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COOPERATIVE BANKS
Agriculture sector Three tier State cooperative banks (SCBs) District central cooperative banks (DCCBs) Primary Agricultural Credit societies(PACs) Non- Agricultural SectorUrban cooperative banks
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DEVELOPMENT BANKS Give loans for Agricultural purpose And also for Non-agricultural purpose
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THE DIFFERENCE:Functional specialisationPrincipleRegulated byFinancial help- by RBI,NABARD, central government, state government. -RBI provides contribution to initial capital. Borrowers:3
No tier versus three tier It becomes imp.cos¶ no direct contact between the 1 st and the 3 rd tier Intra- sectoral funds are greater.e.g. interbank deposits. Competition versus cooperation. CRR, SLR requirements Scheduled versus non-scheduled banks exist in both. Supervision-single,versus dual.-acts that govern them RBI is lender of last resort and first resort.
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Commercial banks: Private sector banks-old, new banks and local area banks Old ±Vysya bank First FI after 1991 to get approval to function as a bank is HDFC. Also InduSind bank .
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Other examples: UTI Bank ICICI Bank Ratnakar Bank Catholic Syrian Bank Dhanalakshmi Centurion Bank
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Foreign banks RBI new rules, foreign banks can set up local subsidiary., not necessarily acquire weak banks. Example:-BOA, Bank of Ceylone, ANZ,HSBC,Duetsch Bank, ABN-AMRO
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BANKS AWAITING: Credit Suisse Group Royal Bank of Scotland US-based GE capital SBI , its subsidiaries Other nationalised banks.
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Cooperative structure: Nearly 28 SCBs at a state level DCCBs Middle tier in the cooperative banking structure. Examples:-Pilbhit ,Tehri,Haridwar DCCBs. PACs Acting at the local level
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UCBs
UCBs cater to non-agricultural finance. Examples are Kurla Nagrik Bank, Abhyudaya Bank. Mainly working capital loans, recently term loans. These days, UCBs are giving home loans as well. Rs. 1 lakh to individuals, and Rs. 3 lakhs scheduled UCBs. Can provide finances against the shares, debentures.
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RRBs: Cater to agro sector, small and marginal farmers. Banks choose 1 or 2 districts in a state which is relatively unbanked area and sponsor that RRB. SBI has 30 RRBs in 13 states and its branches constitute 16% of the total. NABARD also sets up RRBs. Can be established with paid up capital of 25 lakhs of which 50 % comes through CG, 15% through SG and the rest 35% through the sponsoring bank. CRR, SLR requirements are the minimum.(3% and 25 % respectively)
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Examples: Bijapur Gramin Bank Surat baruch gramin bank Faizabad Khetriya Gramin bank. Problems of cooperative banks: Dual Supervision Deposit base is small and therefore likely to fall pray to large banks. The difference . RBI Commercial Banks
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Functions of RBI: NOTE ISSUE All denominations, and CG ± coins, one rupee notes are distributed on behalf of the government. Issue department and the banking department are separate , assets and liabilities are separate. The assets of the issue department:Gold Foreign securities Rupee coins GOI securities . It has to keep (since 1957)gold/ foreign securities of Rs.200 crs. Of which gold must be Rs. 115 crs. This is called minimum reserve system.
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FOR THIS PURPOSE..
Issue offices- 10 in major cities Thousands of Currency chests/receptacles in which stock of new notes and coins is stored. To get people¶s confidence, India has a public monopoly of note issue. Hongkong, HSBC is responsible for the note issue.
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BANKER S BANK: The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.
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BANKER TO THE GOVERNMENT:As a banker to the government, the Bank can make ³ways and means advances´ to both the central and state governments. (ways and means advances :- temporary advances made in order to bridge the temporary gap between receipts and payments)
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Maturity:-3 months State governments- limits are fixed. Three types: (a) normal or clean advances i.e., advances without any collateral security; (b) secured advances, i.e., those which are secured against the pledge of central government securities; and (c) special advances, i.e., those granted by the Bank at its discretion.
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Overdraft facility:in excess of the credit (ways and means advances) limits granted by the RBI. In other words, overdrafts are unauthorised ways and means advances drawn by the state governments on the RBI. Persistently large overdrafts are drawn by the state governments which is not a very healthy sign.
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FOREIGN EXCHANGE MANAGEMENT AND CONTROL: (a) to administer the Foreign Exchange Control; (b) to choose the exchange rate system and fix or manage the exchange rate between the rupee and other currencies; (c) to manage exchange reserves; and (d) to interact or negotiate with international financial institutions such as the IMF, World Bank, and Asian Development Bank.
