whether the variables are related or unrelated. If they move in the same direction, it shows positive correlation. But if they move in
opposite direction, there is negative correlation.
Algebraic or mathematical method : Under these methods the value of co-efficient of correlation remains between plus and minus I.
Under these methods there is Karl Pearson's Covariance method (or coefficient of correlation). This is based on arithmetic mean and
standard deviation. The products of the corresponding values of two series i.e. co variance is divided by the product of standard
deviations of the two series to determine the formula.
The calculation of covariance : It can be done both for individual data or grouped data by using direct method as well as short-cut
method.
Direct method (when deviations are obtained from actual means) = r = Ely /N
where Yxy = Co-variance of x and y -
where x = (X —X Bar) means ..;,..riation in X series from its actual mean
where y= (Y — YeBar) means deviation in X series from its actual mean
where ox = Standard deviation of X series
where 6y= Standard deviation of Y series
Where N =No. of observations.
Measures to describe the degree of correlation
Coefficient of determination :
It the primary method through which the extent or strength of association is measured. It is calculated as: r 2
 = I — (vi / v2 )
It may be remembered that-
the coefficient of determination measures the strength of a linear relationship between two variable. If
we have a lot of x, y points randomly scattered on the circumference of circle, there may clearly be relationship, but it is not linear:
Hence, the coefficient of determination would be zero or close to zero.
Covariance : By computing the deviations of each point from the mean of x and y, we can obtain a measure of the direction and
strength of the relationship. This can be done by multiplying these paired deviation together and then add the cross
products of the deviations over all the points.
Covariance = (X, Y) = I x'y' / n

Coefficient of correlation :A dimensionless-
value showing the extent and direction of relationship is coefficient of correlation.- It
describes how one variable is explained by the other. It can be calculated :
Coefficient of correlation = r {covariance (x, y) / o x o y}
REGRESSION ANALYSIS
The statistical technique .of estimating or predicting. Unknown value of a dependent Variable from –
the known Value of an independent variable,
called regression :analysis If it is known that the two Variables say 'price (X) and demand (Y), are closely related, most probable value
of Y can be found with given value of x.
The regression analysis 'can be classified on the basis of: Change in proportion and Number of variables..
Regression on the basis of Change in proportion: On the basis 'of -change in proportion, regression can be Classified as linear
regression and non-linear regression.
Linear regression : When-
 the dependent variable moves in a fixed proportion of the unit movement of the ... independent variable, : it
is called linear regression. When it is plotted on graph 'paper, it forms a straight line..
Mathematically it can be expressed as:, - . .
 yi.=.a.+bxi+ei (where a and b are known as regression parameters, ei denotes residual terms , xi presents value of independents
variable and yi is.
 the value of dependent variable say y when 'the: value.
 of independent' variable, that is x, is zero).
Again b denotes slope of regression line of y on x axis. ei denotes the combined effect of all other variable on Y axis.
Non-linear regression : In such regression the value of dependent variable say y does not change by a constant absolute amount for
unit change in the value of the independent variable, say x. If the data is plotted on the graph, it would form a curve instead of a
straight line. Hence it is called, curvi-linear regression.
Regression on the basis of no. of variables: Regression analysis can be simple, partial or multiple regression.
Simple regression : When only two variables are studied, it is knows as simple regression. One of these variables is independent and
other the dependent. Functional relationship between price and demand of a product is an example of such regression.
Partial regression : When more than two variables are studied in a functional relationship but the relationship of only two variables is
analysed at a time keeping the other constant it is partial regression.
Multiple regression : When more than 2 variables are studied and their functional relationship are simultaneously worked out, it is
case of multiple regression. Study of growth in bank deposits in relation, to occupation and wealth of people, is an example of such
regression.
Regression lines : It is a graphic technique to show the functional relationship between the two variables say X and Y i.e.
dependent and independent. It is the line which shows average relationship between two variables X and Y.
Regression equation : These are algebraic expression of regression lines.
Properties of regression coefficient:
1 Both the regression coefficients bxy and byr cannot be greater than unit. In other words, the square root of the product of two
regression coefficients must be less than or equal to +1 or -I.
2 Both the regression coefficients will have the same sign i.e. if bxy is positive, the byx will be positive.
3 If r is zero, then bxy and bp: shall be zero.
4 Regression coefficients are independent of change of origin, but not of scale.
Correlation and regression Relationship:
These are two important tools to study the functional relationship between variable. Coefficient of correlation is a measure of degree
of covariance between x and y while the aim of regression analysis is to study the nature of relationship between the variable. This
helps to knOw the value of one variable on
the basis of another,'
Correlation and regression: Difference
Correlation analysis tests the closeness of the variable while the regression analysis measures the extent of change.
Con-
elation analysis studies the cause and effect relationship .between two variables but in regression analysis the causal relationship
is studied.
 In correlation analysis there may be spurious correlation between variables but in regression, there is no such types of relation.
Correlation analysis is a relative measure of linear relationship and the regression analysis is absolute measure.
Utility of regression analysis: It helps in predicting unknown value.It helps in establishing the nature of the relationship between two
variables. It provides regression co-efficient which are generally used in calculation-of co-efficient of correlation.
It is h elpf u l in est imat in g th e error in volved in u sin g regression lin e as t he basis for est imat ion .
Li mi t ati on of r egr essi on an al ysi s: It is based on lin ear relat ion sh ip , wh ich on certain occasion s may n ot
b e availab le. It is calculated on the basis of static condition of relationship. The relationship can be ascertained within limits only.
Standard error of estimates: It is the square root of the difference between the actual (observed) value and the estimated
(computed) value of independent variable.

