Banking

White Label ATM: Meaning, Features, Advantages, Limitations, Financial

Inclusion, Nested Design, Contagion Risk
What is White label-ATM?

Traditionally, Automated Teller Machines (ATMs) have respective banks logo. So

just by looking, this is SBIs ATM, this is ICICIs ATM and so on.

But White label ATM doesnt have such Bank logo, hence called White label ATMs.

RBI has given license / permission to non-bank entities to open such ATMs.

Any non-bank entity with a minimum net worth of Rs.100 crore, can apply for white
label ATMs. (not just NBFC, any non-bank entity can apply.)

Late 80s: first ATM in India; 2012: RBI issues guideline for White label; 2013: RBI
gives license/permission.

Tata Communications Payment Solutions Limited =the first company to get RBIs
permission to open White label ATMs.

They started their chain under brandname Indicash.

Other White label= Muthoot Finance, Srei Infra., Vakrangee Software, Prizm
Payments, AGS. More than 15 companies given such permission.

Whats the difference between Brown label vs White label ATM?

Brown Label ATM

White label ATM

When ATMs are owned and operated by nonWhen banks outsourced the ATM operations to a third

bank entities but they are not doing outsourcing-

party.

contract from a particular bank.

The private company owns & operates the ATM machine,

pays office rent. They negotiate with the landlord,

Same

electricity company, telecom company and so on.

The bank (which has outsourced this work) provides cash

Sponsor bank provides the cash.
for that ATM.

ATM has logo of that bank (which has outsourced this

No. White label ATM doesnt have such logo.

work).

Not even of the sponsor bank.

Theyve to compulsory open a few ATMs in (tier

No such compulsion.

3 to tier 6) areas. (explained after a few

paragraphs)

RBI directly involved because these white label

RBI not involved directly. These outsourcing companies
Companies have to separately get
have contractual obligation with their respective banks.
license/permission from RBI to run business.

Initially, RBI did not permit White label ATMs, and Banks wanted to reduce the
operational cost, so they came up Brown Label ATM (outsourcing) system.
So in a way, the evolution is: (Banks own ATM) =>(Brown Label) => (white label)
Stakeholder/Players in White label ATM game?
Gives license/permission to open White label ATMs. Under Payment and Settlement
RBI

Systems Act, 2007. (And NOT under Banking regulation act or SARFAESI Act,
Ombudsman or any other act.)

(non-bank) White

Rents the place, looks after maintenance and servicing of the machine.

Label ATM company

Loads the cash in those White label ATMs. This also ensures counterfeit/fake
Sponsor bank
currency notes are not circulated through white label ATM.

Payment network

Visa, Mastercard, the National Financial Switch (NFS under National Payment
Corporation of India.)

operator

They provide technical connectivity in the system.

Why do we need White Label ATM?

1. ATMs offer convenience to customer (Because he doesnt need to visit Bank branch
every time). ATMs are open 24/7, and even on holidays.
2. Convenience to bank, because they dont have to keep large staff/office (compared to
a system without ATMs). It reduces their cost of branch-operation.
3. But in India, ATM penetration has been very low. Observe:
Country

Approx. No. of ATMs per 10 lakh population

USA

1400

UK

500

China

200

India

less than 100

Most of the ATMs concentrated in urban areas- that too only at prime locations
e.g. near shopping malls and airports= financial inclusion not achieved.
How does White Label ATM help in financial inclusion?

RBI requires White label-ATM companies to install machines in the ratio of

Two ATMs in (tier 3 to 6 place) : One ATM in (tier 1-2 place).
Confused? Observe:

Center

city

census definition:population is ____

White Label ATM

10 lakh and above

Metropolitan
Tier 1

if company wants to Setup ONE ATM

1 lakh and above

Urban

here,

Semi-Urban

Tier 2

50,000 to 99,999

Tier 3

20,000 to 49,999

Tier 4

10,000 to 19,999
Then, company must install TWO
ATMs here.

Tier 5

5,000 to 9,999

Tier 6

Less than 5,000.

Rural

For example, RBI has permitted Tata to deploy 15000 White label ATMs.
Meaning [2/(2+1)] x 15000 = 10,000 ATMs will be setup in the rural and semiurban areas. = more access to ATM= financial inclusion.
Facilities @White label ATM?

1. Any customer from belonging to any bank, can use it.

2. Every month, Five transactions are free.
3. White label ATM users can also withdraw a maximum of 10,000 per transaction.
4. Open 24/7 and on holidays
5. Value added services like mobile recharge, utility bill payments etc.
Where does the Commission come?
White ATM Company doesnt run for charity or goodwill. Company has to make
profit. So where does the asli-maal/commission come?
Before White label ATM

With White Label

1. If you used card in your own banks ATM= everything free.

2. If you used card on other banks ATM= first five transactions

1.

First five transactions free every

month.

free (every month). After that commission charges of Rs.~17-20

2.

Then, transaction fee ~Rs.15 and

for taking out money and Rs. 5-9 for making balance inquiry or

balance inquiry fee ~Rs.5 BUT

mini statement. (This commission directly charged on your

this commission is paid by your

account.)

bank to the White label

Company.
3.

White label company cannot

directly charge money on you.
(RBI rules).

4. Although it doesnt mean White

label ATM=totally Free
because your bank will cut those
charges from your account.

Additionally, White Label ATM company can make commission from

1. value added services @their ATM e.g electricity /telephone bill payments, mobile
recharge, DishTV-Tatasky recharge etc.
2. Selling advertisement space in the room and above the door.

White label ATM: Challenges/Limitations/Problems

1. For a white label ATM company, biggest challenges = office rent + Security guard.
2. If they want to make profit, every White ATM needs to get at least 75-125
transactions per day= very unlikely, especially when RBI requires them to setup
2/3rd of the ATMs in semi-urban and rural areas.
3. Even in Bangalore, some of the white-label ATMs are getting barely 2-3 customers
every week=loss making business at the moment.
4. Despite the entry of White Label ATM companies, the regular banks have not slowed
down their ATM expansion drive, because branded ATM=passive advertisement and
customer loyalty. Result? ATMs everywhere =too much competition= small players
will bleed out just like in aviation business.
5. Last year, a lady was brutally attacked in ATM booth in Bangalore. Police have
warned all banks to put security guards=input cost increased. Banks themselves
admitting five transactions free every month=loss making in this scenario.
6. SBI has the largest ATM network in India (30,000+)= economies of scale= theyre
supposed to be making profit. But this week, even SBI chairman herself has admitted
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their ATM business is making losses. So, it is unlikely that White label ATM
companies will run profitably for a long period of time.
7. Customer complaint: failed ATM transactions = matter falls into Issuing Bank
(=bank where you have account). Some critiques fear it will lead to taarikh pe
taarikh because data records are with sponsor bank and machine maintenance is
under ATM companys responsibility.
Nested Design
RBI appointed Nachiket Mor Committee on financial services, talks about this
limitation.

The White label-ATM does not have direct access to the settlements system. (like
SBI or ICICI has access to RBI monitored NEFT online money transfers.)

Instead White label ATM is tied with a sponsor-bank. And the sponsor bank looks
after the settlement. Sponsor bank loads and withdraws the cash from those
machines. Example Federal Bank is the sponsor bank for Tatas White label
ATMs.

Mohan

Ok so whats the problem?

Nachi

Nested Design= contagion risk.

Contagion = Bad condition in one institution leads to negative effects in the other
institutes in the market.

Suppose few of Tatas White label ATMs break down for xyz reason (hacking, staff
negligence or whatever) and some clown starts baseless rumoring on
facebook/twitter/whatsapp that Tatas ATMs not working because federal bank has
stopped supplying cash.

Another clown then starts rumor mongering that Federal Bank is about to collapse
because of NPAs and hence not honoring its obligation to Tata.

Result: Fed.Bank account holders panic and line up at other ATMs (sponsored
or owned by other banks) to pull out their money = these type of runs
destabilize the banking system. Extreme cases lead to situation like CyprusBanking crisis.
Mohan But dont the banks have CRR and SLR to arrange cash in such emergency situations?

Yes they have. But with nested design, theyre exposing themselves to additional contagion-risk
Nachi

from other banks/White-label ATM companies. Especially when White label ATM company grows
too large in very short time and sponsor bank cannot foresee the cash requirements.

Mohan Then whats your recommendation?

White label ATM companies should be directly linked to settlement system, without sponsor
banks.

Nachi

RBI should allow White Label Banking Business Correspondent agents. [Same like earlier
BC, but they can work with multiple banks at the back-end.]

Potential candidates= NBFCs, mobile phone companies, consumer goods companies, the post
office system, existing corporate BCs, and milk/agri./sugar etc. real sector cooperatives.

Mock Questions
1. Who among the following can operate White label ATMs?
1. Nationalized Banks
2. Scheduled Commercial Banks
3. Retail Banks

4. None of above.
2. What is Indicash ATM?
0. Brown label ATM chain under Indus Bank
1. Brown label ATM chain under Bank of India.
2. White label ATM chain owned and operated by Tata
3. White label ATM chain owned and operated by Prizm payments
3. Correct statements about White label ATMs
0. RBI permits non-bank entities to setup White Label ATMs under Banking regulation
Act.
1. Only Non-Banking financial companies with 15 years of experience can open
White label ATMs.
2. In case of failed transaction, the complaint is automatically sent to Banking
Ombudsman.
3. None of above.
4. Correct statements about White label ATMs
0. Company has to open 2/3rd of its ATM in areas having tier 3 to tier 6 level
population.
1. Before opening such booths in rural areas, the company has to get
permission from NABARD.
2. Both 1 and 2
3. Neither 1 nor 2
5. Incorrect statements about White label ATMs
0. The operator company is required to maintain SLR and CRR reserves
similar to a scheduled commercial bank.
1. To prevent conflict of interest, RBI has forbidden White label companies
from providing Value added services in such booths.
2. Both 1 and 2
3. Neither 1 nor 2
6. What is the role of a Sponsor bank in White label ATM system?
0. provide maintanance and service to the equipment
1. provide cash to the equipment
2. both 1 and 2
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3. Neither 1 nor 2
7. Suppose RBI rules require the company to open ATMs in Urban: Rural areas in the
ratio of 5:9. If Muthoot Finance owns total 3500 ATMs, how many of them are
located in the rural areas?
0. 225
1. 1250
2. 2250
3. None of above
8. Suppose RBI rules require the company to open ATMs in Urban: Rural areas in the
ratio of 1:1,at the end of the given year. In January 2014 Muthoot Finance owns total
3000 ATMs but its rural:urban ratio is 8:7. So, by 31st December 2014, How many
new rural ATMs should they open to comply with RBIs rules?
0. 400
1. 300
2. 200
3. none of above
9. The ratio of Indicash White label ATMs in urban: rural areas is 4:5. If Indiacash
opened 360 new ATMs each in both urban and rural areas, then ratio will be 7:8. So,
originally, how many ATMs did Indicash have in rural areas?
0. 640
1. 560
2. 600
3. None of Above
10. The ratio of Indicashs urban:rural ATMs is 3:2 and total number of ATMs is 600. If
Indicash wants to change this ratio to 7:3, what should it do?
0. Add 200 ATMs in rural area
1. Add 200 ATMs in urban area
2. Add 200 ATMs each in both rural and urban areas
3. None of above
Descriptive:
1. Despites certain risks and limitations, the White label ATM has a potential role in
financial inclusion. Elaborate. (10m | 200 words)
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2. Define White label ATM. What are its features, advantages and limitations? (10m |
200 words)
3. What are the differences between White label and Brown Label ATM? (5m | 100
words)

Cheque Truncation System (CTS-2010): Meaning, Advantages

explained
What is cheque clearing house?

Suppose a party from Delhi pays you via cheque of Citibank and you have account in
SBI, Ahmedabad. You deposit this cheque in your areas SBI branch.

Now the SBI branch manager would send his [overworked, underpaid] Bank PO to
Citibanks office in Abad. Hed show the cheque, collect the cash and return to
deposit the money in your account.

But SBI would be getting thosands of cheques everyday- some from ICICI, some
from Citibank, some from axis and so on. SBI cannot send its staff to every other
bank to get the cash, thatd be extremely time consuming.

Therefore To simplify this cheque transection process, each bank will send a
representative to a central place and exchange cheques drawn on each other.

This centralized place is called clearing house/processing house.

Reserve bank of India is act as clearing house.

In cities where RBIs office doesnot exist, usually SBI or other public sector bank

acts as the clearing house.

What is MICR code?

By seeing the PIN code, a postman can know the destination of an envelope. Same
way by using the MICR code, RBI (clearing house) can know the name of a bank,
location of its branch from where the cheque was issued= faster clearing of cheques.

MICR = Magnetic ink character recognition.

At the bottom of every cheque, youd see some black colored numbers with weird
looking fonts. That is the MICR code.

These numbers are printed with a special ink containing iron oxide, so that it can be
automatically read by a special machine.

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Ofcourse this sounds similar to bar codes, but there is a difference: unlike barcode,
you can read the MICR code and decode it, without the use of special machines.

What is Cheque Truncation System (CTS)?

Under the old paper cheque based clearing, the SBI bank will send the paper cheque
to the clearing house and get the money and then transfer it to your account.

This is still time consuming. because SBI (or any bank) would need to physically
move the cheques to a clearing house.

So RBI came up with a new idea known as Cheque Truncation System (CTS).

In this Cheque Truncation System (CTS), SBI branch will not send the paper cheque
to the clearing house, but instead, itd merely scan the cheque, and electronically
send the image + MICR data, to the clearing house.

From the clearing house, the data would goto the paying bank (Citibank in our
example), they will inspect the MICR data, signature on the scanned image and
release the money to SBI.

This process is faster and more safer than the conventional paper-cheque clearing

method.
What are the benefits of Cheque Truncation?

It Eliminates the time, money and manpower wasted during physical movement of
cheques (from banks to clearing house).

Thus, Cheque Truncation =faster clearing = better service to customers,

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Cheque Truncation system reduces the scope for clearing-related frauds

There is no fear of losing cheque in transit.

CTS-2010

In the year 2010, RBI came up with the guidelines for Cheque Truncation system.
(CTS 2010)

The banks would need to upgrade a few things to comply with CTS 2010 standards
of RBI.

For example, in their branch offices, they would need to buy scanners and install
special software provided by RBI, to securely transfer and receive the scanned image
and data.

They may need to change the color-scheme of chequebooks so that signature and
handwriting is visible in the scanned image. And so on

Problem: some jholachhaap banks, are yet to comply with RBIs CTS 2010
guidelines.

Hence recently RBI issued a warning to all banks: upgrade your banking
infrastructure according to CTS 2010 guidelines, before the end of Sept. 2012

Bretton Woods and Fixed Exchange Rate system : Meaning Explained

While reading newspaper columns about global economy or Eurozone crisis etc.
you may have come across a sentence, multiple times : we need another
Bretton woods. so,
What is Bretton Woods?
Its a place in New Hampshire State of USA, just like BASEL is a city in
Switzerland.
Why is important?

In 1944, President Roosevelt hosted a conference here, to rebuild the world economy,
after Second World War.
Delegates of 44 allied nations (

) had came to participate in this conference.

Officially it is known as United Nations Monetary and Financial Conference,

commonly known as Bretton Woods because of the place where it was held.

This conference resulted into creation of four extremely important things

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Result of Bretton Woods

1. IMF

They give short-term loans to help nations settle the balance of payment crisis.

Theyve a system called SDR :Special Drawing rights. (requires another

article)

2. World Bank

Officially known as IBRD :International bank for reconstruction and

Development, that time

They give long term soft loans to rebuild the third world.

Soft loans= interest rate is very low. Sometimes you dont have to pay back the
principle.

3. GATT (General Agreement on Trade and Tarrif) later becomes WTO

To facilitate the international trade.

This will later become WTO. Already written an article on this.

4. Fixed Exchange Rate system. (although Discarded in 1970s)

Explained in this same article.

Main Players in this meeting

Total 44 nations participated, but Main players were:

US President Franklin D Roosevelt

UK Prime Minister Winston Churchill

Lord John Maynard Keynes, Famous economist, UK treasury advisor.

India @Bretton Woods

Absent from the meeting: Mohan, Montek, Pranab, and Chindu (good otherwise
theyd have messed up International Economy, just like they did to Indian Economy.)

India was represented by Sir C.D. Deshmukh, he was the first Indian Governor of
RBI, This gentleman had cracked IAS exam in British-raj ,known as ICS exam in
those days. And No, he is not the grandfather of Ritesh Deshmukh.

Back to the topic,

Impact of World War II on Economy

Second world war started in 1939, ended in 1945

There is large scale bombing and destruction in the world. Production has declined.

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Agriculture, Dairy, Manufacturing, Export- everything is brought to standstill=huge

inflation
Agenda of conference

Help rebuilt the World Economy. Provide money, loan, finance to needy nations.
(World Bank)

After WW2, lot of colonies will get independence (India, Sri Lanka), theyll
introduce their own national currencies without control of big superpowers (Britain,
France etc) and theyll enter in international trade in their own capacity.(Exchange
rates, IMF)

Hence, Some rules/order had to be created to facilitate smooth international trade.

(GATT)
Fixed Exchange Rate system.
What is Fixed Exchange Rate System?

Under this system, if RBI says $1=30 rupees, and youve 30 rupees and want to
convert it in dollars but the Foreigners are willing to give 1 dollar to youdont
worry.

RBI will accept your 30 rupees and give your one dollar out of its own reserve and
vice versa.

Cons are obvious : When India is not exporting enough and not attractive enough
foreign investment (in dollars) and still RBI keeps paying people in dollars, one day
the bank lockers will be empty, there will be no dollars to pay. System will collapse.

But it has Pros (advantages) in the times of uncertainty- When youre writing on a
clean slate, after WW2, if every nation decides to have a fixed exchange rate system-

it leads to stability and predictability in Exchange rates = good for foreign trade.
Roosevelt Vs Mohan: Pegging the Currencies
(Fictional, technically incorrect, imaginary)
President Roosevelt: ok I say we put fixed exchange rate system. Lets fix the
rates that 40 Rupees will equal to 1 dollar. 15 Yens will equal to 1 dollar. 12
Pounds will equal to 1 dollar and so on. In short, Im pegging your currencies to
US Dollar. Thus Dollar will be the international reserve currency. AND Your
countrys RBI (central bank) will make sure these exchange rates dont fluctuate
more than 1% from these values.
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Mohan: ya man, but what if the exchange rate fluctuates? for example, What If I
start running my country in a totally pathetic and irresponsible manner and hence
nobody wants to invest in India so supply of dollar is low but demand of dollar is
high- because Indians love gold and weve to import crude oil and pay in dollars.
In short, this will fluctuate the exchange rates between Dollar vs Rupee.
President Roosevelt: Let me ask you a question. Suppose Onions are selling 100
rupees a kilo because of low supply but suddenly farmers produce fresh new 50
million tonnes of onions and supply it to market, what will happen?
Mohan: Easy! Onion Price will drop down to 40 rupees a kilo because the supply
has increased.
President Roosevelt: yes dude, the same way, whenever exchange rate fluctuates
from our standard rate, youll tell your RBI to supply dollars from its own forex
reserves in to the market to calm down the demand and bring the rate back to
normal level.
If the reverse happens: (Onions are selling @ 2 rupees a kilo) then you tell your
RBI to buy all Onions dollars using its own rupees, until the supply is reduced and
price is back to normal.
Mohan: What nonsense is this? If 40 rupees equals 1 dollar but then what does 1
dollar equal to? What is the value of your own dollar? Why should we accept your
dollar as international reserve currency?
President Roosevelt: Ive fixed the value of your currency to my dollars. And Im
fixing the value of my own dollars to Gold. 1 ounce of Gold shall equal to 35
dollars. Meaning you walk in with 35 dollars in my RBI (Federal Reserve Bank of
USA), and youll get one ounce of gold in return. Gold will remain precious
forever. So, its not like were running the show in thin air. Dollars are backed by
GOLD.
Mohan: ya man but what if my RBI doesnt have enough dollars in its lockers?
What will we do then?
President Roosevelt: dont worry, come to IMF. Theyll arrange short term loans for
you, in dollars.

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Mohan: but still, why should we fix price of our currency to dollars? Why should
we accept dollar as the reserve currency and not Yuan, Yen or Pound? Why
should we accept you as our big boss?
President Roosevelt: Because Ive the aukaat to pay enough gold, so I say dollars
will be the international reserve currency. IF youve enough gold reserve in your
RBI, come sit in the chair and well see whether rupee is strong enough to
become the international reserve currency or not.
Even Britain is so financially bankrupt after Second World War, they dont have
the guts to tell me set this exchange rate according to their Pounds. Btw, I also
got some nuke missiles in my limousine.
Mohan: no noI was just kidding man. Im well aware that youre the superpower
both financially and militarywise.
President Roosevelt: Besides When weve a stable and fixed exchange system
like this, itll ensure smooth and long term trade deals between merchants of
various countries. When you dont have fixed exchange rate system, it is bad for
economy. For example, today your call-center boss may give you free lunch and
coffee because $1=60 rupees but next day when value of rupee declines and it is
$1=50 rupees, same boss will even stop running the water-cooler in your office.
Third day when $1=40 rupees, He will just kick you out because outsourcing
generate that much profit for him. Such uncertainty, is not good for economy.
And since Gold is in limited supply, Dollar will be spent carefully, and so your
currency will be in spent carefully. i.e. Since currencies are pegged, you will not
indulge in extravagant spending in subsidies, welfare schemes, tax-reliefs or
debt-waivers to farmers. This ensures fiscal discipline => That ensures less Fiscal
deficit = less inflation.
Mohan: Mr. President Sir, I think I got the point now. Ill tell my RBI Governor
here to sign the Bretton Woods agreement papers, because fixed exchange rate
system sounds safe and good.
Fast forward to 1970s

As you can see, the fixed exchange rate system, is good for stable international trade
environment, atleast on paper.

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But this system can run smoothly only as long as USA has the aukaat to pay gold to
every swinging dude that walks with dollars into their RBI (US Treasury).

Problem started with Cold War. Both USA and USSR (not Russia), are busy in an
arms race, building new tanks, missiles and submarines every week.

Theyre also giving huge donations and help to poor nations, in order to win their
support and dominate the region. This is a non-productive activity, theyre basically
wasting money.

Now, USA gets involved in a very lengthy and expensive Vietnam War from 1959 to

1975.
Inflation and Gold Prices

Fact: War leads to inflation

Fact: Inflation decreases the value of your money.

Fact: Gold becomes more expensive because of Inflation.

US still kept fixed value of 35 dollars = 1 ounce of gold. But thanks to this inflation,
Gold is trading at higher price in open market 40 dollars per ounce.

So there is an opportunity to make quick money, just tell the RBI manager to take
suitcase full of dollars from RBIs locker to US Federal Reserve, take their gold in
return, and sell it to the local jeweler at higher market price and use this profit to fix
indias problems- poverty, education etc. (may be by starting another welfare scheme
named after Nehru-Gandhi family.)

For a while, US Presidents had enough clout over international politics so that they
could force other nations RBI managers not to indulge in such cheap
profiteering. But Vietnam war is fast deteriorating Americas clout and now RBIs of
various countries have started lining up with their suitcases full of dollars and they
want gold in return.

1971, President Nixon decides that if we continue giving gold for dollars, we will go
bankrupt. There will be no gold left in our lockers. So I give up. Im not going to let
anyone exchange their dollars for my gold.

And thus Bretton Wood system breaks down.

1973, World moves to floating exchange rate system.

What is Floating Exchange rate? Governments / Central Banks dont fix exchange
rates here. It is left to the Forex markets, private players and laws of supply and
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demand.Government /RBI will only intervene if there is huge fluctuation in the

exchange rates.
Do we need Bretton Woods?

With respect to the Eurozone crisis (click ME), many columnists write We need
another Bretton Woods.

They dont actually mean that we need to move back to the same old Fixed Rate
exchange system, in which every currency was pegged to Dollar and Dollar was
pegged to Gold. Because that fixed rate thing is impractical in real life scenario, as
we saw in above paragraphs.

Just imagine, if tomorrow World starts running according to Bretton Woods system,
what will happen?

We know that China already has more than 1000 billion dollars in its Forex Reserves.
So Peoples Bank of China will send its Probationary officer with suitcases full of
dollars and take away all the gold from Fort Knox*. They dont even need to fight a
war, USA will come down to its knees financially.

[*Fort Knox is a place in Kentucky State, US Government keeps the gold reserves in
this place.]

In real life, not that China will actually do so, but the mere threat and possibility will
keep USA on its toes. Hence US will not agree to Fixed Exchange rate in the first
place.

There is no chance any other country will agree to become the big brother and let
their currency become the reserved currency and peg it to gold.

Especially India, because if we peg our 10,000 Rupees to one ounce of Gold and
declare that we are the new international reserve currency, just like dollar before
1970s, What will be the Result? Pegged currency means Government cant do
extravagant spending in MNREGA. Theyll have to stop subsidy on diesel, kerosene,
LPG and fertilizers, because they can dole out only as much rupees as the amount
of gold held in RBIs locker.

As You can understand, no political party has the guts to do that, hence no nation
will want to become the big brother or Sacrificial goat (Bali kaa Bakraa) for another
Bretton Woods.

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So, The sentence We need another Bretton Woods is just a metaphor, to say that all
the Presidents, Prime ministers and Economists of the world should meet up once
again and hold conference in some gambling den, drink someDesi liquor (
),
watch some Item-song, brainstorm for new ideas and start something from scratch,

totally new, Just like the Gentlemen at Bretton Woods did, in 1944.
Then what to do?

It could be anything, untried and untested before like-

China could agree that well not dump our products in foreign market, we will not
keep our yuan under-valued,

US could agree that well bring back our troop from Afghanistan and cut down on
our Defense Expenditure and its inflationary effect on world economy. We will also
stop supporting Pakistan. Thus reducing defense Expenditure of India in the arms
race= that will also reduce fiscal deficit of India= India could decrease taxes=boost
for economy and world trade.

Iran could agree that well stop our irrelevant obsession with nuke weapons and give
up, So that UN removes the sanctions and our traders can make more money, thus
improving the standard of living for Iranian aam-aadmis.

EU could agree that well kick out Greece, because its just way too messed up
beyond fixing.

And India could agree that well bring all the black money from Switzerland and use
it to finance our bogus Government schemes and subsidies instead of looting the
aam-aadmi via direct and indirect taxes, to finance those things.

And finally you and I could agree that facebook is a waste of time, so a serious
Aspirant should concentrate on his studies instead of uploading funny/motivational
photos there.

Banking Amendment Bill: Issues, Features, Problems, Reforms meaning

explained
Boring technical details intentionally skipped. I dont do Ph.D on current affairs,
neither should you.
What is Banking Regulation Act?
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This act empowers reserve bank of India (RBI ) to regulate all public sector banks
(SBI, PNB etc.) and private sector banks.(ICICI, HDFC etc.) in India.
Set : Finance Ministers Office
Finance minister and RBI governor are holding a meeting.
Yaar many new players want to open banks in India. But they cant, because youre not
Chindu
giving new licenses, So what is your problem?

Well, Im given powers to regulate public and private sector banks, under Banking
Regulation Act 1949.But those powers are not enough.
RBI governor

So, Im not going to give new bank-licenses to anybody, unless and until you get me
more powers, by updating that Banking Regulation Act.

Ok, Ill move a Banking laws (Amendment) bill, to amend the necessary things.But first
Chindu
tell me what new powers do you need?

RBI Power #1: Can remove entire Board of a Bank

At present, if a Bank doesnt play by my rules, I can remove its CEO or one or two directors. But that
is not enough. What if the whole board of directors is involved in some mischief.
RBI

So, I want powers to remove the entire board of directors.

I also want you to increase the rates of existing monetary penalties that I can impose on a bank if it
disobeys my rules, directives or gives me false information.

Ok agreed.Ill get you the powers to supersede boards of the banks if any irregularities.And Ill
Chindu
increase the penalty rates as well.Anything else?

RBI

Second problem. Connected lending.

Chindu What is that?

RBI Power #2: Connected Lending Prevention

Suppose Mr.Paraajay gets license to open a new bank.

He opens Pawn-Fisher bank, people deposit their hard earned cash in it.

20

Ideally, bank should lend this money to the home, car, education and business-loan
seekers, who then pay interest and thus bank makes profit.

Bank must make good profit, so It can pay 1) good interest rate to its bank account
holders. 2) good dividends to its share holders.

But Mr.Paraajay also owns another company, Pawn-Fisher airlines.

And this airlines company is making losses. Mr.Paraajay gives loans from PawnFisher bank to Pawn-Fisher airlines @very low interest rate, to fix the mess.

And or, this Pawn-Fisher airlines gets the bank loan @market rates from the PawnFisher Bank but it doesnt pay EMIs regularly, yet the bank doesnt take any action.

Similarly, Mr.Paraajay also opens Pawn-Fisher Mutual funds, but it also makes
losses, and money is transferred from bank deposits to mutual funds, to cover up
those losses.

These type of activities = Not good, because in long term, bank will collapse and
depositors money will be stuck.
So, I must be given powers to check the records and account-books of those mutual funds, insurance

RBI
and other companies associated with a bank.

Agreed.
Chindu youll get the power to inspect those other business arms of a bank.
Anything else?

RBI

Yes, money from unclaimed bank accounts.

RBI Power #3: Unclaimed Accounts

If Mr.X has not used his bank account for more than 10 years, it is called unclaimed
bank account.

There are crores of rupees in such unclaimed bank accounts, it increases the
Administrative burden on bank employees (=need to maintain files etc)

Plus there is also an opportunity to commit a fraud. for example some bank employee
knows that Mr.Xs bank account is never checked, then hell forge checkbooks
signature or some other trick to withdraw money from Mr.Xs account.

21

so we must take some measure to tackle this issue.

If a bank account is not operated for more than 10 years, bank will have to transfer its money in
the Depositor Education and Awareness Fund

RBI

And Ill appoint a Committee to use money from this fund to create awareness.

Although if Mr.X returns, he can claim his money and that bank will have to pay him interest
also.

Chindu Agreed. Anything else

Yes one tea, two samosas and four more powers

1.

If any person wants to buy more than 5% shares of any bank, hell have to take permission from
me. And before giving him approval, I can put conditions on him, For example give me deposit
worth Rs.xyz, so if you play some mischief, Ill take away your deposit.

RBI

2.

If primary cooperative societies want to continue their banking business, theyll have to get a
license from me.

3.

I can conduct special audits of cooperative banks because theyre more liable to collapse and
frauds.

4. If a bank fails to maintain the prescribed minimum amount of Cash Reserve Ratio (CRR) on any
day, I can demand penalty interest from that bank.
Chindu All agreed. Anything else.

RBI

Thats enough for now.

Chindu Ok then please leave my cabin and send the SBI chairman in. He too had an appointment with me.

Public Banks Issue#1: Need consolidation

Good morning Mr. Finance Minister. As youre aware, SBI is the largest public sector bank in
SBI chief

India, weve more than 11,000 branches. Yet if you make a list of top 5 biggest banks of the
world, our name doesnt figure.

Chindu

Why is it so?

22

This is because too many small public banks exist in India. So, the incoming-money (from
people to bank accounts) gets fragmented in so many bank branches. Finally, we dont have

SBI

enough cash, to expand in a big way.

Chindu

Ok so what do you want from me?

There is need for consolidation in the banking sector so India can have two to three large
public banks that can compete globally.

SBI

For this, I need you to simplify Banking Companies Acquisition and Transfer of
Undertakings Act.

And to exclude bank mergers from the scrutiny of Competition Commission of India
(CCI).

Chindu

Bank mergers should need only approval of RBI.

Agreed.

PSU Banks Issue#2: Need more investment

Right now the Public Sector banks cannot issue shares worth more than Rs.3000 crores. I want you to
SBI
relax this, because We need lot of investment.

Ok agreed. You can issue more shares, including bonus shares and rights issue etc. (already
Chindu explained click me)But youll have to take permission from Central Government + RBI if you want to
do it.

SBI

Agreed.

Banks issue #3: More voting rights for investors

Before moving on, I must thank you for allowing us to issue bonus shares etc. But that alone will not
SBI
bring investment in public or private sector banks.

Chindu Why?

SBI

Because in shareholders meetings, voting is done on many issues (for example election of board

23

of directors, changing name of company etc.).

A shareholder should have voting rights proportional to the number of shares held by him.

But in case of public banks, the shareholders have only 1% voting right irrespective of number
of shares held. So they cannot heavily influence any Decision.

I need you relax these voting rights. Only then foreign investors will be attracted to invest in
Indian banks.

Chindu Agreed. Well revise the voting rights.

Revised voting rights

Voting rights (%)

Bank

Example

Before

After

Private sector

HDFC, ICICI

10

26

Public sector

SBI , PNB

10

Chindu Anything else.

SBI

No this is all for now.

Then you may leave. But please send the chairman of Citibank in, he too had taken appointment and is
Chindu
waiting outside.

Foreign Banks Issue #1: Stampduty

Chindu

Ok what can I do for you?

When I transfer my branches from the main company to the subsidiary company, I dont want to pay
Citibank
stamp duty. This should help me expand my business in India.

Chindu

Agreed. Anything else.

24

Citibank Yes there is one more matter

Foreign Banks Issue #2: Want to invest in Commodity

Right now, the Banks can trade in shares, bonds and currencies speculation but the Banking
Regulation Act forbids them from trading in commodities.

Citibank

But we (foreign banks) see huge profit making opportunity in that sector.

So we need you to amend Banking regulation Act, to allow the banks to invest in Commodities
market.

Chindu

Agreed.

Standing Committee problem

After a bill is introduced in parliament, it goes to the Standing Committee of

Parliament for particular subject.

for example Banking Regulation bill to Standing Committee on finance.

They inspect the bill clause by clause, put forward their recommendations. And then
voting is done.

In case of Banking regulation bill, after the parliamentary Standing Committee on

Finance put its report, Chindu added some new provisions in it.

so opposition parties got angry this wasnt part of the original bill, if you want to
add new provisions, then this bill must be sent back to the Standing Committee for

re-consideration.
Set: parliament
In the parliament, Opposition members are shouting slogans. (as usual)
Meera Kumar says beth jayiye, beth jayiye, kripyaa shaant ho jayiye.(please sit
down, please sit down, as usual)
Chindu What is the problem?

The share-market and mutual funds = regulated by SEBI.Similarly Commodity market= regulated by
Oppn.
Forward Market Commission (FMC)

Chindu So?

25

So, if banks invest in commodity futures, it would lead to high-risk speculative trading,
especially with those Foreign banks.

What if some investors loose money because of this?

The Forward Markets Commission (FMC) doesnt have enough powers to safeguard
them. because

Oppn.

1) FMC doesnt have legal powers for compulsory registration of traders.

2) FMC doesnt have power to impose huge financial penalty.

Parliament is yet to pass Forward Contract Regulation Act (FCRA) Amendment Bill, which aims
to empower FMC.

And more importantly, you added the this Commodity provision in banking bill, after it was
reviewed by Standing Committee. So this bill must be sent back to standing Committee for
review.

No, no, no. if bill goes back to standing Committee, itll take lot of time.Ok I back off, I remove this
Chindu
provision, so there is no need to send this bill back to standing Committee.

#1: Commodity speculation

#2: Competition Monitoring: RBI vs CCI

Friends, I also propose that only RBIs permission should be necessary for Bank mergers and
Chindu
acquisitions. Competition Commission of India should not play any role in it.

Not acceptable. Again this is new provision added after Standing Committee gave its report. So,
Opposition
send the bill back to Standing Committee.

No, no, no. if bill goes back to standing Committee, then itll delay the implementation.Ok I back
Chindu

off, I remove this provision.CCI will have the power to investigate and clear mergers and
acquisitions in the banking sector.

26

Lok sabha passed the bill. Rajya Sabha also passed the bill. Now this bill file will goto

President. Once he signs it, this bill will become a Law.

Anti-Bill arguments

In December, employees of public banks went on strike. (although

SBI employees did not join the strike.)
The Bank unions give following Anti-Bill arguments:

Government claims more banks = more branches = more poor people get banking
facilities = financial inclusion. But it is mere lip service. Because new corporate
banks/foreign banks wont have any interest in serving poor people.

If mergers are allowed then rural branches will close down and/or rural banking
operations will be outsourced via contractual business route.

This type of privatization will negatively affect our job security and interests of
those poor people.

Statistics indicate that only 50 percent of people in India have bank accounts.

The Centre should focus on educating rural people and cultivating banking habit
among them instead of taking steps to merge banks or diluting voting rights.

27

Merger of banks will de-stablise public sector banks, then corporate firms will start
their own banks and gobble up public savings. And that money will be misused for
the benefit of few corporate honchos and not for the general public.

Although Chindu counters them saying these banking reforms= new banks will
be opened= more employment. (he expects 6,000 new bank branches and
recruitment of 84,000 people next year.)
Critiques also argue that

It seems the whole exercise is not a comprehensive banking reform but just
firefighting because 1) Foreign banks and domestic players put pressure on FM to
help them get bank licenses. 2) RBI blackmails FM to get more powers. 3) FM
comes with banking regulation bill. Prime objective of this bill seems to help private
players get new banking licenses.

Government should further relax the voting rights otherwise, Government will keep
abusing its majority shareholding to further its own political goals and election
agendas.

e.g. in 2008, public sector banks were asked to forgo farmers loans (Debt Waiver
scheme). Although Government promised to refund the loan-money to banks on

behalf of farmers but it is not a good business practice.

Summary
The Banking regulation bill, 2011 was passed in the Winter session of parliament
in Dec.2012.
The salient features of the Banking regulation bill are (list not exhaustive)
1. RBI can inspect books of associate business arms of a bank.
2. RBI can supercede entire board of directors of a bank.
3. RBI can conduct special audits of cooperative banks.
4. Cooperative societies cannot carryout banking activities without license from RBI.
5. A Depositor Education and Awareness Fund to receive money from deposit
accounts not operated for more than 10 years.
6. Increased the penalties and fines for violating Banking Regulation Act.
28

7. Public Banks can obtain more capital via bonus shares and rights issue.
8. Increases the voting rights of shareholders in Public and Private sector banks.
9. Prior approval of RBI necessary if a person wants to purchase more than 5% shares
of a bank.
10. Banking Mergers and acquisition will fall under purview of CCI.
11. Bank will have to pay penalty interest rate, if it doesnt maintain CRR on daily basis.
12. Foreign banks exempted from stampduty payment for certain cases.

SARFAESI Act, Asset Reconstruction Company (ARC), Security

Receipts (SR), QIB, DRT, Central Registry
What is NPA?

Bank gives loan to a person.

Person fails to make regular payments.

Bank gives him notice to correct his behavior. But he doesnt.

Bank declares that loan as Non-Performing Asset (NPA) (=Bad Loan)

Currently Indian banks have NPAs worth more than Rs. 1 lakh crores.
Debt Recovery tribunals?

Prior to 90s, banks had very hard time recovering bad loans.

Because often, borrowers (loan takers) would file frivolous cases in civil courts, then
taarikh pe taarikh, taarikh pe taarikh.. proceeding would go on for years.

So 1993, Government established Debt Recovery Tribunals to deal with NPA

matters.

Now borrower cannot approach civil court, theyve to goto special Debt Recovery
Tribunal (DRT).

This led to some relief, but then DRTs clogged down by truckload of cases. (Even
now, more than 60,000 cases pending with DRTs)

In 2002, Government came up with new Act, named SARFAESI Act.

What is the Sarfaesi Act?

Securitisation

and Reconstruction

of Financial Assets

and Enforcement of Security Interest Act, 2002,

29

Suppose, Mr.Paraajay has opened factory with Rs.100 crores. He financed this,
via mixture of Debt + equity in following way. (make sure you understand debt vs
Equity, if not click me)
Holder

Rupees in Cr.

Paraajay and his family

20

Juntaa (public)

30

Business loan from SBI

40

Bonds

10

Equity (IPO->Shares)

Debt (loans, Bonds)

Total

100

Initially the company runs well and good.

But then Mr.Paraajay doesnt revise his MBA books often, so he forgets the business
concepts. His company starts making losses.

He fails to pay loan EMIs for many months.

SBI gives him notice to correct his behavior.

Still, he doesnt start paying money.

SBI declares this Rs.40 crores loan NPA (Non-Performing Asset).

Once a loan is declared as non-performing asset, SBI can take actions under
SARFAESI act, to recover the loan money.

Bank have following powers under SARFAESI Act

1. Take possession of Mr.Paraajays assets without requiring court order. (Commericial
or residential, fixed or moving assets.)
2. Auction / Sale them.
3. Change the administration/ Management of those assets.
4. If Mr.Paraajay had sold away the mortgaged asset to third party Mr.X, bank can
order Mr.X to surrender that Asset.
5. If Mr.X owes money to Mr.Paraajay, he can be ordered to pay money.
30

*ARCs explained after a few paragraphs.

SARFAESI applies only to loans above Rs.10 lakhs.

By the way SARFAESI applies only to those assets mortgaged/secured to get the
loan.

E.g. if Mr.Paraajay had taken business-loan, SBI would have asked him to sign away
his factory/machinary/vehicles/land etc. specific items as mortgage.

Hence SBI can attach only ^those assets.

But SBI cannot take away Paraajays personal home-furniture, expensive wrist-watch
or his sons bicycle in the name of SARFAESI.

Similarly, Agricultural land is exempted from SARFAESI attachment.

Appeal structure in SARFAESI ACt?
The borrower (loan taker) has following options:

Get a stay order from Debt Recoverty tribunal (DRT) against the auction/sale of his
properties. (He cannot file case in Civil courts.)

Fight the case in DRT.

If unhappy with DRT verdict, he can appeal to Debt Recovery Appellate Tribunal
(DRAT).

But before filing appeal with DRAT, hell have to deposit 50% of his pending loan

money.
Bank: Power to Auction

First SBI contacts the experts, gets valuation of Mr.Paraajays assets.

Expert says those assets are worth Rs.50 crores according to present market value
of land/ building/ machinary whatever.

Then SBI will give advertisement in newspapers we are auctioning xyz

land/machinary/building. Minimum bidding amount is Rs.50 crores. Whoever wishes
to bid, send us application along with Rs.50,000 as deposit, and their class 10, 12
mark-sheets and school leaving certificates, duly attested by a Gazetted officer.

Problem: sometimes, bidders donot take interest in buying such properties, factories
etc.

To fix this problem, Amendment bill of 2011, makes a new provision: if noone else
comes to bid in the auction, Bank itself can buy that property.

31

Here comes the new problem:

Suppose SBI attached a warehouse of Mr.Paraajay.

If the land was in good urban area, SBI could open a new branch office there (or
housing for its employees).

But if plot/factory/house is in some remote area= useless for SBIs personal business.

Under the Banking regulation Act, a bank cannot keep such immovable property
beyond 7 years, (max 12 years with RBIs permission).

So ultimately SBI will have to auction it to someone. What if they dont get better
price? Critiques of the bill say, this is not clarified in the bill.

What is ARC?

Asset reconstruction company (ARC).

They buy NPA (Bad loans) from Banks and try to extract maximum money out of
it=profit.

Theyve to register with Reserve Bank of India.

Examples:
1. ARCIL (Indias first and largest asset reconstruction company (ARC))
2. Reliance Asset Reconstruction Company Limited by Anil Ambani

In our example, SBI has NPA worth Rs.40 crores.

