Tuesday, 1 March 2016

LIC AAO EXAM STUDY NOTES : Banking Knowledge and Terms

Dear readers. You know that in free notes series today we are sharing some study notes for topic LIC AAO EXAM. Read LIC AAO EXAM STUDY NOTES : "Latest Banking Knowledge and Terms" full article for your general knowledge and boost your exam preparation skills to get better future Lic aao exam result. Banking Awareess basic terminology is must for every lic exam aspirants. Below this article you find all free study notes and important quiz for better score.

Recent Developments in Banking with relevant banking terms

RBI related Developments

Monetary System – Agreement of RBI with government on inflation targeting
**-->> Union Government and the Reserve Bank of India (RBI) have signed an agreement on Monetary Policy Framework in order to move towards the RBI Governor Raghuram Rajan’s view of inflation targeting.

**-->> Presently, Union Government and RBI give inflation estimates and do not set targets.
**-->> But as per this agreement government has set a target for RBI to bring down inflation below 6 per cent by January 2016. 4 per cent for financial year and all subsequent years with band of +/- 2 percent.
**-->> This agreement mentions that if RBI fails to meet the target, it will Report to the government with the reasons for the failure to achieve the target. Propose remedial actions to be taken. Further estimate the time period within which the failed target would be achieved.
**-->> As per the agreement, this Monetary Policy Framework will be monitored by the RBI and it is binding on Union Government to take proactive measures for price control.
**-->> This agreement will put in place a framework of a modern monetary policy to meet the challenges of an increasingly complex economy.
(The agreement comes in line with the recommendations of the Dr. Urjit Patel committee on inflation targeting aiming to smoothen the monetary policy. During the budget 2015-16 speech Finance minister Arun Jaitley also had mentioned that government will amend the RBI Act to provide for a Monetary Policy Committee and have a memorandum of understanding with the Reserve Bank.)



Monetary policy is the approach by which RBI controls the supply of money in the economy
Objective: price stability, economic growth and financial system stability.
Monetary Operations:
  • Involve monetary techniques which influence money supply, interest rates and availability of credit
  • Aim to maintain Price Stability, Stable exchange rate, Healthy Balance of Payment, Financial stability, and Economic growth. RBI takes into account the following monetary policies:

CRR and SLR:

Cash Reserve Ratio:  Proportion of the NDTL as directed by RBI, which a bank has to maintain in Current Account with RBI. Under the BR Act RBI has powers to prescribe CRR from 3 to 15%.
Statutory Liquidity Ratio: Proportion of NDTL to be kept in non cash form such as G-secs precious metals, approved securities like bonds etc.
  • CRR and SLR will ensure that a bank’s ability to meet its liabilities (withdrawals by customers particularly on their CASA accounts as and when they arise).
  • NDTL – (CRR + SLR) is the funds with a bank to give loans. So RBI can use these two as tools to influence money supply. An increase will reduce the money supply and control inflation and the opposite effect happens when CRR or SLR is reduced.

Very Short Term: LAF

  • Helps banks adjust/ manage very short term liquidity- REPO, Reverse REPO, MSF
  • REPO rate is the rate at which RBI provides short term loans to banks and is used for injecting liquidity, against securities in excess of SLR requirements, to the extent of 0.75% of NDTL, 14 days tenor, against pledge of securities
  • Since banks also have access to short term money market to get liquidity, the effectiveness of REPO depends on transmission process from policy rate changes to rates in money market.
  • When REPO rate is raised money market rates also go up, increasing the cost of funds for banks which will get reflected in the borrower level interest rates going up. Borrowers reduce or postpone borrowing decisions. This will reduce demand and hence control inflation. The opposite effect will happen when REPO rate is decreased.
  • Reverse REPO refers to the rate of interest paid by RBI on short term funds deposited with RBI and is used to reduce surplus liquidity with banks to reduce loan issues which in turn will affect purchasing power in the economy and hence reduce demand to control inflation.
  • It also helps banks to keep their temporary surplus funds in Reverse REPO and earn interest at 1% below the REPO rate.
  • MSF (Marginal Standing Facility) is facility for banks to borrow for ultra short term (overnight) not exceeding 0.25% of NDTL. It is available even against SLR securities in case a bank does not have securities in excess of SLR.