Going concern concept

Going Concern Concept:

This concept assumes that the business has a perpetual succession or continued existence.
For example, a business unit makes investments in the form of fixed assets and we book only
depreciation of the assets in our profit & loss account; not the difference of acquisition cost of
assets less net realizable value of the assets. The reason is simple; we assume that we will use
these assets and earn profit in the future while using them. Similarly, we treat deferred revenue
expenditure and prepaid expenditure. The concept of going concern does not work in the
following cases:
 If a unit is declared sick (unused or unusable unit).
 When a company is going to liquidate and a liquidator is appointed for the same.
 When a business unit is passing through severe financial crisis and going to wind up.

Overview of credit management

OVERVIEW CREDIT MANAGEMENT:::

Credit plays an important role in driving the national economy. It provides leverage to an entrepreneur to
undertake a project larger than what he could have undertaken without availability of credit. This results in
accelerated industrial production/services. It also enables individuals to first purchase/create assets and
repay the loan from their future earnings. Credit enables a consumer to spend more than what he would
have otherwise spent. The increased demand drives the producers to step up the production. Thus,
adequate and cheap availability of credit propels the economy to higher growth trajectory. But, there is
always a time lag between increase in demand and creation of supply to meet that demand. That is why
excessive availability of credit, specially, for non-productive purposes, puts inflationary pressure of the
economy.
Principles of Credit: (a) safety of funds (b) purpose (c) profitability (d) liquidity (e) security (f) risk spread
Types of Borrowers: A borrower can be (a) An individual (b) Sole proprietary firm (c) Partnership firm and
joint ventures (d) Hindu undivided family (e) Companies (f) Statutory corporations (g) Trusts and co-operative
Societies
The laws applicable to all these different kinds of borrowers and different. Individuals are governed by the
Indian Contract Act, partnership firris by the Indian Partnership Act, Hindu undivided family by the customary
laws pertaining to Hindus, companies by the Companies Act, statutory corporations by the Acts that created
them, trusts by the Indian Trusts Act, Public Trusts Act, Religious and Charitable Endowments Act, Wakf Act
and Co-operative Societies by the Co-operative Societies Act or the Societies-Registration Act.
Types of Credit: Bank credit can be either fund-based or non fund-based.
1. Fund based credit: In fund-based credit, there is actual transfer of money from the bank to the borrower.
2. Non Fund based credit: In non fund based credit, there is no transfer of money, but the commitment by
the bank on behalf of the client, may result in future transfer of money to the beneficiary of such a
commitment. For example, a bank guarantee issued in favour of government departments (or any other
beneficiary) on behalf of a contractor. If the beneficiary invokes the guarantee, the bank will have to remit
the amount to it and the client, for whom guarantee was issued, will be liable to pay this amount to the bank.
Thus, a non fund-based credit always has a possibility of getting converted into a fund-based credit. Other
of non fund based credit are letters of credit, co-acceptance of bills, forward contracts, and derivatives.
3. Periodwise classification: The fund based credit can be short term credit or long term credit (term loan)
4. Purposewise classification: (a) working capital finance, (b) project finance, (c) export finance, (d) crop
loan, etc.
5. Customerwise classification: Banks classify their credit portfolio on the type of the customers like,
Corporate, retail, agriculture, international, institutional credit, etc.
Segmentwise classification: As per RBI guidelines, banks have to report their business, based on the
geographical segments, as 'domestic' and 'international'. In addition, as per RBI guidelines, banks have
adopted the following business segments, for public reporting purposes, from March 31, 2008:(a) Treasury
(b) Corporate/Wholesale Banking (c) Retail Banking (d) Other Banking Business
1. Treasury: 'Treasury' for the purpose of Segment Reporting should include the entire investment
portfolio.
2. Retail Banking: The Retail Banking .would include exposure which fulfill the following four criteria of
orientation, product, granularity and low value of individual exposures for retail exposures laid down in Basel
Committee on Banking Supervision document 'International Convergence of Capital Measurement and_
Capital Standards: A Revised Framework':
(a) Orientation Criterion: The exposure is to an individual person or persons or to a small business;
Person under this clause would mean any legal person capable of entering into contracts and would
include but not be restricted to individual, HUF, partnership firm, trust: private limited companies, public
limited companies, co-operative societies, etc. Small business is one where the total annual turnover is
less than Rs. 50 crore. The turnover criterion will be linked to the average of the last three years in the
case of existing and projected turnover in the case of new entities.
(b) Product Criterion: The exposure takes the form of any of the following: revolving credits and
lines of credit (including overdrafts), term loans and leases (e.g. instalment loans and leases, student and
educational loans) and small business facilities and commitments.
(c) Granularity Criterion: No aggregate exposure to one counterpart should exceed 0.2 per cent of
the overall retail portfolio, 'Aggregate exposure' means gross amount (i.e. not taking any benefit for credit
risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually
satisfy the three other criteria. In addition, 'one counterpart' means one or several entities that may be
considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the
limit would apply to the bank's aggregated exposure on both business).