32

ARC will buy the NPA file from SBI at a lower rate say 35 crores. (well, SBI is
making loss, yes, but something is better than nothing.)

Besides, banks have hundreads of bad loan cases, they donot have time or manpower
to pursue individual case, sometimes no bidders are interested in auction. All the
filework and donkey labour, In such cases, its better for bank to transfer NPA to
ARC.

But that doesnt mean ARC will give 35 crores to the SBI from its own pocket!

Then how will the Asset reconstruction company (ARC) arrange for the money?= via

Security Reciepts.
What are Security Reciepts (SR)?

In above example, ARC needs Rs.35 crores to buy a Non performing asset from SBI.

So ARC will issue security reciepts (SR) worth Rs.35 crores.

Only Qualified Institutional buyers (QIB) can buy these security reciepts (SR).

SR are not bonds, they donot carry fixed interest rate.

ARC will promise to pay money on SR, when it gets money the bad loan.

Although, ARC usually promise 9% profit on security reciepts (SR).

So, three possible situations:

1. Qualified institutional buyers (QIB) buy those security reciepts (SR). So Rs.35 cr
cash goes from QIB -> ARC -> SBI.
2. SBI itself recieves SR worth Rs.35 crores for free. (that means ARC will gradually
pay the money to SBI).
3. combination of both: QIBs buy SR worth 30 crores + SBI recieves free SR worth 5
crores.
What is Qualified Institutional Buyer (QIB)?
These people have the expertise and the financial muscle to evaluate and invest
in the capital markets.
Examples: (click on each to read previous articles on them)
1. Scheduled Commericial Banks
2. Foreign Institutional Investor
3. Mutual Funds
4. Venture Capital Investors
33

5. Insurance Companies
6. Pension/ Providend Funds
Foreign investment in ARC

ARC =buy bad loans from banks.

ARC =arrange money from QIBs to buy bad loans from banks.

Problem= Indian QIBs do not invest much in ARCs.

Therefore ARCs capacity to buy NPA= very low.

And bank themselves dont have enough expertize or manpower to dispose those
NPAs quickly.

Previously Foreign investors could invest only upto 49% in ARC=minority

shareholder=cannot influence company decisions.

Now, Government also increased foreign investment limit in ARCs. This would
attract more investment in ARCs and help in quicker purchase and disposal of NPAs.

Foreign investment in ARC

Earlier

49%

Now (December-24-2012)

74%

Anyways, back to the topic, lets recap:

1. SBI had NPA. First solution: auction the property. Did not work out.
2. Second solution: sell it to ARC.
So, ARC purchased the NPA worth Rs.40 crores (at Rs.35 crores).
ARCs aim= extract maximum money out of this investment. But how?
1. Auction the assets fully or partially. (sell the machinary now, rent the building and
wait for land prices to go up for two years and then sell it.)
2. Sell the property in combination with other NPA properties of other defaulters.
(similar to buy one large pizza and get 20% discount on any medium sized pizzas).
3. Restructure the EMIs of Mr.Paraajay. E.g. instead of 1 lakh per month, give us
75,000 per month.
4. Change the Management of that asset, appoint its own directors/officers.
34

5. Order Mr.Paraajay to outsource or lease his business to a another company.

^SARFAESI act empowers ARC to do such things. The amendment Bill adds a
new power to the ARC.
ARC New Power: convert Debt into equity

Before reading further, Make sure you know the pros and cons of Debt Vs. Equity
(else refer to Mrunal.org/ECONOMY)
The new Amendment in SARFAESI, empowers ARC to convert debt into
equity.(fully or partially).
Shares

Rupees Cr.

Paraajay and his family

20

40%

Juntaa

30

60%

Total shares worth

50

100%

Share holding Before:

Share holding After

Shares

Rupees Cr.

Approx. %

Paraajay and his family

20

22%

Juntaa

30

33%

ARC

40*

44%

Total shares worth

90

100%

*that is the paper value of original debt (NPA loan of SBI to Mr.Parajaay),
Otherwise ARC purchased it @Rs.35 crores.
35

Anyways, This leads to two situations:

1. If company starts making more profit in future, ARC will receive more share from
that profit. (because more profit=more dividend to shareholders.)
2. If price of companys shares go up in the sharemarket, ARC can sell those shares to
third party and make decent profit.
Anti-arguments: Debt to Equity conversion
Critiques says this debt to equityprovision will be abused. This provision is
made to help bad corporates. How so? Well consider following:
Banks loss

SBI gave Rs.40 crores loan to Mr.Parajaay

He refuses to pay loan=bad loan/NPA.

Then SBI sells this bad loan file to an ARC company @Rs.35 crores.

Hence, SBIs loss is 40-35=5 crores. (actually more than 5 crores, if we count the
possible interest rate that he would have paid, if he had not defaulted. And loss figure
will be different if he had paid a few installments earlier. Anyways, lets keep the

loss at 5 crore for the moment.)

ARCs profit

Now ARC owns the NPA assets. (their investment Rs 35 crores)

Paraajay offers Rs.37 crores and ask ARC to sell the assets to his relative, friend or
proxy.

Hence, ARCs profit is 37-35=Rs.2 crores.

And yet Mr.Parajaay successfully saved Rs.3 crores (because originally he had to pay
Rs.40 crores to SBI, but he walked away by paying just Rs.37 crores!)

Few years back, CVC had held a meeting with Bank chairmans and CBI officers.
They alleged ^this type of mischief going on, in many loan default cases.

Now under the new provision: if ARC converts its debt into equity (shares), then
what will happen?
1. It is very unlikely that Parajaays company will start making huge profits (otherwise
it wouldnt be in bad loan problem in the first place!)

36

2. It is very unlikely that share-price of Parajaays company will go up in sharemarket.

(because it has negative publicity due to NPA).
Hence it is very unlikely that ARC will make huge profit out of this Equity.
Then Mr.Parajaay can simply offer them a way out : sell those shares to me, in my
friend,relative,driver or peons name @Rs.37 crores.
And ARC would agree, because 37-35=Rs.2 crores profit!
Side question

How would Mr.Parajaay arrange those Rs.37 crores?

Ans. If Mr.Parajaay is totally awesome then he wouldnt give 37 crores from his
own pocket. Hed just open another company, get new loan from second bank,
issue IPOs to get money from juntaa. Then Iski topi uske sar pe.
^This is (one of the many) reasons why Mr.Ratan Tata said following thing:

Overseas people go bankrupt or companies go bankrupt. Here they never dothey

continue to be sick and still operate. Then they are operating to kill you with
destructive competition (using predatory pricing etc.)

(Airline business) is proliferated by many operators, some of them in financial

trouble.

I would hesitate to go into the (airline) sector today in the sense that the chances are
that you would have a great deal of competition which would be unhealthy
competition.

Bank Employee unions are also against the Debt to Equity clause of SARFAESI
amendment. (When they had gone on strike to oppose Banking Amendment bill,
they also cited this Debt-equity reason as well.)
Central Registry

Previously, borrowers used to forged property documents and get loans from
multiple banks by giving them duplicate property documents as security.

So when borrower refuses to pay up loan, many banks would make claim for the
same property!

To fix this problem, Reserve Bank of India (RBI) setup Central Registry in 2011,
under SARFAESI.
37

This central registry has details of all properties against which loans have been taken.

Any person or bank can inspect records of this registry to make sure the mortgaged
property is genuine.

Official name: Central Registry of Securitisation Asset Reconstruction and Security

Interest of India (CERSAI)

Misc.Amendments
1. In public interest, Union Government can issue notification that xyz provision of
SARFAESI act may not apply or may apply with modifications to a class or classes
of banks or financial institutions. Suppose many textile exporters have taken loans
from banks but due to global recession they are not receiving payments and hence
unable to repay loans. In that case, Government can order notification
that SARFAESI will apply to all loans except those given for textile-export
business.
2. Earlier a borrower could approach Debt Recovery tribunal (DRT) to get stay order
against bank/ARC. New amendment says DRT cannot grant any stay order unless
both parties (Borrower vs. lender bank) are heard. This will ensure the process of law
is not misused by unscrupulous borrowers to get stay orders just to delay moneyrecovery.
3. Bill proposes to enable banks and financial institutions to enter into settlement or
compromise with the borrower. It also seeks to empower the Debts Recovery
Tribunal to pass an order acknowledging any such settlement or compromise.
Summary

SARFAESI empowers banks and other financial institutions to attach secured assets
of a loan defaulter and sale, auction or manage them without requiring court
intervention.

Parliament passed the amendment to SARFAESI Act and the debt recovery tribunal,

in Winter session 2012.

Salient features of new amendment

1. Bank

can buy for the NPA property if there are no other bidders.

multi-state co-operative banks can also take actions under

SARFAESI.

38

2. Borrower

cant get stay orders from DRT easily.

Can make settlement / compromise with Bank/ARC.

3. Asset reconstruction companies (ARC) can convert their debt into equity (fully or partially)
can prohibit or modify SARFAESIs applicability in public

4. Government

interest.

Apart from this amendment, Government has also increased foreign investment
limit in ARCs from 49 to 74%.
Mock Questions

Q1. Which of the following are Qualified Institutional buyers (QIB)?

1. ICICI
2. LIC
3. EPFO
4. FII registered with SEBI
1. Only 2 and 3
2. Only 1 and 4
3. Only 2 and 4
4. All of them.
Q2. Which of the following is not correct about SARFAESI act?
1. It mandates the Rural regional banks to lend atleast 15% of their total loans to rural
cottage industries.
2. It empowers banks to reduce their NPAs.
3. It empowers RBI to impose penalties on Bank responsible for NPAs.
1. Only 1 and 2
2. Only 2 and 3
3. Only 2
4. Only 1 and 3
Q3 Find Correct Statement
1. Foreign investment is prohibited in asset restructing companies.
39

2. To enjoy the priviledges under SARFAESI act, the Asset Reconstruction Companies
have to get themselves registered with SEBI.

1.

Only 1

2. Only 2
3. Both
4. None
Boring details
1. Recovery of Debts Due to Banks and Financial Institutions

Established Debt Recoverty tribunal (DRT)

and

Act of 1993 (RDBF)

2. Securitisation and Reconstruction of Financial Assets and

Helps banks recover money from bad loans.

Enforcement of Security Interest Act of 2002 (SARFAESI)

3. Enforcement of Security Interest and Recovery of Debts

Passed in Lok Sabha in Dec 2012, to amend

above two laws (RDBF + SARFAESI)

Laws (Amendment) Bill, 2011

Committees

SARFAESI was based on recommendation of these two Committees

1. Committee on Banking Sector Reforms (Narasimham Committee II), 1998
2. Restructuring of weak Public Sector Banks -Verma Committee.

Banking Business Correspondents Agents (BCA): Meaning, functions,

Financial Inclusion, Swabhimaan, Common Service Centres (CSC)
What is financial inclusion?

Give every poor man a bank account. And help him get a loan from banks.

Financial inclusion involves

1. Give formal banking services to poor people in urban & rural areas.
2. Promote habit of money-savings, insurance, pension-investment among poor-people.
3. Help them get loans at reasonable rates from normal banks. So they dont become
victims in the hands of local moneylender cum thugs.
40

1969

Lead banking scheme (LBS).

RBI assigns a district to a particular bank.

That Bank will be responsible for promoting banking services and financial literacy, in that
district.(=financial inclusion).

2005

2006

No frills account.

Poor people can open bank accounts with very low balance e.g. Rs.5 only.

Business Correspondents (BC) system. Discussed in this article.

Three important initiatives taken by RBI for financial inclusion:

Why Business Correspondents system?

If Financial inclusion means open bank accounts for poor people. Then whats the
big deal, just open a damn account!

Not so easy. India has around 6 lakh villages. Most of them dont have bank
branches.

Ok so Why cant banks open branches in every village?

No profit

Because Administrative costs will be high= Building rent, telephone, electricity, staff
salary, security guards.

On the other hand volume of business is very low in village areas=amount of

money deposited, loans taken.

Means there is No profit. Actually itll lead to heavy losses.

Reluctant staff

In many villages, there is no electricity, no good schools/drinking water, naxalite

problem= Bank staff doesnt want to serve there.

Therefore banks dont like to open branches below district HQ or Tehsil level. Now

comes the problem

Hardships faced by poors

A poor man lives in remote village.

This man has deposited some Rs.2000 in a bank @his tehsil.

Now, He wants to take out some money from his bank account.
41

So Hell have to make a trip for 10-20 kms =travel =time and cost.

He is illiterate so he doesnt know how to fillup bank slips, other paperwork. He

needs to ask for help here and there in the bank office.

And most banks/post-offices dont treat poor people with respect or priority like they
do with regular customers.

So, he may have to wait for many hours, move from this table to that table, before he
gets his money.

= he cannot return to his village and do his daily job/work.

= his one days income is lost.

Same process repeats, when this man wants loan to buy a new cow, pumpset, seeds
or fertilizers.

One the other hand, local money lenders in his village, give money quickly, without
asking many questions or requiring him to fillup two dozen application forms. (but
then they extract 36% compound interest from this poor man, thus making his life a
living hell.)

1. Banks

We cant open branches @every village, because its not profitable.

We cant make trip to nearest town to access banking facilities, because it is

2. poor people

inconvenient.

finally the problem emerges

So, whats the solution?

How about a middleman / agent between banks and the poor people?
Who/What is Business correspondent?

Business correspondents are bank representatives.

They help villagers to open bank accounts.

They help villagers in banking transactions. (deposit money, take money out of
savings account, loans etc.)

The Business Correspondent carries a mobile device.

The villager gives his thumb impression or electronic signature, and get the money.

42

Business Correspondents get commission from bank for every new account opened,
every transection made via them, every loan-application processed etc.
8.

farmers clubs

1. Non-Governmental Organisations(NGOs)

9.

Community based organisations

2.

Self Help Groups (SHGs),

10. Cooperatives societies

3.

Micro Finance Institutions (MFIs)

11. Village Knowledge Centres,

4.

Post Offices

12. Agri Clinics/ Agri Business Centers,

5.

Insurance agents

13. Krishi Vigyan Kendras

6.

Panchayats

14. Khadi and Village Industries units

7. Civil Society Organisations (CSOs)

15.

corporate entities with IT outlets in rural

parts.

Who can become Business correspondent for Banks?

Functions of Banking Business Correspondents?

1. Create awareness about savings.

2. Give advice to villagers, about how to save/invest money and how to arrange/manage
loans.
3. Help the villagers to open bank accounts.
4. Collect loan applications, forward them to bank.
5. Preliminary processing of loan applications for example: verification of persons
identity, home-address etc.
6. Help the Self Help Groups (SHG), to get loans.
7. Help the bank to collect EMIs and recover loan money.
Swabhimaan

Initiative by the Finance Ministry + Indian Banks Association

launched in 2011

To bridge economic gap between rural and urban India.

Objectives of Swabhimaan

Make banking facilities available to every habitat with a population >2000 (by March
2012.)

Banks will provide basic services like deposits, withdrawal, Kisan Credit Card
(KCCs) etc via Business Correspondents (BCs) also known as Bank Saathi.
43

Banks will also working together with the Unique Identification Authority of India
(UIDAI) for opening new bank accounts.

Government will send subsidies and social security benefits (pension etc.) directly to
beneficiarys account.

Beneficiary can withdraw the money from the Business Correspondents (BCs) in
their village itself.

Government has provided 500 million rupees to banks for taking these
^initiatives.(e.g. paying Commissions to Bank Saathi, their training cost, doing

paperwork with UID.)

Reforms in BC model
Common BC

Last year Finance ministry came up with this proposal:

India be divided into 20 clusters.

A common BC be appointed for all public sector banks operating in that geography.

Such a move would improve the economics of the BC model. (otherwise so many
BCs, fragmentation=nobody earning decent Commission=nobody improving the
service delivery.)

Reserve Bank of India (RBI) has permitted all business correspondents (BCs)
working for one particular bank, to conduct business for other banks as well.

FINO, Indias largest Business Correspondents company

FINO=Financial Inclusion Network and Operations (FINO).

It is promoted by various Public and Private sector banks and insurance companies
like LIC.

Last year, FINO become the common Business Correspondents company for all
public sector banks operating in Jharkhand.
Old system

1. A villager earns some cash under

MNREGA.
2.

Government gives cash to bank.

3.

Bank gives it to B.C.

New system

1.

All accounts will be maintained by core banking system.

2.

So, cash directly goes from Government > Bank >MNREGA

workers bank account.

3. Villagers will have the freedom to make their withdrawals

44

4. B.C. deposits it into MNREGA

from any BC they choose.

workers account.

NREGA payment

Kiosk Banking

The D.I.Y. (Do it yourself) banking services e.g. ATM, internet kiosks = still
expensive.

There is also lack of education + awareness in rural areas about such things.

So even if Government /bank installs such automatic ATM, internet kiosks=> most
of the time they just gather dust.

Therefore, technology-based self-service model (e.g ATM, internet kiosks) is not

useful at this stage.

And hence we need Personnel (these Business Correspondents=middlemen). Because

often villagers are illiterate, so they cant even fill up the forms for opening bank
accounts or loan-application or filling the deposit slips etc. Business Correspondents
are essential at this stage.

But again problem: The cost per transaction remains high. (Because Bank has to pay
commission to B.C.agent.)

Therefore, Chindu has suggested following solution for long term:

Migrate from banking correspondent model to Kiosk banking = mobile vans fitted
with ATM machines+ biometric devices.

Theyll provide banking services in remote areas.

BCA for Direct Cash Transfer?

In November 2012, Mohan announced Direct Cash transfer scheme. (will be covered
in detail, later)

Anyways, under Direct Cash transfer scheme, Government will directly deposit
payments, subsidies, scholarships, pensions etc into the beneficiarys bank account.

Sounds well and good? Well, here is the big problem

There are about six lakh villages in India.

And despite all these financial inclusion initiatives (of FINMIN+RBI), still only
~75,000 villages have a bank branch or business correspondent agents (BCA). So for

45

the poor people in remaining ~525000 villages still face the problems we saw` in
MNREGA payment withdrawl.

So Direct Cash Transfer will be #EPICFAIL unless each and every village is covered
under banking services.

Therefore, recently Chindu asked the banks to have at least one bank branch or
business correspondent agents (BCA) for every village or group of villages with
1,000 to 1,500 households.

In the villages without BCA, Department of Electronics and Information Technology

will install Common Service Centre (CSC).

This CSCs will serve as the BCA.

Right now, CSC will used only for opening new accounts of beneficiaries under the
scheme for direct cash transfer.

Only after banks install the software and complete other technical requirements for

cash transactions, the CSC will allow villagers to withdraw cash from their accounts.
Side note on CSC

Common Services Centers scheme= started in 2006.

Aim= set up of 100,000+ (one lakh) internet enabled centers in rural areas under the

National e-Governance plan (NeGP)

Mock questions
Q1. Financial inclusion involves
1. Covering rural poors in banking net.
2. Covering urban poors in banking net.
3. Providing jobs to poor people.
4. Providing vocational training to poor people.
5. Spreading banking awareness among poor people.
Ans.choices
1.

Only 1, 3 and 5

2. Only 1,2 and 5

3. Only 3 and 4.
4. All of them
Q2. Find incorrect statements about Swabhimaan scheme
46

1. It was launched by the Ministry of Social justice in 2009.

2. It aims to provide insurance coverage to laborers in unorganized sector.
3. It aims to provide financial inclusion to people residing in remote areas of India.
Ans
1.

Only 3

2. Only 1 and 2
3. Only 2 and 3
4. Only 1 and 3
Q3. Who among the following, is/are eligible to become Business correspondents
for banks?
1. Post office
2. Panchayats
3. NGO and Insurance Agents
4. Self Help Groups (SHG)
Ans
1.

Only 1 and 2

2. Only 2 and 4
3. Only 2 and 3
4. All of them.
Descriptive Questions
1. Swabhimaan (5m)
2. Swavalamban (5m)
3. Common Services Centers scheme (5m)
4. Write a note on National E-governance Plan (NeGP) (10m)
5. Define Financial inclusion. Discuss the initiatives taken to achieve financial
inclusion. (15m)
Interview
1. Apart from what is already being done, what new initiatives should be taken to
achieve 100% financial inclusion?

47

Banking Ombudsman: Meaning, functions, appointment, reforms

explained
From UPSC point of view, you dont need to memorize all minute details given in
this article (theyre provided for IBPS/SBI PO exam).
What is Banking Ombudsman (BO)?

He hears customers complaints against banks.

BO was first setup in UK.

In India, RBI started this scheme in 1995.

Appointment & Tenure

Earlier RBI used to appoint reputed persons from banking, finance, management,
legal etc. sectors as Banking Ombudsmen (BO).

But now RBI has reserved this BO post for its own Chief General Managers and
General Managers.

Tenure: 3 years at a time.

Reappointment: yes possible.

Jurisdiction of Banking Ombudsman?

Banking Ombudsman (BO) Scheme applies to whole of India (including Jammu and
Kashmir).

Banking Ombdusmen have jurisdiction over

1. All commercial banks (scheduled and non scheduled, public and private)
2. Regional rural banks
3. scheduled primary co-operative banks
4. NBFCs (BOs Jurisdiction limited to loan part.)

Banking Ombudsman is not a replacement of Consumer forum/courts. He merely

supplements them.

Banking Ombudsman deals with matters less than or equal to Rs.10 lakhs.

Here are some examples situation where BO can help you:

Regular banking

1. Demand draft, cheques, pay orders etc. not issued on time. (or not paid on time)
2. Credit card related complaints (e.g. bank putting hidden charges. Your credit card
was stolen but bank did not disable it even after you called them.)
48

3. You asked the bank to close your account / credit card but they are not doing it.
4. Bank refuses to open your account without giving valid reasons.
5. Bank closes down your account without valid reasons.
6. Government / your company deposited salary / pension in your account but the bank
is not releasing it on time.
7. Bank is taking out money from your account in pretext of some flimsy charges.
8. Branch office notice board says 10.30 to 5 but staff refuses to provide you service
after 3.30PM.
9. NRIs having bank account in India and facing problems about remittances etc. (e.g.
he deposited money from America, but his parents are not given money on time.)
Loans

1. Your loan application is not processed in time.

2. Your loan application is rejected without valid reasons.
3. You loan application is accepted but money is not released in time. (and still bank
is charging interest on it!)
4. Bank doesnt follow RBI guidelines regarding loan-recovery agents (e.g. bank hires
some criminals to bully and harass you.)
5. Bank doesnt follow RBI guidelines regarding loan interest rates.
Procedure for getting justice?

Youre unhappy with the bank for xyz reason. But you cannot directly approach BO.

First youve to give written complaint to the concerned bank that Ive so and so
problem.

and IF the bank doesnt deal with your complaint within one month, then you can
approach BO.

On the other hand, you cannot approach BO if the matter is older than 1 year.

You dont need lawyer to approach BO.

You dont need to pay any fees/ stamp papers for approaching BO.
You cant approach BO in following situations

1. Matter is higher than Rs.10 lakh.

2. If the matter is pending before any other court, tribunal, forum then you cannot
approach BO.
3. If any other court, tribunal, forum has already passed an order on the same matter.
49

4. You cannot approach BO for frivolous or vexatious complaints (e.g. AC or water

cooler was off when I went to the branch. Someone jumped the queue but security
guard did nothing.)
How does BO settle complaint?

Upon receiving your complaint, first Banking Ombudsman will try to solve the
matter via settlement /arbitration (=try to achieve a compromise, conciliation or
amicable solution between bank and its customer.)

This has to be done within one month after receiving complaint.

But if either party (customer/bank) is not accept this

(compromise/negotiation/settlement) then after 1 month, Banking Ombudsman will
have to pass order.

Now, hell ask both parties to present their case/documents etc. And hell pass the
order accordingly.

Two things can happen

1. He rejects your complaint (=bank is not guilty). OR

2. He finds the bank guilty and orders punishment.
Punishment

Banking Ombudsman (BO) can order the Bank to compensate the actual money loss
OR Rs.10 lakh (whichever is lower).

In case of Credit card related cases, BO can order the bank to pay additional fines

(upto Rs.1 lakh) for the mental harassment caused to the customer.
Appellate authority for Banking Ombudsman

If either party (Bank / Customer) is unhappy with Ombudsmans order, then they can
approach the Appellate authority (=Deputy Governor of RBI.)

1. If youre the customer, you can directly approach him.

2. But if youre the Bank, then you can approach him only after getting permission
from your Chairman/CMD/MD or CEO. (This ensures Banks lower staff doesnt
automatically go for frivolous appeals against every order).
Reforms and Issues

Banking Ombudsman scheme was originally started in 1995.

But in subsequent years, RBI made many reforms in it, some of them are:
originally

After reforms

50

Reputed persons from law, finance,

Only RBIs own officers can become BO. (=outsiders not

banking, Management, administration etc. can

allowed for this post.)
become BO.

Banks provided Money+Staff for

Ombudsmans office in their area.

RBI itself gives the money and staff to Ombudsman.

He only accepted paper complaints.

Accepts Paper + online complaints.

Regional Rural Banks put under jurisdiction of Ombudsman.

Ombudsman can look into internet-banking related

complaints.

Banks are required to display salient features of the scheme

for common knowledge of public. (e.g. posters in the branch

office.)

Banking Ombudsman: Before and after reforms:

#1: Netbanking frauds

According to RBIs scheme, Ombudsman can also look into internet banking related
matters.

But Ombudsmen across the country often wash away their hands and ask the victim
to wait for police investigation to finish.

And on the other hand, Banks donot take responsibility saying net banking frauds as
most of them happen due to customers negligence and cyber-crime.

So ultimately customer has to depend on the police to get justice.

#2: Need more BOs

A Committee formed by RBI has recommended that instead of having only 15

Banking ombudsman across country, have one BO appointed for every bank.

The upper limit (of Rs.10 lakh) should be increased.

51

Location of Offices

Banking Ombudsman has total 15 offices throughout India

Those whore preparing for IBPS/SBI PO should prepare this table for MCQs, others
need not worry much.

1. Abad

Gujarat + UT of Diu, Daman, Haveli

2. Banglore

Karnataka.

3. Bhopal

MP+Chattisgarh

4. Bhuvneshwar

Odisha

5. Chandigarh

HP+Punjab+part of Haryana

6. Chennai

TN+Andaman, Nico

7. Guwahati

All north Eastern states minus Sikkim

8. Hyd.

AP

9. Jaipur

Raj

10. Kanpur

UP (some areas excluded though)

11. Kolkata

WB+Sikkim

12. Mumbai

Mah+Goa

13. Delhi

Delhi+J&K+part of UP+Part of Haryana

14. Patna

Bihar+Jharkhand

15. Thiruvanthapuram

Kerala+Lakshdweep+Puducherry

52

Regional Offices of Banking Ombudsman

Mock questions

Q1. Which of the following falls under the jurisdiction of Banking Ombudsman
1. Regional Rural Banks
2. Scheduled commercial banks
3. Non Scheduled primary co-operative banks
Answer choice
1.

Only 1 and 3

2. Only 2 and 3
3. Only 1 and 2
4. All of them.
Q2. Find correct statements
1. BO is selected and appointed by Finance ministry.
2. BOs staff and office expenditure are charged on the consolidated fund of India.
1. Only 1
2. Only 2
3. Both
4. None
Q3. Find incorrect statement
1. If the promises made by a sales agent, are not kept by the bank, you cannot approach
BO.
2. If the matter involves loss of more than Rs.10 lakhs, you cannot approach BO.
3. The appellate authority for BO is High court of the concerned State.
4. There is one separate BO for Union Territories of India.
Answer choices
1.

Only 2

2. 2 and 4
3. 1,3 and 4
4. All of them.
53

Q4. Which of the following are included in the purview of BO?

1. Net banking
2. Credit cards
3. ATM cards
4. Harassment by Loan recovery agents
Answer choices
1.

Only 2 and 3

2. Only 1, 2 and 3
3. Only 2,3 and 4
4. All of them.

Monetary Policy
Prologue

Next article is about RBI appointed Urjit Patel Committee on Monetary policy
framework.

But before dwelling into that, we must recap the basic concepts of what is monetary
policy: its tools and limitations. Otherwise Urjit wont make much sense.

Hence in a way, this whole article is a prologue to next article.

Why RBI and Why Monetary policy?
Initially people used barter system for trading. But the barter system had many
problems (click me). Therefore, people switched to money system.

Financial intermediates = middlemen who help in the circular flow of money

between households and business firms.

There are two types of financial intermediaries: banking institution and non-banking
financial institutions.

RBI controls (all) banks and (some) non-banking financial institutions.

RBIs main job is to control Money supply in this game, and thereby fight inflation
and deflation.

Inflation = price rise = bad for economy, you know that by common sense.

54

But Deflation = price decrease = we can buy things at a lower price. Isnt that
good? Why is deflation bad for economy?

Ans. Every business has fixed cost of production say minimum light bill, phone
bill, office rent, staff salary etc. So, if prices keep falling and falling (say of Nano
car), then car marker will suffer losses. He has no motivation to expand business. He
wants to cut down his production costs, by firing some of the employees= less new
jobs created= unemployment = social unrest.

If prices of everything fall- then custom duty, VAT, excise duty, service tax- their
collection will also decrease. Then government has less money to spend on
education, healthcare, social sector, defense, law and order = poverty, disease, crime.

by the way
TERM

meaning

Does RBI want it?

DEFLATION

fall in the prices (and fall IN employment.)

No.

DISINFLATION

Fall in the prices but without causing unemployment.

yes (while fighting

inflation)

stagnation + inflation
STAGFLATION

No

prices and wages rise

but people cant find jobs, companies cant find customers.

policy to stop the fall in price levels, but without causing rise in
yes

REFLATION
the price levels (inflation).

What is monetary policy?

Policy made by the central bank.

To control money supply in the economy. (and thereby fight both inflation and
deflation).

RBI implements monetary policy using certain tools. Two types

quantitative tool

qualitative tools

55

Lets start from here.

Quantitative Tools
#1: Reserve Ratios (SLR and CRR)
SLR

A Bank has to set aside this much money into gold or RBI approved securities.

23%

A Bank has to set aside this much as reserve. Bank cannot lend it to anyone. Bank earns no
CRR

4%
interest rate or profit on this.

Reserve ratio: SLR, CRR

Suppose economy is showing inflationary trend. Prices of all goods and services are
increasing day by day.

How can RBI stop it using Reserve ratio as a tool?

In this case, RBI should RAISE the reserve ratios.

Observe:
Right now

People deposited total this much money in SBI (net demand & TIME liabilities NDTL)

100 cr.

CRR (4%) [SBI has to keep this much cash aside for reserve]

-4 cr

SLR (23%) [SBI has to invest this much money in RBI approved securities]

-23 cr.

Money left with SBI

100-4-23=73 Cores.

Say RBI raises SRL to 40% and CRR to 15% then?

Originally

100 cr

SLR 40

-40

CRR 15

-15

56

Money left with SBI

45 cr.

You can see, when Rajan has raised reserve ratio, money with SBI is reduced
(from 73 crores to just 45 crores.)
What will be its implication?

Imagine youre a money lender. Youve 100 crore rupees and you must make Rs.1
crore profit in a year.

Obviously, you should lend it @1% interest rate. (because 1% of 100 crore = 1
crore.)

But what if youve only 2 crore rupees, and you still want to make Rs.1 croer profit
in a year?

Now you must lend it @50% interest rate. (because 50% of 2 cores = 1 crore.)

Observe that as money decreased (from 100 to 2), loan interest rate increased (from
1% to 50%).

Same happens when SBI is left with less money (after RBI increases reserve
ratio).
Lets prepare a flow chart.
Situation: Economy has inflationary trend. Prices of goods and services
increasing every day.
Solution: RBI raised reserve ratio (CRR, SLR)
Result: SBI is left with less money to lend.
Consequences:
1. SBI raises its loan interest rate
2. Businessmen borrow less money from SBI
3. Businessmen donot start new business. Donot expand existing business
4. Result=Less jobs. Even existing employees discharged. If anyone remains in the job,
he doesnt get pay raise. He starts cutting down unnecessary expenditure (e.g. buying
two newspapers, getting his shirts ironed, drinking tea @4PM in office and so on.
Thus even paper-wall, dhobi, chai-walla- everyones income reduced.)
5. Result= Less income (Because of above reasons)
57

6. Result= Less demand of goods and services (because less income).

7. Ultimately shopkeeper will bring down the prices to attract people into buying more
things.
Thus inflation is reduced.
You may doubt- what about supply side bottlenecks, what about cost push and
demand pull inflation : Im not going into all that details at the moment, else this
article will become longer than five kilometers.
Lets just prepare a summary table:
Policy

dear money

cheap money

Tool

To fight inflation

To fight deflation

Reserve Ratio (CRR, SLR)

Increase them.

Decrease them.

Moving to the next (Quantitative) tool. Under monetary policy

#2: Open Market Operation (OMO)

Open Market Operation= when RBI starts buying/selling government securities to

control money supply.

Government securities= piece of paper. It says something like this give me Rs.100,
Ill give you 8% interest rate for next ten years and after that Ill repay the principle
of Rs.100. This is how government borrows from others.

Situation: Economy has inflationary trend. Prices of goods and services increasing
every day.

Solution: RBI starts selling government securities in open market.

Result: SBI buys them and thus SBIs lending money is reduced. Wait. How?

Imagine Rajan is selling sabzi (vegetables). If SBIs chairman Arundhati Madam

goes to buy vegetables. Obviously madams money will decrease when she buys
vegetables.
Then same as usual:

58

1. SBI left with less money to lend.

2. SBI raises its loan interest rate (to keep profit margin same)
3. Businessmen borrow less money from SBI.
4. Businessmen donot start new business. Donot expand existing business
5. Less jobs
6. Less income
7. Less demand
8. Ultimately shopkeeper will bring down the prices to attract people into buying more
things.
Thus inflation is reduced.
During deflation, RBI will do the reverse. (i.e. RBI buys Sabzi from SBI). How
will it stop deflation? Think in your head.
Lets update our table
Policy

dear money

cheap money

Tool

To fight inflation

To fight deflation

Reserve Ratio (CRR, SLR)

Increase them.

Decrease them.

Open Market Operation (OMO)

RBI sell securities

RBI buy securities

Mock Question

In 2013, UPSC walla asked a very chillar question from this topic.
In context of Indian Economy, Open Market Operation refers to
1. Borrowing by scheduled banks from RBI
2. Lending by commercial banks to industries and trade
3. Purchase and sale of government securities by the RBI
4. None of Above
Whenever you face a GS/GK type MCQ, Youve three choices
59

Skip

If you dont know the answer, Just leave it instead of risking negative mark.

Attempt

Correct answer is Opt C.

It means youve unsure of the answer. 50:50. So you mark the question number (say 45), at
Mark n Review.

the back of your question paper. At the end of exam, if youre left with 10-15 free minutes.
You look at the question again, and try to solve it.

So, should you put above question in mark n review?

No.

Because its a definition based question. If you dont know the definition of OMO
you might tick a wrong answer and fail. Most of the sincere players fail in
prelims because of this reason. They push their luck in negative marking to
overcome an imaginary cutoff and thus dig up their own grave. (especially during
last 10-15 minutes of the exam.)

Moral of the story: never put fact/definition type MCQs in Mark-n-Review.

Lets solve a bit more complicated MCQ from 2012s CSAT paper.
Q.Which of the following measures would result in an increase in the money
supply in economy?
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank.
4. Sale of government securities to the public by central bank.
Answer choice
1. Only 1
2. 2 and 4
3. 1 and 3
4. 2, 3 and 4

60

Whenever you face such multiple statement type MCQs, always use elimination
method. First find a statement that is definitely right or definitely wrong and
eliminate choices accordingly.

Focus on first statement Purchase of government securities from public by

central bank: will it increase money supply in the system?

Imagine Rajan puts an ad in newspaper: bring your Sabzi (vegetables), Ill buy it.
Junta gives him their own veggies, Rajan gives them money. (a classic buy and sell).

Ultimate result: money supply increased in the system- because junta got the money.
Meaning #1 definitely correct.

If you think it on technical terms. Central bank purchases government

securities=OMO (Open market operation), where money shifts hands from RBI to
people.

Hence money supply increased. (In reality, money doesnt go to aam admi directly,
but those bankers and non-banking institutions who participate in OMO). Anyways,
#1 is right, Eliminate choices that do not have #1

1. Only 1
2. 2 and 4
3. 1 and 3
4. 2, 3 and 4
Now the final answer depends on whether statement #3 is right or wrong?

Statement #3 says Borrowing by government from the central bank. (So, will it
increase money supply?)

How does Government borrow from Central bank? Does Mohan just callup Rajan
and demand 1 lakh crores? No. Mohan will have to give Rajan that much government
securities (vegetables) and Rajan will give him cash.

Is money supply increased? Yes Mohan sold veggies to Rajan and got Money.
Whenever Rajan buys veggies and pays the money supply is increased. (this is
similar to Open Market operation)

Besides, Mohan can then use money to pay salaries of government staff, pay for railroad-bridges and other infrastructure projects, pay for MNREGA and so on.
Therefore Answer C: 1 and 3 correct.
61

Counter- argument?

What if Rajan subsequently sells those (Mohans) securities to bankers. Then

bankers money reduced. Hence #3 is wrong. Therefore final answer A only 1.

So, whats the final answer: is it A or is it C?

Ultimate judge= UPSCs official answer key uploaded on their site.
In 2012s Question paper Test series A, this is Q77: and its official answer is
C. Therefore, both 1 and 3 are correct.
Anyways, what to do in the exam?
Skip

If you dont know the concept better skip.

Attempt

This question is attemptable if you dont drag the logic too much in statement #3.

Yes, it can be put under mark and review because this is not an absolute fact/ absolute definition
Mark n

type MCQ. If you apply some concepts, you can eliminate wrong choices. But still if doubt persists in

Review.

the mind (e.g whether Statement 3 is right or not) then its always safe to skip and avoid negative
marking.

By the way, What about Statement #2: Deposit of currency in commercial banks
by the public. (Will it increase money supply or not?)

Viewpoint 1: yes. Because bank can used it to expand loanable credit. (as explained
in Money creation topic in Class 12 NCERT Macroeconomics page 39 onwards).

Viewpoint 2: no. (Because Bank will have to put some money aside as CRR- so that
much money is less in the system.)

Either way it doesnt change the answer. Because We know that statement 1 is
definitely correct. And there is no option where (1,2) are given simultaneously.
Anyways, Moving onSo far, RBI has two tools under monetary policy:
1. reserve ratios (SLR, CRR)
2. Open market operation.
62

Third and the most important quantitative tool is

#3: Policy Rate

Policy rate= in case of India its Repo rate. Before moving further, lets refresh
our concepts of Bank rate, LAF, MSF, Repo and Reverse repo.
Bank Rate

When banks borrow long term funds from RBI. Theyve to pay this much interest
rate to RBI. [Note: different books give different explanation of Bank Rate. I've
used NDTV's definition]

At present, Bank rate= 9%

Collateral: nothing. (Bank can borrow money without pledging government

securities to RBI)

Bank rate is not the main tool to control money supply these days.

Nowadays, RBI uses LAF Repo rate as the main tool, to control money supply.

Ok then Whats the use of Bank rate?

Penal rates are linked with Bank rate. For example, If a bank doesnt maintain CRR,
SLR as per the prescribed limit.

Then RBI can impose penalty interest on such notorious bank.

At present, Penalty rate = Bank rate + 3% (or 5% in some cases)

Meaning if Bank rate = 9% then penalty rate=9+3=12%

Anyways, what if RBI wants to fight inflation using bank rate as a tool?
Obviously they should increase bank rate. That way it becomes harder (more
expensive) for banks to borrow from RBI.=> SBI increases its loan rates (to keep
the profit margin same). Result?

Less people get home loan, bike loan, business loans.

Less business expansion

Less jobs

Less incomes

Less demand

Ultimately shopkeeper will bring down the prices to attract people into buying more
things.
63

Thus inflation is reduced.

Lets update our (stupid) table
Policy

dear money

cheap money

Tool

To fight inflation

To fight deflation

Reserve Ratio (CRR, SLR)

Increase them.

Decrease them.

Open Market Operation (OMO)

RBI sell securities

RBI buy securities

Bank rate

Increase

decrease

Liquidity Adjustment facility (LAF)

Liquidity Adjustment facility

RBI started this in 2000. You can imagine it as a Adda/gambling den/gang-hideout

where RBIs clients gather, consumer desi liquor, play cards, watch item songs and
borrow money from RBI (or lend Money to RBI).

By the way, who are the clients of RBI?= Central and state governments, Banks and
non-banking financial institutions (NBFI). NBFI further includes:

AIFI (all India finance institutions) NABARD, SIDBI, EXIM Bank and National
Housing Bank.

Primary dealers (Morgan Stanley , Goldman Sachs, JP Morgan Chase, Standard

Chartered Bank, HSBC etc.)

Non-Banking financial companies.

Anyways, Under this LAF adda, RBI has two tools:

If client borrows money from RBI (for short term) then client has to pay this much interest rate to

Repo
RBI. At present Repo is 8%. (article written on 29th Jan 2014)

If client lends money to RBI (for short term) then RBI has to pay this much interest rate to client. RBI
Reverse

doesnt like headache. So they made a simple formula: Reverse repo rate= Repo MINUS 1%=8-

Repo
1=7%.

64

Collateral:

Problem with running a adda/gambling-den = sometimes client drinks too much

desi liquor and passes out on floor. Sometimes he even dies because of
hooch. Sometimes police raids the den, and clients run away with cash and
register.

If such things happen, Rajan will be at loss. So, he demands government securities
as collataral. So even if client doesnt repay money on time, Rajan can sell those

securities (in open market operations) and recover money.

LAF Repo Rate
Lets get a bit technically correct now. Observe following image

Scenario

SBI chairman Arundhati mam wants to borrow Rs.100 crore (for short term).

She gives her stash of government securities to Rajan.

Rajan gives her Rs.100 crore.

Madam Also signs an agreement

I, Arundhati Bhattacharya, agree to buy same securities from Rajan, at 108 crores
after 14 days.

Notice that she has agreed to re-purchase same securities from Rajan. Therefore its
called Repo.

And how much interest rate did she pay on this loan? [108-100]/100=8%. Thats
our repo rate.
65

Important:

Recall that SBI also has to keep part of her money in RBI approved securities (under
SLR).

So Madam cannot USE those government securities to borrow under Repo Rate from
Rajan.

That leads to a new topic

Marginal Standing facility (MSF)

MSF mechanism is same as repo. But some differences

LAF (Repo)

MSF

Rajan says dont come here unless you

want to borrow minimum Rs.5 crores.

Minimum Rs. 1 crore.

All clients are welcome i.e.

Central and state governments

Banks be it commercial bank or

RRB or cooperative bank

Sorry. Not all clients welcome here.

Only scheduled commercial banks can borrow under this

window. SBI, PNB, BoB, ICICI etc.

Non-banking financial

This MSF facility is specially created to help them solve shortterm cash mis-match.

institutions.
You (bankers) cannot pledge securities
from SLR quota to borrow from this

Can use securities from SLR quota.

window.

Maximum 2% of NTDL. To put this in crude words, if SBI received

No limit. You may borrow as much as
100 crores from aam-admi under savings account, current account,
you want. (as long as you have
fixed deposit etc. then SBI can borrow only upto Rs.2 crores from
government securities to pledge to me.)
RBI.