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Controller of credit: Qualitative (selective credit controls) Quantitative : 1.CRR 2.SLR 3.Bank Rate
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Supervisory functions The Reserve Bank Act, 1934, The Banking Regulation Act, 1949 Has Given Wide Powers To RBI Relating To :Licensing And Establishments, Branch Expansion, Management And Methods Of Working, Amalgamation, Reconstruction, And Liquidation. To Carry Out Periodical Inspections To Call For Returns And Necessary Information From Them.
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Promotional functions :- A unique function done in India. The Reserve Bank has helped in the setting up of the following: IFCI SFC UTI in 1964, IDBI in 1964, Agricultural Refinance Corporation of India, Industrial Reconstruction Corporation of India(1972) provide long-term finance to farmers.
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A SCHEDULED BANK: Paid up capital and reserves totaling to ( Rs. 5 Lakhs,) Rs. 100 crs. Must not be a single owner firm or a partnership and must be a joint stock company Must convince RBI that it is conducting its affairs in the interest of the depositors.
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So what?
Privileges:- concessional borrowing facilities from RBI Others are not entitled to borrow form RBI for normal banking purposes , and only in for accommodation in abnormal circumstances. Obligations: Submit periodical returns to RBI subject to SLR requirements
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GOVERNMENT BUDGET Fiscal Policy
Government is trying to achieve economic growth, provide public goods, promote investment, reduce poverty through its various activities.
Fiscal Policy:Government sector activities related to above are represented and formulated through budget.
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Annual Financial Statement
Legal backing :- section - 112 of the Indian Constitution Government presents a statement of estimated receipts, expenditure and a detailed plan that is presented for every financial (1st of April to 31st March) year
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Three divisions of budget: Contingency Fund, Consolidated Fund (CFI) and Public Account.
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Contingency Fund : Is used to in case of unforeseen contingencies. The contingency fund is generally used when the government cannot wait for long for the parliament to authorize the expenses on the expenditure. (parliament approval not required) The fund (Rs 500-crore fund)is at the disposal of the President
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Consolidated fund of India
CFI
Revenues by the government
Loans raised
Recoveries of loans
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Public account
This fund is to account for flows for those transactions where the government is merely acting as a banker.
e.g. provident funds, small savings and so on.
These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Expenditure from it is not required to be approved by the Parliament.
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BUDGET
TWO SIDES: 1. RECEIPTS 2. EXPENDITURE EACH OF WHICH AGAIN IS OF TWO TYPES:REVENUE AND CAPITAL
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Revenue/ Capital budget (account)
Revenue budget Capital budget
Revenue/ capital budget Revenue/ capital expenditure
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Revenue/ capital receipts
Revenue account/budget :± All receipts and expenditure that in general do not entail a sale or creation of assets are included under the revenue account.
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CAPITAL RECEIPT/EXPENDITURE:
All receipts and expenditure that liquidate or create an asset would in general be under capital account. - For instance, disinvestment proceeds (like it did in the case of Maruti, it is in effect selling an asset.) The receipts from the sale would go under capital account. - Alternatively,
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BUDGET
Revenue receipts Revenue expenditure
Capital receipts
Capital expenditure
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Revenue receipts
Revenue receipts Tax revenue Non tax revenue
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Income tax
Corporate tax FBT(Fringe benefit tax) STT (Securities Transaction Tax) BCTT(Banking cash transaction TAX)
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Direct taxes Tax Indirect taxes
Indirect taxes Customs duties Excise duties Service taxes
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Direct taxes
DIRECT TAX: 1. These are taxes where the burden of tax falls on the person on whom it is levied. 2. These are largely taxes on income or wealth. a. INCOME TAX:b.CORPORATION TAX: tax on profits of companies. C. FBT, d. STT and BCTT are direct taxes.
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INDIRECT TAX:
In the case of indirect taxes the incidence of tax is usually not on the person who pays the tax. e.g. Customs, excise and service tax. They are regressive. It means the burden on the rich and the poor is alike. That is why governments strive to raise a higher proportion of taxes through direct taxes.