(d) Low Value of Individual Exposures: The maximum aggregated retail exposure to one
Counterpart should not exceed the absolute threshold limit of Rs.5 crore.
3. Corporate/Wholesale Banking: Wholesale Banking includes all advances to trusts, partnership firms,
companies and statutory bodies, which are not included under 'Retail Banking'.
4. Other Banking Business: Other Banking Business' would include all other banking operations not
covered under 'Treasury', Wholesale Banking' and 'Retail Banking' segments. It will also include all other
residual operations such as banking transactions/activities.

Treasury products

Treasury Products

Treasury products Treasury refers to the products available in the financial market for raising and deploying funds for (a) investment and (b) trading in foreign exchange and securities market Products available in Forex Market:

The forex is a virtual market without physical boundaries_ The information dissemination is very fast through electronic media such as Reuters, Money Line, Bloomberg etc. The foreign exchange markets, as such, are as near-perfect with an efficient price discovery system_ The products are explained as under:

I. Spot trades

 Forward

 Swap

 Investment of foreign exchange surpluses

 Loans and advances

 Rediscounting of bills

 Spot trade : The spot trading in foreign currencies refers to a situation where the settlement takes place up to T+2 days i.e. maximum on the 3rd day. The settlement may take place on same day (ready rate) or on T 1 day i.e. by the next day (TOM rate). The ready rate and TOM rate are less favourable to the buyer and more favourable to seller_ Example : X sells certain foreign currency to Popular Bank on Feb I I, the settlement will take place on the same day. Bank will make payment by applying ready rate. If the settlement is to take place on Feb 12, the bank will apply TOM rate. If it takes place on Feb 13, Tf rate would be applied_

2_ Forward The forward in foreign currencies refers to a situation where the settlement takes place in future i.e. after T+2 days, on a pre-fixed rate and on a pre-fixed date, which are decided on the date of contract. Forward may be at a discount (where future rate of forex. is lower compared to present/spot rate) or at a premium (where future rate of forex. is higher). Example US $ is quoted at Rs.39.20 on Dec 12 (which is its spot rate). It is quoted at Rs.39.40 for delivery in January (which is forward rate). Here the forward is at a premium_ Had the January rate been lower than Rs.39.20, the forward would have been at a discount.

Forward rates are arrived at on the basis of interest rate differentials of two currencies (which are added or deducted from spot exchange rate). For example, for US S and UK Pound Sterling, the difference between the spot rate and forward rate represents the difference in interest rates in USA and UK. The interest rate differential is added to the spot rate for low-interest yielding currency (representing forward premium) and vice versa.

 Swap : Swap represents a combination of spot and forward transactions. Buying one currency in the spot market and selling the same currency for the same quantity in the forward market, constitutes a swap. Though swap is used for funding of requirements but at times there is some element of arbitrage.

Example XYZ Limited an exporter have with them $ 200000 today but they do not need foreign currency today. However, they will require the same amount of foreign currency at the end of the month from now. If the company sells the currency today in spot and buys the same amount 2 months' forward, today itself, it would be a swap transaction. By doing so, they will be able to hedge forex fluctuation risk.

 Investment in forex surplus : The forex surplus arcing from (a) profits on treasury operations (b) profits from overseas branch operations (c) forex borrowings in overseas market (d) foreign currency convertible rupee deposits, are left at the disposal of the

Treasury.

Banks are allowed to invest these surpluses in global money markets or short term securities.

 Inter bank loans: These loans arc of short term nature up to one year and many times, overnight lending to domestic or global banks.

 Short term investments: Banks invest in Treasury bills or gilt edged securities issued by the foreign govt. and other debt instruments.

 Balance in NOSTRO accounts: Banks also keep balances in these accounts, which do not earn interest. Some correspondent banks, however, offer the facility to invest automatically once the balance exceeds the floor limits.

5. Loans and advances : Though Treasury does not undertake the loan granting function, but consent of Treasury is obtained by the credit appraisal department and disbursement function regarding availability of foreign exchange funds or credit lines, prior to sanction of such loans by the Credit Function.

6. Rediscounting of bills : Rediscounting is an inter-bank advance and Treasury provides refinance for the foreign currency bills purchased or discounted by other banks. These are normally of a short term period ranging from 15 days to one year.