MSF = Repo Rate +1% = 8+1=9%. (earlier this margin of 1% used to

Rajan decides Repo rate (8% right now)
be higher. But nowadays just 1%!)

66

for those who still have doubt about Repo vs MSF:

for repo borrowing, bank will need to pledge securities to Rajan. But bank cannot
use SLR-reserved securities for this.
so, imagine if a bank is in dire need of cash, but doesnt have spare government
securities- then they can borrow using MSF by pledging those SLR securities.
(and under MSF window, Rajan will demand 1% higher than Repo as one type of
punishment for pledging SLR securities.)
Reverse repo Rate

Although self-explanatory. But lets check

Repo = clients borrow from Rajan and pay this much interest rate. (short term loan)

Reverse repo= when Rajan himself borrows from clients, then he has to pay this
much interest rate to clients.

Collateral = yes. What if police raids this gambling-den, and Rajan runs away to
Nepal? Clients can sell Rajans Government securities and recover their money.

Reverse repo = Repo MINUS 1% = 8-1% =7%.

Note: in official parlance, they call percentages in basis points so 1%=100 basis
points. So in that official language, Reverse repo = Repo MINUS 100 basis points.

Enough cheap jokes. What have we learned so far?

That Rajan controls money supply using monetary policy.

Under Monetary policy, Rajan has various weapons (or tools)

1. Reserve ratios (SLR, CRR)
2. OMO: Open market operation
3. Rates: Bank rate, LAF (Repo, Reverse repo), MSF.

We already know how to apply SLR, CRR and OMO to fight inflation (and
deflation.) let me paste the table again.
Policy

dear money

cheap money

Tool

To fight inflation

To fight deflation

Reserve Ratio (CRR, SLR)

Increase them.

Decrease them.

67

Open Market Operation

RBI sell securities

RBI buy securities

Bank Rate

increase it

decrease it

Repo rate

increase it

decrease it

(OMO)

its value is linked with Repo, hence cannot be increased/decreased

Reverse Repo
independently.

its value is linked with Repo, hence cannot be increased/decreased

Marginal Standing Facility
independently. Besides MSF= temporary firefighting, cash mismanagement.

We learned that Rajan doesnt use Bank rate much, to control money supply.

We learned that Rajan doesnt decide Reverse repo and MSF. (theyre automatically
-1% and +1% of Repo rate).

Thus the only thing Rajan has to decide under monetary policy= Repo rate.
Therefore, Repo rate is called the policy rate

Lets revisit out flow chart:

Situation: Economy has inflationary trend. Prices of goods and services increasing
every day.

Solution: Rajan increases Repo rate. (say from 7.75% to 8%).

Result: it becomes expensive for SBI to borrow from Rajan. Theyll increase their
own rates as well.

Wait. How?

Just like how things roll in Onion biz.

If prices of Onion rise in Maharashtras wholesale yard (in Lasangaon), then
immediately, retail veggie @Ahmedabad will also raise their onion prices to keep
the profit margin same.
Whatll be the consequences (if repo rate is hiked / increased)?

68

Consequences:
1. SBI raises its loan interest rate (to keep profit margin same)
2. Businessmen borrow less money from SBI.
3. Businessmen donot start new business. Donot expand existing business.
4. Less jobs
5. Less income
6. Less demand
7. Ultimately shopkeeper will bring down the prices to attract people into buying more
things.
Thus inflation is reduced.
Policy

dear money

cheap money

Tool

To fight inflation

To fight deflation

Reserve Ratio (CRR, SLR)

Increase them.

Decrease them.

Open Market Operation (OMO)

RBI sell securities

RBI buy securities

Policy Rate (Repo Rate)

Increase it

Decrease it

Repo Rate in recent years:

Lets observe with a graph: how RBI fought inflation/deflation in recent times
using Repo rate as the main-weapon of monetary policy.

69

From above above graph, you can see RBI has frequently changed its repo rate
to combat both inflationary and deflationary trend. But Youd agree that inflation
has not been contained. No matter what number juggling or statistical
interpretations are given- the hardship of common man has not stopped- be it
milk, petrol, onion, LPG anything.

Agreed that prices of onion, sugar, pulses and food are subject to vagaries of
monsoon and black marketeering. Rajan cannot do anything about it.

Agreed that crude oil prices are subject to rupee-Dollar exchange rate, external
factors and governments de-regulation of their prices. Rajan doesnt have much
control over this.

But still even in the non-food, non-fuel type commodities- RBIs monetary policies
have failed to curb inflation. WHY? Observe the following image.

70

Suppose Vijay Mallay got 100 crore loan from State Bank of India. If you trace the
source of that money, itll turnout 60-70 crores came from banks savings
account, fixed deposit etc. Rajan lends money in repo rate yes, but that doesnt
mean banks depend only on Rajan to arrange the cash for its clients.
Suppose Rajan reduces repo rate from 8% to 5%. Banks are not legally required
to reduce their loan interest rates.

The current system is following:

Banks are free to decide their base rate. E.g. SBIs base rate is 10%.

It means SBI wont loan money to anyone at an interest rate lower than 10% (except
those farmers under Interest subvention scheme.)

SBI will link all of its loan products with Base rate. For example

SBI Base rate =10%

Calculation

Result

Car loan

0.75% above Base rate

10.75%

Two wheeler loan

8.25% above base rate

18.25%

Education loan (upto 4 lakh)

3.5% above base rate

13.5%

71

Home loan for women (upto 75 lakh)

0.10% above base rate

10.10%

Meaning if SBI changes her Base rate then all of above loan interest rates will
change automatically.
If Rajan changes his repo rate, will SBI change her base rate?
Not always.

Because those common men are the main suppliers of money to SBI.

RBI is not the main supplier of money to SBI.

SBI will only change its base rate, when she feels necessary for its own profit / loss
compared to its competitors.

Does it mean Repo rate system is bogus and ineffective?

Not always.

In developing countries like India, most people park their money in only four things:
savings account, fixed deposit (FD), provident fund and LIC. Weve mutual funds,
weve NPS, weve ULIPs, weve Rajiv Gandhi equity savings scheme

but most people (particularly the older generation) feels insecure in into such new
things. Therefore lot of money flows into Savings accounts and fixed deposits=
SBIs main source of money.

But, In advanced economies, like USA, people dont invest large portion their
income in savings account or FD. Theyve variety of investment options. So, for
those American banks, their own Central bank (US Feds) is a significant money
supplier.

Hence US Feds monetary policy shows faster impact on their American Banks,
THAN Rajans monetary policy on Desi banks.

Monetary Policy: limitations

In developing countries, Monetary fails to bring quick results because
1. People dont have many investment alternatives. Commercial banks have large
deposits. Rajan is not the main or even prominent money supplier for these banks.
Whatever Rajan does, its effect will be felt only after 6-8 months but by that time,
72

new factors would cause another rise in inflation and Rajan will have to start from
scratch again.
2. Non-Monetized economy: in rural areas, many transactions are still of barter nature.
(E.g. kiranawalla cum middleman supplies seeds, pesticides, fertilizers- in exchange
of share in farmers produce.)
3. Lack of financial inclusion. Since most people are not in the banking net. They rely
on Shroffs and moneylenders. Many of them circulate the black money of cops and
politicians, and charge 36% interest rate on loans. Rajan has no control over them.
4. Monsoon uncertainty, cyclone, flood, draughts and their effect on food production.
Food inflation =>newspaper walla, washerman, barber, car mechanic everyone will
raise their service fees to accommodate their raised cost of living. Rajan has no
control over them.
5. Crude oil and gold import + negative effect when rupee weakens. Rajan can try to
bring 1$=Rs.65 to $1=63 Rs. But he has not enough forex reserves to bring
$1=Rs.50.
6. Fiscal deficit, illogical schemes. e.g MNREGA worker digs a temporary road. After
first rain, t he road is wiped out= physical infrastructure added to economy no.
Wages raised..yes. = this mismatch leads to more inflation.
7. Subsidy leakage, Black money, underground economy.
8. And most importantly, because Rajan uses Multi-indicator approach, he focuses on
WPI (minus food and fuel). Thats why Urjit Patel recommends him to target CPI.
More on that in next article.
So far, we learned that RBI has two sets of tools/instruments under monetary
policy:
Quantitative tool

Qualitative tools

1. Reserve ratios
2.

Well see them in a moment

OMO

3. Policy rate (Repo Rate)

Qualitative Tools

73

#1: Margin Requirements/ LTV

Mallya wants to borrow from SBI. He pledges his companys shares worth Rs.100
crores as collateral.

For such loans, Rajan can prescribe margin, say 65%.

In that case even if Mallya pledges 100 crores worth shares, SBI can give him 10065=only 35 Crore rupees as loan.

Using this tool, Rajan can control money supply. e.g. during inflation, he should
increase margin requirement, so Mallya can borrow less=> less job=>less
income=>less demand=>prices reduced.

If Rajan changes repo rate, it is not compulsory for SBI to change her loan interest
rates. (we saw how Alok Nath keeps giving money to SBI, so they are not entirely
dependent on Rajan.)

But if Rajan changes margin requirements, then SBI and all other banks must obey it.

In other words, this tool has direct impact on money supply.

#2: Consumer credit regulation

Suppose Nano car sells @1 lakh and Rajan has made rule that downpayment cannot
be less than 30%.

It means customer must bring Rs.30,000 from his pocket and bank can only give him
maximum 70000 as loan.

How can Rajan fight inflation with this tool?

Increase downpayment from 30%=>50% (meaning bank can give less loan.
Customer himself has to arrange lot of money from his own pocket)

Rajan can make rule banks cannot accept EMI less than 5000 on car
loan. Observe:

Case #1: 100 EMIs worth 1000 each = 1,00,000. (ignore interest rates)
Case #2: 20 EMIs worth 5000 each=1,00,000. (ignore interest rates)
In case #2: some of the lower-middleclass families may postpone their decision
to purchase nano car (Because they cant afford higher EMIs.)

74

Result= less demand=>prices reduced. (indirectly- because car mechanics get less
work, number-plate painters get less orders etc. so they reduce fees to attract new
clients and retain existing clients.)

Thus, Rajan can control money supply by changing downpayment and

installment (EMI) rules.

#3: Selective credit control

Under this, Rajan can specifically instruct bankers not to give loans to traders of
certain commodities e.g. sugar, gur, edible oil etc.

even if the said trader is ready to mortgage his shares/bonds/factory/machine/vehicle

anything.

this prevents speculations/ hoarding of commodities using money borrowed from

banks.
#4: Moral Suasion
Here Rajan tries to persuade the bankers to do xyz thing. Example
1. Please reduce giving automobile loans- instead park your money in government
securities. (above the SLR requirements.)
2. Ive reduced my repo rate, now you also reduce your base rate.
Rajan will try to influence those bankers via- direct meetings, conference, giving
media statements, giving speeches @public seminars, university convocations
etc. (even where bankers are not present.) Hell do so, to build a public opinion,
media opinion and influence those bankers by making them feel guilty.

Rationing

Found in Planned economies/communist nations.

Here central bank will decide upper limit to loans in each sector (heavy industries, service,
agriculture, small-scale etc.)

of credit

So once that quota is over. Additional loans cannot be given to that borrowers from that
sector. This also controls money supply.

Direct

Means RBI gives punishment to erring banks. Punishment can involve: penal interest, refuses to

action

lend them money from LAF etc. and in worst case even cancels their banking license.

Lets recap

Monetary policy tools: Quantiative vs Qualitative

75

Quantitative

Qualitative

1.

Margin requirements / LTV

2.

Consumer credit regulation

3.

Selective credit control

4.

Moral Suasion

5.

Rationing of Credit

1. Reserve ratios (SLR, CRR)

2.

Open Market Operation

3. Policy rate (Repo Rate)

6. Direct Action
Indirect in nature. (Even if Rajan changes repo rate, its not
Direct in nature. (e.g. those margin
necessary SBI will immediately change its base rate / loan interest
requirements)
rates.)

Selective- can affect money supply in a

General- they affect money supply in entire economy- be it
specific sector of economy e.g.
housing, automobile, manufacturing- everything.
automobile.

Lets solve an Official MCQ from UPSC 2012 Question paper

Q. RBI Acts as bankers bank. This would imply which of the following?
1. Other banks retain their deposits with RBI
2. RBI lends funds to commercial banks in the times of need.
3. RBI advises commercial banks on monetary matters.
Correct Statement
1. Only 2 and 3
2. Only 1 and 2
3. Only 1 and 3
4. 1, 2 and 3
Approach:
Whenever you face such 3 statement MCQ or 4 statement MCQ, Always use
elimination method. First you find out a statement that is definitely right or
definitely wrong. In above case, we can see #2 is definitely right. RBI lends funds
to banks in the times of need (Repo, MSF)
76

So lets eliminate choices that dont involve statement #2

1. Only 2 and 3
2. Only 1 and 2
3. Only 1 and 3
4. 1, 2 and 3

This did not help much. We still have three choices left. Observe statement #1: Other
banks retain their deposits with RBI. That is correct with respect to cash reserve
ratio. CRR is one type of deposit that banks make to RBI. (RBI doesnt pay interest
on it- thats a different story).

Meaning #1 is also correct eliminate choices that donot have #1

1. Only 2 and 3
2. Only 1 and 2
3. Only 1 and 3
4. 1, 2 and 3

Only two choices left and the ultimate solution = is statement #3 is correct or not?
Viewpoint #1

Viewpoint #2

The statement says RBI advises commercial banks on monetary

matters.The word advises makes this statement incorrect. Because

RBI does advice those banks. We

RBI doesnt Advice they just order the banks- be it SLR, CRR, PSL.

saw it under Moral Suasion.

RBI doesnt advice, RBI gives orders and direction. Therefore statement

Therefore, Statement #3 is right.

#3 is wrong.

Even if we accept that RBI advices, still the questions asks what is
implied by RBI as Bankers bank. So, RBI advices moral suasion
that is a monetary policy tool. RBIs not doing it as a Banker to those

Money Banking and finance, E

Narayan Nadar (PHI publication).
He has specifically listed this
Advice function under Bankers

banks. Therefore, Statement #3 is definitely wrong.

bank topic.

Answer (B)

Answer (D)

77

So, is it B or is it D? Final judge is UPSC.

They had uploaded CSAt-2012 official answer key on their site.

This question is Test Series A, Question #75 and its official answer is D = meaning
all three statements are correct.

If you face such MCQ in exam, what should be your approach?

Upto you. But if you start skipping all such question (OMO, Money supply, Bankers
bank), because youre completely unaware of those topics=that is not pardonable.it shows
Skip

youre underprepared for this exam. You should either change your study method or
change the game- try for some easier exam.

This question is attemptable, if you dont nitpick over the word advises in third
Attempt
statement.

If youve thoroughly prepared the RBIs monetary tools (both qualitative and
quantitative), you can solve it by applying concepts/principles- particularly the moral
Mark n Review

suasion thing. But if youre still doubtful over whether #3 is right or wrong, then better
skip. If you skip because youre doubtful = that is pardonable. But if you skip because
youre completely unaware of this topic= non-bailable offense.

Appendix
These are the topics I wanted to discuss in the article, but they would break the
flow of other topics. Hence writing them @bottom:
#1: Why High SLR and High CRR are bad?

From the discussion so far, you might think why Rajan only focuses on Repo rate
to control money supply. Why not simply raise SLR and CRR requirements.
Lets check the de-merits of high SLR and CRR:
Prior to LPG reforms in 90s, RBI used to keep SLR and CRR very high. Lets
take an example
A Bank can two types of deposits

78

Deposit type

examples

Time Deposit

Fixed deposit (FD) recurring deposit.

Demand Deposit

Savings account, current account

Using this money, bank has to count its Net Demand and Time liabilities (NDTL),
every fortnight. Suppose its 100 crores.

Both CRR and SLR are counted on this figure. In the old times, these reserve ratios
used to be as high as 15% and 40% respectively. Observe the effect:

Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve ratios

CRR (15%)

(-) 15 [no profit]

SLR (40%)

(-) 40 [some profit]

Money left with bank

=45 cr.

From 100 crores, barely 45 crores left with the bank. But adding insult to the
injury- even here RBI mandates Priority sector lending (PSL). Meaning, at least
40% of the loans has to be given to farmers, small businessmen, students etc.
groups.
Lets update the table:
Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve ratios

CRR (15%)

(-) 15 [no profit]

79

SLR (40%)

(-) 40 [some profit]

Money left with bank

=45

PSL (40%)

=45 x 0.4 =18 crore.

Money left for big borrowers (i.e. big businessmen, upper middleclass)

=45-18=27 crores.

By the way, PSL is counted on annual basis while SLR, CRR counted on fortnight
basis so above table is technically incorrect but Ive plugged in those numbers only
for the sake of explanation.

before the 90s- Government would even interfere and order public sector banks to
give PSL-loans @cheap interest rates. The local politicians would coerce the branch
manager to give PSL-loans to ineligible people. They default on loans, Branch
manager cannot recover money (because defaulter will goto civil court then taarikh
pe taarikh.) So, bank would have to forget about most of those 18 crores given in
PSL loans.

Anyways you can see people deposited 100 crores in the bank yet bank is left with
barely 27 crores (over which, bank has Freedom to decide whom they should give
the loan.)

What are the consequences for businessmen?

1. High cost of credit (because bank will try to make maximum profit from those 27
crores- so bank will charge very high interest rate on the business loans- to pay off
for the staff salaries, branch office rents and everything.)
2. Businessman cannot expand his business.
3. Less exports.
4. Less tax income for the government.
So in a way- that was also one of the factors leading to Balance of Payment crisis
(and subsequently LPG reforms.) You can read more about that in NCERT Class
11- chapter 2 and 3.

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#2: Narsimhan (I) Committee 1991

Plagued by problems and losses in nationalized banks, Government of India

formed this Committee.Recommendations were:
1. Deregulate interest rates. Let the banks decide their loan interest rates. Accepted.
Gradually, we moved to the Base Rate system.
2. PSL loans should be given at normal interest rates. Accepted (but with exception=>
interest subvention- that we saw under Nachiket articles.)
3. NPA/Loan default matter should be handled by separate body and not civil courts.
Result: Debt recovery tribunal created in 1993. Ultimately SARFAESI Act in 2002.
4. Reduce CRR, SLR. Accepted. Today weve them @4% and 23% respectively.
5. Allow Private banks and foreign banks. RBI invited applications in 1993. ICICI,
Axis, HDFC and many others got license.
6. Liberate Branch expansion policy. Done (Except that 25% rural branching mandate
we saw under Nachiket articles).
7. Prepare NBFC regulatory framework. Accepted.
8. Government should reduce shareholding (and thereby its official influence) in the
public sector banks. Government agreed. Today governments shareholding in SBI
=~60%.
#3: Narsimhan (II) Committee 1998
Suggested more reforms.
1. allow VRS in the banks so they can get rid of excessive staff.
2. Suggested additional Legal reforms for loan recovery. =>SARFAESI 2002.
3. Computerization, electronic fund transfer, legal framework => Payment and
Settlement Act=>Retail (ECS, NEFT, credit Card) + Wholesale (RTGS)
4. Permit new private /foreign banks. RBI invited license in 2001= Yes Bank and Kotak
Mahindra got licenses. 2013: RBI again invited applications for bank licenses.
[Note: list of recommendations not exhaustive, Ive only highlighted important
topics that show evolution of banking sector in recent times.]

Mock Questions
1. With open market operations, RBI can
1. increase liquidity in the economy, but cannot decrease it
2. decrease liquidity in the economy, but cannot increase it
81

3. Can increase or decrease liquidity in the economy to control money supply.

4. None of above.
2. By which of the following methods, government can reduce money supply in the
economy?
0. taxation
1. sale of securities to public
2. both A and B
3. neither A nor B
3. During the period of deflation
0. RBI should use dear money policy to combat it
1. Government should reduce its tax rates.
2. both A and B
3. Neither A nor B.
4. IF prices are lowered without causing unemployment, we call it:
0. stagflation
1. reflation
2. disflaction
3. Disinflation.
5. Which of the following contains correct set of quantitative instruments of monetary
policy?
0. reserve ratio, bank rate, margin requirements
1. open market operations, margin requirements, regulation of consumer credit
2. cash reserve ratio, bank rate, open market operation
3. None of above
6. Which of the following contains correct set of qualitative instruments of monetary
policy?
0. reserve ratio, bank rate, margin requirements
1. credit rationing, margin requirements, regulation of consumer credit
2. cash reserve ratio, bank rate, open market operation
3. None of above
Q7. To counter the effect of deflation, which of the following steps should RBI
initiate?
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1. decrease reserve ratios

2. buy government securities through open market operation
3. increase policy rate
Answer choices
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. 1, 2 and 3
Q8. To counter inflation, which of the following steps should RBI initiate?
1. Increase reserve ratios
2. sell government securities through open market operation
3. Increase policy rate
Answer choices
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. 1, 2 and 3
Q9. Which of the following may cause deflation in the economy?
1. RBI raises policy rate
2. RBI raises cash reserve ratio
3. RBI sells securities
Choices:
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. all 1,2 and 3
Q10. Money supply in the economy, is affected by
1. Cheap money policy and dear money policy.
2. Open market operation and Moral Suasion.
3. Consumer credit regulation and loan to value ratio.
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Choices:
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. all 1, 2 and 3
Q11. An increase in SLR
1. will restrict the expansion of banks credit
2. will increase banks investment in safe securities
3. will ensure solvency of the banks
choices:
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. all 1,2 and 3
Mains/interview type questions- after we check Urjit Patels recommendations on
strengthening monetary policy.
Hints
1. can increase by buying, can decrease by selling
2. both [or only B, depending on how UPSC examiner interprets the effect of taxation
on money supply. In one of the reputed book on Banking and finance, author
Narayan Nadar claimed taxation can affect money supply.]
3. dear money policy during deflation =adds insult to the injury of businessman. If
government reduces tax- then its revenue collection will drastically reduce. So both
incorrect. [OR debatable- depending on how UPSC examiner interprets the effect of
taxation during deflation.]
4. directly given in the article.
5. see the last table in the article
6. see the last table in the article
7. observe the table before the topic repo rate in recent years
8. same as above
9. same as above
84

10. All correct. (Unless you nitpick and drag the logic too much.)
11. same as above.

Fiscal Policy, Spectrum, Subsidies, LPG and Banking Sector (Part 1 of 3)

Prologue

Overview of Economy related Affairs during 1-7 Feb 2014. Total three parts:
1. (youre here) Part 1 of 3: fiscal policy, macroeconomics issue, subsidies, banking
sector.
2. Part 2 of 3: FDI, regulatory bodies and infrastructure.
3. Part 3 of 3: bilateral, poverty-hunger-HRD, Agriculture-food processing and Persons
in News (PIN).

[Act I] Government side: Fiscal Policy, Macroeconomics

Topics: GDP, Fiscal deficit, Interim Budget, Subsidy raj, Spectrum auction and
NELP X.
Indias bogus GDP growth rate
GDP growth rate : CSO calculation/estimates

year

4.5% (earlier thought itd be 5%)

2012-13

4.9%

2013-14

CSO: other observations/analysis for FY13.

GDP will be 1.7 trillion US dollars. important: DONOT confuse GDP (absolute
number in rupees or dollars) vs GDP growth Rate (percentage)

Per capita income will be ~75,500 rupees.

>4% growth in Agro and allied sector

Negative growth in Manufacturing, mining sector.

Household savings have decreased. (Because of inflation, people are able to save less
money.)

Corporate savings have also decreased (meaning their profitability has decreased)

85

gross fixed capital formation (GFCF) has also decreased. (Meaning less money going
towards investment in business.)

Cost of energy has increased. Because desi coal mining projects stalled by
environment ministry and SC orders. As a result, we had to import ~25% of our coal
requirements from abroad. + adding insult to injury, heavy floods in Australia last
year= their own coal output delinked= coal prices increased.

Solution

@Government: Fast track clearance to infra-projects; decrease the excist duty; relax
the strict environment rules over coal mining

@RBI: Reduce the cost of borrowing (=decrease Repo rate); relax the rules for ECB

(External commercial borrowing from foreign countries)

Fiscal deficit 4.8% target = Mission impossible #6?
What is fiscal deficit, why is it bad? We just saw in last article of Urjit Patel
Committee. Click me
Year

Fiscal deficit as % of GDP

FY2012

4.9%

FY2013

Target 4.8% (this mean nearly 5.4 lakh crore rupees)

Why in news? Because weve already reached 95% of the limit in till December
2013.

Who calculated? Controller General of Account. (and not CAG).

Is it good or is it bad?

Imagine youve fixed a target Ill try to contain my household Expenditure to Rs.1
lakh for the FY13. but you already spent Rs.95000 so far.

Then, for Jan, Feb, March= you can spend only Rs.5000 [if you want to stay within
the target.] This is difficult especially during election year- subsidy bonanzas.

Why fiscal deficit is problem?

Even now, Indias fiscal deficit = highest among BRICS [Brazil, Rus, India, China
and S.Africa]

86

If we cannot keep the 4.8% target, then S&P, Moody etc. will definitely cut down our
rating to junk level=less FDI, FII= high CAD =weak rupee= inflation, and more

economic problems.
Can we keep with 4.8% target? Is it possible?
Possible (because of this incoming
Not possible (because of these outgoing money)
money)

LPG subsidized cylinders increased

LPG distribution policy changed

Fertilize subsidy to be increased

Interest subvention for Women SHG.

NELP X(10) postponed (=money not coming)

In fact food-fuel-fertilizer subsidy alone costs near 3 trillion

Income from Spectrum auction

(>55k crores)

Dividend from Coal India (~15k

crores)

rupees for FY13 [our target was to keep it less than 2.3 trillion]

Government wanted to sell shares of a PSU called Engineers

India ltd. but investors did not pay sufficient price for chillar

Government decided to postpone

the purchase of Rafael jets (~60k
crore saved, for now.)

company. (=less income than expected)

Gold import duty =10%; =>smuggling, government lost

Revenue worth Rs.1 billion. (=less income than expected)

G-Sec auction cancelled

When government wants to borrow money, they release government securities (gsec), with help of RBI.

Government was planning to borrow 15k crore rupees, through this. But Spectrum2014 auction and selling the shares of Engineers India ltd. = Government has got

sufficient money, for now. Hence decided to postpone the G-sec auction.
CAD & gold
>88 Billion USD = rupee starts weakening against dollar.
FY12

To reduce this deficit, Chindu increased gold import duty to 10%.

RBI also imposed various restrictions on gold imports.

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FY13

(expected) <50 Billion USD. Chindu says Ill think about reducing gold duty after March 2014.

FY13: 200 tonnes of gold came in through the black market. Government has lost
~$1 billion (6,200 crore) worth taxes because of this smuggling.

Government raised import duty on gold from 8% to 10%. (mind it: import duty, NOT
excise duty).

Reserve Bank of India made it mandatory for jewelers to export 20 per cent of their
gold jewelry before placing orders for fresh gold imports. (also known as 80:20 rule)

Related topic
FATF: Desi Diamonds = Money laundering

FATF= Financial Action Task Force (HQ : Paris)

inter-governmental body to fight money laundering.
Their latest report says Indian diamond trade is used for money laundering. How?
The agents will overvalue the prices of low quality diamonds

Incoming diamonds

Outgoing diamonds

Low quality diamond from Africa=>UAE=>Indian

businessman deliberately pays higher price.=>his (or
someone elses) black money goes from India to UAE

@high prices=>foreigner sends more

money=>black money comes back. => sent to

then its invested in UAE/Swiz. Etc.

Indian trader will export low quality diamond

Money sent to Hong Kong and China also in the same

original owner, via hawala operators.

way.

Even terrorist financing is done via such overvaluation of bogus diamonds. After all
UAE=>Paki=>Dawood & Co.

By the way, if diamonds are super-high quality then trades dont import it officially
(else theyve to pay high taxes). In case of high quality diamonds, theyre smuggled
through Belgium.

Anyways, this is just an overview, you should prepare it in detail for GS Mains
Paper 3 topic money-laundering and its prevention.
Back to our original topic of fiscal policy cum firefighting cum subsidy-raj
(=Chindunomics)

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Interim budget/Vote on Account?

Ive published separate article on interim budget click me

Interim budget in past

Year

FM

What did he do?

Budget speech

Gave quite a few schemes and tax-benefits. (Despite the fact

2004 Yashwant

12 page

that it was a vote on account.)

Did not announce any new taxes or schemes. (perhaps because

2009 Pranab

18 page
he was confident that UPA will be re-elected).

Most likely hell announce some schemes/tax-benefits (with last

?? Bookies are taking

hopes of winning some vote bank.).

bets on how long itll be!

2014 Chindu

Experts believe, Interim budget 2014, will contain following

1. Government will allot more money to certain schemes (NREGA, pension etc.)
2. reduce excise duties on certain consumer goods, automobiles etc.
3. May announce some disinvestment of shares from PSU (to get more money for
allotting to schemes)
4. Announce some tax benefits. Previously excise duty exemption given to the industry
in states such as Himachal Pradesh and J&K. Theyll expire in May 2014. FM will
renew them in Interim budget. = more job creation (or at least congress can make
claim in election speeches).
Important:

Changes in indirect tax rates dont require Parliaments assent (Government only
needs to notify and place before Parliament).
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Changes in Direct tax = need parliaments assent.

[Subsidy] LPG: nau se baara (9 to 12)

LPG
Price

Who decides?

2012

2013

2014

12

Cylinder

Every connection holder

Subsidized

400+

Oil Ministry.

gets 6 subsidized LPG

cylinders per year

Non1200+

PSU oil companies.

1st of every month.

They use formula of

subsidized

Youll have to
buy additional
cylinders

Average imported cost

@this market

and rupee dollar rate

priceprice.

during last month.

Subsidy payment
initially

2013

After Rahulbaba (2014)

Government would pay the

Government would pay subsidy to

Cancelled DBT plan. Meaning,

subsidy directly to Public sector

beneficiarys bank account via DBT

subsidy will be paid to those PSU

Oil marketing companies.

(Direct benefit transfer)

oil companies.**

Direct Benefit transfer (LPG)

Started in 2013, in selected districts

Government would transfer 435 rupees in beneficiarys account, then hell have to
purchase cylinder @market rate.

>2k crore transferred to 60+ million consumers this way.

Problems / Challenges in DBT for LPG

To enlist in this scheme, youve to link three things (your Aadhar number-LPG
connection number-Bank account number)

90

Problem= not everyone has aadhar number, not everyone has bank account number
(Census 2011: only 54% rural and 67% urban families have bank accounts]

Supreme court said Aadhar card is not mandatory to claim benefits under
government schemes.

**given above reasons, government has postponed the DBT plan in LPG.
But Oil minister Moily is not accepting the #EPICFAIL of DBT, he says We are
quiet proud and happy that this programme has gone on very well. Even if there is a
marginal error, we need to correct it.
Critiques: why 12 subsidized LPG cylinders= bad idea sir-ji?

89% families can survive with 9 cylinders per year. Only very big families need 12
cylinders. So if you give 12 cylinders= youre covering almost 97% of the families.

Subsidy money doesnt fall from sky, you arrange money through direct/indirect
taxes on the same families.

So in a way, you first collect taxes from those 97% families and then give them
subsidized LPG= idiotic. Let the juntaa themselves purchase it @market rate (after
all theyre indirectly paying for the subsidy through taxes)

This will increase black marketing activity [diverting household cylinders to

restaurants, because most families can survive on 9 cylinders, they'll sell away those
three additional cylinders to restaurants, chai-walla.]

Youve cancelled DBT plan= more black marketing and leakage.

Imprudent consumption [because government giving subsidy, so people don't try to

save / use LPG consciously.]

FY13

Rs. (Crores)

Oil subsidy

>1.5 lakh crores

Out of ^that, LPG subsidy

40k [+5k because of 3 extra-cylinders]

DBT could have saved subsidy leakage worth

Rs.60k crore [but now Government cancelled DBT for LPG]

Government also started DBT scheme f or Kerosene subsidy, But its in pilot
stage in a few district.
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[Allocation] CNG reduced by Rs.15 per kg: how and Why?

DONOT confuse this topic with 9 to 12 LPG cylinders.
Background:

Government had ordered gas companies to allot only 80% of domestic gas for
retail purpose (City gas entities- CNG stations, cooking gas pipeline companies).

Remaining 20% exclusive for industrial purpose.

As a result, many cities had to rely on imported CNG, LNG = prices expensive.

Mumbai

Got all its gas supply from domestic field.

Not all of their requirements met to desi gas.They had to rely on imported gas regasified-liquid
Delhi,

natural gas (RLNG)This RLNG cost 4x times more then desi LNG. Thats why CNG, pipeline

Ahmedabad
cooking gas was expensive all these years.

For example, Delhis Indraprastha Gas supplies arranges 80% LNP+PNG from
desi source and 20% from abroad.
After Kejirwal went to SC

Delhi Government (Kejriwal) goes to SC against this above policy.

UPA doesnt want negative publicity in election year therefore, Oil ministry has
made new rule: from domestic gas fields, 100% allocation to city gas entities.

Result?
Cheaper by Rs./kg

CNG

15

Piped cooking gas

So, is it good/bad?

Observe that desi-gas allocation to retail sector has increased from 80%=>100%,

where does the 20% gas come? Government arranged this by cutting the gas supply
to petrochemicals, steel and refineries. (meaning those companies will have to buy

92

gas @market prices=> their input cost increases=> in long term this will lead to
inflation in many products, declined in IIP and GDP.)
By the way
Gas source

Pricing mechanism

Domestic gas

administered pricing mechanism (APM).

Imported gas

Rangarajan formula

Related topic:
Gas based power plant

Gas based power plants in India, they dont get sufficient gas supply from KG D6
basin.

As a result, theyre running barely 27-30% of their full capacity.

Reliance, Torrent, GMR Essar all making losses. Cannot sell electricity @cheap
prices.

Power ministry wants state government to provide subsidy to them. (cost ~25k
crores)

that leads to next topic

Kejriwal vs electricity companies vs NTPC

Daily three page newspaper column and five hours TV news coverage given on
this as if akhkhaa India lives in Delhi only. Anyways, Gist of the matter is:

NTPC= produces electricity, and sells it to distributor companies.

Distributor companies (Discom) sell this electricity to retail customers (households

and business firms).

Anil Ambanis (electricity) distributor companies (BSES, BYPL) = they supply

electricity to 70% of Delhi.

NTPC

(To Anil) Pay our money, else we stop supplying electricity to you.

Anil

But I dont have enough money to pay your past bills! (To Delhi CM Kejriwal)

93

1.

Give me some sort of subsidy/bailout package from tax payers money, so I can pay to NTPC
and get out of this mess. AND

2. Permit me to increase electricity bills of customers, so this mess doesnt repeat next month.
I wont do that. And if you try stopping electricity supply in Delhi, Ill ask Delhi Electricity
Regulatory Commission (DERC) to cancel your license under Electricity Act 2003 or even take over
Kerjiwal
these distribution companies! (the present joint venture partnership=Anil:Delhi
Government=51:49%)

Anil

But I desperately need money to make payments to NTPC!!

Kerjiwal Then goto bank and take a loan.

Already tried. Banks are reluctant to give loans to any private electricity companies in Delhi (thanks
Anil

to your Kejrinomics, those bankers think electricty-business will definitely shut down in a few
months!)

Anil

(To Supreme Court) Maai baap, please help me out.

SC
@Anil, pay Rs.50 crores NTPC asap. @NTPC, donot cut his supply until next hearing.
order

Some more Kejrinomics:

1. If inflation increases, rickshaw fares would then be hiked. If inflation declines, auto
fares would be reduced by the government.
2. Previously rickshaw walla had to install GPS+Meters (=Rs.17k). Kejrinomics: only
install GPS first.
[Subsidy] Fertilizer Subsidy
Who gives Fertilizer subsidy? Department of Fertilizer. (and not agro ministry or
rural development ministry.)
Under what mechanism? New Pricing Scheme (NPS) III

Department has fixed the maximum retail price of urea at Rs.5,360/-

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But cost of production is higher than this. So, Department pays the price difference to
companies to cover their losses= that is fertilizer subsidy.

For FY13, fertilizer subsidy cost >65k crores.

Now fertilizer ministry + Agro ministry agreed that subsidy should be increased,
given the rise in cost of production=> this will increase subsidy burden by ye another
900 crore rupees per year.

Important: were not 100% self-dependent on urea. >25% of demand met through
imports.

Now lets check two auctions: Spectrum and NELP-X. Both Need a mile long
separate articles. Here Im only covering the overview

95

[Auction] Spectrum 2014

Frequency What?

~100Mhz

FM radio stations.

800Mhz

Not auctioned this time. TRAI and Government yet to sort out its pricing formula.

Being auctioned in Feb 2014. only for three circle= Delhi, Mumbai and Kolkata.Airtel, Vodafone
already own this spectrum but their license expiring soon, government is not renewing it.
900 Mhz

Companies went to TDSAT and SC, but did not get relief. Hence theyre again bidding for this
900Mhz spectrum.

Ideal for voice/telephonic conversation.

In USA and S.Korea- even 4G service run in 1800 Mhz.

Being auctioned in Feb 2014.

For all 22 telecom circles in India.

1900-

Ideal for 3G internet.

2100 Mhz

Not auctioned this time. But most likely in FY15.

Ideal for 4G internet.

Not auctioned this time. Mukesh Ambanis Reliance Jio already owns it from past auction.

1800 Mhz

2300 Mhz

In spectrum game, higher the number = more data can transferred per second.
96

2300Mhz=superfast= ideal for 4G internet.

Mukesh bhai already owns this. But he tries to sell only 4G connection (without
voice/phone call function)=> hard to get customers throughout India.

Therefore, Mukesh Ambani interested in buying 1800 Mhz (=good for simple
voice/calling services). Then he can first sell phone numbers for such cheap voice
calling plans, and try to lure customers to upgrade to 4G connection especially in
metro cities.

Players

what

TRAI

Recommends policy, and dispute resolution.

SMRA

Simultaneous Multiple Rounds Ascending (SMRA).

This is the e-auction method used by government for auctioning spectrum.

8 companies: Bharti Airtel, Vodafone, Idea Cellular, Reliance Jio (Mukesh), Reliance
Bidders
Communications (Anil), Aircel, Tata Teleservices, Telewings (Uninor)

His Department of Telecommunications (DoT) is doing this auction. [Not electronics

Department]

Kapil
Sibbal

DoT falls under Ministry of communication & Information Technology

[TRAI/TDSAT doesnt do the auction- do not confuse jurisdictions. thats the easiest trap in
MCQs]

Reserve price

In auction, it means well not sell below this price. (for example: you put used
iphone4 on ebay.in and declare its reserve price Rs.14k.)

The reserve prices for 2014s auction are as following

800 Mhz

Not auctioned because Government and TRAI are yet to fix its reserve price.

900 Mhz Delhi

360 Cr. Per Mhz

900 Mhz Mumbai

328 cr. Per Mhz

97

900 Mhz Kolkata

125 cr. Per Mhz

1800 Mhz (all India)

1765 cr. Per Mhz

Absolute numbers not important, but you can see 1800 Mhz spectrum is kept more
expensive than 900 Mhz. why? Obviously because it can transfer more data per
second.

If all the spectrum was sold @this reserve prices (meaning no company bids higher
price than above), then government would have earned 48000 crores.

But companies bid higher amounts in auction (because every company wants panIndia presence). Result: government will earn more than 55000 crores from this
auction.

Good news for UPA, because they can launch a few more schemes named after you
know who, using this ca$h, before ECs model code of conduct comes in force.

Bad news for we the customers, because companies will soon raise mobile/2g/3g

prices to recover their investment.

Payment for the spectrum?

Auction Winner Company will have to arrange cash by itself.

They can also pay it in installments (with interest rate)

They are allowed to borrow as much as USD 750 million (>4500 crore rupees) from
abroad every year to make these installment payments.

2010

CAG reveals 2G scam. 1.76 lakh crores.

2012

Supreme court cancels 122 spectrum licenses given to companies.

2014, Feb

Spectrum auction for 900 Mhz and 1800 Mhz

[Auction] NELP X (10) delayed

New Exploration Licensing Policy (NELP) X

As per the Constitution of India, Union government owns all the hydrocarbon
resources in India (both offshore and inland)

Hence only union can auction the exploration rights to private companies.
98

This is done by New Exploration Licensing Policy (NELP). Total nine rounds since
1999.

2014: NELP X will be done under the Uniform Licensing Policy regime=>
explorers can hunt for all kinds of resources: oil, gas, coal-bed methane or shale.
Without have to get separate license for each work.

NELP-10 is delayed because:

upcoming general elections. Planning commission advised the oil ministry to

postpone.

Ministries have different opinions about how to earn revenue from this?

Committee

Recommendation on revenue sharing

Good/bad?

Difficulty. Because contractor will

The contractor will first recover his investment by selling
always try to show high cost, to
Kelkar

the oil/gas. Then he will start sharing part of the profit with
delay sharing revenue with
government.
government.

Production linked system. Contractor need to start sharing

More transparent. And NELP-X
Rangarajan profit with government as per productions immediately. It
doesnt matter when his investment is recovered.

will be done in this method.

Related topic:
Mines-mineral development Bill 2011

Will not be introduced in Lok Sabha this time (Budget 2014 session)

Private companies are opposed to it because bill requires them to share profit with
the local people/communities. (In case of coal companies- have to share ~26% of the
profit)

You can dig more details from prsindia.org

ATF: Aviation turbine fuel
How its pricing determined?
Every month three players meet
1. Indian Oil Corp,
99

2. Hindustan Petroleum Corp Ltd (HPCL)

3. BPCL
They decide the ATF fuel prices based on avg. international prices (in the
previous month.)

In news: because recently they reduced the prices by ~2000 rupees per kiloliter.

ATF fuel makesup >40% of operational cost.

ATF cost will be different in every state. Why? Because of local sales tax and VAT.

Vijay Mallya and others have been demanding reduction/abolition of taxes on this
fuel, to reduce their operational costs.

Enough of government side, lets move to

[Act II] RBI, Banking, Monetary policy related

#1: Fed Tapering

Lengthy Topic, requires a separate article.

Basic idea is following

Youre aware of subprime crisis. American banks gave loans to people with no
aukaat to repay money=>investment bankers took those loan files and issued

100

mortgage backed securities. =>people default on loan=>those securities become

paper-junk=> system collapses.

To fix this problem, US feds (American RBI) decided two things

buy those Mortgage backed securities (=to rescue the troubled banks)

Follow cheap money policy, give loans to banks at very low interest rate (US
Feds buy government bonds from those banks @cheap prices.recall how repo
rate system works- with bonds as a collateral!)

Result? Money supply increased=> cheaper loans for customers and

businessmen=> economy starts bouncing back.

Thats quantitative easing.=> more dollars=>more investment in India and

elsewhere.

But now, US Feds decided to reduce purchase of those securities and bonds=> this is
known as fed tapering.

US feds

Purchased securities worth ___ billion USD per month

Earlier

75

Now

65

You can see, US feds reduced the purchase by (75-65)=$10 billion USD.

Thats called fed tapering.

Result? Less money supply=>loans become expensive for American businessmen

(=less import from India), less investment to India + rupee would weaken further
(=petrol, diesel expensive for Indians).

Financial Stability and Development Council (FSDC) = Chindu the chairman, + RBI,
SEBI etc all financial sector regulators. This council met and deliberated on Fed
tapering.