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TAX COLLECTIONS 2009-10 200920082008-09 (Budget)
Name of Tax Gross Tax Revenue
20082008-09 (Revised) Rs. Crors 6,27,949 2,22,000 1,22,600 1,08,359 1,08,000 65,000
2009200910(Budget) Rs. Crors 6,41,079 2,56,725 1,12,850 1,06,477 98,000 65,000
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Rs. Crors 6,87,715 2,26,361 1,38,314 1,37,874 1,18,930 64,460
Corporation Tax Income Tax
Union Excise Duties
Customs Duties Service Tax
NON-TAX REVENUE:
Components:1. Interest payments (received on loans given by the government to states, railways and others) 2. Dividends and profits received from public sector companies. 3. Revenue from THREE types of services :a. General services such as police and defence b. Social and community services such as medical services c. Economic services such as power and railways
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Revenue expenditure
1. Expenditure incurred for the normal functioning of the government departments 2.Interest charges on debt incurred by the government 3.Subsidies
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Capital receipts
RECEIPTS in the capital account of the consolidated fund are grouped under three broad heads. 1. Public debt 2. Recoveries of loans and advances 3. Miscellaneous receipts.
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Public debt
Public debt(components):1. Loans raised by the Center from the market 2. Government borrowings from the RBI and other parties 3. Sale of Treasury Bills 4.Loans received from foreign governments
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Recoveries of loans and advances
Central government gives loans to States and Union Territories . The recovery of the same is a capital receipt. Miscellaneous receipts 1. Primarily receipts from disinvestment in public sector undertakings. What is disinvestment ? The dilution of the government¶s stake in Public Sector Undertakings is called as disinvestment.
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Capital expenditure
1.Expenditure for acquiring fixed assets such as land, building, machinery and equipment. 2. Loans and advances sanctioned by the Center to the State governments,union territories and public sector undertakings.
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Source: http://indiabudget.nic.in/ub2009-10/rec/annex5.pdf
20072007- 2008 (Figures in Rs Crore) Revenue Receipts Capital Receipts Total Receipts NonNon- Plan Expenditure Plan Expenditure Total Expenditure Revenue Expenditure Fiscal Deficit Primary Deficit Actual 5,41,864 1,70,807 7,12,671 5,07,589 2,05,082 7,12,671 52,569 1,26,912 -44,118 2008- 2009 2008Budget Estimate 6,02,935 1,47,949 7,50,884 5,07,498 2,43,386 7,50,884 55,184 1,33,287 -57,520 2008- 2009 2008Revised Estimate 5,62,173 3,38,780 9,00,953 6,17,996 2,82,957 9,00,953 2,41,273 3,26,515 1,33,821 2009- 2010 2009Budget Estimate 6,14,497 4,06,341 10,20,838 6,95,989 3,25,149 10,20,838 2,82,735 4,00,996 1,75,485
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CENTRAL PLAN:
Central or annual plans are essentially the five year plans broken down into five annual installments. Through these annual plans the government achieves the objectives of the Five-Year Plans. The government's support to the central plan is : budget support.
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TOTAL EXPENDITURE
PLAN EXPENDITURE:
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NON-PLAN EXPENDITURE: This is largely the revenue expenditure of the government. The biggest item of expenditure are interest payments, subsidies, salaries, defence and pension. The capital component of the non-plan expenditure is relatively small with the largest allocation going to defence.
This is essentially the Budget support to the central plan and the central assistance to state and Union Territory plans.
2. Like all Budget heads, this is also split into revenue and capital components.
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REVENUE DEFICIT:
1. The excess of disbursements(Expenditure) over receipts on revenue account is called revenue deficit. 2. Revenue deficit=revenue receipts-revenue expenditure
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Importance of revenue deficit: This is an important control indicator. In case of revenue deficit , the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap.
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FISCAL DEFICIT:
The excess of total expenditure over total non borrowed receipts is called the fiscal deficit. Fiscal deficit = Revenue receipts + loan repayments received by the government + disinvestment proceeds - entire expenditure (Revenue expenditure + Capital expenditure)
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Importance of fiscal deficit:1. It shows the borrowing requirement of the government. 2. It has to borrow money from the public to meet the shortfall.
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PRIMARY DEFICIT:
The revenue expenditure includes interest payments on government's earlier borrowings. The primary deficit = fiscal deficit - interest payments. A shrinking primary deficit would indicate progress towards fiscal health.
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CESS
CESS: This is an additional levy on the basic tax liability. Governments resort to cesses for meeting specific expenditure. E.g. education cess of 2%. Both corporate and individual income is at present subject to an education cess of 2%.
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What is a money market?
Market : Money:- market for money and financial assets which are close substitutes of money Close substitutes here means the assets that can be converted into money with minimum transactions cost without any loss in value.
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The definition
It is a market for short term funds. How short? With assets maturing lower than a year. PARTICIPANTS: RBI plays a very important role. Commercial banks, financial institutions, corporate etc.