Types of assets

ASSETS::

Fixed Assets :
Assets which are purchased for long
term and not meant to be sold but used for production.
Land & Building,Plant & Machinery
Vehicles,Furniture & Fixture
Office equipment,Capital Work in Progress These are
represented as under:
Original value (Gross Bock) Less depreciation
Net Block or book value or written down
Value Method

Non Current Assets:

Assets which cannot be classified as current or
fixed or intangible assets Book Debts or Sundry
Debtors more than 6 months old/ Disputed Debts,
Investment of long term nature in shares,
govt. securities, associates or sister firms or
companies. Long term security deposits. Unquoted
investments; Investments in subsidiaries or sister
concerns; Loans & Advances to directors, officers;
Accounts receivables in respect of sale of plant &
machinery; Advances to concerns in which directors
are interested; Deposits with customs port trust etc
Intangible & fictitious Assets Which do not have
physical existence. For example: Goodwill, Patents,
Trade Mark, Copy Right, Preliminary or pre operative
expenses, other formation expenses, debit balance of
P & L account, accumulated losses, bad debts,
Capital issue expenses e.g. discount on issue of
share & debentures, commission on underwriting of
shares & debentures; Deferred revenue expenditure
e.g. Advertisement

Current Assets : Cash in hand, Bank balance
including fixed ,deposits with banks. Stocks/inventory
(such as raw material, stock in process, finished
goods, consumable stores and spares),Book
debts/Sundry debtors/Bills Receivable/ Accounts
receivable/ debtors, Government and other trustee
securities
(other than for long term purposes e.g. sinking funds,
gratuity funds etc.),Readily Marketable/quoted govt. or
other securities meant for sale,Interest accrued and
receivables,Advance payment of taxes,
pre-paid expenses,Advance payments for
merchandise; unexpired insurance

Types of charges

Types of Charges : Very simple way

Purpose, Various types of charges:
1. Pledge - It is used when the bank (or, lender, known as pledgee) takes
actual possession of the securities, such as goods, certificates, golds,
etc, (you provide it to bank to avail loan) which are generally movable in nature.

Bank keeps the securities with itself, and provide loan to you.
Bank will return the securities (possession of goods) to you (borrower,known
as pledgor), after you repay all the debts (i.e., loan) to the bank. In case you
are unable to pay back, then the bank has the right to sell the assets,
and recover the loan amount (with interest).
Example - Gold loans, Jewellry loans, warehouse finance.
2. Hypothecation - It is used when you (borrower) have the
actual possessionof the asset, for which you have taken the loan. Generally,
this is charged against loans for movable assets, like car, bus, etc.
(i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you
are hypothecated to the bank for the loan granted.
In case you are unable to repay the loan amount, then the bank has the right
to sell the asset (bus, car, etc.), (which is possessed by you) and recover the
total amount (with interest).
Example - Car loans, Bus loans, etc.
3. Mortgage - It is used when you (borrower) have the
actual possession of the assets, for which you are granted loan (e.g., house
loan), or against whichyou are granted loan (e.g., house
mortgaged). Mortgages are generally those assets, which
are permanently attached with Earth surface, like house, land, factory etc.
In case you are unable to repay the loan amount, the bank has
the right to seize and sell the mortgage, and recover the loan amount (with
interest).
4. Lien - It is almost similar to Pledge, except that in case of lien,
the lendercan only detain the asset/goods until the borrower repays the loan,
but have no right to sell the asset, unless explicitly declared in the lien
contract. (For a pledge, the lender can sell the asset, if the borrower is unable
to pay the loan). Loan against FD is a lien .
5. Assignment: It is done in case of loan is provided on documents of some
other organization. Like, Loan against assignment policies, NSC, etc. A
notification is required to be sent to the concerned organization to inform that the
original document is with you as a security for loan. Else, the customer can apply
with indemnity to the concerned organization for issuance of duplicate doc and
defraud you.

ECGC case study

Advances covered by ECGC guarantee( USEFUL FOR CAIIB AND CCP)
In the case of advances classified as doubtful and guaranteed by ECGC, provision should be made only for the balance in excess of the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder:

Example::

Outstanding Balance Rs. 4 lakhs
ECGC Cover 50 percent
Period for which the advance has remained doubtful More than 2 years remained doubtful (say as on March 31, 2014)
Value of security held Rs. 1.50 lakhs

Provision required to be made

Outstanding balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: ECGC Cover
(50% of unrealisable balance) Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of advance Rs. 1.25 lakhs (@ 100 percent of unsecured portion)
Provision for secured portion of advance (as on March 31, 2012) Rs.0.60 lakhs (@ 40 per cent of the secured portion)
Total provision to be made Rs.1.85 lakhs (as on March 31, 2014)

Basic accounting terms

Basic Accounting Terms::

The understanding of the subject becomes easy when one has the knowledge of a few important terms of accounting. Let us go through some of them.

Transactions
Transactions are those activities of a business, which involve transfer of money or goods or
services between two persons or two accounts. For example, purchase of goods, sale of
goods, borrowing from bank, lending of money, salaries paid, rent paid, commission
received and dividend received. Transactions are of two types, namely, cash and credit
transactions.

Cash Transaction is one where cash receipt or payment is involved in the transaction. For
example, When You buys goods from a seller paying the price of goods by cash
immediately, it is a cash transaction.

Credit Transaction is one where cash is not involved immediately but will be paid or
received later. In the above example, if You, do not pay cash immediately but promises to
pay later, it is credit transaction.

Proprietor
A person who owns a business is called its proprietor. He contributes capital to the business
with the intention of earning profit.

Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the
amount of profits earned and the amount of additional capital introduced. It is decreased by
the amount of losses incurred and the amounts withdrawn. For example, if Mr. Ram starts
business with Rs.10,00,000, his capital would be Rs.10,00,000.

Assets
Assets are the properties of every description belonging to the business. Cash in hand, plant
and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of
goods, investments, Goodwill are examples for assets. Assets can be classified into tangible
and intangible.

Tangible Assets: These assets are those having physical existence. It can be seen and
touched. For example, plant & machinery, cash, etc.

Intangible Assets: Intangible assets are those assets having no physical existence but their
possession gives rise to some rights and benefits to the owner. It cannot be seen andtouched. Goodwill, patents, trademarks are some of the examples.

Liabilities
Liabilities refer to the financial obligations of a business. These denote the amounts which a
business owes to others, e.g., loans from banks or other persons, creditors for goods
supplied, bills payable, outstanding expenses, bank overdraft etc.

Drawings
It is the amount of cash or value of goods withdrawn from the business by the proprietor for
his personal use. It is deducted from the capital.

Debtors
A person (individual or firm) who receives a benefit without giving money or money’s
worth immediately, but liable to pay in future or in due course of time is a debtor. The
debtors are shown as an asset in the balance sheet. For example, Mr. Ravi bought goods on
credit from Mr. Ram for Rs.10,000. Mr. Ravi is a debtor to Mr. Ram till he pays the value
of the goods.

Creditors
A person who gives a benefit without receiving money or money’s worth immediately but
to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In
the above example Mr. Ram is a creditor to Mr. Ravi till he receive the value of the goods.

Purchases
Purchases refers to the amount of goods bought by a business for resale or for use in the
production. Goods purchased for cash are called cash purchases. If it is purchased on
credit, it is called as credit purchases. Total purchases include both cash and credit
purchases.

Purchases Return or Returns Outward
When goods are returned to the suppliers due to defective quality or not as per the terms of
purchase, it is called as purchases return. To find net purchases, purchases return is
deducted from the total purchases.

Sales
Sales refers to the amount of goods sold that are already bought or manufactured by the
business. When goods are sold for cash, they are cash sales but if goods are sold and
payment is not received at the time of sale, it is credit sales. Total sales includes both cash
and credit sales.

Sales Return or Returns Inward
When goods are returned from the customers due to defective quality or not as per the terms
of sale, it is called sales return or returns inward. To find out net sales, sales return is
deducted from total sales.
Stock
Stock includes goods unsold on a particular date

Stock includes goods unsold on a particular date. Stock may be opening and closing stock.
The term opening stock means goods unsold in the beginning of the accounting period.
Whereas the term closing stock includes goods unsold at the end of the accounting period.
For example, if 5,000 units purchased @ Rs. 30 per unit remain unsold, the closing stock is
Rs. 1,50,000. This will be opening stock of the subsequent year.
Revenue
Revenue means the amount receivable or realised from sale of goods and earnings from
interest, dividend, commission, etc.
Expense
It is the amount spent in order to produce and sell the goods and services. For example,
purchase of raw materials, payment of salaries, wages, etc.
Income
Income is the difference between revenue and expense.
Voucher
It is a written document in support of a transaction. It is a proof that a particular transaction
has taken place for the value stated in the voucher. It may be in the form of cash receipt,
invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts.
Invoice
Invoice is a business document which is prepared when one sell goods to another. The
statement is prepared by the seller of goods. It contains the information relating to name and
address of the seller and the buyer, the date of sale and the clear description of goods with
quantity and price.
Receipt
Receipt is an acknowledgement for cash received. It is issued to the party paying cash.
Receipts form the basis for entries in cash book.

MSME

ABCD OF MSME :::: Excellent Content plz read everybody..