They say we dont have to worry much. Weve taken precautionary steps. [will be
discussed in a separate article later.]

Although Rajan is bit unhappy, USA should also worry about the (negative) impact
on other countries before running such (Stupid) schemes.

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#2: Rajan Wisdom on Monetary policy

Hawk= someone who believes inflation can be fought by raising interest rates (via
monetary policy/repo rate.)

In January 2014, I did increase the repo rate from 7.75 to 8%

But Im not a hawk, Im an owl. Owl is vigilant when others are resting.

I wont have any wonder tool to fight inflation. Ill be using the same old monetary
policy tools (mainly repo rate) to fight inflation just like the previous RBI governors.

Corporate houses are complain to me that loan interests are too high and I should
decrease my repo rate.

But, right now CPI is >9%. Banks pay maximum ~9% to depositors (in FD).
Therefore, even if I reduce repo rate, they wont decrease their loan interest rates.
(Because their main source of cash comes from those deposits and not from my repo
window)

Ive done everything in my hands to fight inflation. Now the ball is in governments
court: they must clear pending infra/business/FDI files quickly and reduce their fiscal

deficit.
#3: Microfinance: RBI changes loan rate formula

2010: high interest rates charged by microfinance companies. Many poor in Andhra
commit suicide because of Microfinance loan-recovery agents.

2011: RBI creates new category under NBFC: NBFC-MFI

Then RBI order that MFI cannot have more than 12% profit margin on their loan
products.

2014: Rajan comes up with new formula for MFI-loan rates

First get two figures

1.

Cost of fund (i.e. how much did it cost to the MFI, to arrange that loan money) +

margin (12%)
2. Average base rate of five largest commercial banks (like SBI,ICICI etCc) multiplied
with 2.75%
Now find minimum between (a, b)
Thatll be the Maximum interest rate, an MFI can charge on her borrower.
System will be effective from FY14 (i.e. 1st April, 2014.)
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Related topic:
Micro Finance Institutions (Development and Regulation) Bill, 2012.
Criticism:

Against the federal principles

Doesnt help in financial inclusion

Gives supervisory powers to RBI but RBI already overburned with so many things.
Therefore, Microfinance matter should be completely handed over to SIDBI or
NABARD.

Result: Parliaments standing committee on finance is going to reject this bill.

Women SHG- interest subvention

Scheme: National Rural Livelihoods Mission (NRLM)

Women Self-help groups (SHG) under this scheme, will get interest subvention

Mechanism:

All banks have to give them loan @7% (upto 3 lakhs)

Government (Rural development Ministry) will give interest subvention of 3%

(meaning government will pay that much interest to bank, on SHGs behalf)

Women SHG will have to pay only 7 minus 3 = 4% interest only.

#3: Housing Start Up Index (HSUI)

Housing sector contributes ~10% GDP, critical indicator of macro-economic

growth for banking (loans), labour, steel, cement, and paint business.

Housing start up index = Joint initiative by RBI + national building organization.

To measure housing growth in various cities of India. It found that

Housing declined in big cities like Kolkata, Chennai and Bangalore

But picked up growth in small cities like Dehradun, Bhopal and Hubli.

Itll help both public and private sector to design their economic activities
accordingly.

We are not the first country to develop HSUI.

Six countries already using it: Canada, US, Japan, France, Australia and New

Zealand
#4: Mobile Banking: new Committee
RBIs Committee on Mobile Banking (Chairman =B. Sambamurthy)
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Main Recommendations
1. >85 crore mobile subscribers in India=mobile banking is an great tool for financial
inclusion.
2. All mobile phone operators should load a single mobile banking app in all mobile
phones.
3. Government should order mobile mfg. companies to pre-install mobile banking app.
In their phones.
4. customers should not be required to visit the bank branch to register his mobile for
mobile-banking Usage.
#5: Banking Ombudsmen conference
Discussed following:

In savings account, if customer doesnt maintain minimum balance, then dont

charge penalty on him, simply convert his account to No frills account. [Basic
Savings Bank Deposit accounts]

In e-banking, if there is any scam, and customer was not negligent, then onus should
fall on bank itself.

For ATM: banks say we want to charge our own customers for ATM use (After 5
free transactions per month.) Then we can earn some additional commission =>use it
for installing more securities guards.

RBI Deputy Governor opposes this idea. Bank should not charge its own customers
for ATM Usages.

practice of levying a penalty for non-maintenance of a minimum balance in ordinary

savings bank accounts was also discussed at the conference.

#6: Banking: Misc./Chillar topics
Common

market, even exchange traded funds.

Demat
account

Investors need DEMAT account to trade in sharemarket, mutual funds, commodities

During the meeting of FSDC (Financial Sector Development Council), FM urged the
regulators to offer Common demat account= financial inclusion.

RIDF

When desi commericial banks (and foreign banks with 20+ branches) cannot meet their
priority sector lending targets, theyve to deposit money in rural infrastructure

104

development fund under NABARD.

Why in news? Because NABARD gave loan to Gujarat government to further develop
Narmada Canal from this RIDF fund.

RuPay

Alternative to visa and master card. By National Payments Corporation of India (NPCI).

Card

Launched in 2012, Reached 25 million subscribers in Feb 2014. thats why in news.

Topic already covered in earlier article.

White label is in news because RBI has finanally given certificate of authorisation to four

White label
ATM

White label companies viz. Tata, Muthoot, Prizm a nd Veakrangee.

Plastic

Rs.10 plastic notes will be circulated on a trial basisin five cities Kochi, Mysore, Jaipur,

notes

Shimla and Bhubaneswar.From second half of 2014.

Stress test= one type of statistical analysis tool. Where experts will check does the bank
have sufficient money to handle unforseen events.

Stress Test

A study indicates that most Indian banks dont even have 20 people looking into this
subject. = poses a danger of sub-prime crisis like event.

Third party
norm

RBI simplified the forms and rules for importers and exporters, related to third party
payments.

RBI related Numbers

As of January end 2014

MSF

9%

Repo

8% (earlier it was 7.75), Rajan increased to 8% =dear money / hawk.

Reverse repo

7%

SLR

23%

CRR

4%

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PSL

40%

Forex Reserve

290+ billion dollars

FDI, Regulatory Bodies, Infrastructure (Part 2 of 3)

Prologue

Overview of Economy related Affairs during 1-7 Feb 2014. Total three parts
1. Part 1 of 3: fiscal and monetary policy
2. (youre here) Part 2 of 3: FDI, regulatory bodies and infrastructure.
3. Part 3 of 3: bilateral, poverty-hunger-HRD, Agriculture-food processing and Persons
in News (PIN).

[Act III] FDI related current affairs [2014FebWeek1]

Important basics:

FDI matters are handled by Department of Industrial Policy and Promotion (DIPP),
under Commerce Ministry.

They release the FDI policy notification. (and not under Finance ministry or home
ministry or corporate affairs ministry or external affairs ministry)

There are two types of FDIs : automatic approval vs non-automatic (i.e. where
government permission necessary).

Where government permission is necessary, two things can happen:

Investment upto Rs.1200 crore

Investment above Rs.1200 crore

You need to get permission from FIPB

Foreign Investment Promotion Board.

Need permission from Cabinet

Committee on Economic Affairs
(CCEA).

FIPB headed by Secretary of Department of Economic

CCEA is headed by Prime Minister.

Affairs. (=IAS working in finance ministry=> meaning, the

(although we all know who is the

real Boss behind the curtains is Finance minister.)

real boss behind the curtains.)

Other bodies related FDI

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CCI

Cabinet commission on Investment (Boss: PM)

Project worth Rs.1000 crore or more.

But cannot override decision of Environment ministry.

Cabinet Committee on infrastructure. No longer exists. It is merged with Cabinet Committee

CCI (infra)
on Economic Affairs (CCEA)

PMG

Project monitoring group. Attached with Cabinet Secretariat. (and not PMO)

For fast track clearance to the stalled investment projects.

Of 1000 crore or more.

Claimed to be Indias first completely file-less government office- works entirly via
web-platform.

In news because: Has cleared 70000 MW worth coal projects in last few months.

[FDI] Multi brand Retail: Gaddari by Delhi & Rajasthan

2012

Government permits 51% FDI in Multibrand retail.

107

Total 12 states/UT permit FDI in Multibrand retail.

2013

Including Rajasthan and Delhi (Congi government in both states)

2013,
Dec

Congi lost Rajasthan to BJP and Delhi to AAP

UK company TESCO becomes the first MNC to give 51% FDI in multi-brand retail. They tie up
with TATA to open malls in India.

New state governments of Delhi and Rajasthan, write letter to DIPP saying we want to cancel the
2014

permission given to FDI-multibrand, by the previous Congi governments.

Union government is upset because

Delhi Rajasthans move will create negative impression among foreign investorsIndia has an unpredictable policy environment.

So far 12 state/UT has permitted. MINUS Delhi, Rajasthan = only 10 state/UT left
where MNC can open multibrand shopping malls. = Market not Big enough to
attract investors.

Therefore, Union asks Attorney-General can state governments revoke such

permission after change in political regime?

Experts say yes. Besides even if Union gets some relief from Supreme court, still
AAP/BJP state governments could refuse to give building permission etc. to those

MNC to open shopping malls.

[FDI] Lobbying by Walmart and Amazon

Lobbying= when private companies try to influence the politicians, to make

favourable policy/act for them.

American companies spend truckload of cash on lobbying- both within US and

outside. But as per American laws, theyve to submit report of their expenditure on
lobbying (even if done in foreign countries.)

So, from such disclosure reports, it was found that

2012 Walmart spent crores to lobby for FDI-multibrand retail in India

2013

Government (Corporate affairs ministry) forms a commission to look into this allegation. (only one man

108

army: retired Justice Mukul Mudgal)

Amazon spent crores to lobby for FDI in E-commerce in India. (and simultenously government releases
2013 a Whitepaper on FDI in E-commerce. If you join the dots, then its obvious government is influence
by Amazon lobbying.

2014 Justice Mukul Mudgal gives his report to Government (Corporate affairs ministry.)

Limitations:

Mukul Mudgal panel was not formed under commission of Inquiry act => he did
not have the power to summon documents/witnesses.

Walmart executives did not cooperate with him, refused to give detailed breakup of
account/expenses in India.

Walmart maintains that company did not spend money to lobby in India. Only some
individual executives of walmart spend money from their own salary. So we as a

Company have not broken any Indian law.

[FDI] Railways: FM, HM oppose Chinese FDI
DIPP: Department of Industrial Policy & Promotion wants to liberalizing FDI in
Railways. here is their recommendation:
Dont permit FDI in

permit FDI in

high-speed tracks

Railway freight lines connecting ports, mines and power

existing passenger rail network

Existing freight network

installations

operations
Railway corridors in sub-urban areas.

DIPP gave this note to Cabinet for consideration. But Home Minister and finance
minister say Chinese FDI shouldnt be allowed in railway sector because:

China is Indias main rival on the economic and military fronts,

We have unresolved border disputes with China.

Recently Chinese company Huawei was accused of hacking into BSNL network.

109

Therefore, Chinese investment in core sectors such as Railways= Dangerous from

National security POV. (Point of view).

Even if Non-Chinese players are allowed thru FDI window, all issues related to

security, safety and quality control should vest with the Indian Railways.
[FDI] Drugs Pharmaceuticals
Present status

What DIPP wants

FDI in New projects= 100% automatic route (dont need

This system is right.

permission from Government/FIPB/CCI)

FDI in existing pharma companies =100% but ned

permission from FIPB (Foreign Investment Promotion

Not good. FDI in existing Indian

companies should be reduced to 49%
(from 100%)**

Board) approval.

**why? Why does DIPP want to reduce FDI in existing desi-pharma companies?

Because if desi pharma cos are 100% owned by Foreign MNC giants, itll impact the
availability of affordable/cheap drugs in India.

And in the worst case scenario: Pfizer /Novartis may simply buy out desi companies
and make them produce only the patented expensive drugs only (and not the cheap
generic drugs.)

Latest clearance: US company Mylan to acquire desi drug company Agila.

[FDI] Vodafone: fully foreign owned

Vodafone Indias parent company is located in Mauritius, owns >60% shares in

Vodafone India.

The parent firm wanted to buy all shares from Indian shareholders, to have 100%
ownership of shares.

Dec 2013

FIPB approves

Feb 2014

Cabinet also approves

Thus, Vodafone India=First telecom company in India that is 100% fully owned by
Foreigners.
110

[FDI] Andhra favorite despite Telengana protests

Andhra CM says that despite the political turmoil (about Telengana), Andra pradesh
is still favorite destination for foreign investors. MNCs like Johnson and Johnson,
Proctor and Gamble are setting up plants worth crores of rupees.

Why?

John D Rockefeller (American oil tycoon)- he was richer than Bill Gates, Steve Job
and Mark Zuckerburg.

His business mantra: The way to make money is to buy when blood is running in the
streets. He used to buy firms, factories, land, shares and bonds during
riot/war/famine/depression like situation because at that time businessmen in
distress would sell their assets at throwaway prices.

Perhaps same is happening behind the curtains in Andhra. Thats why favorite

destination for MNCs.

IFC Rupee bonds

IFC= International finance corporation, its a member of the World Bank Group.

Theyve released IFC Rupee bonds.

Foreign investors buy such bond (by paying dollars to IFC). Who are these clients?
Asset companies, Private banks, insurance cos, even central banks of Asia, Europe
and US.

IFC convert these dollars into rupees and invests in India- particularly in the areas of
low-growth states.

They earn money (in Rupees), covert it into dollars.

Then principle/interest paid to you in (dollars), and IFC keeps some part as
commission.

IFC also doing same with Brazilian real, Chinese renminbi, the Nigeria naira, Russia
ruble etc. They convert dollars into local currency and invest.

So, is this FDI or FII? If we go by the Chindu definition (less than 10% investment
in a company=FII and >10%=FDI, then rupee bonds is mostly FII).
[FDI] Defense

Needs a separate article. Just a few point here:

111

DefExpo

2014 Held in Noida (UP);

by Defense ministry

Biennial event. (Every second year)

At present FDI limit in Defense= 29%. Latest clearance.

Joint venture

ownership

Thales (UK firm)

26%

BEL (Desi)

74%

Product

Main focus= Radar production in India.

Defense procurement procedure 2013

Wants to boost Indian defense industry (Both public + private sector)

In Defense purchases, it gives preferences to Buy (Indian), Buy and Make (Indian)
category of products.

India wants to procure 70% of its defense requirement from domestic players (both
public + private) but difficult given the low limit in FDI.

Some tie-ups between Foreign and Desi brands:

Sensor

UAV

Vehicle

MicroObserver Unattended Ground Sensor (UGS) for securities agencies.

By Bharat electronics + an American company

SQ-4 Recon= new brand of Unmanned Aerial Vehicle (UAV).

India based OIS-AeroSpace + a UK company.

Light armoured high mobility vehicle (LAMV)

By TATA and a UK company.

Related topic
Rafael jets=purchase delayed (kyoki apni hesiyat nahi)
2012

We decide to buy 126 Rafael fighter jets from a French company Dassault.

Cost: ~60k crore rupees.

112

Theyre MMRCA= medium multi-role combat aircraft

Negotiations start.

Defense Minister says we dont have enough ca$H at the moment for FY13 (ends @31st March
2014).

2014

If we borrow money to buy these planes then fiscal deficit target will not be achieved (4.8% of
GDP)

So, we Will have to postpone this purchase- perhaps to FY15.

[FDI] Environment clearances

Old story, Needs a separate elaborate article. Just an overview.

December 2013: Moily becomes Environment minister. But he simultaneously

holding charge a petroleum minister.= one is pollution controlling ministry, one is
pollution creating ministry. = incompatible jobs. Should be done by two separate
ministers.

Moily giving fast clearances = to attract investors, improve IIP and show that he is
also pro-business like Modi.

POSCO

S.Korean company. Steel plant. $12bn USD. Odisha.

cleared

bauxite mining project in in the Niyamgiri hills of Odisha

Vedanta

Not cleared

Moily Says local gram sabhas are opposed to it, so I cant approve.

Tawang

Arunanchal Pradesh

Cleared

Ennore

Coal based powerplant, TN

cleared

Chennai

Petroleum pipeline

cleared

Teesta

Sikkim hydroelectricity project. (NHPC)

cleared

Coal Mines

Allowed some of them to increase output without requiring new permissions.

Cleared.

Hinduja

Coal power station @Vishakhapatnam, Andhra

Cleared

113

[FDI] flows in last eight months (from highest to lowest)

sector

From country

Service sector

Mauritius**

Automobile

Singapore

Construction

UK

Chemical

Netherlands

** it doesnt mean Mauritian people are very rich. These investors are mostly
American/European tycoons who setup post-office companies in Mauritius to get
tax benefits. [Recall Vodafone/Hutch controversy.]
[FDI] declined in India: says UNCTAD

UN Conference on Trade and Development (UNCTAD) report.

FDI destinations:
Year

Indias position

2012

15

2013

16 (meaning incoming FDI has declined.)

[Act IV] Regulatory bodies (Truckload of)

#1: DGH: need statutory status

Directorate General of Hydrocarbons (DGH).

Present status

What Finance ministry wants

Should be given Statutory status. Because DGH implements New Exploraton

DGH falls under Oil
Licensing Policy (NELP), matters related to Production Sharing Contracts for oil
Ministry.
exploration fields etc. = it must have autonomous status.

funded by the Oil

Should get ca$h from consolidated fund of India (from Budget).

Industry Development

114

Board (OIDB)

Top officer from

ONGC and Oil India,

No, should have independent staff.

get posted here.

Not under direct CAG

No. Once DGH starts getting funds from budget, then CAG will audit it.
audit.

By the way, whats the situation in other bodies? Where do they arrange cash?
SEBI,
IRDA,

Charge fees on the licensees.

FMC

Gets funding from government.

TRAI

TRAI wants commission from the spectrum licensing, but government doesnt agree to
share the maal.
Its the central bank. Central Banks earn money from seigniorage. We learned about it in

RBI
Nachiket Committee article.Click me+ income through OMO, repo, MSF, license fees.

#2: PNGRB- koi hum ko bhi puchho yaar

It is a statutory body setup under Petroleum and Natural Gas Regulatory Board
(PNGRB) Act 2006.
You need to get its permission before setting up city gas distribution network
(cooking gas lines, CNG station).

2013

GAIL wants to setup its own CNG gas stations

Oil Ministry says, ok go ahead, you dont need permission from PNGRB to setup CNG stations in
cities.

2014 Oil Ministry makes a U-turn. Tells GAIL to get permission from PNGRB.

115

#3: Civil Aviation Authority= no country for non-IAS

Statutory body.

Problem: this boss (DG) is mostly a serving/retired IAS => CAA has become an
inefficient bureaucratic organization. = lazy approach => USA downgraded Indias
aviation safety rating.

Now Ministry of Civil aviation proposing a bill, to ensure only professional person is
appointed as DG. (and not some serving/retired IAS). And he must be given security
of 3 years tenure.

Problem: cabinet not clearing this bill.

#4: Rail fare regulator: Im Useless without statutory status

Cross subsidization = railway sells passenger tickets cheap (=~25k crore loss per
year), but recovers that loss by keeping freight charges high. (=ticket prices for
transporting non-human things cements,coal etc.)

Result= not making optimum profits. Bogus food, bogus toilets, bogus security.

Government finally notified to setup a new Rail Tarrif authority. (Feb 2014)

Itll suggest pricing in such way that railway generates healthy profit.

Problem=Executive body. Recommendations not binding to rail ministry.

If you want to make it statutory body, then need to amend Railway act 89 = but

thats unlikely in the current budget session.

#5: Desi Drug regulator: I want Firangi powers despite staff shortage

USA has FDA (Food and drug administration)

Similarly India has CDSCO- Central Drugs Standard Control Organization

CDSCOs boss is called Drugs Controller General of India. (DGCI)

CDSCO Falls under Ministry of Health (mind it: Drugs/Pharmaceutical falls under
Chemical ministry)

Anyways, why in News?

USFDA even monitors the desi-plants of desi pharma companies (e.g they banned
Ranbaxys Toansa (Punjab) plant from manufacturing medical products for the US
market.

So CDSCO feeling envy, we also want similar powers to inspect the foreign
plants of foreign companies- who supply drugs to India.

116

Problem: CDSCO doesnt even have enough staff to supervise desi drug
companies. They asked Union government to increase budget so we can hire 5000
more people. But no positive response. After all funding to drug supervision =not as

important as MNREGA.
#6: 14th Finance Commission: homework abhi baaki hai

Constitutional body, setup in Jan 2013.

Boss = Ex RBI governor Governor YV Reddy

His recommendations will be effective from 1/5/2015, for a period of five years

Apart from the usual terms of reference, 14th FC also has to make recommendations
about:

1. Pricing of public utilities such as electricity and water in an independent manner

2. issues like disinvestment, GST and subsidies.
Why in News

It was to submit report by 31/10/2014.

But things are moving slow, Finance commission will take long time to meet all state
government and process the data and demands. + issue related to compensation to
Seemandhra from mega Polavaram project from Telangana and so on.

Finance commission is seeking an extension of 3 months (i..e up to Jan 2015)

This is not the first time in history though. 13th FC (under Kelkar) they also

submitted their report in December 2009 (instead of original deadline in Oct 2009)
#7: 7th Central Pay commission

Chief= Justice Ashok Kumar Mathur

Member= Vivek Rae full time (IAS) + Rathin Roy part time (economist) + Meena
Agarwal (Secretary, IRAS)

Target audience= 50 lakh Central government employees, including the Railways

and Defense. +30 lakh pensioners.

Deadline= submit report in two years.

Implemented from January 1, 2016. [6th PC's recommendations from January 1,

2006.]

Criticism:

117

6th PC cost us more than 20k crore rupees= fiscal deficit + and blamed to be one
of the factors for inflation (Because money increased in babu-logs hands
without subsequent increase in their productivity.)

Timing before the general election.

#8: EPFO- I want to stay in news everyday

From aspirants point of view, EPFO= most bogus of all public entities. Because they
create new current affairs on almost daily basis or just keep coming in news for no
reason.

Anyways what did they do in Feb. 2014, first week?

For anyone earning upto Rs.15000 = EPF contribution is must. = this will enroll 50
lakh more employees in the EPFO game.

Minimum Rs.1000 pension to retired people.

(did not implement) minimum age to get pension: raise from 58 to 60 years.
#9: IRDA- I also want to stay in news every day

Just like EPFO, ye IRDA walla also keep doing something new every day to stay in
the news. Anyways why in news?

1. Broker model for Bancassurance (already covered in past article. click me)
2. Allowed common service centres (CSCs) to sell life insurance products. CSC are
setup under National e-governance plan.
3. Norms/guidelines for Micro-insurance products (for rural/poor people). Allowed
RRB, Coop. Banks, SHG, Banking BCA etc to sell such micro-insurance products.
4. Asked companies to general insurance companies should increase their focus on
agricultural insurance, disaster Management products.

[Act V] Infrastructure related

Important fact: that the 12th plan envisages $1 trillion for infra development
GS3 (Mains): Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
Lets check
communication

spectrum auction

Energy

NELP, LPG, Electricity = given in part1

airport

aviation safety sucks =given in part 3

118

Railways

FDI given above, Monorail given below

#1: Monorail @Mumbai

Monorail runs on a single rail. This rail may be located either above or beneath
the railway cars. Observe the photo

Mumbai Monorail was setup by Mumbai Metropolitan Region Development

Authority (MMRDA) + L&T Engineering.

None of our neighboring countries have Monorail (except China).

First phase: ~9km from shootout @Wadala to Chembur.

Minimum fare: Rs.5

When entire project is completed:

itll have ~19km length.

7000 passengers per hour

Cost: Rs. 3000 crores

Ranking

Monorail in

Osaka, Japan

Mumbai, India (when entire project completed)

Tama, (Tokyo), Japan

Kuala Lumpur

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#2: Metro @Mumbai BOT Problem

Being developed by Anil Ambanis Reliance infra

PPP Project under BOT model (buildoperatetransfer).

But dispute with Maharashtra government about pricing of metro rail tickets.

CM asks union government to setup a dispute redressal mechanism at the national

level to resolve disputes in such BOT projects.

Railway Misc.
New rail coach factory here. (will build passenger coaches)
Kolar

Rail minister + Karnataka State government will share cost.

Delhi-Amritsar Bullet train

Bids invited

Chennai Metro

Under testing. manufactured in Brazil.

#3: North East: hydro, manpower potential

Truckload of schemes and issues, only listing new points happened in Feb2014
week#1, related to economy:
Planning commission says

North Eastern states can earn ~650 crores per year by hydroelectricity.

12th FYP wants to add 88000 MW electricity generation. And out of them North
East can generate ~3000MW

5000 crore spent on developing airports @North East. Asks state governments to
hasten the land acquisition

Modi says:
1. Youngsters in the North Eastern states are generally tech-savvy with good command
over English
2. = Suitable for digital outsourcing/IT jobs. But at present theyve to migrate to
Bangalore and Hyderabad.
3. Government should create such job opportunities within their own villages in North
Eastern States.

120

Related issue: Arunanchal boy Nido Taniam murdered in Delhi in a racial hatecrime.
#4: [Summit] 101st Indian Science Congress

\Not an economy topic as such but Mohan said we must spend atleast 2% GDP on
science tech, hence making a passing reference here (else separate discussion in
S&T compilation later on)

Where? Jammu

Theme? Innovations in Science and Technology for Inclusive Development.

Major Points/Achievements listed by Mohan

Neutrino-based Observatory @TN

India joins CERN as associate member

ISROs missions to Mars and moon

Can issue Tsunami alert within 13 minutes

Setup new dept for Health Education and Research

A Rota Virus vaccine, a new drug for malaria, CSIR discovering new drug for TB

We should not succumb to unscientific prejudices against genetically modified (GM)

crops.
#5: Exhibition upgrades

India Trade Promotion Organisation (ITPO)- government owned company. It has

planned to spend crores of rupees to upgrade following venues

1. Pragati Maidan, New Delhi.

2. Vigyan Bhavan
3. Kochi (for coffee, tea, spcies exhibition).
4. Karnataka: wan to setup a venue for IT-related fares and exibitions.
Some notable expos in 2014:
Expo-2014

Venue

Auto

Pragati Maidan, New Delhi

Defense

Noida (UP); organized by Defense ministry.

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Petro-Tech

Noida (UP)

#6: Infrastructure Misc./chillar topics

Pharma

Youre aware of the mega food parks click me. In mega food parks, the companies
have common facilities for packaging, weighing etc. = operation cost reduced.

Chemical ministry launching similar scheme for Pharma companies.

In SEZ/industrial locations, Government will give them financial assistance to setup

common infrastructure for setting up effluent plants, R&D labs, training centers etc.

Toll Tax

Fall under State list (entry 59)

As per National Highway Authority of India (NHAI) minimum distance between

toll booths should be 80 km.

But in Maharashtra toll booths are setup even at distance of every 20-30 kms

The toll collection money is supposed to be used for road-repair, but its not done.

Traders allege bribery and irregularity by toll booth operators. Road contractors have
recovered their original investment, yet toll tax still collected.

Shiv Sena and MNS have ordered their troops to attack and vandalize toll-booths.

Steel industry: we ar unhappy

Goa used to be Indias top Iron-Ore exporter. But declined after SC ban on illegal
mining. = less supply= input cost increased.

government imposed a 5% tax on the export of iron ore pellets

Jindal Steel says Karnataka-walla miners have formed a cartel = steel industries
suffer.

Inflation = automobile sales declined, therefore demand of steel decline.

Bilateral, Poverty Hunger, Food Processing, PIN (Part 3 of 3)

Prologue

Overview of Economy related Affairs during 1-7 Feb 2014. Total three parts
1. Part 1 of 3: fiscal and monetary policy
122

2. Part 2 of 3: FDI, regulatory bodies and infrastructure.

3. Part 3 of 3: bilateral, poverty-hunger-HRD, Agriculture-food processing and Persons
in News (PIN).

[Act 6] Bilateral/Policy affecting Indian Interests

IR topics can run miles long, but only cursory points here- of those related to
Economy/trade.
#1: Visa on Arrival for 180 countries

Mechanism for (Tourist) Visa on Arrival (applicable from Sep14)

Foreigner has to apply online (3 days before arriving to India)

When he reaches India, pays 60$ fees, goes through biometric identification and gets
the (Tourist) Visa.

Validity: 30 days, Cannot be renewed. He must leave after that.

But Why should India give Visa on Arrival?

1. Will boost tourism and business
2. Can help us earn >40 billion USD by 2017
3. Challenges: women security, bad infrastructure, unhygienic places.
Before 2014

from Sep.2014

Visa on arrival facility available to tourists

from 180 countries. Including
1.

US (Despite Devyani!)

2.

China (Despite Dushmani!)

3.

UK

4.

UAE

~40 countries eligible for visa on arrival.

5. Bangladesh
Not eligible for Visa on Arrival [security reason]
1.

Pakistan

2.

Sudan

3.

Afghanistan

4.

Iran

Same continued.

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5.

Iraq

6.

Nigeria

7.

Somalia

8.

Sri Lanka

Tourists from these countries need to apply for visa

through Indian embassies in their country.

By the way, India is not the first country in the world to have Visa on arrival
facility. Following countries already offer this facility: Japan, Finland, Singapore,
Indonesia, Luxembourg, New Zealand, Cambodia, Vietnam, the Philippines, Laos
and Myanmar.
#2: [USA] Dushmani with Indian pharma cos.

US Food and Drug Administration (FDA) commissioner is coming India

To inspect quality of Ranbaxy, Wockhardt and other companies. (+Spices processing

companies in Kochi).

Theyve already banned production in Ranbaxys factory in Toansa, Punjab.

Why? (Conspiracy theories)

1. American wants to teach us a lesson for the Devyani issue.
2. Other foreign pharma companies have lobbied /bribed USFDA to teach us a lesson.
American/European MNC hate Desi companies because
1. Were largest producer generic drugs. (=cheaper copy of the foreign drugs, whose
patent has expired.)
2. Were second largest drug supplier to US and Canada
3. Were major supplier of low cost medicines for Cancer, AIDS and Malaria to Africa
and Latin America= Those foreign MNCs are loosing business.
#3: [USA] Indias Aviation safety sucks

US Federal Aviation Administration (FAA)

They reduced Indias safety rating from Status #1 to Status #2; meaning were as
bogus as Ghana and Bangladesh. Infact even Pakistani Airlines are more safer than
India!

Main reasons
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1. India doesnt have sufficient number of Flight operation inspectors.

2. Indias aviation regulator Directorate General of Civil Aviation (DGCA) does not
meet the safety standards set by ICAO. [as we saw earlier this post has become
retirement house for IAS.]
3. (conspiracy theory) America intentionally downgraded the safety rating to teach us
a lesson for the Devyani Khobragade controversy.
Consequences:

When Indian flights go to USA, their officers will do more safety checking = more
time will be wasted, inconvenience to Desi passengers.

Jet airways share prices fell down.

Domino effect: Singapores aviation authority also started inspecting Indian aircrafts.

The aviation regulators of EU, Japan, UAE will also reduce our rating.

Related topic: Policy of USA affecting Indian interests = Obama has urged the
house to pass immigration reform bill, thatll give legal citizenship for illegal
immigrants (=indians will be benefited) so, its not like Obama wants to teach us
a lesson everywhere.
Anyways, moving on:
#4: Pakistan- MFN status for India (hum nahi Denge)

Pakistan has still banned import of 1000 Indian items, including automobiles,
pharmaceuticals, agriculture and chemicals.

Only when Pakistan permits their import, we can say India got Most-favored nation
(MFN) status in India.

Then our bilateral trade will increase to $10 billion USD.

Commerce Minister wrote a letter to pakis about this, but they didnt reply, so it
seems he will cancel his plans to visit Pakistan.

125

#6: India and Morocco (Ibn Batuta)

Our Foreign minister had gone to visit 3 North African countries (Morocco, Tunisia,
Sudan)- Look Middle East policy.

Morocco significant supplier of Phosphate to India= fertilizer, food security.

14th Century: famous traveller Ibn Batuta came from Morocco to India

Morocco supports Indias demand to get Permanent seat in UNSC.

During this visit, many agreements on Environment coop, HRD, IT training.

#7: India-Fiji DTAA

India and Fiji- Signed DTAA: double taxation avoidance agreement (DTAA).
From Indian businessmans point of view:

If he has permanent business in Fiji, then his business profit will be t axed in Fiji
only. And not in India.

126

If he makes capital gains in Fiji, hell have to pay taxes to Fiji only (and not in India).
Recall Vodafone/Hutch controversy.

If his airlines HQ in India, then India will tax (and not Fiji).

Dividends, interest, royalty and fees for services will be taxed both in the countries
(India and Fiji).

+ both countries agreed to exchange of banking information.

#8: India-Mauritius

Mauritian authorizes have urged Indian investors to come in their country

because:

Low tax regime

In doing business index (of World bank) = Mauritius rank 19th all over world, and
1st in Africa

Possible to start business in three working days

Indian entrepreneurs can setup base in Mauritius and focus on EU, Africa and West
Asia.

IOCL already started Aviation fuel business here.

Potential areas: Seafood, IT, movie production.

#9: Misc./Chillar developments
German President Joachim Gauck visit to India.
Germany

1 Billion Euro worth agreement for green energy project.

NZ

UGC and its NZ counterpart signed agreement for research collaboration and education exchange

Japan

JICA gives loan to Bihar road upgrade in NH82

127

Our small cars (nano, Alto etc.) have failed safety tests conducted by a UK-based body that
tests car safety worldwide.

UK

Car companies make excuses but fact is, none of these cars have airbags (because desi std.
dont require airbags).

ONGC

Consequences= negative publicity= decline in sales in rich foreign countries.

Rosneft = Worlds largest oil company (by output). HQ: Russia

Theyve offered stakes to ONGC for exploration blocks- in Barents Sea and Black sea.

ONGC Videsh Ltd (OVL) and GAIL India also looking f or gas exploration opportunities in
Tanzania.

[Act 7] Issues related to Poverty, Hunger, HRD

#1: DTH = DBT v2.0

DBT= Direct benefit transfer (to beneficiarys bank account)

Now, Rural development minister (Jairam) came up with a new idea

DTH= Direct to Home (benefit transfer)

Women, disabled, widows, elderly and students will not have to go to banks or post
offices to get their entitlement.

DTH system will transfer money to beneficiary via Micro-ATM and Mobile banking.

Pilot project in Andhra Pradesh

#2: UIDAI is against Indian Constitution

Petition in SC, by a group of retired judges and army officers.

They say UIDAI violates Indian Constitution because

UIDAI has no statutory powers. Its functioning under an executive order.

Even UIDAI was a statutory body (like SEBI) still, this project violates fundamental
rights under Art. 14 and 21. Because project is putting a surveillance mechanism over
humans = right to privacy, right to dignity violated.

Public funds given to private companies without parliamentary oversight.

Biometric= unreliable technology, privacy can be compromised.

#3: Both UIDAI+RGI to focus on 4 states
UIDAI setup. They were mandated to give Unique ID number to residents in 18 states + Union
2009
territories.

In the other states this work is done by Registrar General of India, under National Population

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Register (NPR) process.

2013
>55 crore Aadhar numbers generated.
end

Government orders both UIDAI + Registrar General of India (RGI).

2014

To enroll people in Uttar Pradesh, Bihar, Chhattisgarh and Uttarakhand

Why? This will help fully implement Direct Benefits Transfer schemes in these
States as well= some vote bank benefit.
At present, the DBT scheme covers 28 Centrally-sponsored schemes in 121
districts.
#4: NSSO survey: Poverty Declined because its election year

Planning Commission is the nodal agency for estimation of poverty at the national
and state levels (with help of NSSO)

NSSO carries survey on quinquennial basis. (Every five years)

Poverty line is measured on Monthly Per Capita Consumption Expenditure

Rs. 447 (rural)

Rs. 579 (urban)

This method designed by Suresh Tendulkar Committee (2005)

2012: Planning commission sets up a new Committee under C.Rangarajan to review

this poverty estimation n method.

2014: latest NSSO survey found that Poverty declined under Congress government
(!)

FY11

~40 crores poor people

FY14

~27 crore poor people

For more, refer to Frontline Data card: click me

129

#5: Gujarat: Earning >11 Rs. = not poor kyoki Lakdawalla says so

1993 Lakdawalla Committee to determine poverty status. He suggested calorie intake method.

Union government asks state governments to implement Lakdawallas Calorie intake method.
2004
Accordingly, Gujarat = people earning more than Rs.10.80 per day=are not poor.

2005 Suresh Tendulkar Committee setup to review the poverty determination method.

2009 Tendulkar gave report

Planning commission and Union government accepted Tendulkar method. Poverty line= 32 rupees
2011
(Urban); 26 Rupees (Rural).

2012 Rangarajan Committee (by Planning commission)

Gujarat State government website mentions the old figure based on Lakdawalla (10.80 Rupees=poor).
2014
Hence the controversy.

BJP defends saying:

1. this is based on Union governments 2004 notification (Lakdawalla), and since
Union did not update it, hence outdated number in our website.
2. Btw, we did accept Tendulkar, and for Gujarat, the official poverty line is Rs.38.40
(Urban) and Rs.31.06 (rural).
#6: Women SHG- interest subvention

Scheme: National Rural Livelihoods Mission (NRLM)

Women Self-help groups (SHG) under this scheme, will get interest subvention

Mechanism:

All banks have to give them loan @7% (upto 3 lakhs)

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Government (Rural development Ministry) will give interest subvention of 3%

(meaning government will pay that much interest to bank, on SHGs behalf)

Women SHG will have to pay only 7 minus 3 = 4% interest only.

#7: Contract workers

Among the employed people in India, ~40% are contract workers. (as per Assocham
survey)

Is it good / bad? It is Bad because:

1. They dont get Job security

2. They dont get medical aid, gratuity, provident fund, educational funds, pension and
health insurance and leaves benefits,
3. Regular worker gets >3 times salary for doing the same job.
4. Given the oversaturated labor market, mushrooming self-financed colleges with
overqualified people= even scientists, doctors, MBA and Engineers are also serving
as contractor workers in private companies/hospitals.
#8: NSDC
National Skill development Corporation.
Ownership

Private sector

51%

Finance Ministry

49%

Target: give skill training to 150 million Indians by 2022.

Why in news: signed MoU with some state government. Anyways that happen
every now and them, Important thing for MCQ= above table and target.
#9: DSDS 2014: Desi liquor=sustainable livelihood

DSelhi Sustainable Development Summit 2014

Theme/ Focus: Attaining Energy, Water, and Food Security for All.

Location: Delhi

By Who? The Energy and Resource Institute (TERI). DG=RK Pachauri.

131

In the summit, Guests made lengthy speeches to give fodder points for

essay/interview. Not covering here because article will run mile long.
#10: IMF: Inequality is growing (ya like we dont it!)
Nothing that you dont know already. Just some fodder points:

Chief=Christine Lagarde

Their report says: in last 15 years, the income of Indian billionaires increased by 12
times.

These Indian billionaires have enough money to eliminate Indias poverty TWICE!

In the coming decades, Indias population will surpass China; Nigerias population
will surpass the United States.

Income inequality rising in the entire world.

Richest 85 people in the world own the same amount of wealth as the bottom half of
the worlds population.

In the Asia-Pacific region, 1.7 billion people lack access to sanitation and 680 million
are without electricity.

[Act 8] Agriculture/food processing/Export industries

Some fodder points from Feb Week#1, 2014:
Indian
Potential

Challenges

Industry

Large harvest in South America (Brazil, Argentina).

non-genetically modified
Hence foreigners not making inquiry to Indian exporters.
(GM) nature. Hence diet

In India, majority production comes from Central India-

conscious rich foreigners

but excess rain destroyed the crops
prefer it.

Soybean

MP, Rajasthan farmers are also holding back the

When USA had imposed

soybeans, in hope of fetching higher prices (which is not
various sanctions on Iran,
going to happen because of South America)
they used to buy Soybeans

Result: Desi food processing industries that Soybean=

from India @high prices.

suffering losses.

Spices

Many

USFDA chief is making visit to Kochi, to inspect the

charges that Indian spices are Contaminated.

132

Export oriented Textile factories concentrated in South

India, particularly TN. But cotton production
concentrated in Gujarat, MH = transport cost.

Textiles

Textile ministry believes

we have export potential

Transport cost increased (Because of hike in diesel

prices)

of >40 Billion USD.

Cotton cultivation price increased (labor shortage

MNREGA)

Gujarat cotton farmers are holding back the cotton bales.

(Because cotton non-perishable, and want higher prices to
coverup those labor costs.)

Factory cost increased due to electricity shortage.

Union government allows import of rubber= foreign

competition destroying desi farmers. (Solution: Kerala

90% of production comes from

Rubber

government started directly buying Rubber from farmers,

Kerala.

@prices higher than Rubber board of India)

Cardamom

VAT needs to be reduced.

Dry weather condition hurting harvest

Bumper production in Guatemala, theyre selling

@cheaper price.

High demands from

Singapore, NZ, Australia
and Europe during
valentine day.

Rose

Our competitors are China

Some of these countries rejected our rose exports for

and Africa- but their rosephytosanitary issues. (mites in the roses)

production declined due to
adverse climate.

Good production around

Bangalore (Karn.) and
Hosur (TN)

133

Russia also permitted rose

import.

Factories in Kerala, but shortage of raw material.

Majority of the coir supplied from Tamilnadu. (Because

Coir

Keralite grow coconuts as household activity, while

Tamils do as a plantation= economies of scale, bigger
production.)

seafood

Main ports from where

seafood is exported:
Vizag, Chennai, Tuticorin

Only marginal increase in export, compared to last year (except

Kochi)

and Mangalore

El Nino

Needs separate article. Just a cursory mention here:

Central & East Pacific gets warm

Western Pacific gets cold.

Result: less rainfall in India.

Experts believe 2014=El Nino year= less rainfall, desi farmers will suffer.

[Act 9] Persons in News (PIN): Feb Week#1 (2014)

List can go long, only the major names related to business/economy and been in
news during 1st Week of Feb 2014.
#1: India
DG of Hydrocarbons

BN Talukdar (newly appointed, FM wants to give him statutory status)

Arvind Mayaram (makes statements on daily basis. He has to give new

Secy, Economic Affairs
definitions FDI, FII)

Drug Controller General of

GN Singh (wants firgani powers like USFDA, but doesnt have staff)

India

134

IRDA

TS Vijayan (wants Broker model for bancassurance)

TRAI

Rahul Khullar (doesnt fully agree with Sibal on Spectrum auction)

UTI

Leo Puri (golden jubilee of UTI)

LIC

SK Roy (passing comments about IRDA guidelines)

Labour minister (Oscar Fernandes) =Chairman of the Central board of Trustee

EPFO
of EPFO. 16k max for compulsory EPF, 1k min for pension.

7 Pay commission

Justice Ashok Kumar Mathur

Walmart lobbying

Justice Mukul Mudgal gave report

14 Finance commission

YV Reddy, cannot finish report on time.

th

th

#2: Abroad
S.Jaishankar

Indian Ambassador to USA.

aerospace and cyber security expert. He became appointed special advisor to United
Vivek Lall
Nations

Hyderabad born CEO of Microsoft. Replaced Steve Ballmer. Microsoft has seen only three
Satya Nadella
CEOs so far Gates, Ballmer, Nadella.