Short Term–Bank Rate

  • Rate at which RBI will rediscount eligible bills of finance for advances to specific sectors, for example, exports. After introduction of LAF, Bank Rate as a tool to control inflation has become less important. Moreover, it takes longer time than LAF to influence money supply.
A bill of exchange is an order or direction on a stamped paper drawn by a seller to the buyer to pay a certain amount of money on or after  a certain date (in future) either to the person named in the bill or order (to whom it is transferred) or bearer(specific person to receive the payment not mentioned).
  • When the instrument is accepted by the buyer by putting his signature, the order of the buyer becomes a bill, a substitute for money as a medium of exchange and also a negotiable instrument (right to the amount in the instrument can be passed on to another by endorsement (words of transfer and signature) and delivery).
For examplea cheque is a bill of exchange drawn on a specified banker by the account holder. Now for the seller the bill of exchange is a substitute for money and can be discounted (sold to another party at a value lower than the face value) or pledged (physically handed over as a collateral) with a bank.
  • The banks usually give a loan against the security of bill of exchange (one of the loan facilities given by a bank generally to traders).  Thus, the seller raises money slightly lesser than value of goods sold. The bank, in turn, can rediscount (second discounting of an already discounted bill) the bill of exchange with RBI provided the bill of exchange is for financing certain eligible purposes approved by RBI, for example exports.
  • RBI did not change policy rates in its announcement on 1 Feb 2015.
  • RBI has announced in January 2016 plans for injecting liquidity of Rs.10000 cr through OMO.

Medium Term – OMO

Open Market Operations (OMO) refer to outright sale and purchase of securities by RBI to influence money supply. When government securities are purchased by RBI from banks more purchasing power goes into the economy by way of additional liquidity available with the banks to give new loans, which will stimulate demand and production resulting in economic growth.
  • The opposite effect happens when RBI sells securities. The liquidity with the banking system is reduced to control creation of new loans. It is done to reduce inflationary pressure on the economy created by increase in money supply.

Long Term – Market Stabilization Fund

Whenever there is a likelihood of huge increase in money supply due to inflow on account of external aid, grants etc on account of bilateral or multilateral agreements between India and other countries, the foreign exchange is kept in a separate MSF and made available as and when the government requires, to avoid the sudden increase in money supply.
Other monetary policy operations could involve prescribing credit ceiling or margin against loans and moral suasion (an advice not statutory) but they are used mainly to regulate the flow of credit to specific sectors.
Approved Securities are the securities stipulated under Indian Trusts Act, in which a trust can invest its funds.