1.Keynote address delivered by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India at the 2nd CII
National Conference on MSME Funding held in New Delhi on August 23, 2016 ).
Thank you for inviting me to deliver the keynote address at this second edition of the Conference on
MSME Funding. I compliment the CII for having chosen a very relevant theme for the Conference
‘Propelling MSME Growth through Enhanced Financial Access and Support’. The theme lays emphasis on
two crucial pillars that are pertinent for the sector i.e. enhancing financial access and ensuring adequate
support to enable MSMEs to attain faster growth.
2.It is universally recognized that small businesses are the best vehicles for generate jobs. A IFC
/Mckinsey Study has estimated worldwide MSME population at 420 to 510 million, of which 360 to 440
million alone, are in emerging markets. The report also estimates that the formal SMEs contribute up to
45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies
and these numbers could be significantly higher when informal SMEs are included. The Asia SME Finance
Monitor 2014 published by the Asian Development Bank has estimated that 96% of all enterprises in the
Asian region fall under the MSME category, absorb close to 2/3rd of the working force and contribute to
about 42 % of GDP.
3. According to MSME Ministry’s Annual Report for 2015-16, MSME sector in India today is a network of 51
million enterprises providing employment to 117.1 million persons and contributing 37.5 per cent of
India’s GDP2
. The development of this sector is, therefore, crucial in generating significant levels of
employment across the country, more so since we have a large young and educated population which is
on lookout for employment.
MSME – Significance beyond job creation
4. While job creation is certainly critical, small businesses play a far greater role than just providing
employment. Let me state two key contributions of MSME sector here.
5.One, the MSME sector is a nursery for entrepreneurship and a school for innovation. Countless medium
and large corporates in India have evolved out of being micro and small sometime in not so distant past. I
am sure many in the audience here, who own fairly large businesses today, would have cut their teeth in
business through the route of micro and small enterprises.
6. Secondly, MSME sector is crucial for the success of the national agenda of Financial Inclusion. Let me
explain. Normally, when we talk about financial inclusion, we do so largely from the perspective of an
individual or at best a household. However, to my mind, universal financial inclusion cannot be considered
to have been achieved unless it is ensured that the micro and small businesses are financially included.
Credits to these small family run or individual run entities from the formal financial channels would make
these businesses sustainable and help them move out of poverty and propel them to a better quality of
life.
7. The surmise that I am trying to drive at is that if this is the sector that is the bulwark for such criticaldevelopmental paradigms, there are compelling enough reasons for all stakeholders- be they the
Associations, the Financial Institutions, the regulators or the Government, to put all their might together
in a convergent fashion so that the right environment is created to propel growth of MSMEs in our
country.
8. For achieving this objective, there is a need to create an ecosystem which can facilitate handholding
and nurturing of MSME units particularly at the nascent stages. Also, there is a need to eliminate a host of
impediments – of permits, of inspections, of red tape and provide a set of enablers – skill development,
infrastructure, markets, technology etc. However, of all the enablers, probably none is more important
than Credit. The IFC/Mckinsey has estimated the credit gap for formal and informal MSMEs worldwide at
around $ 3.9 trillion globally, of which $2.1 to 2.6 trillion is in emerging markets.
The ABCD of Credit
9. As I said, credit is perhaps the most critical component for MSME entrepreneurs. Provision for Credit is
essentially dependent on four pivotal issues which I would call ‘ABCD’ of credit. Let me take you through
each of them and also explain what we are doing to iron out these issues.
a) The Á of Credit –Access/Availability
10. The 4th All India survey of MSMEs states that close to 90 per cent of MSMEs are dependent on
informal sources, which by any standards is a worrisome figure. Since that survey, some headway must
have been made in improving MSMEs’ access to formal financial channels; however, it still remains a
challenge. The public sector banks today have close to 3000 specialized branches which specialize in
lending to MSME units. Private sector banks have built up products and processes, which enable quick
disbursal of loans. Most banks have switched over to centralized credit sanctioning, which enables better
turnaround time. Many others have increased the credit limits to the field level functionaries. While these
steps have improved access, there is still a huge unmet demand for credit for MSMEs. (There is a total
finance requirement of INR 32.5 trillion ($650 billion) in the MSME sector, which comprises of INR 26
trillion ($ 520 Billion) of debt demand and INR 6.5 trillion ($130 Billion) of equity demand).As per
provisional data for period ended March 2016, total outstanding loan of the banking system to MSME
sector stood at around 11.1 trillion rupees in 20.6 million loan accounts. Contrast this to the estimated
need of INR 26 trillion and number of MSMEs at 51 million.
11. An important piece of the problem is adequacy of banking outlets. Small entrepreneurs are spread
across remote locations in the country where physical bank branches are not available. Also, the banking
correspondent mechanism is yet to mature to a level where they can play a key role in credit disbursal.
Second and perhaps a more import dimension is availability of credit at a time when it is required by the
entrepreneur. Ability of small entrepreneurs to withstand life cycle shocks is extremely limited and hence
availability of timely credit becomes critical for their survival. The formal financial system, due to a variety
of reasons, which may include cumbersome procedures, lack of understanding of the business model,
inability of the entrepreneur to meet the requirements of the banks etc., is unable to meet this immediate
need of the entrepreneur.
b) ‘B’- Banks and Business
12. ‘B’ in the ‘ABCD’ paradigm of credit fundamentally refers to the information asymmetry between the
two Bs – Banks and Business.
The United States Agency for International Development (2009) defines a financially literate SME
owner/manager as “someone who knows what are the most suitable financing and financial management
options for his/her business at the various growth stages of his/her business; knows where to obtain the
most suitable products and services; and interacts with confidence with the suppliers of these products
and services. He/she is familiar with the legal and regulatory framework and his/her rights and recourse
options.”