Prez. Joachim Gauck. Recently visited India. 1 billion Euro worth green energy deal.
Germany

Note: Angela Markel is Chancellor and not the President of Germany.

US Feds
Ms. Janet Yellen replaced Ben Bernanke as the chief of US Feds.
(American RBI)

135

Margaret A Hamburg, commissioner, she is coming to India to inspect our pharma cos and
USFDA
spices factories.

IMF

Christine Lagarde. Says income inequality rising in the world.

#3: Women entrepreneurs: Fortune Top 50

Notable Companies

chief

General motors

Mary Barra

IBM

Ginni Rometty

Lockheed Martin (fightjets)

Marillyn Hewson

Facebook

Sheryl Sandberg (COO)

Yahoo

Marissa Mayer

Pepsico

Indra Nooyi (too clichd)

ICICI

Chanda Kochhar (too clichd)

Epilogue
Q. Where are the mock questions?
Separately, when sufficient content is generated (perhaps at the end of entire
Feb).
Q. Will you release the same Week#2 (i.e. 8 to 14 February 2014?)
Yes.
Q. does it mean I should stop maintaining notes from newspaper?
of course not. This is merely a reference point to crosscheck you did not miss any
important development. Mrunal.org is no substitute for newspapers and standard
reference books.
136

Q. what about current affairs on polity?

Refer to prsindia.org + [Hindu/IE]
Q. What about IR/diplomacy
Refer to idsa.in + official site of MEA. + [Hindu/IE]
Q. When are you going to release Hindu Sci-Tech compilation?
Somewhere in March or may be April. The way things rolled in Prelim and Mains
2013, Hindu Sci-tech compilations were mostly useless hence not in my priority
list right now.
Q. When are you going to finish the pending articles in the land reform, world
geography, and world history?
Ya Ill finish those loops but next Mains is in December 2014, hence those
pending articles are not in my priority list right now.
Q. When are you going to release PIN-2014 compilation?
Had plans to release it before CDS2014 and IBPS Specialist office exams
(Feb2014) but after Nov13, there werent many high profile PIN developments
(Padma, Bharat Ratna is too clichd). other than that, very few new noteworthy
appointments/sports winners between Nov13 to Jan14. Hence dropped the idea.
Now PIN-2014 =In April 2014, before SSC starts.
Q. will you release answer key for CDS(I) 2014?
Yes. Ofcourse.
Q. When are you going to release the remaining answerkeys for Mains 2013?
World history answerkey most likely in Feb-end, and remaining in March.

New Bank Licences: Bandhan, IDFC, Bharatiya Mahila Bank; Differential

Bank licences, Bimal Jalan Committee, Narsimhan Committee;
arguments favor against, Bank nationalization, Historic evolution of
Banking sector in India

137

Bandhan and IDFC got new licences, you already know that. its just two line
current affairs. but for SBI /UPSC interviews, we need to some background
information for questions like:
1. After Sahara Scam and NSEL crisis, why should we risk giving bank licences to
private companies? In fact why not simply nationalize the existing private sector
banks so they cannot do any scams!?
2. We already have large banks such as SBI, ICICI, BoB- all of them having pan-India
presence, capable of fulfilling the goal of financial inclusion, then why is there a
need to get new private sector banks?
To answer such Devils advocate type interview questions, we need to go back
in history:

Banking sector in British India

There were two types of banks
British Banks

Swadeshi Banks

First, East India company establishes

three Presidencies in India- Bombay,

Parallel to British banks, Indian banks also setup-

Bengal and Madras

Allahabad Bank, Punjab national bank (PNB), Bank of

Three Presidency banks setup in those
Baroda (BoB), Canara bank etc.
cities. Later merged into one Imperial
bank (21)=> SBI (55)

Their target audience = British army, civil

Target audience= big merchants, particularly raw-material

servants and judges

exporters in Bombay and Madras Presidency.

Overall, neither British Banks nor Swadeshi banks helped in the financial
inclusion of poor people, they still had to rely on local money lenders
and Zamindars.
Birth of RBI

By early 30s, there were >1200 banks in India!

138

But all of them under Companies law- there was no banking regulation, no RBI, no
SLR, CRR, repo rate, reverse repo rate etc. So the Civil service & BankPO aspirants
of that era, were relatively Stress free compared to present generation.

Problem starts with Great American depression (29) => sharemarket and companies
of US and Europe collapse= raw material import declines = desi merchants cannot
repay loan EMIs = Indians banks starts collapsing one by one.

therefore, British Indian government setups Reserve bank of India to supervise over
these banks (34)

Banking sector Post Independence

from mid-50 onwards, there is gradual expansion of banking sector in India

SBI, ICICI, PNB, BoB all start opening more and more branches.

but still target audience= merchants, urban (upper) middle class and industrial houses

Branches increased? YES

139

Rural penetration? NO

Did they help aid in Five year plans like giving cheap loans to farmers and microenterprises? NO

All these banks were in the hands of industralists. (who owned majority shareholding
=> can vote majority of board of directors=> banks policy decision will only be
made to suit those industrialists e.g. opening branches near factory-townships, giving
loans @cheap rate for setting up new factories and so on.)

Nationalization

Government gets impatient with ^all this.

starts nationalizing banks (By taking over the ownership from those industrialists)

Year

How many?

who?

55

Imperial bank (SBI)

69

14

banks with >50 cr. deposits.

80

banks with >200 cr. deposits (Andra, Vijaya, Oriental bank of commerce etc.)

Nationalization: more problems

1. In theory, nationalization =government becomes majority shareholding in those

banks => government can pick board of director of her choice = bank takes decisions
to suit governments Five year plan requirements= everyones happy, right? nope
2. In reality, nationalization =created more problem than it solved. for example
3. Now all the board members = politicians, their relatives, retired IAS/IPS etc. Result?
Professionalism =nope, sycophancy=yes.
4. Banks were forced to give loans @throwaway prices to farmers/ small enterprises,
sometimes even cost of giving loan (staff salary, light bill, office rent etc.) would be
higher than the profit involved.
5. Local politician interfered in operations. Run loan mela in our Constituency, open
all branches in RaiBareily and Amethi only, pass applications of our chamcha-log.
They would get lakhs of rupees @4% interest rate (to buy cattle) and then circulate
the same money to farmers @36% interest rate and so on
140

6. When banks tried to recover loan money from such political elements, t heyd get
stay order from courts, thentaarikh pe taarikh.
7. This politicization even came into Bank employee unions- theyd always demand
higher wages and lower working hours, irrespective of how much profit bank made.
8. adding insult to injury, RBI kept the CRR and SLR very high (15 & 40%
respectively)
9. =very less money left for banks to lend.
10. Business man cannot get easy loans = no business expansion =export declines =in a
way all this contributed to the Balance of Payment crisis (BoP) in 1991.
moral of the story = nationalization is not a solution even if Sahara, NSEL,
Ramalinga Raju, Ketan Parekh, Harshad Mehta or Mr.XYZ is doing scam- that
doesnt mean you should nationalize everything.

Narsimhan Committee I (1991)

By government of India in 1991. It recommended following:
recommendation

result?

Government / RBI mustnot regulate the banks loan

RBI adopts BENCHMARK PRIME LENDING RATE
interest rates. Banks should be allowed to decide
(BPLR) => nowadays Base rate system.
their home loan, bike loan etc rates by themselves.

setup Debt recovery tribunals. so loan defaulters

DRT setup in 1993 => later SARFAESI Act in 2002 to
cannot get stay orders from courts, no more
Taarikh pe taarikh

give them more powers.

done. banks can open branches anywhere. only condition

Liberate Branch expansion policy. Let the banks
25% of the new branches each year must be setup in
open branches outside Raibarely and Amethi also.
rural areas. For more readNachiket Committee article.

Reduce CRR and SLR so banks are left with more

Done, gradually reduced. from (15,40)=>(4,23)
money to lend.

141

NBFC regulatory framework

done

done, SBI shares sold, nowadays government owns

government should reduce its shareholding from
~60%. (this facilitates entry of professionals in the board
public sector banks.
of directors)

Allow entry of private sector banks and foreign

done, leads to first round of bank licences, explained

banks.

below:

Bank licences: 1 Round (1993)

st

RBI invites application 1993

New private banks start Operation: 1994-95 onwards

Total ten private banks given licences: 6 still running + 4 closed down.

6 running

1. ICICI
2. HDFC
3. UTI=>became Axis bank (2007)
4. IDBI
5. Indus
6. DCB
All of above running successfully, so that gives us positive arguments- that not
all private entities are seamstress. in fact, ICICI, HDFC, Axis = top banks of India,
even have presences abroad, employ lakhs of people. Hence no harm in giving
bank licences to private players.
4 closed down

merged
Bank

why?
with

Global

Oriental

recall Ketan Parekh- he took money from Madhupura cooperative Bank, Abad and

Trust

bank of

used it to run scam in Sharemarket. Same Ketan had also taken some money from

Bank

Commerce Global Trust bank also=> news stories =>junta panics and runs to take out all

142

money=> business collapsed.

Bank of

Centurion

loss making. hardly any depositors and loan takers, couldnt stand in competition

Punjab

bank

against SBI, ICICI, BoB etc.

HDFC

same as above

HDFC

same as above

Centurion
bank

Times
Bank

These four #EPICFAIL banks give us the negative arguments that private
companies must not be given bank licences. Because they can also close down
like ^these, creating panic among the clients, blood pressure, heart attacks and
suicides.
Anyways, moving on
Narsimhan Committee II (1998)

1. Introduce Voluntary retirement scheme (VRS) in public sector banks.

2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework
4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
5. Continue allowing entry of private banks and foreign banks.
New Bank licences 2 nd round (2001)

2001: applications invited

2003-04: winners launch banks.

From the earlier #EPICFAIL of those four banks, RBI also learned lesson.
This time RBI gave licence only two strongest contenders:
1. Kotak Mahindra
2. Yes Bank

New Bank licences 3 Round (2013-14)

rd

2010: Finance minister says we need to give more licences.

143

2013, February: RBI invites applications with following conditions:

Conditions/guidelines for new bank licence application:

1. must include class 10-12-college marksheet, school leaving certificate and three
passport sized photos
2. 10 years successful work-ex (=Fit and proper criteria)
3. minimum capital Rs.5 billion
4. Will have to get shares listed on stock exchange within three years, bring down
voting rights to 15% within 12 years.why?

say Anil Ambani gets licence, in the beginning hed have ~100% ownership and
decision making. But in the long run such one man game show = not good in
banking sector. So hell have to get the shares listed within three years.

once shares are listed, junta starts buying those shares= they elect the board of
directors (BoD) and then BoD makes policy decisions of the bank, appoints CEO and
top executives and so on.

By 15 years, Anil should sell majority of his shares to junta- so that he holds barely
~40% or less of the bank shares = he cannot have lot of say in banks decision
making = bank doesnt run according to his whims and fancies =rational decision
making.

Anyways moving on to the rules

5. foreign shareholding must not be more than 49% (for the first five years)
6. 50% of the directors should be independent (=not chosen by majority shareholder
e.g. Anil)
7. Such bank must not invest in shares/bonds of its parent group (e.g. Anils
telecom/electricity business)
8. must have viable business plan
9. must open atleast 25% branches in the unbanked rural areas. (as per latest census
there are ~10000 such places)
10. Have to comply with PSL (priority sector lending) norms.
Many other technical rules but for descriptive/interview answer- above 9-points
sufficient.

Total 26 applied, including Anil Ambani, Birla, Bajaj, Tata, Muthoot, Indian post.
144

later two left (TATA, Videocon)

+ one came (KC Land and finance ltd.)

Thus 25 left.

Bimal Jalan Committee

Now Rajan had to decide winners among those 25 applicants.

Sep 2013: Rajan sets up RBI High level advisory Committee to process those
applications.

Bimal Jalan (Chairman)

Former RBI governor

Usha Thorat

Ex-RBI Deputy Governor

C B Bhave

Ex-Sebi chairman

Nachiket Mor

RBI board member

Important: Bharatiya Mahila Bank also launched in Sep13 (but its public sector
bank, has nothing to do with this third round of Bank licences or Bimal Jalan
Committee)
Anyways, moving on
November 2013

Bimal first meeting

February 2014

Bimal submits report

March 2014

Rajan fears Election commissions model code of conduct, seeks their approval.

31 March

EC gives approval

2 April

Two winners announced. (Bandhan Microfinance and IDFC)

st

st

Bandhan Microfinance and IDFC

Bandhan Microfinance

IDFC (Infrastructure Development and Financial

145

Corporation)

West Bengal

Mumbai

Micro-finance company

infrastructure finance company

Chandra Shekhar Ghosh

Rajiv Lall

net worth 1100 Cr., 45% branches in rural

net worth 21000 cr., but rural presence low.
areas

These two are given only in-principle approval. Meaning

In principle approval

Within 18 months

must get net worth Rs.1000 crore

Must open 25% branches in unbanked rural areas.

once they fulfill above conditions, RBI will give them licence under Banking
Regulation Act, 1949 [Sec.22(1)]

Once they get licence under BRA, then we can open current account, savings account
etc.

RBI has also prohibited the promoters (Ghosh and Lall) to hold CEO position in
their respective banks. This is meant to prevent conflict of interest. Because in
past, Global Trust banks CEO Ramesh Gelli was accused of involved in Ketan
Parekh scam.
Curiously though Yes Banks promoter Rana Kapoor enjoys both MD and CEO
position in his bank!
India post

For Indian postal department, Bimal Jalan said RBI should consult separately with
government and give licence if necessary.

Kumar Mangalam Birlas name involved in Coal block scam, Anil Ambani in 2G
case, hence licence not given.
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What is Differential licences?

Total 25 applied, but only two won so what about the remaining 23 contenders? Will
they get any consolation prize? Yes.

Rajan said they can later apply for Differential bank licences.

Differential bank licences = for opening payment banks, wholesale banks etc (whore
not full banks like SBI, PNB etc.)

for more on these differential banks read following articles on Nachiket Committee:

1. Wholesale Banks
2. Payment Banks

New Private banks: Pro and Against arguments

Anti arguments

Pro arguments

Existing banks not sufficient for 100% financial

inclusion.

only one in two Indians have bank account

Only one in seven Indians gets loan from banks (others

There is no need for additional private banks,

have to rely on the evil money lenders who charge 36%
existing banks sufficient.
compound interest rate!)

As per Census 2011

well in that case, government should launch

Only 67% of Urban households getting banking services.

Only 54% Rural households getting banking services.

Throwing sakaari money, subsidies and schemes to solve

some Rajiv Gandhi scheme to open bank

every problem = bad idea. Business has to become

accounts for everyone, there is no need to get

new private banks! Besides, these two

vibrant by itself.

(Bandhan and IDFC) are too small to be any

compared to elephants like SBI and ICICI but every

relevant in financial inclusion.

As per your own table, Bandhan already has

It is true both Bandhan and IDFC are mosquitos

maestro was an amateur someday.

as a Microfinance company, Bandhan cannot open

45% of her branches in rural area as

savings account / current account etc (Because they dont

microfinance company, then why do they

have bank licence)

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need bank licence? Theyre already doing

financial inclusion!

as a result, such microfinance companies have to borrow

money from other banks, NABARD etc @12-15%
interest + have to maintain profit margin=> they give
loans to poor people yes, but at 23-25% interest rate.

but if same Microfinance company was given bank

licencee, they can accept publics deposit money under
savings account ~4% interest, fixed deposit ~9% interest
=> cheaper way to arrange loan money. can give loans to
poors at reasonable rate like 10-15%

In the first round, ten banks were given

licence, four of them closed down..private

The same licensing round gave us giants like ICICI, Axis bank

sector cannot compete with existing giants.

and HDFC. It is wrong to think every private player is out there

They try to take shortcuts, hence all the

only to bully, loot and steal.

scams.

The same ICICI Bank, HDFC Bank and Axis

RBI has taken quick and firm action against those three banks.

Bank were caught violating KYC norms and

And the inquiry revealed it wasnt the mass scale organized

doing money laundering case in the Cobra

money laundering operation but irregularity on part of certain

post sting operation.

branch managers to overcome the targets.

These two small players cannot even afford to

launch all India ATM network, forget about
opening branch offices.

They dont need to open ATMs anyways, because of the

White label ATM scheme.

In the early 90s, all nationalized banks were heading towards

#EPICFAIL, so to correct the course, RBI had to get in more
RBI should gave given licences to more

players to breed competition. Same is not the case today- two

applicants, like they did in the 90s (ten

new banks are good enough. If Rajan gave licence to 15-20

licences).

applicants at once => too much competition => predatory

pricing like in aviation industry => smaller players will be
wiped out.

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Public sector banks are already bleeding

In the end, Business is all about the survival of the fittest.

because of the heavy marketing and teaser

Public sector banks and their trade unions should learn to

rates offered by Private banks. Two more

perform or perish. Customer deserves better services. Just to

such banks will increase the misery of the

make life easier for sarkaari banks, we must not prevent the

public sector banks.

entry of private sector.

Rajans American ideas of free market,

Just two new banks cannot create Subprime crisis. RBI is much
wholesale banks, differential licenses etc. will
more vigilant and strict than their American counter part US
ruin Indian banking sector and Economy.
feds. It is wrong to assume that Rajan comes from America so
What works in USA need not automatically

he is automatically an evil capitalist, and all the hushiyaari

work in India as well. This will lead to

(smartness) is with Newspaper columnists in The***** only.
subprime crisis like disaster.

More pro-con arguments can be added, post them in comments below!

Bharatiya Mahila Bank (2013)

This has nothing to do with Bimal Jalan Committee or third round of private bank
licences. But to confuse you in MCQs, the examiner will deliberately include
some facts related to Mahila bank. Therefore, you must know the basics:

Budget 2013: Chindu announced to open this bank with 1000 crore Rs. (=100% State
Owned / public sector bank.)

Keep in mind, Chindu also setup Nirbhaya fund for women security initiatives. But
thats separate 1000 crore fund and this is separate 1000 crore bank. (tricky MCQ)

Concept is not new: Pakistan and Tanzania already setup such banks in past.

MBN Rao Panel prepared blue print (he was chief of Canara bank)

Sept. 2013: licence given

November 2013: bank launched on Indira Gandhis bday.

HQ= Delhi but since assembly election was going on, hence to follow the model

code of conduct, they launched the bank from Mumbai

How is it a Mahila Bank?

Boss Usha Anantha-Subramanian =woman

Board of Directors=all women.

149

but staff = male + female

mid-level staff from BoB, PNB on deputation= male + female.

Customers (Depositors) = male + female. (no distinction among them, both get same
interest rate on their savings account / FD etc.)

BUT Loan giving => predominantly to women.

Women entrepreneurs can get loans up to Rs 1 crore without collateral (meaning they
dont have to mortgage their house/factory/jewellary)

kitchen loans, education loans, small home-based catering businesses

Projects for Skill development, financial literacy among women.

hence the name Mahila Bank- because itll predominantly cater the credit needs of

women entrepreneurs and Self help groups.

Business plan of Mahila Bank?
1. By March 2014: 25 branches in capitals/major cities of India
2. 25% branches in unbanked rural areas.
3. By 2020: 700+ branches; 60k cr business
Software

as such most desi banks use finacle core-banking software designed by Infosys

But this Mahila bank got Core Banking Software by FIS (American Co.)

(^ya this type of GK essential for IT-graduates for the bank interview stage.)
Why Mahila Bank is mere publicity stunt?

(Interview Q.) Bharatiya Mahila Bank is a mere symbolic exercise for feel good
publicity. Do you agree? Yes/No and Why?
I already mentioned the Positive points 1 cr. loan without collateral, skill
development for women etc.
But in Group discussion/ interview, you need to be aware of the negative points
as well, in case the other party decides to play Devils advocate.
Mahila Bank is mere tokenism, without substance because:
1. SBI, PNB, BoB better suited, they have pan-India presence including in rural areas.
Govt. already majority shareholder. Could have launched the 1 crore without
collateral scheme without Mahila Bank.
2. 25% rural branching: duplication of effort.
150

3. In the first phase focus on state capitals and UT = real need of women financial
inclusion is in rural areas and not those big cities.
4. Mid-level executives all imported from BoB, PNB etc. such deputed staff usually
dont have or motivation to put their blood and sweat in making this new bank
successful. Their loyalty remains with their own parent bank only.
5. Theyre offering 4.5%/5% interest rate on savings account but pan India presence
necessary, otherwise customers wont feel attracted. Besides private banks like Kotak
already offering 6%

Nachiket Committee: Universal Electronic Banking Account (UEBA),

Payment Access Points, Financial Inclusion, Seigniorage and More
Prologue

Time: September in 2013

Location: Ministry of Finance
The term of our government is soon to expire, so we cant form any new Committees. Im getting
Chindu
bored.

Then just watch my jalwaa- This month, Ill form not one, but TWO Committees!
Rajan
1.

Bimal Jalan for Bank licenses

2. Nachiket Mor for financial services

YES, YES, YES, Now even if I cant become PM, Ill have no regrets, because UPSC aspirants
Chindu are thoroughly harassed! By the way, I know Bimal Jalan was ex-governor of RBI, but who is this
Nachiket fellow?

Rajan

Nachiket Mor is my batchmate from IIM Ahmedabad, served in ICICI and right now RBI
board-member.

As per office-gossip, hell become a Deputy Governor of RBI in future.

151

(enters) Mr.Rajan could you please tell Mr.Nachiket to allow me silently watch his Committee
Mohan
proceedings?

Rajan

But why would you want to do that?

Because I havent read economy books since a long time, Im not maintaining notes from
Mohan

newspapers, so my command over economy is very weak. If I watch Mr.Nachiket talk, itll help me
refresh the concepts of economy.

Cut to Next Scene

Location: Nachiket Mors Cabin.
(To self) I need more gangmembers, otherwise, Ill have to do all reading-research-typing labor
Nachiket myself. (Sends Committee invites to facebook friends-only 12 people accepted, remaining 99 were
just too busy liking funny photos of their 12999 friends.)

Mohan

Could you please tell me the names of those 12 people in your Committee?

Nachi: Ofcourse! Please Note down:

1. Prakash Bakshi: He was NABARD chairman. (He recently retired. The new
NABARD chairman is Harsh Kumar Bhanwala.)
2. Shikha Sharma: Axis Bank. This is same Shika Sharma whose annual salary package
is almost 2 crore rupees and LTC alone is ~12 lakh rupees. In short she is totally
awesome.
3. S.S. Mundra: Bank of Baroda
4. Vikram Pandit: Retired from Citigroup.
5. Sunil Kaushal: Standard Chartered Bank India
6. Roopa Kudva: CRISIL Limited
Mohan But these are only six names? What about the other six?

Theyre not important for Person in news (PIN) type MCQs/two markers. Rule #73 of competitive
Nachi
exam preparation: NEVER pay attention to chillar parties.

152

Toh thik hai (then it is ok). Anyways, what is the purpose of your Committee? What exactly do you
Mohan
want to accomplish?

The official name/purpose is Committee on Comprehensive Financial Services for Small

Businesses and Low Income Households.

Nachi

And we want to accomplish 100% financial inclusion (by giving financial services those small
businessmen and poor people in a comprehensive manner)

What is Financial Inclusion?

Financial inclusion means everyone is given access to:
BANKING

Savings & payment (through ATM, cheques, e-transfer etc.)

CREDIT

loans @affordable interest rates.

INVESTMENT

mutual funds, pension plans, child investment plans etc.

INSURANCE

life insurance and non-life (general) insurance.

We need financial Inclusion because

1. It Turns savings into investment. Circular flow of income=helps the economy.

(Compared to if everyone just hid their money under pillow.)
2. Insurance/investment/savings =Protects family against unfortunate circumstances.
Child future secured.
3. Income inequality falls more rapidly in areas that have more developed financial
intermediaries (banks, insurance companies).
4. In the 80s, countries that focused on providing easy financial services to small
businessmen =became large economies today be it Japan, South Korea or USA.
5. Financial inclusion = cheaper loans=faster growth of agri and small business.
(Because Banks charge less interest rate than private moneylenders and financers.)
6. IF all of the government subsidy/benefit payments are done via netbanking/e-transfer
then Rs.1 lakh crore rupee will be saved per year in terms of manpower-timepaperwork-leakages. [As per Mckinsey research.]

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7. If there are no formal channels to save money (like Bank), then low income
households are more likely to fall victim to Ponzi schemes like Saradha chit fund in
Bengal.
8. IF everyone has bank account=> lowers the transaction costs, paperwork and time.
(Compared to counting currency notes, maintaining records, manually recovering
money vs cheque drop box and so on.)
9. Economic well-being of the poor people also ensures social harmony, theyll not fall
into brainwashing by Maoists/Secessionist/Extremist elements.
10. + Women empowerment.
[If you can add more points, post them in the comments below]

Financial Inclusion: Steps taken so far

In a free market economy, banks, NBFC, mutual funds and insurance companies
would only focus on urban areas and High networth individuals (HNI). Because if
they try to serve poor people, the cost of operation =higher than the profit.

Therefore, RBI and Government had to intervene and force these financial
intermediaries to serve the poor people all over India. Here is a list of steps taken so

far
Giving More Access to banking /Payment
1. Post office: savings account, e-money order, even international money transfer
(remittances)via Western Union.
2. Government has nationalized Banks and insurance companies, made them serve low
income groups and rural areas.
3. Government helped setting up Regional rural banks, Cooperative banks, Primary
Agriculture societies.
4. Lead bank schemes: RBI assigns a district to a particular bank. That Bank will be
responsible for promoting banking services and financial literacy, in that district.
5. Government launched Swabhiman project to extend banking services to rural areas.
6. RBI permitted Business Correspondents (BC) system. Banks extend their services to
villagers with help of these agents. click me for more.
7. Bhartiya mahila bank setup and owned by GOI,exclusively for women is a initiative
towards financial inclusion

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8. RBI permitted White label ATMs, and ordered the companies to open 2/3rd of these
ATMs in semi urban and rural areas. click me for more.
9. RBI has ordered the banks to open at least 25 per cent of their new branches in
unbanked rural centres.
10. RBIs No Frills accounts for poor people. Later renamed to Basic Savings Bank
Deposit Account (BSBDA).
11. Governments Direct Benefit Transfer (DBT) initiative. Money directly sent to
beneficiarys bank account. If he doesnt have bank account already then itll be
opened.
12. RBI relaxed Know Your Customer (KYC) norms for small value accounts. RBI
allows customer accounts to be opened without any documentary proof of identity or
current address if the amounts involved are less than Rs.50,000. (but once that limit
is crossed, hell have to give proofs).
13. RBI permitted Aadhar card can be used as proof, for opening bank account.
Giving Access to Credit (Loans)
1. Priority sector lending targets. Banks have to compulsory give some of the loans to
farmers, students, small businessmen etc.
2. NABARD=>Microfinance, Various schemes for Self-help groups.
3. Interest Subvention scheme for farmers.
4. Debt relief to farmers in 2008.
5. General Purpose Credit Card (GCC)and Kisan Credit Card (KCC) to help people get
loans easily.
Giving More Access to Investment
1. National Savings certificates
2. Public Provident Funds
3. New Pension Scheme + Swavalamban
4. Rajiv Gandhi equity savings scheme + tax benefits offered.
5. inflation indexed bonds
Giving Access to Insurance
1. Post office: has tied up with LIC, offering variety of insurance schemes, particularly
targeting rural junta e.g. Gram Surakha, Suvidha, Sumangal etc.
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2. Weather based crop insurance loans for farmers

3. Aam Admi Bima Yojana
4. Rashtriya Swasthya Bima Yojana (RSBY)
5. Rajiv Gandhi Shilpi Swasthya yojana (one type of Health insurance)
Plus, RBI and SEBI running financial literacy campaigns.
[Sidenote: If youve more points to add, do mention them in comments]
Impressive!! But If government and RBI have taken so many steps for financial inclusion, then why
Mohan do we need a new Committee under your chairmanship? apart from the obvious motive of harassing
aspirants of various competitive exams!

Because despite all the previous efforts, result has been unsatisfactory. As per Census 2011

Only 67% of Urban households getting banking services.

Only 54% Rural households getting banking services.

Another study indicates that:

Nachi

In Banglore alone: while 70% micro-enterprises have bank accounts, barely 1% of them given
loans.

There is also regional variation: some districts in Nagaland 0% people have bank account
while in some urban districts of Southern and Western states, more than 70% adults have bank
accounts.

hmm so far Ive learned following:

Financial inclusion its meaning and benefits.

In past, RBI and government took many steps to achieve financial inclusion. But by and large

Mohan

they were #EPICFAIL.

So now RBI has formed a new Committee under your chairmanship for old wine in new bottle.

So, tell me Mr.Nachiket Mor, if all the previous attempts have failed to achieve 100%
financial inclusion, then what makes you think you can succeed?

Nachi

My six pack abs six point vision.

156

Six Visions Statements

Topic

1. Bank
account

What will we do?

Vision Statement

First, we open bank account for every adult resident, via

their Aadhar card. (mind it: Resident not citizen.)

1. A Universal Electronic
Bank Account by
1/1/2016

But if people dont have a branch office/ATM nearby

then bank account is useless.

2. Ubiquitous Access to

Therefore, well setup access points to help

Payments and Deposit

everyone takeout/deposit money within 15 minutes

Products at

of walking distance.

Reasonable Charges

We also setup special Payment banks to facilitate

by 1/1/2016

2. Access to
bank

banking services.

Banks dont easily give loans to poor people and

small businessman=100% financial inclusion not

3. Easy loans

3. Sufficient Access to

achieved.

Affordable, Formal

So, for that, Ill suggest reforms in Priority sector

Credit by 1/1/2016

lending (PSL), NBFC, RRB etc. But they too have

157

their problems of NPA, liquidity and loan defaults.

Well setup special Wholesale banks to help them
out.

IF you deposit money in bank, at max you can get

~9% return (on fixed deposit/FD). But today,
consumer price index is 11%. The inflation is rising

4. Universal Access to
higher than the money you can earn from your bank
Investment Products at

4. investment

savings.

To fix this anomaly, well help people access variety

Reasonable Charges
by 1/1/16

of investment products- mutual funds, inflation

indexed bonds, NPS etc. that protect your savings
against inflation.

We must give Insurance to everyone at reasonable cost, be

it life insurance, health insurance, crop insurance, livestock

5. insurance

insurance, property/fire insurance and so on. @reasonable

5. Universal Access to
Insurance and Risk
Management Products
at Reasonable Charges

price ofcourse!

by 1/1/16

Above initiatives will be meaningless, if consumers

are not protected against unscrupulous agents and
financial advisors.

6. consumer
rights

Crook agents only sell plans/policies where they get

6. Consumer protection,

high commission irrespective of what is suitable for

right to suitability,

customers needs. So, we must give the customer

grievance redressal

right to suitability.

Well setup a Financial Redress Agency (FRA) to

protect people in banking-financial-insurance sector.

Lets check these visions one by one. In the present article, well see vision 1 and
2. other visions later on.

Vision #1: UEBA Bank account for Adult

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Bank account is an essential gateway to all financial services, even those outside RBI
regulation. For example IRDA has ordered the life insurance companies to give
money only through cheque/electronic transfer to bank account of beneficiary.

So if you dont have a bank account, youll be shut out of the entire financial system.

Government also wants everyone to have bank accounts so money/subsidies can be

directly transferred into beneficiarys account under DBT.

Nachiket recommend that By 1/1/2016, every Indian resident (above 18) will be
given a Universal Electronic Bank Account (UEBA). HOW?

1. When Aadhar Card is issued to any adult (above 18), hell be given a choice to open
a bank account automatically.
2. Itll be called Universal Electronic Bank Account (UEBA).
3. In the bank of his choices. (So far, State Bank of India, Bank of Baroda and Axis
Bank have indicated their willingness to participate. )
4. Account opening=Totally free of cost. (But subsequently bank is permitted to charge
fees- for ATM, credit card etc.)
5. This UEBA account would remain active as a perpetual account as long as the
Aadhaar number remains active.
What is so special about this 1st January 2016? Why not some other date like 26th January or 15th
Mohan
August or 2nd October?

Im hoping that by 1/1/2016 National Population Register (NPR) will almost finish issuing Aadhar
Nachi

cards to all adults in India. Well give unique bank account number with Aadhar card= target will
automatically complete!

Mohan Well, Your target is ambitious but unrealistic. Consider these facts:

1. Earlier RBI tried the no-frills account for poor people, but the response has been
lukewarm.
2. In 2009, your IIM-buddy Raghuram Rajan chaired a panel on financial sector
reforms (to harass UPSC aspirants of that era.) At that time, Raghu hoped 90 per cent
of Indian households will get bank accounts by the end of 2011. But that target still
not achieved. Proof? Census 2011.
159

3. Now youve put all your eggs in UID-Aadhar. But:

1. ~50% of juntaa yet to get Aadhaar cards (Nov.2013 data).
2. Chhattisgarh and Madhya Pradesh have performed even less on Aadhar
enrollments.
3. If BJP/AAP/third front forms next government, Will they continue UID project
with same enthusiasm and budget support? Doubtful!
(This panel member has officially criticized Nachikets 1/1/2016 plan)

Youre talking about Electronic Bank account but In many rural and naxal areas, we dont

Shikha

have the physical structure (office/staff) OR even virtual structure (by mobile/broadband) to

Sharma

run banking services.

Besides, if deadline is 1st Jan 2016, means everything has to be finished by the end
31/12/2015= Mission impossible.

A more plausible target is 100% bank accounts by 1st January 2018.

Both of your concerns are valid. But I believe 1/1/2016 is possible. Besides
Nachiket

France: People are given right to bank account

Sweden: Banks cannot refuse to open an account

I recommend RBI to issue similar guideline/order to banks in India.

Additional criticism to Nachikets Universal Bank account plan:

1. Nachis plan is noble but no different than the Paternalistic formulation which say the
State knows everything- about what should be consumed by each customer= licencequota-inspector raj.
2. Nachi says bank account for every resident (not citizen). So even outsiders like
Bangladeshi and Nepali immigrants get the benefit, and money comes out of tax
payers pocket. (How? because even if SBI agrees to open UEBA accounts for free,
itll need to spend money on paper-work and staff. and over the years, SBI is not
making optimum profits and suffering from large NPAs. So, Government will have
provide some special scheme, Rajiv Gandhi Sabko bank account dedo Yojana, under
which, Government pays 10-20 rupees to such public sector banks for every new
UEBA account opened.)

Vision#2: Access Points for Banking/Payment Services

160

ok, for the sake of argument, lets assume everyone gets a universal bank account by
1/1/2016. BUT if a person has no branch office / ATM nearby, then it is useless.

So, by 1/1/2016, well also create so many access points that everyone can reach
them within 15 minutes of walking distance.

Example of access points: bank branch office, Banks business correspondence

agent, mobile recharge/repair shop, small retailer, Panchayat office, post office.
(+Payment bank, separately discussed click me)

Facilities given @access points:

Deposit and withdraw money

Transfer money from one bank account to another

This service will not be 100% free. Youll have to pay reasonable charges.
Again, your plan is Ambitious but unrealistic. Suppose a person is climbing Mt. Everest or
Mohan some Baba is doing samaadhi in a Himalayan cave, how will you create an access point within 15
minutes of his walking distance?

Technically speaking, well try to create one access point per square kilometer in areas where atleast
Nachi
400 people live.

161

Then why dont you just say 1 Access point for each sq.km with population of 400 people, across the
Mohan

country by 1/1/2016.

Because within 15 minutes of walking distance = shock value = Newspaper will talk about it and
Nachi
junta will take me seriously. This is marketing funda #101.

Mohan Still, it is an unrealistic goal.

Nachi

well, consider these facts:

1. Government is planning to cover all the 2.5 lakh gram panchayats through
the National optical fiber network(NOFN) by 2014. This network + Panchayat
office can be used for e-banking.
2. Mobile Penetration is higher than you believe: There are more than 85 Crore mobile
phone subscribers in India. Out of them 35 crores in Villages. And that number is
increasing at 10% every year=> Mobile banking opportunity.
3. Additionally, I also recommend RBI to give license for Payment Banks. (Topic
separately discussed click me)
Rural Branching Mandate
Center

city

census definition:population is ____

Metropolitan

10 lakh and above

SCB (Scheduled commercial bank):

Need RBI permission needed to open

Urban

Tier 1

1 lakh and above

new branch [Except Northeast and

Sikkim]

Semi-Urban

Tier 2

50,000 to 99,999

Tier 3

20,000 to 49,999

Tier 4

10,000 to 19,999

doesnt need RBI permission to open

new branch.
Rural*

Tier 5

5,000 to 9,999

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Tier 6

less than 5,000.

*Additionally, Bank will have to open atleast 25% of its branches in unbanked
rural areas.
Nachi

I recommend this 25% rural branching mandate rule should be continued.

Mohan Ok but 25% of what?

Nachi

25% of ABEP (annual branch expansion plan)

Meaning, if SBI wants to open 1000 new branches in 2014-15 then alteast 250 need to be opened
in unbanked rural areas.

White label Business Correspondence Agents

Banking Business correspondent Agents already discussed click me

White Label ATM discussed already click me

Nachiket recommends White label Business correspondence agents. Meaning same

agent be allowed to tie up with multiple banks.

Why? Same logic like White label ATM: if all banks open ATMs in every
village=operation cost increased. But is a white lable company gives service common
to all of them, then operational cost reduced.

In short, NOFN + Mobile Banking + Payment Banks + Rural Branching

Mandate=the Vision#2 achieved.
Apart from these, Nachiket also suggested reforms in NBFC, RRB etc. to achieve
vision #2 but they also overlap with vision 3,4,5 and 6. So, well discuss them
later on in separate articles.
The end of the article, unless you want to read some additional topics associated
with vision 1 and 2

Appendix: side topics

Basic Savings Bank Deposit Account (BSBDA)

2005: RBI cameup with No frills account for poor people.

Allows you to open bank account with no minimum balance requirement.

163

2012: RBI renamed it to Basic savings Bank deposit account (BSBDA).

Facilities/ features:

Anyone can apply for BSBDA (rich, poor, middle class doesnt matter)

Available at All scheduled commercial banks in India (including foreign banks with
branches in India)

Can deposit and withdraw cash

Cheque and electronic payment facilities.

Free ATMs-cum-Debit Card

If you account remains inactive, still bank cannot charge any penalty on you.

KYC norms apply

Account opening is free

Each year, First chequebook free.

Netbanking facility is free

Interest paid : 4% just like regular savings account.

Limits

Maximum of four withdrawals in a month, including through ATMs.

He cannot open any other account in the same bank.

Are Bank Branches useless for financial inclusion?

A traditional bank branch (of SBI or ICICI) has high cost of operation office rent,
staff salary, securiy guard, lightbill, telephone bill etc. Even an ultra-small branch
will cost ~20-22 lakh per year.

In rural area, most people will get No frills account / Basic savings and deposits
account= bank can hardly make any profit to make.

Some Regional rural banks and cooperative banks are yet to be integrated with Core
Banking platforms (CBS) = difficult for NEFT and RTGS money transfers.

Traditional bank branches have fixed working hours and bank holidays. If a poor
labourer wants to access his account, hell have to waste 2-3 hours in walking and
talking=>late at work =>contractor will cut his wages.

Most villagers need loans less than Rs.5 lakh. In this type of small loans, banks
paperwork, headache, loan default risk is high compared to the profit/reward.

But It doesnt mean Bank branches are useless. Nachiket recommends following

164

1. Branch should focus on high value customers, transactions, cheque clearing and cash
management only.
2. Outsource other things to Business correspondence agents. e.g. account opening,
organising financial literacy camps, sourcing loans resulting in sanction and
disbursal, maintaining records, and post-sanction monitoring and recovery of loan
accounts.
3. Allow White lable Business correspondence agents. (i.e .same agent/PCO
operator/kiranawalla can do work for multiple banks) in other words, permit
Interoperability of BCs.
4. Allow Non-deposit taking NBFCs to run Business correspondence agents network
for Banks.
5. Real Sector Adjacencies to increase banking penetration: For example
1. Diconsa, an operator of 22,000 grocery stores in rural Mexico, began a program
to deliver cash payments from government benefit programs to people in its
stores.
2. Axis Bank partnered with Airtel and Idea to leverage their wide outreach in rural
areas.
3. Banks should partner with Community Service Centres (CSC) and Panchayat
Offices in the villages.
6. Right now Aadhar cards enrolling is done via camps. Once this phase is over, bank
branches could be used for handling new aadhar cards in applications in upcoming
years.
Banks should get commission for DBT

If a person wants to transfer money via NEFT (netbanking) from one bank account to
another- hell have to pay fees between 2.5 to 25 rupees to the bank.

Similarly if government wants to give direct (cash) benefit transfer to poor

beneficiaries accounts, then government should also pay fees the banks.

Nachiket recommends that for every DBT Transfer, the government should pay the
bank 3.14% commission (upto to maximum Rs. 15.71 per transaction).

Problem? Most government departments dont like it. Not one bit.
RBIs Seigniorage and E-Money

Just food for thought, not very important for exams.

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In the medieval times, there was no RBI (central Bank.) The king himself issued the
coins. Hed give gold/silver/copper/bronze metal to mint-officers. Theyll melt it and
make coins.

In this case, Profit of the king (Seigniorage)= face value of a coin MINUS the Input
cost. (salary to staff, blacksmith, charcoal burned to melt the metal etc.)

Today we live in the era of Fiat-currencies- Rupee, Euro, Dollars, Yen and Yuan.

So, how does the Seigniorage work now?

Suppose cost of printing one fifty rupee note= twenty rupees (in terms of the
money spent on buying paper, ink, electricity and staff salary).

Thus RBIs Seigniorage (or profit) = face value of currency notes MINUS the cost of
printing currency notes. In our example, 50-20= 30 rupees.

But thats not the end. There are two cases when RBI needs to print money
1. To replace the torn out currency notes.
2. To pump additional money into the system.

In the second case, RBI cannot arbitrarily print money as per its time and mood
(because itll lead to inflation). First government will have to give equivalent
amount of bonds/government securities (G-Sec) to RBI. Say worth 100 crores.
Then RBI will print 100 crore worth notes and circulate it in the market. And on
those G-sec, government will have to pay interest to RBI.
so, What will be RBIs Profit in this case?
1. Direct profit: face value of notes minus production cost of those currency notes.
2. + Interest earned from G-sec. [RBI earns more than Rs.85,000 crores from this only!]
Anyways, whats the point?

When junta switches to Electronic money transfer (NEFT, RTGS, mobile banking
etc.) then less wear-n-tear of currency notes= demand of physical currency notes
decreased=RBIs profit (Seigniorage) decreased.

In a futuristic society, junta will stop using physical cash altogether, All transactions
will be done through mobile and electronic devices. How will RBI make profit?
obviously the direct profit is stopped (because RBI doesnt have to print currency
notes anymore).

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RBI will still earn interest from G-sec. (because even in an electronic money system,
RBI Governor will have to type the 100 crore in his super-duper banking software
to pump 100 crore rupees in the electronic system. and he cannot do so, unless
government gives him some legal backing through those securities/bonds.)

But overall, e-money= threat to RBIs Seigniorage(Profit). Nachiket gives two

solutions (just like Yudhisthir when asked about Ashwashthamas death):
1. We should admit it will not a big problem, and RBI can survive on less Seigniorage,
even if Junta switches to e-money.
2. We should admit that it will a big problem, and find an alternative solution.
(e.g. Rajiv Gandhi RBI Bachaavo Yojana, under which government will agree to pay
*** crores to RBI every year to compensate for the loss of Seigniorage because of
electronic money.)