Currency Management

Extension of date for exchange of pre 2005 currency notes
Ø RBI has extended the date for exchange of pre 2005 notes to 30th June 2016
Ø Exchange will be only at specific authorized branches of banks
Ø RBI decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005.
Ø Will create a disincentive for cash hoarders
Ø The withdrawal exercise is in conformity with the standard international practice of not having multiple series of notes in circulation at the same time.
(Mahatma Gandhi series currency notes were issued in 1996 and 2005. So pre 2005 notes viz., MG series notes of 1996, are withdrawn)
The RBI has already been withdrawing these banknotes in a routine manner through banks. In 2005 RBI issued MG (Mahatma Gandhi) series notes Pre 2005 notes are notes issued in 1996It is estimated that the volume of such banknotes (pre-2005) in circulation is not significant enough to impact the general public in a large way and the members of public may exchange the pre-2005 series banknotes at bank branches at their convenience.
New paper cum printing unit owned by GOI started at Hoshangabad in MP. There is a recent news that the first batch of thousand rupee notes printed here were found to be without security thread and RBI has asked banks not to recirculate these notes whenever they get them into the bank.
  • RBI planning to issue plastic currency notes
  • GOI planning to issue rupee one notes
Banker to government – Changes in the method of estimation of Ways and Means Advances recommended by a committee have been introduced.
Ways and Means advance is a temporary loan given by RBI to state and central governments. It is one of the three ways of borrowing available to the government for borrowing within the country, the other two being treasury bills and dated securities.
Treasury bills are short term securities issued with 91 and 364 days maturity. They are always issued at a discount to the face value and redeemed at par or face value at maturity. So interest on these instruments are not paid separately as the interest rate decides the discounting rate.
Cash Management bills are treasury bills of specific maturity usually lesser than 91 days issued by RBI to raise temporary liquid funds.
Dated Securities are long term government securities with names usually carrying the rate of interest on the securities and year of maturity. For instance the name `7% Government of India 2030’ indicates that the security carries an annual interest at 7% and will be redeemed in 2030. The rate of interest is called Coupon Rate.
Sometimes bonds are issued with Call option (a right of the issuing institution  to recall the bond by paying off the bond holder before the maturity period) or a put option (option to the holder of the bond to surrender the bond and seek return of face value) subject to certain conditions specified.

Control and Supervision over banks

  • Issue of license to 11 Payment banks and letter of intent to 12 entities for issue of Small Banks license
  • RBI has permitted banks dealing in FE to set up IFSC Banking Unit (IBU)s in IFSC (International Financial Service Centres.
Ø Banks in the public and private sector authorized to deal in Foreign Exchange are eligible to set up IBUs with prior permission from RBI
Ø The parent bank has to provide a minimum capital of US $ 20 million or its equivalent in any foreign currency to IBU
Ø Liabilities of IBU are exempt from CRR and SLR
Ø Funds can be raised only from foreign sources but can be deployed with both persons not resident in India as well as those resident in India
Ø All transactions shall be only in foreign currency
Ø Can undertake transactions with nonresident entities other than individuals/retail customers and HNIs
Ø Not allowed to open SB or CA. They cannot issue bearer instruments or cheques.
Ø Prudential norms as applicable to overseas branches of Indian banks will be applicable to IBUs
Ø Deposits will not be covered by deposit insurance
Ø No liquidity support from RBI.


An IFSC caters to customers outside the jurisdiction of the domestic economy.
  • Fund-raising services for individuals, corporations and governments
  • Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds
  • Wealth management
  • Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.
  • Global and regional corporate treasury management operations that involve fund raising, liquidity investment and management and asset-liability matching.
  • Risk management operations such as insurance and reinsurance
  • Merger and acquisition activities among trans-national corporations.