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Features: It is a whole sale market; volume of funds traded are very huge. Large number of participants. Finances working capital requirements. Objective: Money market is an equilibrating mechanism for evening out surpluses and deficiencies etc. A focal point for central bank intervention for influencing liquidity in the economy.
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Money market SHORT term funds
Finances working capital requirements Wholesale market
Capital market
LONG term funds Finances fixed investments Not a wholesale market ,as retail buyers can participate
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Sub-markets:- call or notice money
Call Money market:- Overnight money Short notice money:- funds are provided for less than 14 days. No collateral is required to cover these transactions
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functions: 1. To even out day to day surplus and deficit. 2. Helps to adjust their cash reserve requirements. Interest rates are market determined. Very volatile market. Till 1971,LIC,UTI only as lenders. RBI enlarged the list to include in 1991, to include GIC,IDBI,NABARD, DFHI etc. Min. size of operation for the non-bank entities was brought down to 3 crs. From 20 crs.
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Based on the recommendation of the Narasimhan committee report (1998), the nonbank participants are disallowed in the market. They only exist for treasury bills. Now, it is purely an inter-bank market. While lending, RBI prudential norms apply. Lending not to exceed 25% of the owned funds (paid up capital plus reserves) as fortnightly average. On any single day, bank can lend upto 50% of owned funds.
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Factors that affect call money rates: Reserve requirements Volatile forex market-banks fund foreign currency position by withdrawing form the call market. Tight/ easy liquidity position of banks. Interest paid on call loans is call money rate. Market determined. Depends upon demand and supply conditions in the country. Earlier, 1974-1989, the IBA had control over it.
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Treasury bills market: T-bills ( Treasury bills):-A short term instrument of borrowing by GOI to bridge the temporary gaps between receipts and expenditure. They are issued at a discount to the face value. (Rightly called zero coupon bonds.)
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OTHER FEATURES: Negotiability High liquidity Absence of default risk Eligibility of inclusion in SLR Transaction through SGL account
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Issued by RBI through AUCTION method. It declares the auction calendar at the start of financial year mentioning the amount of issue, date of auction and day of payment. Two maturities: 91 days and 364 days T-Bills The former are issued every Wednesday. The later are issued on 2nd and 4th Wednesdays.
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Types of Auction: Multiple price based auction or French auction for 91 day T Bill Uniform price based auction or Dutch auction for 364 day T Bill
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Auctions process:-multiple price (FRENCH)
For these the RBI invites bids The bidders have to quote the price(per Rs. 100). RBI then decides the cut-off price at which the issue would be exhausted. All the bids above the cut-off are allotted securities. Each winning bid pays the price it bids-Winner s curse Primary dealers/ banks bid for it.
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Auctions process: uniform price auction(DUTCH)
RBI invites bids in descending order and accepts those that fully absorb the issue amount. Each winning bid pays the same price as decided by the RBI.
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Repo market
Repo market:-repurchase agreement Two types of repo transactions are conducted. 1. Inter-Bank repos 2. RBI repos.
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Repo ????/
Is a transaction in which two parties agree to sell and repurchase the same security. The seller sells the specified securities with an agreement to purchase the same at a mutually decided price and date. Repos will have maturity between to days. Repos take place in the market lot of 5 crs.
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The difference between the price at which securities are bought and sold is the lender s profit. The annual interest rate for the funds transferred by the lender to the borrower is the repo rate. Short and call money market is not collateralized but repos are, and hence safer. Inter bank repos were banned after their misuse in the 1992 scam. Again they are allowed since 1995. Repo transactions are allowed in all treasury bills and GOI securities, State government securities etc.
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The aim of conducting repo transactions is to allow secondary sale in these securities. The interest paid for the use of funds is called the repo rate. Non- bank participants deal with only the reverse repo. i.e. They can lend money to the eligible participants.
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CP(Commercial Paper)
CP is short term negotiable instrument. Issued by companies. Issued at a discount to face value or a fixed interest bearing terms. When companies directly deal with investors- Direct Paper. When companies indirectly deal with investors through a dealer- Dealer Paper Participants in the market are corporates, LIC,GIC, UTI, Banks and mutual funds, NRIs, FIIs.
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Who can issue the CP?
Companies having Net worth as high as 5 crores. Minimum credit rating of P-2 . Is issued in multiples of Rs.5 lakhs subject to the minimum issue of Rs. 1 crore. Maturity is between 15 days to 12 months. Rate of interest was between 4.6% to 6.3% in 2003. After Nov. 2001, CPs are held in the dematerialized form.