Mock Questions
1. Correct Statement
1. Since Independence, if India had followed a free market capitalistic model of
economy, Financial inclusion would have been extremely high.
2. Since Independence, If India had taken concrete steps for financial inclusion, the
regional disparities would have been less.
3. Both A and B
4. Neither A nor B
2. Recently RBI formed a Committee under Nachiket Mor. Which of the following is
one of the vision statements issued by the Committee?
0. Bank account for every citizen by 2016
1. Bank account for every resident by 2018
2. Bank account for every BPL by 2018
3. Bank account for every resident by 2016
3. Nachiket Committee has recommended Universal Electronic Bank Account (UEBA).
How will it be achieved?
0. Nationalized Banks will be required to hold camps and Melas to enroll people in
UEBA
1. RBI will issue a circular mandating all scheduled commerical banks to enroll all
the unbanked BPL families in their branch-territories under UEBA
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2. Every resident will be issued a UEBA account automatically at the time of

receiving their Aadhaar number
3. None of Above.
4. What do you understand by RBIs Rural Branching Mandate?
0. that all scheduled commercial banks have to open atleast 25% of their branches in
tier-1 and tier-2 areas
1. that all scheduled commercial banks need RBIs permission before opening 25%
of their branches in tier-1 areas
2. that all scheduled commercial banks to open atleast 25% of their branches in tier
3 to 6 areas.
3. None of above
5. Correct statements about Basic Savings Bank Deposit Account
0. This is special type of bank account only Micro finance institutes can open.
1. only BPLs and self-help groups can apply for it.
2. They get higher interest rate than (regular) savings account.
3. It was earlier called No frills account.
6. If we completely moved to an electronic money system in place of physical currency,
then which of the following will be reduced?
0. Governments subsidy burden
1. RBIs Seigniorage
2. both A and B
3. Neither A nor B
7. A place is given Tier 6 rank in Census 2001. it means the given place is a ____ area.
0. Semi Urban
1. Rural
2. Urban
3. Semi-rural
8. (Aptitude) Suppose rural branches ratio of SBI : PNB=1:3, PNB: ICICI=2:5 and
ICICI:BoB=2:3, then what is the ratio of SBI :PNB: ICICI:BoB?
0. 4: 12: 3: 5
1. 12: 4: 50: 10
2. 4: 12: 30: 50
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3. None of above
9. (Aptitude) SBI, PNB and BOB have rural branches in the ratio of 2:3:4. If each of
them adds 40 new branches, then ratio becomes 4:5:6. Find the total number of rural
branches in the beginning.
0. 220
1. 200
2. 180
3. None of above
Q10. Match the following
1.
II.

Bimal Jalan

1. Financial Services

Nachiketa Mor

2. Banking licenses

III.

Arvind Mayaram

3. Multi Dimensional Index to measure state backwardness

IV.

Raghuram Rajan

4. New definitions for FDI and FII

Answer choices
choice

II

III

IV

Q11. Which of the following factor(s) aid in financial inclusion?

1. That under National optical fiber network, government plans to connect all Gram
Panchayats with internet connection.
2. That Mobile penetration is increasing day by day in rural areas

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3. That as per Census 2011, Indias working age population (15-64 years) is more than
60%
Answer choices
1.

only 1 and 2

2. only 1 and 3
3. only 2 and 3
4. All of above
Q12. Financial inclusion doesnt automatically help in:
1. turning savings into investment
2. reducing current account deficit
3. Decreasing inflation
Answer choices
1.

only 1 and 2

2. only 1 and 3
3. only 2 and 3
4. None of above.
Descriptive/Mains
1. Examine the lack of financial inclusion as a factor responsible for inequality of
income in India. (10m | 200 words)
2. Nachiket Committees plan of providing Universal Electronic Bank Account to
everyone by 2016, is ambitious but unrealistic. Do you agree? Justify your stand.
(10m | 200 words)
3. Nachiket Committees recommendations, if implemented in letter and spirit, can
achieve 100% financial inclusion. Elaborate. (10m | 200 words)
4. Critically evaluate the utility of Aadhar card in facilitating financial inclusion. (10m |
200 words)
5. (Ethics Paper 4: Case study) DevAnand is member of a Committee on financial
sector reforms appointed by the Finance Ministry. Chairman Alok Nath comes up
with recommendations that are good in theory but highly impractical if implemented
in real life. Dev had some reservations but this wasnt a matter of life and death, so

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Dev did not object while recommendations were being finalized. After the report was
released in public domain, TIMESNOW editor Arnab Goswami invited DevAnand
on his show, and started asking uncomfortable questions pertaining to the
practicability of those recommendations.
The following are some suggested options. Evaluate the merits and demerits of each
of the options:
1.

DevAnand should tell the truth that he did not agree with some of the

recommendations but did not oppose officially during the meetings because it wasnt a
matter of life and death.
2. DevAnand should tell Arnab that he was merely a member, and Alok Nath is the
chairman of the Committee, he is more capable of answering such interview
questions.
3. DevAnand should fervently defend those recommendations of the Committee.
4. DevAnand should informally request Arnab Goswami not to ask hard questions
because such Committee reports are never implemented anyways.
Also indicate (without necessarily restricting to the above options) what you
would like to advise to DevAnand, giving proper reasons. (25 marks | 300 words)
some chillar questions:
6. What is National optical fiber network? How does it facilitate financial inclusion?
(5m | 100 words)
7. Write a note on the steps taken by RBI for prompting financial inclusion. (5m | 100
words)
8. Write a note on the steps taken by Government of India for prompting financial
inclusion.(5m | 100 words)
9. Write a note on the steps taken by RBI and Government of India for prompting
financial inclusion.(10m | 200 words)
Interview
1. 100% financial inclusion vs 100% literacy. Which one will you pick first, as the
prime minister of India? and why?
2. Do you think higher literacy levels and financial inclusion are directly related with
each other? Yes/No and Why?

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3. If yes, then why North Eastern States have performed relatively low on the
parameters of financial inclusion, despite having relatively higher education levels?
4. As a policy maker, what will you do, to fix this anomaly, apart from giving money in
subsidies and schemes with special component for NE states?
5. Recently Nachiket Committee recommended bank accounts for everyone in India.
Others recommend government to give food to everyone, give education to everyone,
even mobiles for everyone! Critiques say this type of paternalist planning or Maaibaap-mindset is outdated. The state should not be doing everything. Do you agree?
Yes/No and why?

Nachiket Committee: Payment Banks- Rationale, Features, Advantages,

Limitations, Pre Paid Instrument Providers (PPI), USSD Banking
Pre-Paid Instrument Providers (PPI)

Airtel money is an example of PPI. So, What do they do?

You give them money (from your regular bank account)

They give you a digital wallet tied with your mobile.

You can use it to pay bills, shopping, movie tickets etc.

What are the features/characteristics of such PPI?

Theyre regulated by RBI under Payment and Settlements Act of 2007. (More than
20 such companies allowed to run their PPI scheme.)

KYC norms apply.

You dont earn interest rate on the money saved in it

You can put maximum Rs.50000 in it.

You cannot pull out money from it. (Meaning youve to spend. You cannot ask for
refund in cash. except under some special models/schemes.)

Transaction fee applies. Every time you buy something using your Airtel Money
account, they charge ~0.5% as commission.

Other examples of PPI:

Gift cards issued by banks e.g. prepaid.onlinesbi.com/giftcard.html

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Airtel money, Oxigen Prepaid cards

Paypoint, Zipcash, flipkart wallet, Paytm, Mobikwik

By the way, unlike currency notes, these prepaid instruments are not fungible.
For example, if you have 500 Rs. in your Airtel money account, you cannot get it
exchanged for 500 Rs. in Oxigen prepaid card. (even if you manage to do it by
some jugaad- there will be ~0.5% commission charge, you never get full
convertability from one instrument to another instrument.)
For more on fungibiity, click me
Why Nachiket hates PPI model?
Last year, RBI appointed a Committee for financial services under Nachiket Mor.
Committee observed that:

PPI doesnt offer interest rate. From financial inclusion point of view, this doesnt
help the poor people and small businessmen save their money.

PPI is a nested payment model: you give money to PPI, they deposit it in an escrow
account in some bank. Everytime you do something using digital wallet, they take
out money from that escrow account and pay on your behalf. Whats the problem?

Problem is nested models= they increase contagion risk.

Contagion risk = bad thing happens @one place, then it also leads to more negative
outcomes @other places in the market.

Suppose TRAI/Supreme court cancels Airtels license for xyz reason, result?
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Direct problem for people whove money in Airtel account.

indirectly, gives an opportunity for some crook to start a baseless rumor via facebook
that airtel has deposited all that PPI money into ICICI/xyz bank and now theyll also
go out of business => then juntaa will rush to demand their money back, share prices
fall down and so on. creating instability in the banking-finance system.

plus, Issues related to account security, KYC etc.

Therefore, Nachiket recommends:

1. RBI should NOT give any more licenses to open PPI.
2. Still, If anyone is interested, RBI should ask him to become a Banking business
correspondent OR apply forPayment Bank license.
Now comes the main topic:
Why Payment Bank?

Nachikets thought process is like this:

1. Pre-Paid Instrument Providers (PPI) = suck because they dont pay interest on your
money.
2. But their basic model /concept is good= You load cash into your mobile (airtel), use
it for buy things, pay utility bills and so on. No need to carry cash, cheque book,
credit card or visit ATM booth.
Thus, from financial inclusion point of view, PPI model is good, if they gave
interest on your money. So, based on that idea, Nachiket recommends RBI to
give license to a new type of banks called payment banks. [Under the banking
regulation Act.]

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What is payment bank?

Payment banks will have following characteristics:
1. Target audience: small businessmen and poor people. (=low income households)
2. Potential candidates to run Payment banks: mobile phone companies, consumer
goods companies, post office system, agri/dairy type cooperatives and Corporate
Business correspondents. Even Scheduled commercial banks can open payment
banks as their subsidiaries.
3. Payment bank will have to keep CRR (Cash reserve ratio) just like other Scheduled
commercial banks (SBI, PNB, BoB, Dena, ICICI etc)
4. Payment bank cannot hold more than Rs.50,000 per customer. (This is similar to
PPI.)
5. Payment bank cannot involve in any credit risk. (again similar to PPI)
Mohan

Cannot assume credit risk? What does that mean?

Nachiket It means Payment bank cannot give loans to anyone, especially to liquor kings like Vijay Mallya.

Hold on! That raises even more questions. Banks main function is to take deposit from one
guy, give it as loan to other guy and make profit in between these interest rates.

Mohan

But if bank cannot loan the money, then how will they make profit and howll they give
interest to those depositors?

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Na

Hold your horses, brother. Payment bank will be permitted to invest in SLR approved securities.

Mohan

Meaning?

Meaning Payment bank can invest customers money in Government securities (G-Sec) and
Nachi
corporate bonds of reputed companies like Infosys, reliance, TCS etc.

So?

Mohan

Investment in SLR securities give you return of atleast ~8%. So, payment bank can keep some
Nachi

money as profit and give the remaining to customer as interest.

Mohan

Toh thik hai. (then it is alright!) but what is SLR?

Nachi

click me

more characteristics of Payment banks:

1. Payment bank will enjoy all the rights and responsibilities of a Scheduled
commercial banks (SCB- like SBI, PNB, BoB, Dena and ICICI)
2. Entry capital requirement will be Rs.50 crore.
Hold on. I read in some newspaper that, to open a full scale SCB like SBI, you need minimum entry
Mohan capital of Rs.500 crore. Then why such relaxation given to Payment banks? Why do you allow them
to open bank with just Rs.50 crores?

As I told you earlier, Payment bank cannot assume credit risk (meaning they cannot give out
loans)

Nachi

and since they cannot give out loans=> there is no danger of loan default/NPA.

Payment bank can invest money in SLR securities, but they are safe investments, you can easily
recover money.

In short, Payment bank faces near-zero risk of default. so, they dont need a large capital for
emergency backup.

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Mohan Toh thik hai. (Then it is alright!)

side note: Nachiket also recommended wholesale investment banks and

wholesale consumer banks. But well see about them in a separate article later.
For now, Lets make a table:
Can Give Loans

Can Accept Retail

(Credit)?

Deposits?

No

No

Yes

Payments Bank (Nachikets Brainchild)

No

Yes

Yes

Sch. Commercial Bank (SBI, ICICI)

Yes

Yes

Yes

White Label ATM (TATA/Indica$h)

No

No

Yes

Bitcoin digital wallet

No

No

System

Can Make Payments?

Payments Network Operator (like

Mastercard, Visa)

Yes (only if both party

agree)

M-Pesa: Why India should get Payment banks?

Nachiket cites the case study of M-Pesa, to strengthen his argument in favour
of Payment banks. So lets check what is this M-Pesa?

M-Pesa is Kenyas Payment bank. (Fundamentally, it is a Mobile payment service,

just like our Airtel Money.)

M=mobile; Pesa=swahili word for money.

M-Pesa is the brainchild of Vodafone (=enemy#1 of our Income tax department) +

Kenyas local mobile company called Safaricom +IBM.

2006: M-Pesa launched. At this time, more than 70% of Kenyas Juntaa didnot have
bank accounts.

How does M-pesa system Work?

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You go to an M-Pesa outlet (local kiranawalla, shopping center, petrol pump, paanki-dukaan etc.)

Give him cash, he fills up your M-pesa electronic account with that money. (just like
how you recharge your prepaid mobile)

This M-pesa Account is tied up with your mobile phone. Wherever you go, money
goes.

M-pesa helps in money transfer between one person to another, international

remittances (e.g. Kenyan worker from USA can send money home), utility bill
payments and so on.

You can even borrow money from Microfinance Institutions (MFI) via mobile phone
(and later repay the loans, via same mobile phone).

M-Pesa size and Success:

Today, More than 75% of Kenyas juntaa uses M-Pesa system

More than 25% of Kenyas GDP flows through M-Pesa system.

M-Pesa also offers a separate model called M-Shwari to give 2-5% interest rate on
your money saved in that M-Pesa account.

So, If Payment bank model can succeed in Kenya, it can also succeed in India.
(Atleast thats what Mr.Nachiket believes)

Payment Banks: Anti-Arguments

Bankers have criticized this idea of Payment banks because:
#1: Nothing new under the sun

M-Pesa model you saw above- it is nothing radically new- SBI, ICICI and all other
big banks already offering such services via mobile banking platform.

So instead of opening new Payment banks, better just let those existing banks to give
these banking-investment-insurance services through their branches, mobile banking,
internet-kiosks, business correspondents and bancasurrance model.

OR Mr.Nachiket could have simply recommended all PPIs like Airtel money should
pay interest on the money held in digital wallets. instead of coming with a new type
of payment banks

#2: Not 100% financial inclusion

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Financial inclusion is a bigger thing than mere payment/money transfer- Financial

inclusion means access to complete bouquet of financial services banking,
investment, insurance, pension everything.

But thats very difficult to achieve through Payment bank system. (Because Nachi
himself said, bank cannot assume Credit risk.)

#3: Price wars

Schedule commercial banks also permitted to run Payment banks through their
subsidiaries. That defeats the whole purpose because SBI is a giant elephant with
large resources and manpower. If it starts a payment bank then other small players
payment banks cannot compete, and theyll bleed in price wars.

in the previous article on White label ATM, we saw how ATM operation costs are
hurting the entire banking sector.

So instead of allowing NBFCs and private companies to open Payment banks and
compete with regular (commercial) banks, Nachiket should better suggest a model
where they all can work in synergy to achieve 100% financial inclusion.

USSD and Conflict of Interest

Mohan

online transaction.

Nachi

For mobile banking, you need an active mobile number to send those SMS and passwords during

And You just said Mobile company can also get license to open Payment bank.

What is your point?

Mohan There is conflict of interest=> customer exploitation. Observe:

Suppose both Airtel and Idea got Payment bank license. I open a payment bank
account with Idea but keep airtel phone number.

Then what if airtel charges more money per SMS when I want to do some net
banking /balance inquiry about my Idea BANK account?

And airtel walla also promises me that if I open Payment bank account in Airtel,
theyll give free services and even discounts @Bharti-walmart malls!
Your concern is valid. There will be conflict of interest when such large companies also run payment

Nachi
banks. To solve this problem, All mobile companies must be ordered:

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1.

to provide USSD connectivity as per recent TRAI regulations (Rs 1.5 per 5 interactive sessions.)

2. to categories all SMSs related to banking and financial transactions as Priority SMS services
(with reasonable rates)

Man!! that means RBI and TRAI will have to take additional headache and supervision to
prevent customer exploitation.

Mohan

That is one more negative argument against Payment banks. Better just let the regular banks
handle stuff instead of opening new payment banks.

Anyways, what is this USSD connectivity?

USSD connectivity for Banking

USSD=unstructured supplementary service data

Example of USSD= When you type #123* etc. numbers in your mobile to check
balance, activate 2g/3g pack, ringtones etc.

USSD can be used for prepaid call-back service, location-based content services and
menu-based information services.

Unlike SMSs, USSD messages create a real-time connection during a USSD session.

The connection remains open, allowing a two-way exchange of a sequence of data

making USSD more responsive than services that use SMS.

Last year, TRAI cameout with guidelines on USSD that:

For banking related USSD, the mobile company can charge only Rs.1.50 per session.

This money will be charged on subscribers account (i.e. balance in your mobile
phone).

ICICI and SBI have already launched their USSD Based mobile banking services.
For example click me for SBI page

Mock Questions
1. What do you understand by the term Pre-Paid Instrument Providers (PPI)?
1. White label ATMs
2. Brown Label ATMs
3. Both A and B
4. Neither A nor B

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2. Recently, Nachiket Committee on Financial services, has recommended a new type

of Payment banks. Which of the following, is not true about them?
0. Scheduled commercial banks will be allowed to open Payment banks as subsidiaries.
1. Payment banks will be exempted from CRR and SLR requirement.
2. Mobile phone companies, consumer goods companies, post office and
cooperative societies will be allowed to apply for Payment bank license.
3. None of Above
3. Correct statements about Pre-Paid Instrument:
0. With RBIs permission, prepaid instruments are issued in the form of smart cards,
internet wallets, or mobile wallets.
1. They can be used for purchasing railway tickets, paying utility bills and purchase
of goods and services.
2. Scheduled Commercial banks can issue such Pre-Paid instruments.
3. As per RBI rules, 4% interest rate has to be paid on each such Prepaid
instruments
4. Find the correct statement(s) about Payment Banks as recommended by Nachiket
Mor Committee
0. Payment banks will be kept outside the purview of Banking regulation Act.
1. Payment banks will be focusing mainly on Service class employees and HNI
(High networth individuals).
2. Payment banks will have to follow the targets under PSL (Priority sector
lending).
3. None of above
5. Correct Statements about USSD
0. USSD facilitates real-time two-way exchange of data between mobile phone and the
service provider.
1. As per TRAI regulation, mobile companies are requireed to provide all USSD
services free of cost.
2. Both A and B
3. Neither A nor B
Descriptive/Mains

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1. Nachiket Committees proposed payment banks are better suited to achieve the goal
of financial inclusion compared to the existing setup in banking sector. Do you
Agree? Justify your stand. (10m | 200 words)
2. Write a note on Nachiket Mor Committees recommendations regarding Payment
Banks. (5m | 100 words)
3. Compare and contrast between the proposed Payment banks and Scheduled
Commercial banks. (5m | 100 words)
4. Define USSD. Explain its utility in Mobile Banking and Financial inclusion. (5m |
100 words)

Nachiket Committee: Remove SLR, Reduce CRR, Raise PSL to 50%,

Increase Loan Access: Issues, implications explained
Prologue

So far, weve seen RBI appointed Nachiket Mor Committee on financial products
for small businessmen and poor people (low-income households). Nachiket
cameup with six-point vision.

1. Universal bank accounts for everyone (already done click me)

2. Better access to payment services, payment banks (already done click me)
3. Better access to loans (Credit) discussed in this article
4. Better access to investment
5. Better access to insurance
6. Consumer protection.
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In this article, well see vision #3: better access to loans (Credit). Nachiket has
three major recommendations in this regard:
1. Remove SLR, reduce CRR
2. Remove interest subvention, Remove debt relief
3. Priority sector lending: raise from 40% to 50%
4. Other Misc. recommendations to increase access to credit (loans).

Accepting Deposits:
Bank is an organization who got license from RBI (under Banking regulation
act)
A bank must have three features:
1. Accepts deposit from public
2. Gives these deposits for loan / investment
3. Deposited Money can be withdrawn by cheque (and other means like Debit card,
ATM card, netbanking etc.)
Bank accepts mainly two types of deposits:
They mature at a particular time e.g. Fixed deposit for 1 year @9%
Fixed deposit, recurring

Time
interest rate. If you demand this money before expiry of one year= they

deposits, cash certificates

Deposit
cut penalty.

Savings account
(for general public)

Demand
You can demand / takeout money without as per your wish.

Deposit

current account (for

businessmen)

Demand Drafts
(DDs)

For bank, both of them are liabilities. Because bank has to repay this money sooner
or later.

RBI counts SLR and CRR only on ^these net demand and time liabilities (NDTL.)

Incoming (Time and Demand Liabilities) suppose its 100 crores

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4 cr.gone here. (Bank

CRR: Cash reserve ratio. (4%)

earns no profit/interest
here)

SLR (23%): Bank has to keep aside some money in liquid assets such as gold,

23 cr. gone here. (some

government security other RBI approved securities of public/private companies.

interest/profit earned)

Money left with bank

100-(23+4)=73 cr.

Now whatever car loan, home loan, and education loans the bank wants to give,
they have only 73 rupees left. (even there, youve Priority sector lending
requirements.)
So, Nachiket recommends reforms:
SLR

CRR

Remove SLR

CRR should be counted only on the Demand deposit.Ignore

requirement.

Time deposits for this calculations= CRR will be reduced

(gradually)

automatically.

What Nachi
recommends?

Money kept under CRR doesnt earn additional money. it is a

WHY?

Explained below

dead asset. So let money kept in CRR=better.For more

points, click me to know why SBI hates CRR?

Why Remove SLR?

SLR=Statutory liquidity ratio =banks have to keep aside some assets into liquid
form= cash / gold / government securities / RBI approved securities of public and
private sector companies.

these assets are called liquid, because you can easily sell them and recover money
in cash form. This cash comes handy during emergency for example: When many
people simultaneously come to take out money from their savings/current account
during festivals, after natural calamity, or when someone rumours that bank is going
to collapse.
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When customers make such bank runs, bank can sell away the SLR securities and
quickly arrange cash for customers.

So, in a way SLR=one type of emergency backup.

But SLR securities=very safe, low risk securities. And in market, low-risk = low
reward. Banks hardly earn ~8% interest/dividend on such investment. So most

bankers consider the SLR investment = lazy investment or even dead investment.
BASEL norm
BASEL norms=lengthy topic, needs separate discussion. For the moment, just
know that

BASEL is a town in Switzerland, where bankers across the world met, to decide how
to make banking sector more safe and sound, and how to prevent repeat of sub-prime
crisis.

This leads to various terms: Capital adequacy requirements, tier I, tier II assets and so
on.

Third version of this system =BASEL III. Effective from 2013.

Bankers agreed we must keep some money apart, as emergency backup (just like
our SLR).

They came up with a new concept called Liquidity Coverage Ratio (LCR). The
basics are similar to our SLR, that bank should invest part of their money into liquid
assets like Treasury bonds / government securities and highly rated shares & bonds.

RBI has been talking with BASEL board to include SLR securities into this LCR
system.

Indian banks have to comply with BASEL-III norms by 2018.

Nachikets argument is following

SLR = lazy investment (Because it gets barely ~8% return)

In future, weve to comply with BASEL-III norm. and theyve LCR system that is
very similar to our SLR

If banks have to keep money aside for both LCR+SLR => less money available for
lending=not good for economy. So, better abolish SLR and just follow the BASEL
norms.

185

Overall, SLR removed + CRR reduced = more money available for banks, for
lending to needy people = access to loans increased =financial inclusion.

Why Priority sector lending?

Youre aware of the common sense principle no risk no reward=>high risk high
reward. So, What will happen in a free market economy (where RBI and
Government donot interfere with the system)?

Loan customer

Bankers thought process

How much interest should

bank charge on the loan?

Maximum risk, because his income depends on the

Farmer

vagaries of monsoon. He is mostly to default on the

High (50%)

loan.

Less Risky than farmer but still he may make losses

High (45%)

Small businessman
during high inflation/recession and default on loan.

Hell not repay until he finishes graduation and gets a

High (40%)

Student
job.

Salaried middleclass
Minimum risk.

Low (10%)

family

Low (5%) because

High net-worth
individual (HNI), Big

Minimum risk.

minimum risk=minimum
reward.

businessman

Obviously, farmers, small business and students:

1. Will be exploited with high interest rate OR
2. Will never get any loan.
Therefore, RBI requires the banks to give part of their loans to the weaker
sections of society. This is called Priority sector lending (PSL) requirement.
186

Late

RBI asks the banks to increase lending to agro + small Industries (but did not give any targets

60s

RBI required the banks to submit data on how much money do they lend to agro+small industries? (RBI
70s

had not imposed any targets on the banks yet)

Finance minister comes up with the idea of 40% lending to priority sectors.

80s

Priority sector includes following categories:

1. Agriculture and allied activities: (dairy, fishery, animal husbandry, poultry, beekeeping and sericulture.)
Direct lending

Indirect lending

Individual farmer, self-help groups (SHG),

Food processing industry, other Corporates and firms

cooperative societies

engaged in this sector.

2. Micro and Small industries (upto 2 crores)

3. Education loans (10 lakh in India, 20 lakh for going abroad)
4. Housing loans (upto max. 25 lakh in metropolitan cities)
5. Renewable Energy: Loans for solar and renewable energy solutions.
Note: Export credit is not a separate category. Export credit to eligible activities
under agriculture and MSE will be reckoned for priority sector lending under
respective categories.
Weaker section
Within priority sectors, bank has to give some of the loans to weaker section of
society. Weaker section means:
1. Small and marginal farmers;
Farmer

Landholding upto

Small

more than 1 ht. but less than 2 ht.

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Marginal

upto 1 hectare

1. Artisans, village and cottage industries

2. Beneficiaries National Rural Livelihood Mission (NRLM); Swarna Jayanti Shahari
Rozgar Yojana (SJSRY); and Manual scavangers rehab. scheme
3. Scheduled Castes and Scheduled Tribes;
4. Women, self-help groups
5. Distressed people in the clutches of non-institution lenders (private Moneylenders,
loan-sharks, financers etc.)
Overall, PSL targets are as following
Desi Banks. (+foreign banks with 20 branches

Foreign banks with less than 20

of more)

branches

Agro

18%

No specific targets

Weaker sections

10%

No specific targets

Whatever left to reach the 40% target

No specific targets

40% of net loans given**

32%

Target

Remaining categories
under PSL

Overall PSL target

**To be technically correct that is Adjusted Net Bank Credit (ANBC) or credit
equivalent amount of Off Balance Sheet Exposure (CEOBE), whichever is
higher? But such minute technical details not important for exams.

What if PSL target not met?

Most banks miss their PSL targets.
Year 2013

Official loan target of PSL

40%

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Public sector banks gave

36.3%

Private sector banks gave

37.5%

So what happens when bank fails to meet PSL target?

Foreign bank with
Desi Banks. Foreign banks (with 20 or more branches)
less than 20 branches.

Theyve to send remaining target money to RIDF

To SEDF

SEDF= small
RIDF=Rural infra. Development fund

enterprises
development fund

NABARD manages RIDF

SIDBI manages SEDF

NABARD pays interest rate to the bank for this money (RBI decides the rate)

Same by SIDBI

State governments get money from this RIDF fund to launch various infra. Projects.
But this isnt free money. The state will have to repay money with interest rate.

Similar case.

Additional safeguards under PSL

just for general awareness, not much important for exam:

1. Bank itself has to arrange for applicants photograph. (in other words, Bank cannot
reject application because poor man did not have photograph.)
2. Branch manager is given discretionary powers while handling loan applications of
weaker section. He can approve suc loan application without consulting his boss.
3. If an SC/ST person has applied for loan under priority sectors, then Branch manager
cannot reject. If he wants to reject, he must forward the file to boss.
4. If loan application is less than Rs.25000, Branch manager must clear it within 15
days. (and for bigger amount than Rs.25k, then within four weeks)

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5. During natural calamities, floods, cyclones etc. bank has to restructure the loan
repayment terms so the victim doesnt suffer more.
6. Bank cannot charge penal interest, if borrower delays repayment. (for loans upto
Rs.25000)
7. A farmer took loan but late in repayment, still bank cannot charge compound interest
rate on his dues.
8. At regional level, banks have to setup special machinery to handle complaints of
PSL-borrowers.
9. Bank has to maintain a separate register for all rejected PSL loan-applications, along
with reasons. RBI has powers to inspect these records.

PSL target raised to 50%

Ok so far, I understood:
Mohan

That you want to remove SLR, reduce CRR = increase availability of loans for people.

What is Priority sector lending, its features.

Now, tell me your next ambitious but unrealistic target!

Nachiket well, I suggest PSL target should be raised from 40% to 50%

Whoa, whoa, whoa.PSL borrowers often default on loan repayment. If bank has to give
half of its deposits to Priority sector=high NPA, system will collapse, like it happened during
Subprime crisis. (Because American banks gave too much home loans to people who did not
have the aukaat to repay. Technically called Sub-prime borrowers.)

Mohan

Most banks even fail to reach 40% target. Howll they reach the 50% Obviously, theyll fail
and all the money goes to RIDF =>State government=>chowed down by local politicians,
bureaucrats and contractors in bogus infrastructure projects.

Besides, If banks have to give half of their loans to PSL/weaker section, then where will
middleclass get loan? Is this another election gimmick or what? MAN! I thought youre an
IIM graduate but your mindset is of a jholachhap NGO/NAC member.

Hold on man. Dont jump the gun so quickly. 50% doesnt mean 50% of 100 rupees. It is a
Nachi

weighted scoring system. Allow me explain:

Existing situation
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There are no regional targets under PSL. Suppose SBIs plans to give total 100
crore as loans, then theyve to give 40 crore as loans to priority sector areas. BUT,
SBI is free to give this loans- anywhere in India.

As a result, most of the PSL-loans are given in rich-n-developed states e.g. Gujarat,
Andhra, TN, Punjab, Haryana etc. where a farmer is more likely to repay the loan,
compared to a farmer in Assam or Arunachal Pradesh. Observe

Therefore, I recommend a new system: if bank gives loan to hardship areas, then
theyll get more marks, and they must get minimum 50% marks to reach PSL
target. Thats our new system. Observe:

Financial inclusion at the

Direct

Weaker

Other

agro.

section

sectors

District
moment

highest

Pattanamthitta, Kerala

1.25

1.1

high

Namakkal, TN

1.38**

1.21**

1.10**

medium

Rajkot, Guj

1.43**

1.25**

1.14**

medium

Muzzaffarnagar, UP

1.46**

1.28**

1.16**

1.56**

1.37**

1.24**

Kurung Kumey,
lowest
Arunanchal

Suppose SBIs net credit (ANBC)=100 Crore. So their (new) Adjusted PSL target
=50%=50 crore rupees.
If SBI gives agri.loan of Rs.1 lakh to a farmer in Kurung Kumey district of
Arunanchal, then under the (new) PSL target, well say SBI has given 1 lakh x
1.5617=1,56,170 rupees loan under PSL target.
Now, Observe from SBI bank managers point of view:
Earlier PSL-system (40%)

New (adjusted) PSL system (50%)

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Whether SBI gives loan to farmer in Assam

hardship area will get more weightage.
or in TN, its counted one and same.

40%=40 crores target

50%=50 crores target

Not necessary to give exactly 50 crore rupees. Suppose SBI

To reach this target, SBI will have to give

focuses only where they get multiplier of at least 1.3. then how

away exactly 40 crore rupees.

much money does SBI need to give out?50 crore / 1.3 = approx.
38 crores.

Meaning, only 100-40=60 crore left for

giving out as normal loans (car loan,

Meaning, 100-38 crores=62 crores left. So additional two crores

for giving out as normal loans=more profit than previous

business loans etc. where SBI earns more

(40%) system.
profit margin)

In other words, this is win-win situation for both parties:

Banks earn more profit (Because theyve to give out less money in PSL).

Loan seekers in hardship areas, get more attention from banks.

HmmInteresting. In your example SBIs new PSL target actually reduced to 38% (although on
paper it will be 50%).

Mohan

Plus, youve already recommended removal of SLR, and reduction in CRR.

So, youre not a jholachhap NGO as I had thought.

Right, Im totally opposite of that. And to prove it, I give another recommendation: government
Nachi
stopping giving debt reliefs and interest subvention to farmers.

Mohan But why??

Nachi

For that, youve to understand the concept of Base rates.

Base Rate
Banks accepts deposits from people and gives it as loan to others. But who or
what decides how much interest rate should be charged on such loans?
192

Benchmark prime lending rate (BPLR).

From

Banks would use this complex formula to calculate the rates for various loans.

2003

Drawbacks: system was opaque, middleclass had to pay high interest rates, while rich corporates
got big loans at cheaper interest rates.

Even if RBI changed its repo rate, the banks will not change their loan interest rates.

RBI abolished above BPLR system. Introduced Base Rate

From

Under base rate system, the individual bank is free to determine its own base rate. (7%, 8%, 9%
whatever.) bank is free to adopt a formula, as long as RBI feels it is consistent.

2010

Banks have to publish the Base rate on their website.

Banks cannot lend money below the base rate.

Benefit: System more transparent, all type of loans are linked with Base rate.
For example: SBI s Base rate is 10% (as of Nov 2013)
SBIs

Calculation

result

Car loan

0.75% above Base rate

10.75%

Two wheeler loan

8.25% above base rate

18.25%

Education loan (upto 4 lakh)

3.5% above base rate

13.5%

Home loan for women (upto 75 lakh)

0.10% above base rate

10.10%

If tomorrow, SBI changes the base rate, then all these loan interest rates will
change accordingly. SBI cannot give loan to anyone, at a rate below the base
rate. But Problem comes with the

Agri. interest subvention scheme

By government of India

Applies to scheduled commercial banks (both public + private)

Target beneficiary: farmers

193

If farmer is given loan upto 3 lakhs @7% interest rate, THEN government will give
2% interest subvention.

In other words, farmer has to pay only 7 MINUS 2 =5% interest rate to bank, and
that remaining 2% will be given by government (From tax payers money)

Mohan Ok man but whats the problem?

This interest subvention scheme is inconsistent with RBIs base rate system. Recall that a bank cannot
Nachi

give loan to anyone below the base rate. Most banks have base rate higher than 8% but government
will give subvention only if farm loans given @7%.

Mohan So what do you recommend?

government should stop giving interest subvention. If government wants to give any
benefit/subsidy/relief to farmer, then give it under direct (cash) benefit transfer. (DBT) to
farmers bank account.

Nachi

This would ensure that the banking system is able to price loans in a sustainable manner based
on the risks involved.

Itll also protect credit discipline amongst its borrowers.

Whatever dude. In the election year, it is unlikely that government will scrap down interest subvention
Mohan

scheme just because Nachiket the great recommends so!

Debt relief= bad habits

2008= Government waived all the debts taken by farmers. (so they get happy
and vote for UPA in 2009 election.)
Lazy

I dont need to repay loans on time because government will again waive all the farm loans

farmer

before next general election!

Honest
if other lazy farmers are not repaying loan on time, why should I bother?
farmer

194

Thus, governments debt waiver scheme has created negative implications for the
banking system. Farmers now expect more such loan waivers schemes would follow
before state/general election, so they dont repay loan installments on time.

This also hurt taxpayers because

Government waived farmers loans=>government pays to the banks on behalf of

farmer.

But money doesnt fall from sky. Such freebies =fiscal deficit increased and it leads
to plethora of new problems. (To learn more on negative effects of high fiscal deficit
click me)

Nachiket recommends that:

From now on, government should stop giving debt waiver or interest subvention.

Bank should bundle farm loans with weather based insurance scheme, that way,
during crop failure, the farmer doesnt default on loans. His insurance money will
cover the loan payment.

In case of large scale loan defaults after natural calamity, banks should work closely
with insurance companies to recover money. (instead of relying on state or central
government to pay bank losses from budget.)

If at all, government wants to give relief to debt ridden farmers, then transfer money
to their bank account via DBT (Direct benefit transfer- just like in LPG subsidies).
Dont directly waive everyones loan.

Every loan defaulter should be reported to credit bureaus (e.g. CIBIL)- be it small
farmer, self help group or big businessman. Then people will automatically become
cautious to protect their credit history, and repay loans on time. Why? Because if a
person has low score in CIBIL, next time bank will not give him loan easily.

PSL: Misc. Issues/recommendations

to increase access to credit/loans among small businessmen and low income
households:
PSL Insufficient

Banks alone cannot fulfill the credit/loan requirements. Entire MSME (micro-smallmedium) enterprises need 4 lakh cores of credit.

195

Banks dont have that much money to lend to a specific sector. If banks divert all of
the incoming money to business/agro loans then middle class will have hard time
getting loans.

Nachi recommends:

Legal/regulatory framework should be relaxed to help NBFC to raise more money

from capital market, FII, External commercial borrowing etc. So NBFC can also lend
more money to needy people.

Setup Wholesale banks. (well see it in detail, in a separate article)

Middle & Large farmer benefits most

Small/marginal farmer= relies on self-labour. So, apart from seeds, fertilizer,

pesticide and irrigation, he has to spend money on himself for health, food, life
insurance and disability insurance premiums, clothing, shoes etc. => hell have to
borrow again to manage expenses during the off-season.

But such items are not counted as Agricultural lending under PSL. So banks have
no interest in helping farmers for those side-expenses. And even if bank gives the
loan, itll charge higher interest rate under personal loan.

On the other hand, Middle / Large Farmer= Already has some machines (tractors,
harvesters, diesel pumpset etc).

So labor= Not his main factor of production and he has sufficient money to survive
even in the off-season.

Thus, medium and large farmers have benefit the most from PSL target. But smallmarginal farmers have not benefitted much from PSL.

Nachiket recommends:
Loan given to small/marginal farmer and landless labourer= should be counted
under PSL target, irrespective of whatever it is meant for buying direct agricture
Inputs or indirect wage components.
Middleman model failed

Banks cannot open branches in each and every village (and still they have to fullfill
the PSL targets), so they tried the real-sector intermediary model.

In this model: fertilizer dealers, Sugarmill owners, APMC agents etc. disburse loans
to farmers on behalf of the bank.
196

What is Problem in this model?

Overconsumption of fertilizers and pesticides. How? Because fertilizer dealer will

invariably advice the farmer to buy more inputs using the loan money. And farmer
would fear that dealer will create some hurdle in loan-processing if he doesnt use
complay.

Dealer will increase the price of seeds, fertilizer and pesticides. And farmer has no
alternative but to buy at higher price (Because dealer processes the loan papers.)

Sugarmill owner will deliberately give less price to farmers sugarcane.

+None of these agents have any complaint/redressal facility where farmer can
quickly seek justice. (unlike the regular bank and banking ombudsman model)
Nachi recommends: This Real-sector intermediary model should be used only as
a stop-gap arrangement. Bank should focus on increasing penetration in rural
area by direct branch or business correspondence model.
March Rush
Season

Kharif

Rabi

Months when farmer needs the loan desperately

June, July, September

December and January

But, statistics indicate that most of the loans are given in March month. Why?
Because PSL-compliance is calculated at March end.

This is similar to March rush in government departments. Parliament sanctions

budget =>government gives crores of rupees departments=> but if department
doesnt spend it before 31st March, all the unspent money will go back.

For the entire year, sarkari babus sleep, but during March, they rush to buy new
office equipment, start clearing all tenders and project files. Same happens in Banks
for PSL-target. Result?

1. In the haste, banks dont thoroughly verify the credit history of farmer=more chance
of loan default.
2. Farmer gets the money when he doesnt need. (in the march month). He is more
likely to spend it on unproductive things such as festivals, weddings, pilgrimage to

197

Amarnath/Nashik etc.=> Only a small part of a loan money to agriculture

inputs=>More chances of loan default.
Nachiket recommends: PSL counting should be done on quarterly basis (every
three months) rather than yearly basis (12 months). Thatll prevent the March
rush among banks.
Customer Data Architecture

When you apply for loan, Bank Officer will first check your credit worthiness.

For city folks, this is no problem because they already have xerox passbook showing
their balance history, income tax records, salary slips, land possession titles, vehicle
registration and so on.

But most villagers and city poors dont have such records.

In banking parlance theyre called Thin file clients. (Because their credit record,
bank balance history is very thin).

Banks dont give loans easily to these Thin file clients. =100% financial inclusion
not achieved.

Solution? Make their file thicker.

But how? Ans. Via customer data Architecture.

But Again how?

Even if the person doesnt have a thick file record to show his credit worthiness, he
may still have some evidence that he regularly pays his dues e.g. lightbill, phone
bill, gas-cable bills etc.

In Italy, even water utility bill is counted in credit score. If you pay your water bill
regularly, your loan application will be processed easily.

In Brazil, phone companies share all data records that would predict creditworthiness
of low-income borrowers. (e.g. how many times did the person recharge his phone,
average monthly call/sms/internet usage and so on.)

In India, even the poors without toilets, have mobile phones. Banks can crosscheck
with mobile company about their credit worthiness.

Nachiket Committee recommends

198

1. New guidelines so mobile companies can share data with banking and finance
companies.- even with prospective employer, landlord, or creditor, whether bank or
non-bank.
2. But only with written authorization from user. (=the mobile phone customer)
3. Special IT system to prevent misuse of information (e.g. only an officer above **
grade can login the system and check data, data cannot be copied in Usb and so on)
Weather stations

Farmers need loan to buy seeds, pesticides, fertilizers and machinery

But their loan repayment capacity depends on the vagaries of monsoon.

Therefore, most banks sell agriculture loans along with weather based insurance
cover. For example, the Weather Based Crop Insurance Scheme (WBCIS)

Such insurance schemes give protection from crop loss during

Adverse monsoon: Both excess rainfall and drought situation.

Adverse weather: frost, heat, relative humidity, and un- seasonal rains during
Rabi season.

So whats the problem? Lack of weather monitoring stations. So even if there is crop
loss, it is difficult for farmer to prove the loss was because of bad weather. For
complete coverage we need ~40,000 weather monitoring stations across India.

Nachiket Committee recommends:

1. If bank gives loan to setup weather station, it should be counted under PSL target
(priority sector lending). This will encourage entrepreneurs to setup weather stations.
2. If farmer suffers crop loss due to bad weather, he should be given the compensation
before next cropping season, without delay.
3. Setup Automatic Weather Stations (AWSs) and Automatic Rain Gauge (ARGs).
Land Registries

You can get loan more easily if youve an immovable collateral (e.g. apartment,
factory, farmhouse in your name.) because even if you default on loans, the bank can
take over that property and sell it to recover money under SARFAESI act.

But most poors dont have land records to prove their ownership over immovable
collaterals.

199

Therefore, banks dont give them loans easily= 100% financial inclusion not
achieved.