13.I don’t think that majority of the MSME entrepreneurs in the country today meet the criterion.
Financial literacy in the context of a MSME focuses on an individual’s ability to translate financial literacy
concepts to business needs. Financial literacy is essential for effective money management and low levels
of financial literacy hinder the understanding of available financial products and services. MSE
entrepreneurs are also constrained by lack of operational skills, accounting and finance acumen, business
planning etc. which underscores a need for facilitation by banks/other agencies.
14. However, it is not a one way street. Large-scale retirements in banks in recent years have also
adversely impacted the collective skill-sets available at the field level in understanding, appraising and
monitoring the MSME loan portfolio. The poor underwriting skills leads to avoidable under or ovefinancing, which can have a telling effect on the health of the MSME units, particularly in adverse life cycle
situations.
c) ‘C’- Collateral Requirements
15. The formal financial institutions particularly banks consider lending to MSMEs as highly risky since the
entrepreneurs often do not possess adequate collateral to support the credit. Very often, the loans are
rejected, despite the project prima facie, being feasible. While there are several dispensations to tide over
the problem, the credit culture has not matured enough to a level existing in developed economies where
lending is done against the assets of the firm including its movable assets. This also necessitates that we
build up strong financial infrastructure, which would support the banks in lending to these sectors without
worries and using all types of assets available to secure the loan. It is also pertinent for banks to realise
that though the loan to the individual entities in the sector may be riskier on a solo basis, overall on a
portfolio level, these are less vulnerable than loans to corporate.
d) ‘D’- Documentation
16. Many of the MSMEs, particularly the Micro units, do not have adequate documentation to match the
rigours of a formal financial system. Absence of documentation drives the small entrepreneurs to informal
sources that are willing to provide credit with minimum documentation. Further, a vast majority of the
MSMEs are informal, which brings down the credit score of the entrepreneur and hinders the ability of the
formal financial system to lend to them. Banks, on their part will need to leverage on modern technology
algorithms and Big data so that they can differentiate between a good borrower and a not so good one
even in the absence of conventional documentation.
17. Having analysed various impediments in finance to the sector let me dwell on some of the steps
taken by RBI, Government of India and other Apex institutions in bridging these gaps.
(i) Access/ Availability
RBI has initiated several measures to improve the availability of banking services, especially in the rural
and far-flung areas where access to formal finance is arduous.
18. New institutions: As you are aware, two new universal banks have started operations while in-
principle approval has been granted to 10 entities to set up Small Finance Banks that would primarily
focus on lending to unserved and underserved sections including small business units, small and marginal
farmers, micro and small industries and unorganized
sector entities. These small finance banks have been mandated to extend 75 per cent of its Adjusted Net
Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve
Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.
Many of the SFBs have prior experience of working with small businesses as MFIs/NBFCs and we believe
that they will be able to bring in technology backed innovative last mile practices to serve their
customers.
19. Increased branch penetration/ Specialized branches: RBI has advised banks to set up ‘brick and
mortar’ branches in villages with population of more than 5000 in a phased manner. Coupled with a more
mature Banking Correspondent mechanism, this would give considerable fillip in meeting the banking
needs of the MSMEs particularly in rural areas. Besides, creating presence of physical branch, there is
also a need to have large number of bank officials with appropriate skill sets and knowledge to handle
the life cycle needs of the small businesses. Already, Public Sector banks have established specialized
MSME branches in every district to cater to the needs of the small businesses. We are already working
towards improving the skill sets and entrepreneurial sensitivity of the field level functionaries.
20. P2P lending: New players have entered the MSME lending landscape in form of P2P companies. These
entities use an online platform to match lenders with borrowers to provide unsecured loans and mostly for
receivables financing. P2P lending has great potential as an alternative form of low-cost finance as it can
reach to the needy where formal sources are unable to reach or unwilling to lend. RBI has been mindful of
a need to regulate these entities without stifling their ability to innovate and is currently in the process of
issuing final guidelines on P2P lending.
21. Policy intervention for Life Cycle Issues: We have advised the banks to keep a provision for
additional credit limits (Standby Credit Facility for term loans and an additional provision within the overall
working capital limits) in order to provide timely financial support to Micro and Small enterprises facing
financial difficulties during their lifecycle. Banks have also been advised to carry out mid-term review of
regular working capital limits and fix up timelines for credit decisions. I am happy to say that most banks
have put in place similar provisions in the last one year or so.
22. Co-origination of loans: While several steps have been taken to address the problems related toaccessibility, there are certain structural problems which would take their own sweet time in getting
sorted out. One of this is the issue of reaching the last mile. Much as we have encouraged the banks to
establish brick and mortar branches across remote villages, we must be conscious that they would always
be driven by viability assessments/
cost considerations. One possible solution for this problem could be convergence of efforts between banks
on one hand and the NBFCs, MFIs on the other, who have ‘feet on the ground’ in such locations, better
understanding of the local conditions and business viability, better knowledge about the credit worthiness
of individuals, their repayment capabilities etc. Could we envisage a framework for co-origination of
loans by banks and the NBFCs/MFIs with risk participation? While it would ensure skin in the game
for both parties, it would benefit the entrepreneurs in terms of cost of credit, which on account of blending
could be substantially lower. This could probably be the most ideal structure to serve the micro
enterprises who are the most deprived in terms of availability of credit.
(ii) Banks and Business
23. Let me now turn my focus to steps for bridging the information asymmetry between the banks