RBI relaxes norms for branch merger and closure

  • Banks can close, shift, merge, all branches except rural and sole semi urban branches.
  • The bank is required to get approval of DCC/DLRC.
  • Further banks to ensure banking needs of the centre where the branch is located met through the satellite offices, mobile vans or Banking Correspondent Services.
  • RBI has asked the banks to open more brick and mortar branches in villages with no banking facilities and with a population of more than 5,000. It has asked banks to submit a roadmap on how many branches they will be opening by 31 March 2017. Banks have to submit the roadmap by end of January 2016.
  • RBI observed that coverage of banking services in unbanked villages is skewed towards the BC model and the ratio of branches to BC is very low. Therefore, it has been decided to focus on villages with population above 5,000 without a bank branch of a scheduled commercial bank.
  • This will also enable banks to provide quality financial services and timely support to BC outlets that would help in sustaining and strengthening the services provided through BCs and also ensure close supervision of BC operations.
Brick and Mortar branches are Ultra Small Branches between the present base branch and BC (Business Correspondent) locations so as to provide support to a cluster of BC units at a reasonable distance.
RBI has advised banks to set up these Ultra Small Branches so as to provide support to about 8-10 BC Units at a reasonable distance of 3-4 kilometres.
These could be either newly set up or by conversion of the BC outlets. Such Ultra Small Branches should have minimum infrastructure such as a Core Banking Solution (CBS) terminal linked to a pass book printer and a safe for cash retention for operating large customer transactions and would have to be managed full time by bank officers/ employees.
It is expected that such an arrangement would lead to efficiency in cash management, documentation, redressal of customer grievances and close supervision of BC operations.
  • RBi introduced AQR (Asset Quality Review) in April 2015 which has shown alarming increase in the total of Gross NPA +stressed advances + written off assets for all banks from 11.5% to 14.1% ANBC. In respect of public sector banks during the same period it has gone up from 13.4% to 17%.
  • The stress is comparatively more in large accounts than Priority Sector
  • RBI has given time upto March 2017 to redress or recover the account
  • March 2017 is the deadline for creating adequate provision
  • RBI observed DP manipulations, EPBG abuse, funding satellite entities, devolved L/Cs .late adjustments etc., Round tripping- last week to first week – 50 cr to 500 cr Short term O/D to repay.. then O/D paid by fresh sanctions and sale of assets within groups at inflated prices and issues related to CDR (..equity upfront/security creation/personal guarantees), interchanges…(NFB to FB, DCCO- not achieved/cosmetic/very small capacity) and restructuring(incomplete TEV study)    as some of the reasons
(DP: Drawing power, EPBG: Export Promotion Bank Guarantee, O/D: Overdraft, CDR: Corporate Debt restructuring, NFB: Non-fund based, DCCO: Date of commencement of commercial operations,TEV: Techno-economic viability)


i. NPA (Non Performing Asset) represents Assets/project not generating cash flow to the extent and in the period originally envisaged. (The technical definitiofor different types of advances like term loans, crop loans, cash credit, overdraft etc are different).
ii . NPAs arise due to: Genuine reasons, Wrong assumptions/inefficiencies in project parameters and Misdemeanour
iii. NPAs are classified into substandard (assets which are in NPA category for a  period upto one year, doubtful (assets which are NPA for more than one year)  and loss assets (assets considered irrecoverable by bank’s auditors or during RBI         inspection)
iv. Stressed assets refers to assets in which interest and / or principal installment remains overdue for more than 30 days. When the overdue period crosses 90 days the asset becomes NPA. In case of large accounts with signs of stress, which were restructured before 31 March 2009 banks were allowed by RBI to treat such assets as standard.
v.Written Off Assets are loans treated as irrecoverable and reduced/removed from the books of account by writing down or setting off against NPA provisions.
CRAR (Capital to Risk-weighted Assets Ratio) is the ratio of capital of a bank to the (nominal) value of risk weighted assets. Each category of assets is given different risk weights or in lay man’s terms risk involved in recovery. All the assets in the balance sheet are multiplied by respective risk weight indices and the
total value thus arrived is the total nominal value of risk weighted assets. Under
the Basel III norms Indian banks have to achieve 9% CRAR by March 2019. In case of public sector banks this involves huge additional capital infusion from the central government.
  • Changes in Priority Sector recommended by a Committee
  • New categories of loans viz., Medium Enterprises, Social Infrastructure and Renewable Energy have been included in the revised PS Advances announced in April 2015
  • The distinction between direct and indirect Agriculture has been removed
  • Priority Sector Advances level increased for RRBs from 60% to 75%
  • Internet banking to be introduced by cooperatives
  • RBI has allowed Cooperatives to implement two types of internet facilities.