In India, registration is compulsory for sale of land and property. But the authorities
dont verify the history or ownership of the property from the seller= nuisance of real
estate mafias and property disputes pending in courts = difficult for the victim to get

loans. Solution? reforms in the Tenancy reform acts.

Complimentary infrastructure
If bank gives equity investment in following, then it should also be counted under
PSL target:

warehouses,

market yards,

godowns,

Silos

NBFCs operating in district with low financial inclusion.

Weather monitoring stations in rural areas.

In other words, Nachiket recommends that complementary infrastructure for rural

Development should be brought under PSL targets.
Bond purchase in MFI

If bank gives loans to an NBFC Microfinance institutions (MFI)= counted under PSL
target

But if bank buys the bonds of such NBFC-MFI= not counted under PSL.

Nachiket says count such bond purchases under PSL.

Warehouse receipts

Basics Already explained click me

Nachiket recommends that Food Corporation of India (FCI) and State
Governments should use warehouse receipts to raise money, rather than being
reliant only on bank credit.

Mock Questions
1. Which of the following, is/are not a part of priority sector lending?
1. Food processing industry. renewable energy
200

2. Small industries, housing loans

3. both A and B
4. Neither A nor B
2. Which of the following is/are correct about classification of Small vs Marginal
farmers?
0. This classification is based on total hectares of land owned.
1. This classification is based on total income from the land owned
2. This classification is based on number of crops cultivated on the land owned
3. None of above.
3. Correct statement about Priority sector lending targets
0. These are administered by Finance ministry
1. If a bank fulfills its PSL targets, RBI gives it permission to open more branches
in Metropolitan cities.
2. Within the PSL targets, a bank is required to give 18% of the loans to weaker
sections of society.
3. None of above.
4. NABARD administers a fund called Rural infra. Development fund. What is the
major source of its funding?
0. borrowing from RBI
1. borrowing from World bank
2. Penalties levied from foreign banks who fail to meet PSL targets.
3. None of above
5. Correct statements about small enterprises development fund?
0. It is administrated by Ministry of Commerce.
1. It gets funding from certain types of banks that fail to meet PSL targets
2. Both A and B
3. Neither A nor B
6. What do you understand by Base Rate?
0. As per RBI norms, Banks cannot pay interest rate higher than the base rate to time
and demand deposits
1. As per RBI norms, Banks cannot pay interest rate lower than the base rate to
time and demand deposits
201

2. As per RBI norms, Banks cannot charge interest rate lower than the base rate to
any borrower.
3. As per RBI norms, Banks cannot charge interest rate higher than the base rate to
any borrower.
7. Who decides Base rate of a bank?
0. RBI through monetary policy
1. Finance Ministry through gazette notifications
2. Meeting among the representatives of RBI, Finance ministry and the respective
banks.
3. None of above.
8. Which of the following will reduce the fiscal burden of the government?
0. Removal of interest subvention scheme
1. Removal of Priority sector lending targets
2. Both A and B
3. Neither A nor B
9. Which of the following will be detrimental to the objective of financial inclusion?
0. Removal of interest subvention scheme
1. Removal of Priority sector lending targets
2. Both A and B
3. Neither A nor B
10. (Paper II Decision Making) Youre posted as a District Magistrate in an area affected
by left wing extremism. With your efforts, a few of the naxalites had surrendered,
spent jailtime and resumed family life after release. One day, a former Naxal turned
farmer approaches you, complaining how the branch manager of a public sector bank
has rejected his loan application for agricultural inputs. What youll do?
0. Call up the Branch manager, order him to pass the loan.
1. Call up the SP, order him to write a police verification certificate for the said
farmer, so he can avail the loan again.
2. Ask the farmer to approach higher authorities within the said bank
3. ask a journalist friend of yours to unearth the truth and get justice for this farmer.
Q11. RBI appointed Nachiket Committee has recommended
1.

RBI should Abolish Marginal Standing facility system.

202

2. Government should stop giving debt waiver and interest subvention to farmers
3. SLR system should be gradually removed.
Answer choices
1.

only 1 and 2

2. only 1 and 3
3. only 2 and 3
4. None of above.
Q12. According to the current PSL-system:
1.

Banks are required to allot 23% of their deposits into SLR securities

2. Banks are required to allot comply with BASEL-III norms by 2018

3. Banks are required to allot 18% of their credit to North Eastern States
Answer choices
1.

only 1 and 2

2. only 1 and 3
3. only 2 and 3
4. None of above.
Assertion Reasoning:
Assertion reasoning instructions: Each of the following questions contain a set of
Assertion (A) and Reasoning (R) statements. Answer codes are as following:
1.

Both the statements are individually true and Statement R is the correct

explanation of Statement A
2. Both the statements are individually true but Statement R is not the correct
explanation of Statement A
3. Statement A is true but Statement R is false
4. Statement A is false but Statement R is true
Question statements
13. (A) In the recent years, most of the public sector banks have full filled or even over
crossed their PSL targets (R) Public sector banks are given interest subvention
benefit by government of India.

203

14. (A) In the recent years, the farmers in Southern states have received large amount of
agricultural loans under PSL targets (R) Southern States have highest % share in
gross cropped area in India.
15. (A) In recent years, Public sector banks have suffered large NPAs. (R) Delay in
environmental clearance in power, iron and steel sector have reduced the industrial
output.
Descriptive/Mains
1. Despite the robust guidelines under PSL, the small and marginal farmers continue to
suffer from lack of access to formal sources of credit. Examine the reasons and
suggest remedies. (10m | 200 words)
2. Lack of timely access to credit, has been one of the main factor behind the dismal
performance of micro and small industries in the Eastern and North Eastern Sector.
Examine the reasons, and suggest remedies. (10m | 200 words)
3. Examine the access to credit as a factor for geographical distribution of secondary
and tertiary industries in India. (10m | 200 words)
4. Nachiket Committees new model of Adjusted Priority sector lending targets, will be
a win-win situation for both the banks and the borrowers, do you agree? Justify your
stand. (10m | 200 words)
Interview
1. Are you in favor of the removal of SLR? Dont you think itll make our banks more
vulnerable?
2. Youre aware of the PSL targets and all the issues about farmer debts, financial
inclusion and NPA. What are your thoughts on following alternative:
1. government orders the banks to submit 40% of their deposits to the consolidated fund
of India
2. A separate department is created loans for weaker section. They receive
money directly from consolidated fund of India, and dole it out to the farmer via
district collectors office or post office.
3. Whatever interest is earned, that is directly given back to bank account holders.

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Dont you think this is a better alternative than existing PSL? Why should we
even trust the banks to give economicjustice to farmers? Shouldnt the
government and the executive take up this job?
3. (looking at your DAF form) In banking sector, if an officer serves in a hardship area,
he is given additional points while the promotion list is prepared. Now, Nachiket
Committee has a new system under which, if a bank lends money in the hardship
districts, they get additional score under PSL target. Following the same logic, if
Personnel ministry gives you an option to pick a difficult state cadre in North East
or Red-corridor, well give you faster promotion and pay grades. Will you change
your cadre preference? Yes/ No and why?

Shadow Banks, Wholesale Banks, Securitization: Functions & Features

Nachiket Committees recommendations
Prologue

Under [Banking] Nachiket Committee article-series, so far weve seen following

1. What is financial inclusion, steps taken by RBI and Government to achieve it.
2. Nachi gave six point vision to achieve financial inclusion. Under that, Universal
Bank account for everyone. Access to banking within 15 minutes of walking
distance.
3. Priority sector lending: meaning, benefits, constrains and Nachikets
recommendation for 50% PSL target and 0% SLR.
If youve not read those articles, go to Mrunal.org/economy.

Securitization
As such very technical topic and not important for exam but basic understanding
necessary before dwelling intoShadow Banking, Whole-sale banking. So, first lets

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construct a technically-not-so-correct model:

A retail Bank has given home loans worth total 100 lakhs to 50 families @10%
interest rate. (if anyone defaults, bank snatch their house.)

An investment banker, Hrithik Roshan, buys these loan-files from the normal bank.

Hrithik makes a new company/entity, backed by those home loan files worth Rs.100
crores.

Then he breaks down those 100 lakhs into (10 lakh bonds x worth Rs. 10 each) and
promise to pay 8% interest rate.

Aam Aadmi/retail investors/Mutual funds/insurance companies etc. buy these bonds.

Securities =some piece of paper that promises to some money to someone.

Shares, bonds, IPOs, Debentures these are all examples of securities.

So, What did the investment banker do in above example? He turned those
mortgages (homes loan files) into securities. [and made some profit in between].

This is called securitization.

Is it good or is it bad?

Good for banks because they can gather some new cash, look for new clients. (rather
than waiting for EMI payments for 20-30 years.)

Good for investors, because they can earn interest by buying those bonds.

Bad? Yes, when the game is played without good faith- as it happened in Sub-prime
crisis.
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What happened in Sub-prime crisis?

(normal) Banks gave loan to people who did not have the aukaat to repay the loans
(hence they were called Sub-prime Borrowers.)

But banks were smart, they securitized those loans, recovered money from
investment bankers in wall street.

Investment bankers in turn, sold securities (bonds) to aam aadmi/retail

investors/pension funds/mutual funds/hedge funds etc.

Then investment bankers used that money to buy even more loan-files from (normal)
banks, and created even more mortgage backed securities.

Everyone is happy. Bubble keeps blowing.

But soon, one after another, those sub-prime borrowers default on EMIs.

Wait, we shouldnt worry right? Because weve their loan papers, we can attach their
property and auction it to recover money.

But unfortunately, as many people defaulted on loans, there is over-supply of houses

on sale/auction => Real estate prices go down. if the house was originally worth 3
lakh dollars, now itd sell not even for 30,000 dollars.

Thus whole system collapsed.=>2007s subprime crisis.

World: Since investors all over the world had joined this game, they also suffered
losses=>2008 global financial crisis. Ripples were felt even in India.

Europe: Since European investors also lost money in Subprime crisis + Decline
trade, tourism, export+ Their own governments had MNREGAish Maai-baap
mindset with huge fiscal deficits and loss making PSUs=> PIGS crisis, sovereign
default crisis, Greece crisis. (more on that, explained in old articles under
Mrunal.org/Economy)

Shadow Banking
1. Shadow Banks = organizations that function like banks but outside the banking
regulation. American examples- hedge funds, securitization companies,
Special Investment Vehicles (SIV), Money Market Funds (MMFs) etc.
2. This term came after subprime crisis in USA, 2007.
3. Shadow banks helped creating that asset bubble. But one day, home loan borrowers
defaulted and the bubble collapsed =>crisis.

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4. Shadow banks have significant presence in Netherland, Hong Kong, USA, EU= they
continue to remain vulnerable to such crisis even in future.
Shadow Banks: Why good?
They provide quick source of loan/credit/finance/liquidity.
Shadow Banks: Why bad?

1. Shadow Banks lack transparency about their business model, modus operandi and
profit margins.
2. Some companies intentionally adopt shadow banking model to evade banking
regulations for making higher profits. (e.g. CRR= bank earns no profit. SLR=bank
earns barely ~8% interest. But if NBFC lends money they usually get 15-25%
interest.)
3. Since shadow banks dont have Backup plans like CRR, SLR, deposit insurance
etc. =>theyre more vulnerable to runs. (e.g. all depositors/FIIs pull out their
money due to some rumor and company collapses.)
4. Shadow banks dont enjoy powers under SARFAESI Act.= difficult for them to
recover money incase of loan defaults.
5. Shadow banks send/receive money from many sources (mutual funds, insurance cos.
etc.) so if Shadow bank collapses, itll have negative ripples in other areas of
economy as well. (As it happened during Sub-prime crisis =>global financial crisis.)
6. Even in China, recently one of the shadow bank defaulted, and ~3 billion yuan are
lost. (Jan 2014)
Shadow Banking in India?
Not all the NBFCs are directly regulated by RBI. Observe:
Regulated
NBFC

Function

example
under

Insurance

Take premium from you, invest It in

companies

shares/bonds.

Housing Finance

They arrange money from variety of

DHFL, Muthoot Housing

Companies

sources, lend it to home-loan seekers

finance etc.

LIC, Bajaj Allianz

208

IRDA

National
housing

Bank (NHB)

Canara Bank, Andhra Bank

Merchant Banking

They lend money to company via

(and many other banks- they

Companies

buying its shares / underwriting.

take separate license to operate

SEBI
as a Merchant Bank)

They help buying-selling securities

Stock Broker
(of their clients) and earn commission
companies
in between.

1. Indiabulls
2.

Sherkhan

SEBI

3. Reliance Money

Venture Capital

They finance start-up companies via

Fund Companies

equity. (=shares, partnership)

Nidhi

IFCI, IDG

SEBI

South Madras Benefit Fund

Department

Limited and many similar

of Company

names

affairs

They borrow money from members,

Companies(mutual
lend it among the members.
benefit funds)

Members contribute money on

monthly basis, and give it to one

Chit Funds

of their own member through

1.

Sriram Chit fund (TN)

bidding.

2. Saradha Chit fund (=not

State

Winner doesnt need to repay

really a chit fund but

governments

loan directly, but needs to

multi-level marketing

registrar.

contribute money on monthly

scam MLM)

basis, so others can also win

next time.

Some of these NBFCs do form one type of Shadow banking in India, because
theyre outside the traditional regulatory rules for Banks, dont have SLR-CRR
emergency backup, still dwelling into deposits-loan-credit-finance type work.
Among all these, Chit fund is the biggest headache. Why?

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Constitution of India=>7th Sch.=> union list=> banking, post office savings,

corporation, insurance, stock exchange, future market fall here.

Hence union government make can make laws to setup All India regulators RBI for
bank, SEBI for securities and IRDA for Insurance.

But as per SC verdict, Chit fund=contract = falls under concurrent list. = both union
and state can make law. Hence chit funds government by their respective state laws.
RBI only provides overall guidelines. SEBI doesnt watch. thats how Saradha chit

fund managed to evade regulatory oversight and duped crores of rupees.

Should India be worried?
Ans. Not much. Reasons are following:
1. Indias financial system is still Bank dominated. ~60% of financial sectors assets are
controlled by banks. So NBFC =not large enough to cause an shock/asset bubble.
2. Largest NPAs are held by Public sector banks and not NBFCs. So if (god forbid)
there is any subprime type crisis in future, itll be because of those banks and not
NBFCs.
3. American Shadow banks have MNC-like presence in various countries of Europe=>
indirectly responsible for PIGS crisis, EU Sovereign default etc. but their presence is
not much in India because of strict rules on FDI.
4. 2008: Global financial crisis=> Indian NBFC saw a few negative setbacks but theyre
sorted now.
5. Indian NBFCs are strictly supervised by RBI/SEBI/IRDA/Government. Barring a
few ponzi scams and Saradha Chit fund scam, there is no major threat seen in recent
times.
Besides Indian NBFC= shadow bank = automatically villains. That assumption
is not true. Some positive points about Desi-NBFCs:
1. ~80% of the NBFCs have CRISIL rating of AA or above. (= NBFCs will not
cause systemic instability in the economy.)
2. NBFCs provide door to door service, their loan recovery rates are also better than
banks.
3. NBFCs have extended the reach of the financial services to the more difficult parts of
the economy via micro-finance.
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4. Their agent-network / manpower is more efficient than public sector banks. (because
they dont have unions to go on strike every week.)
5. Public sector banks like SBI, Dena etc. =giant elephants, cannot move quickly. Their
own bureaucratic procedures slow them down. On the other hand, NBFCs are
entrepreneur driven companies. Main boss keeps an eye on everything and doesnt let
any part of the company get slow or sick.
Gold Loan Companies as Shadow Banks?
1. The gold-loan NBFCs were mostly catering South Indian borrowers. (Mannapuram,
Muthoot etc.)
2. But in recent times, theyve seen high-growth and geographic penetration across the
country. (thanks to Akshay Kumar.)
3. These Gold loan NBFCs are regulated by RBI but they dont fall under traditional
bank rules about SLR, CRR norms.
4. So, Do they pose a systematic challenge like American Shadow Banks?
lets take an example:

Jan 2014: 10 gm gold =30,000 rupees. I deposit it a gold loan company, they give me
Rs. 30000 (=loan to value ratio of 100%; if they gave me only Rs.15k, the loan to
value ratio=50%).

Ive to repay this loan, with 25% interest by Dec 2014.

December 2014: price of gold still remains in the 29-30k region. Then ill not bother
repaying the loan (because Ive to give Rs.7500 interest). So, let them have the gold.
I dont care much.

if large number of borrowers start doing ^this, system will collapse. Why? Because
Gold Loan company doesnt print currency notes at its office. They also have to
arrange money from market (mostly from banks and debentures sold to aamadmi/retail investors).

So, if gold loan company collapses, then negative ripples even in other sectors of

economy.
RBIs safeguards on Gold loan NBFC
RBI has taken following steps in recent times to ensure it doesnt happen:

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1. Gold loan NBFC must maintain loan to value (LTV) ratio maximum 75%. (meaning,
if i give them 1 lakh worth gold, they should loan me only Rs.75,000 rupees.) This
ensures, Ill try to repay the loan and take back my deposited gold.
2. Gold loan NBFC with more than 1000 branches, must get RBI permission before
opening any new branches.
3. Strict rules for security and storage of such gold deposits.
4. Must insist on PAN card copy (for gold loans above Rs.5 lakhs)
5. RBI has ordered all NBFCs, not to lend money to any person for purchasing gold in
any form (be jewelry or coins or even gold Exchange Traded Funds (ETF) and gold
Mutual Funds.
6. RBI has instructed Gold loan NBFC to maintain transparency in loan pricing and
follow KYC norms.
7. They were asked to adhere to a revised fair practices code and customer grievances.

Wholesale Bank?

So far we know What is Shadow banking, how it can be a threat to economy.

Right now Desi-NBFC sector is still small (compared to Banks), but with time, some
of these NBFCs will grow extremely large.

Then, itll not be our best interest to let them continue as NBFC (Because theyre
not covered under CRR-SLR emergency backup.)

Therefore, Nachiket Committee recommends a new type of bank called Wholesale

bank. So, large NBFC could be allowed to transform into Wholesale banks and fall
under full supervision by RBI.

Please note: Nachi also recommended Payment banks. Make sure youve read that
topic first. Click me

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Lets make a comparative table of their features.

Sch.Commercial
Payment
features

Bank (SBI, PNB,

Wholesale bank

NBFC
Bank

ICICI)

Has to get
license under
Yes

Yes

yes

Nope

Banking
regulation Act?

No. They can only accept

Can accept

Ofcourse yes.

Only for deposit taking

deposits larger than Rs.5 crore.

deposits from

Hence also called

aam aadmi?

Retail banks.

(hence called Wholesale

Yes

NBFCs (NBFC-D) like

Mahindra Finance.

banks).

Access to
payment system
Yes

Yes

Yes

(can give
cheque book?)

213

No.

1. Not to retail/aam-aadmi
borrowers.
Can give loans?

Yes

2. it only lends in niche

No

Yes

yes

Nope

wholesale markets such

as infrastructure or
corporates.
CRR?

Yes

yes

Nachi did
not give
specific
targets. But
SLR?

Yes

Yes

Only for NBFC-D

they can
invest in
SLRsecurities.

5 cr for Microfinane
Entry capital
500 Crores.

50 crores.

50 crores

company. 2 cr for

requirement?
others.

No.

PSL

Yes.

Yes but at a wholesale level.

because

And they help retail banks

they cannot

fulfill their PSL targets.

lend

No.

money.

No.
SARFAESI
Yes

because

Yes

powers.*

they cant
lend

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No. except housing

finance companies

money!

*SARFAESI powers= If you default on loan, theyll take away your mortgaged
property. You cannot get stay order from civil court. Youve to approach DRT
(debt recovery tribunals) to get stay order, but they usually rule in favor of banks.
Wholesale Investment Bank vs Wholesale Consumer Bank?

Within Wholesale bank, Nachi recommends two sub-types

Wholesale Investment Bank

Wholesale Consumer Bank

If given institution has 20 branches

If given institution has more than 20 branches.
or less.

25% rural branching mandate will

Applies.
not apply.

They can act as Business Correspondent agents of other scheduled

No
commercial banks.

but Why Wholesale Banks?

Alright man, so far I know
1.

What is securitization, how it helps transforming mortgages into securities. And how it can be a
threat, if misused.

Mohan
2.

What is shadow bank? How does it pose danger to Economy?

3.

That youve recommended new type of banks called Wholesale Banks.

but what is the purpose of creating this wholesale bank? What exactly will they do?

Nachi

Their main focus = securitization of PSL loans.

Mohan How?

Nachi

Lets re-apply our earlier technically-not-so-correct model.

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1. Suppose Banks/NBFCs give loan to PSL areas worth Rs.100 crores. And for xyz
reason they want to get rid of that headache and arrange money quickly, rather than
waiting for EMIs.
2. So, They sell loan-files to wholesale bank.
3. (recall wholesale bank can accept deposit of Rs.5 crore or more=they have really
deep pockets to buy so many loan files).
4. Now, Wholesale banker has purchased loan files worth Rs. 100 lakhs. He will create
a structured investment vehicle worth Rs.100 lakhs. Then hell divide it into (10 lakh
bonds worth Rs.10 each). Offering xyz% interest rate.
5. Who will buy these bonds? Ans. Retail banks like SBI, ICICI, PNB; mutual funds,
insurance companies, retail investors (aam Aadmi) etc.
6. Thus PSL loans are securitized
7. Wholesale bank can even such securitized loans from other entities/investment
bankers in capital market and resell it further.
Mohan But why should retail banks (like SBI , ICICI, PNB) bother with investing money in such thing?

Nachi

Because itll be counted under their PSL target. (Ive recommended so in my report.)

Mohan Ok but why should Mutual funds, insurance companies, retail investors give money in such thing?

Because their investment will enjoy Tax-free status. So whatever profit they make, they wont have
Nachi

to pay a penny to Government. (Ive recommended so in my report.)

Man wait a minute. Something doesnt feel right.On one hand:

1.

Banks have PSL target.

2.

People want tax-free investment.

Mohan So they want to park their money.

On the other hand

1.

RRBs, NBFCs operating in rural area they know wholesale bank will take care of their loanfiles.

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2. So what if they also started lending to sub-prime borrowers in rural area who dont have
the aukaat to repay EMIs. Then system will collapse like it did in America?
Nachi

Your concerns are valid but:

1. We already have investment bankers in India- performing almost the similar

functions like these wholesale banks. (Standard Chartered, Kotak Mahindra capital,
Citigroup, Morgan Stanley etc.)
2. But theyve not caused any risks in India because our regulators (RBI, SEBI) are
more vigilant and strict than American counterparts.
Besides, if we assume only the worst case scenario, progress cannot be made.
And The advantages of wholesale bank, outweigh its risks. Observe:
Benefits of Wholesale Banks?

1. Wholesale banks will provide more liquidity in the system. (than in a situation where
every bank keeps its loan-files to itself.)
2. Wholesale banks also loan money to corporate clients, infra. Projects=> retail banks
like SBI and ICICIs cash is spared, that can be used as loans for small borrwers.
3. Regional rural banks, Cooperative banks etc transfer their local-risk to Wholesale
banks via securitization.
4. This will make local banks structurally more stronger (because theyll have less risk
and less liabilities.)
5. Big (retail) banks like SBI, ICICI etc. can fullfill their PSL targets by investing in
Wholesale Banks (mortgage) backed securities. Rather than wasting their time and
manpower on finding borrowers under PSL targets.
6. This type of flexibility will help banks become more Specialized and focus on a
niche groups e.g. RRB on farmers, SBI on small businessmen and middleclass,
ICICI on corporate clients= new level of economies of scale= banks operating
cost decreases, profit increases, clients get better services at lower prices.
7. Thus wholesale banks indirectly help in financial deepening and inclusion.
Nachis thought process for arriving @Wholesale Bank concept?
1. PSL related problems: farmers dont get loans on time, banks mostly focus on
southern and western states.
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2. Large NBFC=shadow bank problem=>need to transform them into Banks.

3. But if these Large NBFCs become regular banks, then theyll also need to fulfill PSL
targets= difficult for them. E.g. suppose a NBFCs deals with only infrastructurefinanccing. Later it becomes bank. But its staff, organization structure doesnt have
the skills/experience/presence in rural areas to deal with Agri. Loans to fullfill PSL
targets.
4. So, better let them handle PSL via securitization process rather than via physical
banking in rural areas.
5. This securitization will also provide investment opportunity for retail investors.
(Because Nachi offered tax-free status.)
6. Therefore, we should allow such large NBFCs to transform into wholesale banks,
instead of asking them to transform into retail banks.

Mock Questions
1. Correct statements
1. All NBFCs are regulated by SEBI
2. All NBFCs are regulated by RBI
3. Both A and B
4. Neither A nor B
2. Which among the following is/are covered under the Concurrent list in our
Constitution?
0. Banking, Bankruptcy, Contracts
1. Contracts, Corporations, Trusts
2. Trusts, Contracts, Bankruptcy
3. None of above.
3. What do you understand by the term Shadow Banking?
0. A system wherein banks use technical loopholes to open more branches and
expand operations beyond what is permitted by RBI.
1. A system wherein scheduled commercial banks use technical loopholes to
partially evade their true liabilities under CRR, SLR and PSL.
2. A system wherein financial entities undertake activities akin to banks while
remaining outside the traditional regulatory regime which are otherwise
applicable to banks.
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3. None of above.
4. Recently, Nachiket Committee has recommended Securitization of PSL loans.
What do you understand by the term Securitization?
0. It is a process under which banks get insurance cover for their loans under PSL
targets, from General insurance companies.
1. It is a process under which the mortgages issued by banks and other lenders are
converting them into securities that can be sold to investors.
2. It is a process by which a mortgaged loan asset can be converted to cash without
losing value.
3. None of above.
5. Which of the following factor(s) make India less vulnerable to the risks from shadow
banking?
0. RBI has specifically prohibited shadow bank entities from opening branches in
India.
1. Under SARFAESI act, Government has specifically prohibited shadow bank
entities from giving loans to people.
2. Both A and B
3. Neither A nor B
6. Recently, Nachiket Committee has proposed a new model of banks, called
Wholesale banks. Find correct statement about them
0. Only Scheduled Commercial banks can setup such banks through
subsidiary model.
1. Theyll enjoy the rights and privileges under SARFAESI Act.
2. Theyll have higher entry-capital requirements than commercial banks.
3. None of Above
7. (A) Chit fund companies are regulated by State laws. (R) The subject of Chit fund
falls under State list in 7th Schedule of Constitution of India.
0. Both the statements are individually true and Statement R is the correct explanation
of Statement A
1. Both the statements are individually true but Statement R is not the correct
explanation of Statement A
2. Statement A is true but Statement R is false
219

3. Statement A is false but Statement R is true

Q8. All NBFCs are exempted from
1. Maintenance of CRR
2. Maintenance of SLR
3. Priority sector lending targets.
Answer choices
1.

only 1 and 2

2. only 2 and 3
3. only 1 and 3
4. all 1, 2 and 3.
Q9. Who among the following is/are not required to maintain a Cash Reserve Ratio
(CRR)?
1. Shadow Banking entity
2. Merchant Banking entity
3. Housing Finance Company
Answer Choice
1.

only 3

2. only 1 and 3
3. only 1 and 2
4. All 1, 2 and 3
Q10. Who among the following is/are fall under SEBIs direct regulatory watch?
1. Nidhi Company
2. Chit funds
3. Housing Finance Company
4. Merchant Banking company
Answer Choice
1. only 1 and 2
2. only 3 and 4
3. only 1, 3 and 4
4. all of them
Descriptive
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1. Define Shadow Banks. Assess the vulnerability of Indian financial sector from the
threat of Shadow Banking. (10m| 200 words)
2. Examine the need for a super-regulator over the other regulators in banking-financeinsurance sector with special reference to shadow banks. (10m| 200 words)
3. List the salient features and functions of these wholesale banks envisioned by
Nachiket Committee. (10m| 200 words)
4. Discuss recent initiatives by RBI to preserve stability in Gold Loan sector. (5m | 100
words)
Interview
1. Do you know the difference between:
1. Merchant banking vs corporate banking?
2. Wholesale banking vs retail banking?
3. Investment bank vs commercial bank?
2. Whenever someone raises even a hint of sub-prime like crisis in India or shadow
banking in India, the RBI-apologists defend saying our fundamentals are strong, our
regulatory regime is strong. If that is the case, why do Public sector banks have large
NPAs?
3. And dont you think they pose danger of sub-prime crisis in India?
4. Some economists suggest government of India should completely disinvest from
public sector banks. Given the threat of Shadow banking and sub-prime crisis on side
versus the inefficiency-unionism-strikes, BASEL norms and NPAs on the other side,
where do you stand on this issue?
5. Do you think Contract as a subject should be shifted to Union list, to prevent any
more chit fund scams?Yes/No and Why?
Hints for MCQs
1. see the very first table given in the article.
2. M.Laxmikanths Appendix
3. akin to banks but outside regulation
4. mortgage=>securities
5. neither
6. only SARFAESI
7. Chit fund in concurrent list.
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8. NBFC-D have to maintain SLR

9. None of them are banks.
10. All except Chit funds.

Bancassurance: Compulsory Broker Model, IRDA vs Banks, issue,

benefits, challanges, insurance penetration, Financial inclusion &
Nachiket Committee
Prologue

As such Bancassurance=important for IBPS but not so much for UPSC, but topic
has recently came in limelight because:
1. (Chindu+IRDA) vs Banks on broker model for selling insurance policies.
2. Nachiket Committees recommendations: insurance/investment service to all poors
by 1/1/2016

Bancassurance

Bancassurance= Banks as Insurance Agents=Bank and an insurance company form a

partnership so that the insurance company can sell its products to the banks
customers.

Concept originated in France.

Overall, Insurance companies 30% of the business comes from Bancassurance. (i.e.
bank customers).

There are three business models in Bancassurance.

Benefits
1. Insurance company can reach more customers using Banks marketing channel,
without having to invest in more offices and manpower. Bank Customer is more
likely to buy insurance policy because of past faith. (than if insurance company asked
a shopping mall/cinema owner to sell insurance policies to their customers.)
2. Even Regional rural banks and cooperative banks are allowed to sell insurance
policies like this= most economic for insurance companies, because they dont have
enough money/manpower to reach every rural area.
3. Bank earns additional income.
4. Bank staff already proficient in processing such forms/applications.
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5. Banks already have e-banking, mobile banking, ATM etc. facilities=> easy to collect
money from customers.
6. Customer gets both banking and insurance services at one place= time and effort
saved in visiting multiple offices.
7. + financial inclusion (when banks business correspondence agent or bank staff itself
is providing insurance services to rural/poor customers.)
There are three business models of Bancassurance.
#1: Referral Model

Here, Bank will give office space to the insurance company in its branches.

The insurance staff will sit in the bank branch and sell its products to bank
customers.

Bank staff doesnt participate in selling.

Bank faces no risk. Insurance company pays fixed-fees for using the office space.

Pro: Customer directly talks with insurance staff=less chance of bank staff
misguiding/mis-selling policies to them.

Con: In other two models, bank can make more commission.

#2: Corporate Agent model

Here, Bank ties up with one life, one non-life and one health insurance company.

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For example:
Insurance company

Its corporate Agent (Bank)

Bank type

SBI life insurance

State Bank of India

Public sector

Tata AIG General Insurance

HSBC

Private sector

Bajaj Allianz General Insurance

Saraswat Cooperative Bank

Regional rural bank

United India Insurance.

Tirunelveli District Central cooperative bank

Cooperative

Majority of banks follow this model.

Bank sells policies of only one insurance company= customer is deprived of

choice, even if other insurance companies are offering better alternatives. (imagine
walking into an Apple showroom- the salesman can only sell you apple phones, even
if other Samsung/LG/Micromax phone is more suitable to your requirement and
budget.)

Bank is not liable to customer.

#3: Broker Model

Bank sells policy of multiple insurance companies under one roof. (multiple life
insurance companies, multiple general insurance companies, multiple health
insurance companies.)

Bank earns commission according to sales-agreement with individual company.

Imagine running a shopping mall displays variety of biscuit brands.

Timeline

What happened

Government and RBI permitted banks to sell insurance policies. (either through corporate model
2000
or through referral model.)

2013

Chindu allowed Banks to act as insurance brokers. (so that insurance penetration can increase in

budget

rural areas= financial inclusion)

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November
RBI permits Banks to use Broker model and starts drafting guidelines.
2013

Chindu writes letter to public sector banks- in budget 2013, I had hinted that you should switch to
December
Broker model. But you havenot yet implemented it yet. Anyways, adopt the insurance broker
2013

model by 15 Jan 2014!

Bank chiefs dont take Chindus advice seriously. None of them adopts the Broker model. They
Jan 2014

continue selling insurance under Corporate Agent Model.

Chindu feels disrespected and maybe he even informally complained to IRDA chief.IRDA Chief
Jan 2014

TS Vijayan makes press statement that IRDA will make it make it compulsory for banks to adopt
Broker Model. (once RBI drafts final guidelines.)

Benefits of Broker model?

1. Bank will offer more choices to Customer= less chance of mis-selling.

2. insurance penetration will increase in rural areas, thanks to bank branches and their
business correspondence agents.
3. In past, some insurance companies couldnt tie up with big banks under corporate
agent model. These insurance companies get less sales, even if their products are
better (Because big banks are selling other xyz single product.) The broker model
will benefit these insurance companies- to display their products on banks
showroom.
Anti-Arguments: Broker Model
Banks and Financial experts have criticized the move of government + IRDA
because:
#Bad impression to Foreign investors

1. Bank have already have signed MoUs/Agreements with specific foreign insurance
companies promising well sell only your products. (e.g. Bank of India with
Japans Dai-ichi life insurance.)
2. Now, If IRDA/Chindu forces them to adopt Broker model, then foreign insurance
companies will feel cheated. They may even drag the banks to courts.
225

3. Chindus devil-may-care attitude= Potential foreign investors fear Indian

economic policies are unpredictable = less investment in future = current account
deficit increases = rupee weakens = petrol expensive = more inflation.
#Staff skills
1. Bank Staff lacks the skills in broking multiple insurance products. (again- Apple
showroom salesman only needs to mugup the feature list of Apple phones and tell
customer that Apply is best! But a smalltowns mobileshop salesman has to mugup
feature lists for 3-4 dozen phones, and guide the customer in choosing the right
phone!)
2. Therefore, Banks will have to hire separate staff to deal with insurance-brokering
only. = operating cost increases. And NPAs are already high because of pending
infrastructure projects and environmental clearances. = systemic risk.
#Diseconomies of scale

Broker model= bank has to keep staff trained for selling multiple products. Theyve
to keep literature, application forms of multiple companies. Keep separate
finance/accounting records/softwares. Keep in touch with multiple executives in
different companies = diseconomies of scale (Compared to doing this with just one

company.)
#BC already doing it
Banks are permitted to appoint Business Correspondents (BCs). This BC may
even sell mutual fund products, pension products, and micro-insurance products
of third parties. Examples:

Syndicate Banks officially tied with Birla Sun life insurance. But its Business
correspondents in rural areas sell TATA AIG insurance policies as well.

So Chindus aim/intention that people in rural areas should get multiple product
choice = this is already being done by Business correspondent agents. There is no
need to force Banks to adopt to broker model.

226

# Consumers more aware:

With internet penetration, even customer himself go online and buy insurance
product. So, there is no need to force bank to sell insurance policies of multiple
companies.

Sites like policybazaar dot com even give daily ads dont buy insurance without
comparing= consumer awareness is increasing. They can decide for themselves,
even if bank staff tries to sell them a not-so-good insurance product.

Nachiket on Insurance

Mr.Nachiket, your Committee was appointed by RBI. But this insurance topic is related to IRDA.
Mohan
So, What are you doing here?

Official name of my Committee is Comprehensive Financial Services for Small Businesses

and Low Income Households.

Nachiket

Therefore, Ive to make recommendations on all type of financial services: be it banking,

loaning, investment OR insurance.

Mohan

Fair enough. Then tell me about your next ambitious but unrealistic goal.

Nachiket here it goes

All small businessmen and poor families will be given insurance/investment

products for
227

1. insurance for humans: life insurance, health insurance, disability insurance

2. insurance of livestock (Cows, buffaloes, poultries)
3. insurance of crops/farming/agriculture
4. Insurance against property damage.
5. Protection against commodity price movement. (e.g. Negotiable warehouse
receipts click me)
Deadline: by 1 January 2016
Mohan

and how to do you plan to achieve it?

Nachi

observe:

Cross KYC

At present RBI, IDRA, SEBI, PFRDA(NPS) have permitted Aadhar card as a proof
of identity and address.

But still Banks, Insurance company, mutual funds, NBFC- all carry their own
separate KYC checks. = duplicity of effort. Villages face inconvenience because
theyve to get photos and xeroxes of documents every time for every new account.

Nachiket suggests RBI to give explicit instructions about Cross-KYC to Banks,

Insurance Companies, Asset-Management Companies, Mutual funds, NBFC , Banks,
and Non-Banking Financial Companies.

All of them must be permitted to rely on KYC done by each other, instead of

duplicating the effort every time you open a new account.

Reforms in NBFC bancassurance models
Like the banks, NBFCs also sell life and general insurance to their customer
base. but there are limitation:
NBFCs Bancassurance

IRDAs current guidelines

Nachi

Referral model

not permitted

allow =>financial inclusion.

Corporate agent model

permitted

already permitted so nothing new to do here!

228

Broker model

not permitted.

permit, with some conditions.

Allow NBFCs to take deposits

At present there are two type of NBFC

Deposit taking.

Non-deposit taking.

Mohan So whats problem?

Even if NBFC sells insurance products still NBFC cannot accept premium money from
customer.

Nachi

The customer will have to directly deposit the premium to the insurance company (LIC etc.)

Its not a big deal for city folks. But in remote villages, people dont have access to netbanking,
cheque dropbox etc.=problem.

Mohan Then whats your solution?

Nachi

Remove this classification of Deposit taking vs. non-deposit taking NBFC.

Simply allow all NBFC to accept deposits/premiums on behalf of banks/insurance companies.

Itll facilitate financial inclusion.

Insurance companies will be able to reach even the farthest parts of India, with help of NBFC
agents.

NBFCs as mutual funds agents

at present NBFCs can sell/distribute mutual fund policies after RBIs permission. But RBI will grant
permission ONLY if
Nachi
1.

the given NFC has minimum 100 crores of funds

2.

making profit for last three years

3. minimum NPA
Mohan so?

Nachi

given these stringent conditions, most of the small-time NBFCs are disqualified from selling mutual

229

fund policies to their customer-base.

Mohan then whats your solution?

RBI should relax the eligibility critiera, so more NBFCs can apply. That way, people from remote
Nachi
areas can also invest in Mutual funds, through their local NBFC agents.

Banks as Mutual fund agents

With RBIs permission, the Banks can also sell mutual fund policy and give
investment advice to its customers.
Bank
Where does the commission come from?
as___

Bank will convince its customer to invest in xyz mutual fund policy. Customer fills up the
Mutual
application form, bank forwards it to the mutual fund company, and mutual fund company gives
fund agent
commission to Bank. = this is typical salesman / agent type model.

Investment
advisor

Bank officials will give financial planning and investment advice to its individual customers.

Consultancy/advice fees paid from customers account or sometimes it is given totally free of
cost informally. Mutual fund company doesnt pay anything to bank (atleast officially!).

But as you can see, there is conflict of interest. IF the bank is simultaneously
acting a mutual fund agent + investment advisor=problem. Because bank staff
will only advice you to invest money in the mutual funds where bank earns
commission= misguidance, mis-selling, fake promises.
Nachiket has given many recommendations for consumer protection in such
cases. But well see that in a separate article. But lets get a brief overview here:
Guidelines for Agents

1. RBI should publish a guideline for appointment of agents including National Banks,
Regional Banks, and NBFCs. (no matter whether they sell insurance or mutual funds
policies.)

230

2. All Agents must be required submit some security deposit. Minimum Rs.5 lakh.
Amount can be increased depending on the number of customers and volume of
transactions
3. Biometric authentication of customers to prevent frauds.
4. Agent must have trained staff to explain the risks and benefits of various financial
products to customers.
5. Agent must not design the salary/bonus package in such way that staff is motivated
to do mis-selling/fake-promises to reach the sales target.
6. Agent must set up an internal grievance redressal mechanism, must publish give
contact number/helpline for customers complaints.
7. All customer grievances should be solved within a defined time frame.
8. Other recommendations related to consumer protection discussed in a separate
article.

Mock Questions
Q1. Who among the following can to sell insurance policies in India?
1. Scheduled commercial banks
2. Regional Rural Banks
3. District cooperative banks
4. NBFC
Choice
1.

Only 1 and 4

2. Only 2 and 3
3. Only 1, 2 and 4
4. All of them.
Q2. Recently, Finance Ministry issued a circular asking the public sector banks to
adopt Broker model for selling insurance products. This move will:
1. increase insurance penetration in rural areas
2. Reduce mis-selling of insurance products.
3. Improve profit levels of Public sector banks.
Answer choices
1.

Only 1 and 2
231

2. Only 2 and 3
3. Only 1 and 3
4. All of them.
Q3. Recently, Finance Ministry and IRDA have asked the Banks to adopt Broker
model of Bancassurance. But the banks have not yet adopted this model because
1. Broker model doesnt allow them to sell life insurance, non-life insurance and health
insurance simultaneously.
2. RBI does not permit Broker model-that sector is completely reserved for NBFC
entities.
3. Bank unions have demanded additional overtime-payments to work under this
system.
Answer choices
1.

Only 1 and 2

2. Only 2 and 3
3. Only 1 and 3
4. None of them.
Q4. Which of the following is / are correct about Bancassurance?
1.

If a bank provides bancassurance services to a farmer, poor or marginalized group,

it qualifes under Priority sector lending targets.

2. If a customer doesnt make timely payments for Bancassurance services, bank is
entitled to impose penalties under SARFAESI Act.
3. Both A and B
4. Neither A nor B
Descriptive
1. The compulsory broker model for bancassurance, will improve Insurance
Penetration in Rural India. Comment. (5m | 100 words)
2. Despite the nationalization of insurance companies decades ago, the insurance
penetration in rural areas has been far from satisfactory. Examine causes and suggest
remedies. (10m | 200 words)
3. Write a note on the initiatives taken by Government of India to improve insurance
penetration in rural India. (10m | 200 words)
232

Interview
1. On the issue of Broker model of Bancassurance, bank chiefs have said unofficially
that IRDA and Finance ministry shouldnt try to force their economic views upon
others, this is akin to the erstwhile license-quota-inspector raj. Do you agree? Yes/No
and Why?
2. Nachiket Mor has suggested removal of various restrictions on NBFCs, to allow
them to sell insurance-mutual funds in rural India more easily. Of course his thought
process is focused on financial inclusion. But dont you think this sudden exposure of
free market forces in Rural India may lead to financial exploitation of villagers rather
than inclusion? yes/no and how?
3. Suppose, NBFCs are allowed to freely sell insurance/mutual fund policies of private
companies in Rural India- but what if one day stock market crashes and the villagers
investment is lost! Dont you think Government should setup a separate organization
or department to sell policies in rural area? yes/no and why?
MCQ Hints
1. all
2. FinMins official letter to PSB mentions statement 1 and 2. Third statement is wrong
(or debatable on how you drag the logic of increase in profit vs increase in
operational costs.)
3. None.
4. Bancassurance is outside the purview of PSL and SARFAESI.