and the businesses. As I mentioned earlier, this is not a one-way street. Not only are the small
entrepreneurs often ignorant about banking products and practices, several bankers have little
understanding of the lifecycle credit needs of small businesses. Towards covering this base, RBI has
started a capacity building initiative called the National Mission for Capacity Building of Bankers for
financing MSME Sector (NAMCABS) in a mission mode. The field level functionaries must appreciate the
importance of two critical pillars of financing MSME sector viz., timeliness and adequacy of credit. I am
happy to state that close to 3300 officials of the banks have undergone this programme in the last one
year.
24. Credit Counsellors : For bridging the information asymmetry on the MSME borrowers side, RBI is
initiating a process for putting in place a framework for accreditation of credit counsellors who are
expected to serve as facilitators and enablers for micro and small entrepreneurs. Since MSMEs are
typically enterprises with little credit histories and with inadequate expertise in preparing financial
statements, credit counsellors will assist the borrowers in preparing their project reports and also help
banks make better informed credit decisions.
25. Revival and Rehabilitation of MSMEs: Another key step in the direction of supporting the firms in
distress is the issuance of guidelines on the Framework on Revival and Rehabilitation of MSMEs, which
provides an institutionalized framework for rehabilitation of enterprises which are potentially viable, but
are under temporary duress. The Framework provides for a structured mechanism, which could be
triggered either by the banker or by the entrepreneur at the first signs of stress. The problem resolution is
scaled up to a committee with a time bound schedule. I see this as a very powerful tool and urge upon
the bankers to get this process rolling at the earliest.
(iii) The difficult ‘C’s -Credit and Collateral
26. The issue of finding the right balance in securing a loan without pushing the borrower to informal
sector has been a bugbear for the banking system. This is sought to be addressed through creation and
development of right institutional structures. Let me delve upon some of these efforts:
27. Movable Asset Registry: Movable assets, as opposed to fixed assets such as land or buildings, often
account for most of the capital stock of private firms and comprise an especially large share for micro,
small and medium-size enterprises. Hence, movable assets are the main type of securities that firms can
pledge to obtain bank financing. I am happy to state that CERSAI, in active coordination with Government
of India and Reserve Bank has established the movable asset registry, which when mature would have a
multiplier effect in lending to the sector.
28. TReDS: In order to solve the problem of delayed payment to MSMEs, RBI has licensed three entities
for operating the Trade Receivables Discounting System (TReDS). The system would facilitate the
financing of trade receivables of MSME enterprises from corporate and other buyers, including
government departments and public sector undertakings (PSUs) through multiple financiers. The
objective is to create Electronic Bill Factoring Exchanges which could electronically accept and settle
bills so that MSMEs could encash their receivables without delay. It is expected that the TReDS will
commence operations within this current fiscal. It would be important that the use of TReDS is
made mandatory for, to begin with corporate and PSUs and later for the Government
departments. I would urge the Chambers and the MSME Ministry to proactively examine this
aspect as success of TReDS initiative can be a game changer for the sector.
29. Utility of the Credit Guarantee Scheme: Realizing the problems of small borrowers in posting
collaterals, RBI has asked the banks not to insist on collateral in case of loans up to Rs 10 lakh extendedto units in the MSE sector. Also, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
has been set up to encourage the Member Lending Institutions to extend credit based on the viability of
the proposal rather than insisting on security or surety. Based on practical experience however, I tend to
believe that these provisions have not led to desired outcomes. Let me elaborate.
On one hand, the guideline on collateral-free loans has led banks to at times devise ways of denying
credit to the MSMEs borrowers, while on the other extreme, the provision for credit guarantee has
potential to cause deterioration in quality of credit appraisal and due diligence, consequently straining
the resources of the CGTMSE. Clearly, both outcomes are undesirable. I would rather advocate that
borrower is compensated by way of a better pricing in loan for the availability of collateral. Further, I
would also like to see the CGTMSE to evolve a framework for making the pricing risk-based rather than
having a uniform risk premium related to the past performance and quality of individual portfolios.
Eventually, this activity should also move to an open market system.
(iv)The Cumbersome ‘D’- Documentation
31. The absence of credit history and the need for documentation often pushes the micro
entrepreneur away from conventional banking channels to the more informal sectors. This has to be
addressed through a constant process of simplification of procedures and more importantly by leveraging
technology.
32. Udyami Mitra portal set up by SIDBI leverages IT architecture of Stand-Up Mitra portal and
aims at instilling ease of access to MSMEs’ financial and non-financial service needs. The Portal, as a
virtual market place endeavours to provide 'End to End' solutions not only for credit delivery but also for
the host of credit-plus services by way of hand holding support, application tracking, multiple interface
with stakeholders (i.e. banks, service providers, applicants).We could see development of more such
technological interfaces in the coming days making it easier for MSME entrepreneurs to borrow from the
banking system. RBI is committed to support such initiatives with appropriate safeguards and consumer
protection measures.
33. Role of Associations: The entrepreneur and Industry bodies have a significant role to play in
linking, maintaining and sustaining the borrower-banker relationship. This could be in handholding,
enabling and capacity building of the new entrepreneurs. As you are aware, the BCSBI has formulated a
Code of Bank's Commitment to Micro and Small Enterprises for voluntary adherence by the banks. The
industry associations must also spread awareness about various facilities available/guidelines issued by
the regulators to bridge the information asymmetry.
Conclusion
34. Let me conclude by going back to the theme of propelling growth of MSMEs. In using the term
‘propel’ you have underlined the sense of urgency that is required in this area. Our demographics compel
us to push forward this agenda and make quantum jumps so that entrepreneur can start and drive
businesses without worrying about finance. We are committed to this paradigm shift and the slew of
measures that are being taken by the RBI