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CDs:Issued by : commercial banks.and FIs of All India Nature. Min. 1 lakh and in multiples there off. No lock in period for the CDs and are freely transferable by endorsement and delivery. Loans against CDs is not permitted. Subscribers: Individuals/corporates/trusts/funds/ associations etc. Maturity:- between 15 days and 1 year. FI can issue them for 1 to 3 years.
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Primary dealers: In 1994, the system of PDs started. Applicant must have net owned funds of a minimum 50 crs. consisting of paid up equity capital, free reserves etc.
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What is inflation?
Inflation is persistent rise in the level of prices. It is expressed as a rate per cent per unit of time (per month or per year)
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Effects of Inflation: Purchasing power gets affected adversely. Creates uncertainty, discourages investment. Redistribution of income in favor of borrowers class from the creditors class.
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Causes of Inflation: Supply shocks (cost push inflation):Raw materials price increase Import prices rise
Demand pull inflation Increase in government spending Tax cuts Increase in the borrowing
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Inflation is measured as a change in the price level. The representation of the price level is done using three types of indices.
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Index Number
An Index Number is developed with an arbitrary base (usually starting with 100) that indicates a change in magnitude relative to its value at a specified point in time.
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Three types of Indices: CPI- CONSUMER PRICE INDEX WPI- WHOLESALE PRICE INDEX GDP deflator-
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The Consumer Price Index (CPI) is used to monitor changes in the cost of living (i.e. the selected market basket) over time. When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.
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Consumer Price Index
Consumer Price Index is the main measure of price changes at the retail level. It measures Price changes of fixed market basket of goods and services of constant quality and quantity. It tells how much cost of living has risen or fallen due to price changes irrespective of changes in consumer behavior or quality of goods. It measures changes in the cost of buying a representative fixed basket of goods and services and is generally accepted as a measure of inflation in the country .
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Main groupings are: Urban Industrial Workers: Agricultural Laborers: Urban Non- Manual Laborers:-
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Steps in the construction of CPI:Determine what goods are most important to the typical consumer: Fix the Basket Find the prices of each of the goods and services in the basket for each point in time: Find the Prices Use the data on prices to calculate the cost of the basket of goods and services at different times: Compute the Basket s Cost Designate one year as the Base Year, which is the benchmark for yearly comparison.
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The final step includes using the CPI to calculate the Inflation Rate, which is:
± the percentage change in the price index from the preceding period
Example:
± Base Year is 2002 ± Bundle of goods in 2005 = Rs.1,200 ± The same bundle in 2005 cost = Rs.1,272 ± CPI = (Rs.1,272 ÷ Rs.1,200) X 100 = 106 ± Prices between 2002 & 2005 increased by 6%
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Data: Consumption basket data come from family budget surveys. Price data is obtained from the retail outlets by a large staff of field investigators.
Publication:CPI for various population groups are calculated and published by Bureau of Labour.
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Hypothetical example for CPI for an Urban Working Class family: Item Qty. Prices Prices (01-02) (04-05) Prices Relatives
Rice 15 Kgs. Rs. 9 Rs. 12 Wheat 10 Kgs. 15 20 Milk 30 Ltrs. 17 24 Cotton Cloth 5 M. 20 30 Housing Two Room House 300 600
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Price Relatives: Price relative for rice for 2004-05 = Price in 04-05/Price in 2001-02* 100 Weights:- Total Expenditure on an item in the base year/ Total expenditure in that year. LASPEYRE S CPI P1 CPI = § wi --------------------Po x 100
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Real and Nominal Interest Rates
Example
Assume:
± You borrow Rs.1,000 for one year. ± Nominal Interest rate was 15%. ± During the year inflation was 10%.
The real interest rate is: 15% - 10% = 5%
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When comparing rupee values from different times, it is necessary to keep in mind that a rupee today is not the same as a rupee in the past. The CPI illustrates one way that prices are measured and how to make adjustments for these price changes.
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WHOLE SALE PRICE INDEX (WPI)
Wholesale price index ( WPI) is designed to measure the change of price in the primary and wholesale markets. WPI can be interpreted as the index of prices paid by the producers for their inputs. WPI for individual commodities,commodity groups, and the overall WPI is published monthly by the Office of Economic Advisor to the Government of India.
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THE MAIN GROUPS OF ITEMS ARE: Primary articles Food(Rice, Wheat), Non Food ( Raw Cotton, Jute) , Minerals (Iron Ore,etc.) Manufactured Articles:- 270 Items Fuel, Power, Light, Lubricants :- 10 Items GDP Deflator: It is the ratio of Current price GDP to constant price GDP.
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