RBI Urjit Patel Committee: 4% CPI, Nominal Anchor, Multiple Indicator,

Monetary Policy Framework Reforms (Part 1 of 2)
Prologue

This article wont make much sense, unless youre thorough with the concepts of
monetary policy: its functions, tools and limitation. So make sure youve read the
previous article. click me.

Place: RBIs Main Adda @Mumbai

233

Time: September 2013

Boss: Rajan has recently taken charge as the new governor of RBI. Immediately he
setups three Committees:

Occupation
Chairman

Topic

Result

New Bank licenses

Work in progress.

in RBI

Bimal

Retire

Jalan

Governor

Nachiket

Board

Financial products/ Financial

Published report in January 2014.Discussed

Mor

member

inclusion

in earlier articles.

Urjit

Deputy

Monetary policy framework: how

Published report in Jan14. This is the topic

Patel

Governor

to strengthen it?

of our article.

Urjit Patel Committee: Basics

1. Formed by: RBI (and not finance ministry)

2. Official name: Expert Committee to Revise and Strengthen the Monetary Policy
Framework
3. Chairman: Dr. Urjit Patel, Dy. Governor of RBI
4. Eight Members: economics professors, finance experts etc. Theyre not important
for exams, because No high profile members. [may be because Nachiket took away
234

all the high profile members like Shikha Sharma of Axis bank, so Urjit bhai was
left with only chillar parties.]
Overall, Urjit Patels main recommendations can be summarized in just three
lines:

1. @Rajan, you fight inflation. [Nominal anchor, 4% CPI and everything]

2. @Rajan, you fix accountability in your own gang. [form MPC Committee, decisions
by voting etc.]
3. @Chindu, you give cover-fire to Rajan, while he is fighting inflation. [fiscal
consolidation.]
Lets start with first recommendation.
My first recommendation is that RBI must target inflation only. Nothing else- dont focus on
Urjit

increasing employment, dont focus on increasing growth, dont focus on stabilizing rupee-dollar
exchange rate. Just focus on one thing and one thing only- Inflation.

Mohan But why focus on inflation only?

Urjit

Observe.

Monetary Policy: Where to focus?

235

There are three main ways to frame monetary policy

1. Focus on Exchange Rate
2. Focus Multiple indicator (GDP, IIP, Exchange rate, inflation)
3. Focus on Inflation (started in 80s)
Lets check the pros and cons of each strategy.
#1: Focus on Exchange rate

If RBI adopts this strategy/method to frame monetary policy then- what will happen?

Rajan will first decide an ideal target exchange rate say 1$=Rs.50.

Then hell try to amend monetary policy to control rupee supply in the market.

To put this in technically incorrect example: Imagine dollars are apples.

Prices of apple vs Rupee are decided by laws of supply and demand.

At present 1 apple sells for Rs.60. But Rajan wants to bring it 1 Apple=50 rupees.
What should he do?

1. Rajan will tweak his monetary policy to reduce the supply of rupee in the market.
Then, 1 apple will sell for Rs.50. (apple supply is same but rupee supply is
decreased.)

236

2. Alternatively, Rajan will open his own refrigerator (forex reserve), and put some
apples (dollars) for sale. Thatll also bring down prices of 1 apple =50 rupees.
(because apple supply increased)
Advantages/Benefits of targeting Exchange rate?
1. Prices of imported goods are kept in check.
2. Prices of imported crude oil is kept in check. (so indirectly inflation is kept in check).
3. Since exchange rates are kept stable- both importers and exporters can decide their
business expansion plans accurately. (compared to a situation where exchange rate is
volatile-say today $1=40 Rs. And tomorrow $1=60Rs. Then it is not good for
business decisions.)
4. Clarity. Transparency in Decision Making. Aam Juntaa can understand what RBI is
trying to accomplish and whether Rajan is succeeding or failing? (if they ever
get free after watching cricket matches, Saas-Bahu serials and (un)reality shows.)
Disadvantages/limitations of targeting Exchange rate?
1. This method works well to control (imported) fuel inflation. But cannot control
(local) food inflation.
1. Works well for a small countries. Because their population is small, they can even
import food from India, China and just focus on export competitiveness in
electronics and consumer goods. e.g. Singapore, Taiwan etc.
2. But Doesnt work for large countries like India, Mexico or Brazil. Our population is
so large, we cannot sustain on imported food. We must be self-reliant in food
production.
3. Country becomes vulnerable to external shocks. Continuing the previous example of
Apple vs Rupee
1. What if American RBI tightens their own monetary policy to control local
American inflation (= US Feds follow a dear money policy =dollar (apple)
supply is reduced.)
2. Then Rajans statistical projections will go wrong. Hell have to make new
adjustments in Rupee vs Dollar (Apple) quantity in Indian market.
4. Government is bogus, and causes high food inflation. Result= Real interest rates
become negative, Juntaa will start investing more in gold=>Gold import

237

increased=>payments have to be made in Dollar. This also creates imbalance in

supply-demand of rupee vs Dollars (Apples). Rajan will have hard time controlling
this mess.
5. Country becomes vulnerable to Speculative attacks. e.g. Forex traders in Europe or
China decide to hoard Apples (dollars) in their refrigerator to create artificial
shortage in market, so later then can sell their apples @higher rate. In such
speculative attacks, Rajan will have hard time controlling supply-demand of Rupee
vs dollars. He cannot prosecute them under FERA/FEMA laws, those traders live
outside his jurisdiction.
6. Outdated: During WW1 era, most central banks used to follow this Exchange rate
targeting strategy. But today, almost all banks in developed countries, have shifted to
inflation targeting strategy. Only few exceptions- like Singapores RBI use this
strategy.
Moving to next method/strategy
#2: Focus on Multiple indicators

At present, this is the strategy RBI uses for making monetary policy.
Under multiple indicator method, Rajan will first gather information about:
1. Index of industrial production (IIP), Consumer confidence
2. Professional forecasts (CRISIL, S&P, Moody, World Bank) about GDP, inflation,
unemployment
3. Inflation data: WPI minus food, fuel.
Then, he will design the monetary policy (mainly repo rate), with following
objectives/focuses:
1. Increase employment
2. Increase GDP
3. Stabilize inflation
4. Stabilize exchange rate
Sounds fair enough? Not really!

238

Multiple indicator method: Negative points/ Limitations

1. Multiple indictor method has no nominal anchor- no actual target. What exactly are
you trying to accomplish? Bring down WPI by 5%, raise GDP to 9%..no such
targets. Just bol-bachhan. Therefore ineffective.
2. Multiple indicator strategy worked well between 1998 and 2008. GDP was good and
inflation was kept in check. But in recent times, this strategy is no longer workinginflation has skyrocketed and GDP is falling day by day.
3. Since 2008, Consumer price index rose to double digits (i.e. 10% or more)
4. But RBI doesnt focus on CPI. They only focus on WPI (minus food and
fuel). Result?
1. WPI doesnt track changes in the service sector related inflation (e.g. doctor,
physiotherapist, IT, call center etc.)
2. Service sector contributes more than 60% of GDP. So, when monetary policy is
designed without considering service sector inflation=then itll be ineffective.
5. WPI commodity list has been revised in recent times- they added ice cream, oven,
cricket ball, guitar and so on.Result?
0. RBI has to make new statistical calculation about each of such busines arenasnumber of people employed in it, total bank loans given, their contribution to GDP
etc.
1. But when WPI commodity list is revised, RBI has to calculate new statistical
projections= problem. Policy doesnt give effective result in the meantime.
6. Even if Rajan makes best policy, its Impact will be seen after a lag of 3-4 quarters
(i.e. nine to twelve month). Why? We already learned the limitations of Monetary
policy in a developing country, the past article. Click me
7. Since this strategy doesnt have a clear cut transparent targets, it becomes vulnerable
to various pressure groups. For example
Pressure
informally forces Rajan to:
group

Chindu

Please increase SLR ratio. That way government is able to sell more of its securities to the
banks and- arrange cash from more schemes to increase employment- after all thats what

239

you want- increase employment!

Secondly, please increase the quota for women under Priority sector lending because Rahul
baba has been advocating women empowerment everywhere, including @Arnab
Goswamis interview.

Exporters/

IT

then we earn more rupees while exporting goods n services abroad.

companies

Importers

Rajan Bhai, please tweak your monetary policy in such way that $1=becomes 1000 rupees,

Please design your monetary policy in such way that $1 = Rs.1. then weve to spend less
rupees while importing stuff from abroad.

FICCI

Please decrease Priority sector lending, CRR and SLR that way more money is left for
business loans for corporate giants.

Bankers

Maai baap, please reduce PSL targets, SLR, CRR and Repo, that way more money is left
with us, and we can lend it to middle class and businessmen.

Therefore, Urjit recommends Rajan to dump this multiple indicator method.

Ok boss. So far Ive learned following:
1.

Monetary policy should not focus on exchange rate because our country is very large, unlike
Singapore and Taiwan.

Mohan
2.

Monetary policy should not focus on multiple indicator approach, because of the limitations
we just saw in above paragraph.

Then what is your solution?

Urjit

Simple. Focus on inflation

#3: focus on inflation

In this strategy- Rajan will decide a Nominal Anchor say CPI -to monitor
inflation. Then hell fix an inflation-target say 2-6% and adjust his monetary policy
so that inflation remains within that range.

240

Nominal anchor (CPI) method: Benefits/Advantages of

1. Once Rajan sets a CPI target. Noone can influence him or put informal pressure- be
it Chindu, Exporters, Importers, FICCI, Mallya, Ambani or Bankers cannot influence
Rajans policy. Because Rajan
2. Easy to track progress. Because CPI data released after every twelve days.
3. Central banks in all advanced economies and Emerging market economies have
adopted this method. (Except India and China).
4. It brings transparency. Even aam-juntaa can understand what RBIs policy is and
whether its yielding result or not? Because there is only target to monitor=CPI.
Previous Committees have also directly/indirectly recommended for this system.
For example:
year

Committee

Chairman

2007

Mumbai as International Finance Center

Percy Mistry

2009

Financial sector reform

Rajan the Boss himself

2013

Financial Sector Legislative Reforms Commission (FSLRC)

BN SriKrishna

Nominal anchor (CPI) method: Drawbacks/Limitations/Anti -arguments

Hold on a second. Youre trying to paint a very rosy picture. But if Rajans monetary policy tries to
Mohan

Urjit

control CPI, itll have many problems!

Such as??

In CPI index- more than 50% weightage is given to food and fuel components.

Food prices= depend on monsoon and blackmarketers. Rajan has absolutely zero control over
this.

Mohan

Fuel/crude oil prices= depend on external factors and Rupee-Dollar exchange rate. Rajan doesnt
have sufficient forex reserves to control rupee-dollar exchange rate in the manner he wants (e.g.
1$=50 rupees and not 1$=60 Rs.)

241

Youre right. But under multiple indicator method, Rajan focuses on WPI (minus food and fuel
inflation).

Urjit

Thats why his policy has remained ineffective in controlling inflation.Because he always
ignored food and fuel inflation.

Infact, We must focus on CPI for the very same reason-because it give >50% weightage to the
food and fuel inflation.

Point taken. But in India, we have three CPIs: Urban, Rural and Combinedif we try to control all
Mohan

three of them, then..

No problem. We must focus only on CPI (Combined). Its data is released @every 12 days. Very easy
Urjit
to monitor, tracks price movement all over India.

Mohan Ya but still, Its data is not accurate and.

yaar if you start to find fault in everything (like a TheH**** columnist), .then only God can help
Urjit

you. Fidel Castro and Che Guevara cannot fix Indias inflation problem. This only gets fixed from
inside the RBI!

But even if Rajan focuses on this Nominal Anchor (CPI), still there will be a lag of 6-8 months before
Mohan
its impacts are seen.

Brother, no matter which method we use there will be lag of 6-8 months before its impact is seen on
inflation @ground level.
Urjit

Because we are not a developed country, we are a developing country.

Weve already learned this limitation of monetary policy in developing countries. Click me.

Ok one last obstacle. Governments own policy to fight CPI. For example, whenever prices of sugar,
Mohan onion or pulses get very high, the government arbitrarily puts export ban on those commodities, start
importing them from xyz country, starts distributing them @subsidized rates in various cities.

Urjit

So?

242

So Rajan may be designed his policy to fight CPI using abc statistical projections but at random, the
Mohan government will do xyz policy on its own to fight inflation= Rajans statistical projections will become
wrong and his monetary policy will become #EPIFAIL.

For this I recommend better coordination and data sharing between Government of India and RBI,
Urjit
regarding inflation control.

Why Target inflation?

Im still not clear. Why should Rajan only focus on inflation (CPI). Other things are also important
Mohan like GDP, IIP, employment, investment, exchange rates. why focus on CPI only, and ignore everything
else?

Urjit

let me explain:

petrol and onion prices, hardship to middleclass= those are clichd points. Lets
learn some new points.

In recent years, Indias inflation has been highest among all G20 countries.

Indias inflation has been higher than its trade competitors.

CPI

2008

2012

World

243

Brazil

China

<3

India

>10

S.Africa

11

Russia

14

From above table, you can see that

Between 2008 to 2012- China, South Africa and Russia have drastically reduced their
inflation. Only India is the #EPICFAIL country where inflation has increasedinstead of decreasing!

Higher inflation = real interest rates decreased => makes people buy more
gold=>CAD=>rupee weaken=>petrol expensive=>everything expensive=>every
more inflation =vicious cycle.

Mohan

Whoa, whoa, whoa man slow down. What is real interest rate? How does it affect economy?

Nominal vs Real interest rate

Urjit

Suppose Ive 100 rupees. But instead of buying onions, I put this money in a savings account.

Observe what happens with my purchasing power:

Onion Rs./kg

Money

How much can you Buy?

1st Jan

20

100

5 kg

31st Dec

100

104

~1 kg

Meaning, although bank increased your money from Rs.100 to 104, but you can
buy very less onions. Therefore, we must not focus on nominal interest rate i.e.
4% but on real interest rate.
244

Bank deposit

Nominal Interest Rate

CPI (Inflation)

Real Rate of Interest=(Nominal-Inflation)

Savings account

4.00%

11%

-7%

Fixed deposit

9.00%

11%

-2%

From above table, you can see Banks in India offer negative real interest.
Therefore, people prefer to invest in gold, instead of putting money in bank
accounts.
Result:

Excessive gold import=>Current account deficit increased=>Rupee Weaken

=>Petrol/diesel expensive=>even more inflation. This becomes a vicious cycle where
you cannot find whether hen came first or the egg came first?

When people invest money in gold, instead of putting it in bank=> businessmen get
less loans=>less expansion =>less jobs=> less growth in GDP.

Now if you compare India vs [China, Russia, South Africa]. You can see- their
inflation is low=> real interest rate would be higher => people invest less in gold=>
more money flows towards banks=>business loans=>higher GDP, higher IIP (index
of industrial production).

In other words, when Rajan frames monetary policy, he should only fight against inflation then low
Urjit
GDP, low IIP will be fixed automatically.

245

Mohan fair enough.

Nominal Anchor (CPI): the 4% Target

Ok far weve learned:

When Rajan frames monetary policy
1. He must focus on fighting inflation only.
2. To fight inflation, he must focus on CPI.
Now the problem? What should be his exact CPI target? 4%, 5%. 0%, -50%??
This is easy. Rajan should design monetary policy in such way, that CPI is -50%. If bottle of desi
Mohan liquor was sold @100 Rs. in 2010, then in 2014 its price should reduce to Rs.50 only. Then Maujaa hi
Maujaa.

Urjit

I hate to break your spirit, but such deflationary trend is not good for economy.

Every business has fixed cost of production minimum light bill, phone bill, office
rent, staff salary etc. So, if prices keep falling and falling, then businessman will
suffer losses. He has no motivation to expand business. He wants to cut down his
production costs, by firing some of the employees= less new jobs created=
unemployment = social unrest.

If prices of everything fall- then custom duty, VAT, excise duty, service tax- their
collection will also decrease. Then government has less money to spend on
education, healthcare, social sector, defense, law and order = poverty, disease, crime.

Mohan Then what should be the minimum target? What should be the lower limit of inflation?

Urjit

Minimum 2% inflation is necessary in any economy.

Mohan Then what should be the maximum limit for inflation/CPI?

Ive analyzed data from various countries. When CPI gets higher than 6.2%, it negatively affects GDP
Urjit

and employment. Therefore Rajan should ensure CPI inflation doesnt cross more than 6%.

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Mohan Ok, minimum 2% and maximum 6%.

Right RBI should try to get CPI inflation @4% with band of +/-2%.
Urjit

meaning 4-2=2% minimum

and 4+2=6% maximum

Mohan But why give this 2% band? Why not just say 4% is our target?

Because in real life, it is not possible to get inflation controlled @exactly 4% level. There will be
unanticipated price shocks in food and fuel items, wars, famines and natural disasters.

Urjit

Therefore, Rajan should be given some room to accommodate such shocks thats why 2-6%
target.

Besides, the RBIs of other countries also use similar band method: observe
Central Bank of

CPI target under their monetary policy

Mexico

2-4%

South Africa

3-6%

Israel

1-3%

Chile

2-4%

So, its a tried and tested method. we should follow the same.
Nominal Anchor CPI 4%: WHEN to reach?
Ok so far Ive learned:
Mohan

Urjit

Urjit Patel Committee wants to strengthen monetary policy framework

You insist RBI to fight inflation only.

You even gave Rajan a target: 4% CPI (Combined), with +/-2% band

That is correct.

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well, Your recommendation is ambitious, but unrealistic. I repeat again- There are many factors
Mohan outside Rajans control like monsoon and black marketers. I dont think Rajan can ever bring down
inflation to 4% level.

Urjit

It is possible. Let me give you the case study of Chile.

During 90s, Chile was facing CPI inflation as high as 25%.

But in the early 2000s, the RBI of Chile made the target 3% CPI (With +/-1%
band)=2-4% CPI

Now observe the following graph- particularly the green band between 2002 to 2006.
You can see Chiles RBI has successfully managed to contain inflation within that 24% level.

Urjit recommended following timeframe:

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0 month (i.e. when Urjit was making

CPI is ~10%
report)

Within 12 months

RBI should reduce CPI to 8%

Within 24 months

RBI should reduce CPI to 6%

Just try to maintain inflation within the 2-6% range. (i.e. 4% with +/Then
2% band)

In short: 0/12/24 (months)=>10/8/6 (CPI)

Nominal Anchor CPI 4%: How to reach?
Mohan Alright. If Chile can do it, we can also do it. But HOW?

Urjit

Using the same tools available in the present monetary policy framework.

Especially the policy rate.

Mohan What is policy rate?

Urjit

Urjit

Repo rate under Liquidity adjustment facility (LAF)= thats our policy rate.

And reverse repo(RR) = Repo minus 1%;

MSF=Repo +plus 1%

^This system is fine. I recommend that Rajan should continue with it.

RBI should not change this +/- 1% spread between RR-Repo-MSF. (unless in extreme situation)
because unpredictable policy making= not good for banking sectors own business plans and
tactical projections .

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Hawkish trend: Why interest rates will rise?

Ok so far Ive learned:

Mohan

Urjit

Urjit Patel Committee wants to strengthen monetary policy framework

You insist RBI to fight inflation only.

You even gave Rajan a target: 4% CPI (Combined), with +/-2% band

You even gave Rajan a timeframe: 0/12/24 (months)=>10/8/6 (CPI)

You even gave Rajan the firing strategy: fight inflation via Policy rate (Repo Rate)

That is correct.

But then whats the new story my friend? All these years, RBI has tried to fight inflation by using
Mohan Repo rate as its policy rate. But it has failed to yield any positive result. What makes you think repo
rate can fix our inflation problems?

Swami Vivekanand has said Aim higher. On the same logic, I recommend Repo Rate should be
Urjit

kept higher than CPI. Then itll fix the problem.

Observe.
At present

Repo

8%

CPI

~10%

Difference (Repo MINUS CPI)

-2

You can see Repo rate is lower than CPI. Thats why its ineffective. In the
previous article on monetary policy, we learned that
Monetary policy Tool

How to Fight inflation?

How to fight deflation?

Repo rate

Increase repo rate

Decrease repo rate.

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Therefore, to fight inflation repo rate MUST be increased. Urjit Patel recommends
that Repo rate should be increased so much that its higher than CPI.
At present

Urjit Patels recommendation

Should be higher than CPI. Here CPI=10, so lets keep Repo

8%

Repo

@11%

CPI

~10%

~10

-2

(11-10)=+1

Difference(Repo
MINUS CPI)

In other words, Urjit Patel recommends that difference between Policy rate (Repo
rate) and CPI should be positive, Only then Policy rate can fight inflation.
What will be the consequences of high repo rate?

Banks borrow less from RBI (Because theyve to pay more interest rate)

Banks will increase their loan interest rates (because theyve less new money and still
want to keep profit margin same)

Less business expansion (because less people take loans, due to higher interest rate)

Less new jobs created

Less income

Less demand

Sellers will reduce Prices of goods and services, to attract and retain customers.=
inflation reduced.
Wait wait wait. Urjit Patel, youre a hawkish person, a person who believes inflation can be fought

Mohan
by increasing the interest rates.

Urjit

Mohan

So what?

So manRajan raises Repo rate=>SBI increases loan interest rates=>harder to borrow for
businessmen=>less business expansion =>less new jobs=>deflationary trend=>this will hurt our

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GDP.

CRISIL, Moody and other experts have made statistical projections- that even in 2015, our CPI
will be ~8.5%. So by your logic, Rajan should keep Repo @9%. It will kill the growth!

Urjit

Theoretically youre right. High interest rates are not conductive for higher GDP growth.

But Indian inflation has become so high, that extreme steps are necessary.

Besides, the RBIs of Australia, Canada, S.Africa, Mexico, Brazil, Israel all have taken same
measure in past.

When inflation became very high, they raised repo rate to level higher than inflation. Only then
problem was fixed.

Whatever man. Im going to write a column in TheH**** to criticize you that If Urjit Patel
Mohan Committees report is implemented, interest rates will rise and growth will be killed. (Packs his
laptop and Prepares to leave.)

WAIT! Picture abhi baaki hai mere dost. Overall I made three important recommendations. In this
Urjit
article we only learned the first one:

1. @RBI fight inflation

1. Target=4% CPI, +/-2% Band [=control inflation in 2-6% range.]
2. Tool=Repo as policy rate, +/-1% spread in RR-Repo-MSF,
3. Time limit: 0/12/24 (months)=10/8/6% (CPI)
4. Strategy=keep repo higher than CPI.
2. @Chindu, give cover fire to Rajan, while he is fighting inflation (=in next
article click me)
3. @Rajan fix accountability in your gang. (=in next article click me)

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Mock Questions
1. Incorrect statement
1. Nominal interest rate doesnt take inflation into account.
2. Real interest rate doesnt take Nominal interest rate into account.
3. Both A and B
4. Neither A nor B
2. What do you understand by Real interest rate?
0. Nominal interest rate plus inflation
1. Nominal interest rate minus inflation
2. Nominal interest rate multiplied with inflation
3. None of above.
3. In a futuristic society, if Real interest rate became a positive number, which of
the following is mostlikely to be correct?
0. Fiscal deficit increased at the expense of current account deficit.
1. People have started putting their entire savings into gold.
2. RBI and Government failed in combating inflation.
3. RBI and government successfully managed to bring down inflation below the
nominal interest offered in banks.
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4. Urjit Patel Committee has observed that

0. CPI lower than 2% is good for economy but CPI higher than 6% is bad for economy
1. CPI lower than 2% facilitates growth but CPI higher than 6% reduces
employment.
2. CPI lower than 2% and higher than 6%, are bad for GDP and employment.
3. None of above.
5. Urjit Patel Committee has recommended that
0. RBI should continue with multiple indicator method to frame monetary policy, while
targeting 4% inflation.
1. RBI should ignore fuel, food and service sector inflation and focus on core
inflation only.
2. RBI should frame monetary policy while keeping CPI as the nominal anchor.
3. None of above.
6. Urjit Patel recommends RBI to:
0. Bring down consumer price index inflation to 6% within next twelve months.
1. Switch its focus from multiple indicators to exchange rate stabilization
2. both A and B
3. Neither A nor B.
7. To Combat inflation, Urjit Patel Committee has recommended RBI to:
0. Keep Repo rate lower than CPI.
1. Keep Reverse repo rate higher than MSF.
2. Keep the value of Reverse repo rate between Repo rate and MSF.
3. None of Above.
Q8. If RBI frames monetary policy with primary objective of stabilizing the
exchange rate, what will be the consequences?
1. Country becomes vulnerable to shocks emanating from the country to which its
currency is pegged.
2. Country becomes immune to speculative attacks in forex trading market.
3. Imported inflation will be kept in check.
Choices
1.

Only 1 and 2
254

2. Only 2 and 3
3. Only 1 and 3
4. All 1, 2 and 3.
Q9. What are the recommendations of Urjit Patel Committee?
1. Ination should be the nominal anchor for the monetary policy framework.
2. RBI should adopt the new CPI (rural) as the measure of the nominal anchor for
policy communication.
3. WPI ination should be set at 4 per cent with a band of +/- 2
Answer choices
1.

Only 1 and 2

2. Only 2 and 3
3. Only 1 and 3
4. Only 1
Q10. Match the following:
1.

Hawk

1. Purchases securities under the assumption that they can be sold later at a higher price.

II.

Bull

2. Believes that a particular stock or the market as a whole, is headed for a fall in prices.

III.

Bear

3. Favors relatively high interest rates in order to keep inflation in check.

4. Favors relatively low interest rates in order to keep deflation in check.

Answer choices
Options

II

III

255

Q11. Match following

1.

Nachiket Mor

1. Nominal Anchor Method to frame Monetary Policy

Urjit Patel

2. Financial Sector Legislative Reforms

III.

BN SriKrishna

3. Governance of Boards of Banks in India.

IV.

P. J. Nayak

4. Financial products for small businessmen.

II.

5. State backwardness index

Answer choices
Options

II

III

IV

Mains / interview type questions, once we finish remaining recommendations of

the committee in next article.
MCQ hints:
1. incorrect statement is B
2. technical formula is bit different- but here opt B
3. last one
4. <2 and >6 both bad.
5. second last
6. neither
7. none
8. second statement is wrong.
9. only first statement is right
256

10. hawk-interest, bull -will rise; bears-will fall

11. Nachi- products, Urjit- Nominal, BN-reforms, Nayak-Board.

Urjit Patel Committee: Fixing Accountability in RBI, Monetary Policy

Committee, Decision by Majority, Fiscal Deficit (Part 2 of 2)
Prologue

RBI had formed a Committee under Dy. Governor Urjit Patel to strengthen
monetary policy framework. Committee gave three major recommendations:
1. @RBI Target inflation (4% CPI; 2% band). Already covered in previous article click
me.
2. @RBI fix accountability (discussed in this article)
3. @Government: help RBI fight inflation (in this article)

#2: @RBI fix accountability in monetary policy making

What is the existing mechanism in RBI?
1. Governor: Selection by finance minister, approval by Prime minister, appointment by
Government of India.
2. Term: three years for Rajan.
3. Eligible for re-appointment? Yes RBI Act provides for appointment of a governor for
a period of up to five years.
4. He is directly accountable to government of India.
5. Government can even issue him directives in public interest.
6. Rajan is also accountable to Parliaments standing Committee on Finance. They can
summon him. On and average, RBI governor has to appear before this Committee 34 times a year.
How is monetary policy formed right now?

At present, monetary policy is made by the governor alone.

Rajan does consult with his Dy. Governors, board of directors etc. but only Rajans
signature necessary for approval file= meaning Rajan and Rajan only is the decision
maker.

Some initiatives in recent times:

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2005: RBI governor started consulation meeting with noted economists, industrial
bodies (FICCI etc) and Credit Rating Agencies (CRISIL etc.)

RBIs annual reports put on the official website

Governor publishes quarterly reviews, and during the release, he answers media
queries.

But overall, Monetary policy is still one man game, without any formal mechanism
for ensuring participation and accountability.

Recommendations in Past:
Previous Committees Tarapore, Reddy, FSLRC etc. have directly/indirectly
recommended that
1. Monetary policy should be decided by a Committee
2. Decision based on majority voting
3. Publish minutes of such meetings on the website/media.
Mohan alright man now come to the point.

Well, Considering all of above facts and factors, I recommend that RBI should form a monetary policy
Urjit
Committee.

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Monetary Policy Committee

Total five people in this Committee:

1. Chairman: Rajan himself (governor)
2. Vice Chairman: Any one Dy Governor (RBI has total four governors)
3. Members:
1. One Insider: RBIs own Executive Director (in charge of Monetary policy).
2. Two outsiders/External members:

Noted Economists, finance experts etc, whore not office bearers in RBI.

term: three years

not eligible for re-appointment.

Outsiders: Safeguards and provisions
The outsider members will have the right to assess all data/files/records in RBI office.But he cannot
Urjit
hold office of profit under the government.

Mohan Meaning?

Urjit

To put this in crude words: he should not be on the payroll of the government. for example: IAS

259

officers, bureaucrats, even certain bodies / corporations funded by the government.

Mohan But why?

Government may try to influence RBIs decision making via such member- because his bread n butter
Urjit
depends on that job.

In all the advanced economies, monetary policy is made by a Committee of

independent members- even in China, government directly doesnt interfere with its
officers/representatives.

Exceptions where government side is represented in Monetary policy Committee

=Colombia, Philippines.
Conflict of Interest
Urjit

Secondly, such outside member must not involve in any activity that has conflict of interest with RBI.

Mohan Meaning?

Consider HSBC, Morgant Stanley, JP Morgan Chase etc giants. They have license to operate as
Primary dealers in India. Meaning they can directly buy and sell government securities. So, if
monetary policy Committee member also provides consultancy services to such firms= there is

Urjit

conflict of interest.

What if he leaks information to that company, e.g. RBI will start Open market Operation in
week OR RBI is set to decide Repo rate @xx%.

Those primary dealers could make windfall profits from such insider tips.

MPC Decision by Majority

Urjit

Monetary Policy Committee (MPC) will decide the monetary policy by voting among themselves.

Mohan

But what if there is a tie?

Urjit

Noone will be allowed to abstain from the voting. (unlike the CBI fearing parties in Rajya
Sabha).

All five members must vote on each and every issue brought on table.

260

Since 5 is an odd number, there is no chance of tie.

Mohan

Ya but what if one member is absent? Then four members left= 2 vs 2 tie possible!

Urjit

In that case Rajan (Chairman) will give the casting vote to break the tie.

Mohan

But what if Rajan himself is absent? And there is 2vs2 tie?

Urjit

Then Vice Chairman of the Committee (Dy.Governor) will give the casting vote to break the tie.

Mohan

But what if He is also absent?

Urjit

if both chairman and VC are absent, then common sense suggests we should postpone the meeting!

Ok one last doubt: you told there are five people in MPC Committee: three insiders (Rajan, Dy
Governor and one member) vs two outsiders (external members).

What if one of the outsider member always gives dissenting vote.Ultimately, Rajan bhais

Mohan
goonda-log beats him to pulp to make sure he remains absent in the meeting.

and then Rajan bhai uses his own casting vote to decide policy according to his own whims and
fancies!

Urjit

How will you maintain accountability in that case? Solve it for [Ethics] GS4.

Im not going to dignify that stupid question/case study with an answer. Lets move to next topic:

MPC: Accountability for #EPICFails

In the previous article we saw the Target: RBI must control CPI within 2-6%
range. (i.e. 4% CPI with +/-2% band)

EPICFAIL = When MPC fails to keep CPI within this range for three successive
quarters. (meaning 3 x 3 = 9 months continuously CPI remains outside the [2,6]
range.)

In case of such #EPICFAILs, Urjit Patel recommends

1. MPC Must issue a public statement
2. Every MPC member must sign it
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3. This statement will contain

1. Why did we fail? (Reasons)
2. How will we fix it (Future action proposed)
3. By when will we fix it? (Timeframe)
MPC: Summary
Total five persons.
1.

RBI governor as chairman

2.

RBI dy.governor as Vice chairman

Members:
STRUCTURE

DECISION
MAKING

TRANSPARENCY

One Executive director of RBI

Two members from outside RBI.

cannot hold office of profit,

cannot involve in work that has conflict of interest with RBI

term: three years

not eligible for re-appointment.

Must meet once every two months.

Decision by majority voting

Each person has one vote.

Member cannot abstain from voting.

If there is tie, Casting vote power to Governor and Dy.Governor.

Must publish minutes of the meeting.

Must publish Bi-annual report.

In case of failure to contain inflation with 2-6% range for three successive quarters,
MPC will release a public statement signed by all members.

^~130 words.
Moving to the third main recommendation:

#3: @Government give Cover fire to RBI

RBI Makes monetary policy to control money supply in the system [and thereby fight
inflationary and deflationary trends in economy.]
262

But RBIs monetary policy fails to yield result because of governments policies and

subsidies. Observe:
#: MNREGA:

Money increased in Juntaas hand? Yes

Productive infrastructure/assets increased =Hardly. (Most of those kuccha roads and

ponds get washed away in first rain.)

So in a way, more money in publics hand, without corresponding rise in some

physical goods/infrastructure/services. => leads to inflation.

Additionally, MNREGA=>less poors migrating to rich states to work as farm

laborers=> the farmers in those states have to arrange local laborers @higher
wages=> food inflation.

+ lot of this money chowed down by Sarpanch, Patwari and Tehsildaar=> they give it
local money lender, who in

turn loans it to farmers @36% interest rate. Rajan has no control over this. His

monetary policy fails to control this.

#: MSP

In recent years, government kept increasing minimum support prices (MSP) of

foodgrains (To benefit farmers/vote bank politics.)

But APMC merchants are not ready to buy grains @such high price.

So, Farmers bring the grain to FCI (to sell it @Minimum support price declared by
the government.)

FCI buys it, but FCI doesnt have sufficient godowns= grains rotten @railway
stations and eaten away by birds, rats, dogs and cows.

Money increased in farmerss hand? Yes

Products/Goods/services increased in the economy? Nope. in fact foodgrain

destroyed=> less commodities/products/breads/biscuits.

Result= inflation.

+ even if this reaches to PDS shop, those shopkeeper themselves involved in

hoarding and black marketeering. So, inflation continues.

Ill-gotten money gets reinvested in gold, real estate etc (because black-marketer
cannot deposit in banks- else Income tax walla will track him down through KYC
form.)
263

Again, Rajan doesnt have control over this, so his monetary policy will remain

ineffective.
#: Fiscal Deficit

Without getting into all details:

Any type of deficit = as such bad. Because it shows government is spending beyond
its income.

Revenue expenditure = not good. [e.g. salary to staff]

Capital expenditure = good. [e.g. building new road/bridge]

Receipts= incoming money

Lets check the formulas to calculate various deficits:

Deficit

formula

Budget deficit

Total expenditure Total receipts

Fiscal deficit

Budget deficit + Borrowing.

(Total Expenditure Total Receipts) + Borrowing

264

(Total expenditure + borrowing) [Revenue Receipts + Capital Receipt]

Total expenditure [Revenue receipts + (Capital Receipts non debt type)]

Total Expenditure [Revenue receipts + (Recovery of loans +Other receipts)]

Primary deficit

Fiscal deficit interest payment (on previous loans)

Revenue Deficit

Revenue Expenditure Revenue receipt

Effective Revenue

Revenue deficit grant for creation of capital assets

deficit

So what do we get from above formulas?

As such, any type of deficit is bad, because it shows youre spending beyond your
income.

Sometimes it is good to overspend- e.g. A middleclass family takes loan to send

their kid for higher education. [because money will recover when kid starts
job/business.]

Similarly, if government also overspends for productive purpose like building new
bridges, dams, canals and powerplants (i.e. capital Expenditure), then it is good, even
if they run into deficit.

^Atleast Keynesian economists believe so.

But in Modern Times, such goodwill expenditure also create more problems
than they solve
1. because youre still overspending beyond your income,
2. even if bridges, dams, canals and powerplants are created itll take 20-30-50-100
years before the money is recovered through tolltax/selling electricity and water.
3. Besides governments tend to subsidize here also. So the capital Expenditure will
not be recovered quickly.
4. E.g. Kejriwal offering free water and cheap electricity. (After all it does come from
some dam, some canal, some powerplant.)
Therefore, Free Market economists argue that Government should not borrow
money even for capital Expenditure (building roads, canals, bridges and
265

dams). Government should only spend according to its income. And thus fiscal
deficit should be kept minimum.
There are two ways to cut down fiscal deficit:
1. Government should increase its income (e.g. increase taxes, order PSU to give more
dividend)
2. Government should decrease its expenditure (e.g. stop bogus schemes, reduce
subsidies, sell away loss making PSU, recruit less people and so on.)
But in real life scenarios, both solutions are difficult to implement, therefore
instead of decreasing fiscal deficit, government will keep issuing more
bonds/Government securities to arrange additional cash.=> fiscal deficit keeps
increases. And High level of fiscal deficit leads to following problems:
1. Banks and investors buy these government securities.
2. As a result, less money left for businessman to get loans/investment => less business
expansion, less jobs=>GDP reduced.
3. In other words, fiscal deficit crowds out investment in private sector. Business loan
interest rates continue to remain high.=> Rajans statistical projections about money
supply, will become wrong. Thus monetary policy wont be effective.
High Fiscal deficit: the vicious cycle:

High Fiscal deficit=> S&P, Moody etc. reduce our Rating to junk level=> FDI, FII
slows down. But crude-oil, gold imports remain high => less incoming Dollars=>
rupee weakens => crude oil more expensive=> fuel inflation => inflation in
everything transported by petrol/diesel.

And IF government starts giving subsidies on petrol/diesel, then more fiscal

deficit=>vicious cycle of weak rupee and high inflation continues.

Rajans monetary policy give much positive result in this case.

#: Loan Waiver

2008: Government announced debt waiver scheme for farmer. Accordingly,

government paid >60k crore rupees to the banks, on farmers behalf to settle their
loans. This hurts in three ways

1. Fiscal deficit increased=> more problem as we saw above.

2. Rajans statistical projections for monetary policy go wrong.
266

3. Farmers get bad habit of not repaying loans on time, hoping that government will
again waive off their loans before general election.=> again NPA increases, banks
are left with less money to lend => banks will charge high interest rate on business
loans (to keep profit margin same)=> less business expansion = GDP, IIP declines.
Urjit Patels recommendations to Government
Given all these negative factors, Urjit Patel recommends government to do
following:
1. Eliminate administered prices (MSP on foodgrains, LPG cylinders),
2. Eliminate administered wages (MNREGA)
3. Eliminate administered interest rates (interest subvention given to farmers.)
4. Implement Vijay Kelkar Committees recommendations on fiscal consolidation.
5. Religiously follow the guidelines of Fiscal responsibility and budget Management
Act (FRBM).
6. At present fiscal deficit is ~5% of GDP. Reduce this to just 3% of GDP, by 2016-17.
Waah Urjit bhai waah. Youve given some radical recommendations.Lejin Hum nahi
Chindu sudharenge (well not reform and continue to give truckload of subsidies and freebies before election.)
Just observe:

1. Weve increased number of subsidized LPG cylinders from 9 to 12 => subsidy

burden increased by 5000 crore.
2. Previously 6th Pay commissions recommendation cost us Rs.20000 crores. Now
Weve formed 7th Pay commission under Justice Mathuor. You can be damn sure
itll cost more than Rs.20000 crores.
3. And before the Model code of conduct is announced, we may launch a few more
schemes, freebies and highest MSP for farmer.
Then I better just run away to Nepal, Dubai or Bangkok than try to fix the inflation mess through
Rajan
monetary policy.

267

Urjit Patel: Misc recommendations

1. Create standing deposit facility (similar to MSF.)

2. Reduce SLR rate as per basel III framework. (Nachiket Committee said remove SLR
completely).
3. Governments cash and Debt management function should be under a separate
Government body. (and not with RBI)
4. Government should not give directives to public sector banks on interest rates.
5. Exchange rates related. (QE, Tapering.)
6. Fixed income financial products (e.g. various maturity plans, Non-convertible
debentures, small savings scheme etc.): = for TDS and tax benefits, treat them similar
to bank deposits. Thatd motivate people to save into them rather than in gold.

Mock Questions
1. Find correct statements
1. Primary deficit cannot be higher than fiscal deficit
2. Primary deficit is obtained by deducting interest rates from Revenue deficit
3. Both A and B
4. Neither A nor B
2. Find Incorrect statements
0. Fiscal deficit cannot be lower than budget deficit
268

1. Fiscal deficit cannot be lower than Revenue deficit

2. Both A and B
3. Neither A nor B
3. Effective revenue deficit means
0. Revenue deficit + Interest payment
1. Revenue deficit Borrowing
2. Revenue deficit + grant for creation of capital assets
3. Revenue deficit grant for creation of capital assets
4. RBI governor is__
0. Selected by a panel consisting of Finance minister, commerce minister and the leader
of opposition in Lok Sabha
1. Answerable to the parliaments standing Committee on finance.
2. Both A and B
3. Neither A nor B
5. (A) In the recent years, RBIs monetary policy has failed to contain inflation. (R)
High level of subsidies and fiscal deficit reduce the impact of monetary policy on
ground level.
0. Both the statements are individually true and Statement R is the correct explanation
of Statement A
1. Both the statements are individually true but Statement R is not the correct
explanation of Statement A
2. Statement A is true but Statement R is false.
3. Statement A is false but Statement R is true.
Q6. Urjit Patel Committee has recommended setting up a monetary policy
Committee. Which of the following statements are correct in that regard:
1. Members will be chosen by a panel of RBI governor, Finance minister, commerce
minister and the minister for corporate affairs.
2. Their salaries will be charged upon the consolidated fund of India.
3. They cannot be removed from office without a proved misbehavior and voting in
both houses on such motion.
Answer choices
1.

Only 1 and 2
269

2. Only 2 and 3
3. Only 1 and 3
4. None.
Descriptive

(GS2-regulatory bodies)

What are the recommendations made by Urjit Patel Committee, to bring more
accountability in the monetary policy formation in India? (5m | 100 words)

Write a note on the salient recommendations by Urjit Patel Committee to

strengthen the monetary policy framework in India (10m | 200 words)

(GS3) Examine the role of Minimum support prices and farm subsidies as the Factors
responsible for inflation in India. Do you agree with Urjit Patel Committees
recommendations for removal of such administered prices and subsidies? Justify
your stand. (10m | 200 words)

Interview
1. Urjit Patel Committee has recommended RBI to keep repo rate higher than CPI. This
type of hawkish policy to combat inflation, will hurt the growth momentum. Do you
Agree? Yes/No/Why?
2. Urjit Patel Committee says bring down fiscal deficit to 3% of GDP by 2016. Do you
think this is even plausible? Yes/no/why? If youre made by the finance minister of
India, how will you address the problem of fiscal deficit?
3. In the recent years, RBIs monetary policy has failed to put much impact on inflation.
If youre made the governor of RBI, how will you address this problem?
4. Suppose youre the Finance minister of India, and have to pickup the next governor
of RBI. There are two candidates- both man of high integrity and impeccable career
record- one is an IAS, who has long served in finance, commerce and corporate
affairs ministries. And the second candidate is an IIM graduate with long experience
of teaching economics at prestigious institutions abroad, and working with IMF but
he holds a US Green card. Which one will you select and why?

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