View only

Ø All licensed UCBs, SCBs and DCCBs which have implemented CBS
Ø Appropriate security features as per RBI guidelines
Ø Strictly for non transactional services
Ø Banks to report to RBI and NABARD within one month of commencement of service

With Transaction Facility

Ø CRAR not less than 10%
Ø Networth as on last March not less than Rs. 50 crores
Ø Gross NPAs not more than 7% and net NPAs not more than 3%
Ø Made net profit in the immediately preceding financial year and in 3 out of 4 preceding financial years
Ø Should not have defaulted in CRR and SLR in the immediate preceding financial year
Introduction of marginal cost based rate of interest from 1 April 2016
In December 2015 RBI announced introduction of Marginal Cost of funds based Lending Rate (MCLR) in banks w.e.f 1 April 2016
Ø Banks will review and publish MCLR every month
Ø Provision also for existing borrowers to switch.


  • To improve efficiency of monetary policy transmission
  • Presently Base Rate in banks is worked out on average cost of funds basis or marginal cost of funds basis or a combination of both.


  1. Base rate is the minimum rate of interest which a bank should charge its borrowers. There are exceptions to the BR like DRI advances, Loan against FDs, Loans to staff, Government of India Interest Subvention Scheme for Agriculture, NRLM, specific refinance schemes of SIDBI, NABARD and Loan Schemes of state corporations like SCST Corporation etc.
  2. Base Rate which followed Bench mark Prime Lending Rate (BPLR) was introduced in 2010 as it was felt that banks were not disclosing transparently the basis of BPLR to their customers and benefits of reduction in interest rate, whenever RBI changed the key policy rates, were not passed onto customers.
  3. Under Government of India Agriculture Interest Subvention Scheme, all agricultural loans will have to be charged 7% rate of interest. The difference between the financing bank’s BR and 7% is paid by GOI. For prompt repayment, the borrowers are also eligible for 3% incentive.
  4. For target SHGs under the government of India programme National Rural Livelihood Mission (NRLM), the rate of interest on loans from banks to the SHGs is 7% and difference between BR and 7% is released under NRLM which replaced SGSY in 2012.
  • New documents to be recognized as Officially Valid Documents(OVDs) for KYC.
  • Utility bills not more than 2 months old of any service provider (electricity, telephone, post paid mobile, piped gas, water bill) are OVDs for the limited purpose of proof of address under relaxed KYC norms for BSBDA.

The following will be valid OVDs for address proof for regular KYC

  1. Bank Account or Post office SB account statement, Pension Payment Orders issued by government departments or PSUs
  2. Letter of allotment of houses to employees issued by government, regulatory bodies, PSUs, banks, financial institutions, and listed companies.
  3.  Documents issued by government of foreign jurisdiction and letter issued by foreign Embassy or Mission


  • In July 2014, RBI had approved Passport, Driving License, Voter ID, MNREGA job card, Aadhar numbers as OVDs for proof of ID and address

Capitalization under Basel III norms

Ø The new 7 point plan of GOI to infuse professionalism and fresh capital into public sector banks under Basel III norms
Ø Setting up of Banks Board Bureau that will give way to a holding company into which government will transfer its share holding in public sector banks
Ø Government plans to infuse 70000 crores as additional capital in 4 years
Ø Govt announced 100 point framework of Key Performance indicators to measure the performance of PSU banks
Four Foreign banks have applied to RBI for WOS (Wholly Owned Subsidiaries)
Ø WOS will be treated on par with Indian banks
Ø Capital Gains Tax and Stamp duty benefits
Ø Allowed to acquire local private banks.


  • Public Sector banks to get Rs 70000 crores over 4 years to meet government’s share which has to go up with growth in the volume of business of these banks and to meet the resultant capital adequacy norms – Targeted infusion for 2015-16 Rs.25000 crores –  budget provision Rs. 7940 cr.
  • RBI received 7 applications for running electronic exchanges on which TReDS (Trade Receivables Discounting System) on which receivables of MSME sector can be traded.
  • Trade Receivables Discounting System The objective of the TReDS is to facilitate financing of invoices / bills of MSMEs drawn on corporate and other buyers, including the Government Departments and PSUs, by way of discounting by financiers.


No comments:

Post a Comment