Banking and Financial Awareness – 100

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28 Sep, 2015

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1) The Reserve Bank of India on 1 September 2015 issued draft guidelines pertaining to interest rates and base rates. In the draft, RBI has sought to implement what new methodology for interest rates of the banks? – It has prescribed a uniform method by which banks have to arrive at the interest rates for providing loans

Explanation: The new draft guidelines RBI has proposed to encourage banks to move to the so-called marginal-cost-of-funds-based determination of their minimum lending rates. Using this methodology, the base rates of banks could soften a tad, going by the easy liquidity in the banking system currently. This could also reduce the lag between changes in deposit rates and lending rates. Thus banks could lose some of their freedom to fix lending rates. The RBI has proposed to fix 1 April 2016, for implementing the new methodology. This will give sufficient time to all banks to adopt the new base rate methodology as well as the spread guidelines. Banks will have to submit a roadmap clearly indicating the time frame for adopting the new methodology within a period of two months from the date of the final circular. The central bank has sought stakeholders’ feedback on or before 15 September 2015.

2) The Union Cabinet announced which new policy for white label ATM operations in the country on 9 September 2015? – It allowed 100% FDI under the automatic route for white label ATM operations

Explanation: White labeled ATMs are set up by private non-bank companies that own and operate their own brand of ATMs. Till date, foreign investment in while label ATM operations (WLAO), was allowed through the government approval route. This required some processing time and projects were delayed. The move to allow 100% FDI under the automatic route for white label ATM operations is expected to promote financial inclusion in the country. This is also expected to help in government’s objective of enhancing ATM networks in semi-urban and rural areas.

3) A committee set up by the government to rationalise distribution incentives for financial products and curb their mis-selling, has in its report recommended flexible exits for financial products and that profits from exit charges not accrue to product providers. Who headed this committee? – Sumit Bose, former Finance Secretary

Explanation: The report of the Sumit Bose Committee has recommended that the choice of withdrawal of all financial products, except those pertaining to pensions, should remain with the investor. It clearly said that financial products should have flexible exit options and the cost of exit must be limited. Currently, products such as unit-linked insurance plans (ULIPs) have a lock-in period of at least five years. It was increased from three years following a spate of customer complaints prior to September 2010, when market volatility led to poor returns for policyholders, who exited early.

4) The recently released RBI Annual Report for 2014-15 had revealed that the central bank’s Contingency funds, used in case of unforeseen shocks, have fallen to 8.4% of total assets. Apart from this, for the last two years, the RBI has made no transfers to its Contingency Fund or its Asset Development Fund. What is the stipulated target for funding of RBI’s contingency funds? – 12% of assets

Explanation: While the total in these contingency funds of the RBI stood at Rs. 2,424 billion in 2012-13, it was Rs. 2,434 billion in 2014-15. This meant that balance in these funds has barely changed since 2013. The capital requirements of a central bank can vary considerably depending on a number of factors, according to the annual report. The annual report also showed that the RBI had been transferring 99.9% of its profits to the government, without keeping any amount for itself. This is a sharp increase from the 40-50% it had transferred in the 2010-13 period. In the financial year 2014-15, the RBI transferred Rs.659 billion to the government coffers, up from Rs.150 billion in 2010-11.

5) In order to enable seamless travel by different metros and other transport systems across the country, the Ministry of Urban Development has come out with a smart National Common Mobility Card (NCMC) model which will be inter-operable across different transport systems in the country. Which payment entity is being given the task of establishing a robust payment system for this proposed card initiative? – National Payments Corporation of India (NPCI)

Explanation: The smart National Common Mobility Card (NCMC) model will primarily enable seamless travel by different metros and other transport systems across the country, besides retail shopping and purchases. Globally, there is no nationwide common card except in Singapore wherein inter-operability is confined to city only. Hence the card based on NCMC model is expected to address the deficiencies associated with other cards being used in Singapore and other countries. The Ministry of Urban Development has decided to task the National Payments Corporation of India (NPCI) with indigenous development and management of clearing and settlement of payments, simulating cards, terminals and network, a support base of vendors for providing certified tools, cards, terminals and other services.

6) Union Cabinet on 9 September 2015 announced the Gold Monetisation Scheme under which gold in any form can be deposited with banks for a period of one to 15 years. What is the primary objective of this scheme? – To bring out the huge amount of gold that is being kept idly by Indians

Explanation: The Gold Monetisation Scheme has been announced primarily to bring an estimated 20,000 tonnes of idle gold lying with Indian consumers into the economy and also reduce India’s dependence on gold imports. Under it, Indians citizens would be able to deposit gold in any form in the banks for a period of one to 15 years. This gold will earn interest and redemption will be at the prevailing market value at the end of the tenure of deposit. By taking advantage of Gold Monetisation Scheme, people can thus deposit idle gold with authorised agencies and take advantage of the price escalation of gold as well as earn interest on the deposit. The gold deposited with banks under the monetisation scheme will be allowed to be sold to jewellers in order to boost domestic supply. However, the government intends not to allow the Gold Monetisation Scheme to become a vehicle for converting black money into white. The draft proposal of Gold Monetisation Scheme was put up on 19 May 2015 while it was announced in the Union Budget 2015-16 with the aim of replacing both the existing Gold Deposit and Gold Metal Loan Schemes.

7) What is the primary objective of the Sovereign Gold Bond Scheme, which was approved by the Union Cabinet on 9 September 2015? – To rope in customers looking to buy gold as an investment

Explanation: Under the Sovereign Gold Bond Scheme (SGBS) there will be no need to buy actual or physical gold as customers can buy gold bonds which will be relatable to the weight of gold. It is expected to attract people who look for gold as a worthy investment option. The bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there would be a cap of 500 grams that a person can purchase in a year. Such bonds would be offered to only Indian citizens and institutions.

8) Global rating agency Standard & Poor’s (S&P) downgraded which leading Latin American country’s credit rating to junk grade on 9 September 2015? – Brazil

Explanation: The downgrade of Brazil’s credit rating from investment grade to junk grade thus further hampered President Dilma Rousseff’s efforts to regain investors’ trust and pull the country out of recession. Brazil is the largest economy of Latin America. It is worth mentioning that Moody’s Investors Service had downgraded Brazil less than a month ago to the brink of junk, but said its investment grade was safe for now. S&P said its decision was based on the mounting political problems that have muddled economic policy. When Brazil first got the coveted investment-grade stamp from S&P, after decades of financial volatility, it was considered a star among developing nations. Once Rousseff took office in 2011, however, the economy began to slow down sharply and last quarter it officially entered a recession.

9) The World Bank on 14 September 2015 released the first ever ranking of States on the ‘Ease of Doing Business’ in India. The rating assessed states over a six-month period from January to June 2015 on the issue of implementation of ‘ease of doing business’ policy. Which state topped this list? – Gujarat

Explanation: Gujarat implemented 71.14% of the reforms, according to the assessment. Andhra Pradesh came second with a score of 70.12%, Jharkhand third at 63.09%, Chhattisgarh fourth with 62.45% and Madhya Pradesh fifth with 62%. The largest recipients of foreign investments, Maharashtra and Tamil Nadu, were ranked eighth and twelfth with less than 50 per cent scores. The rankings reflect the ease of doing business in these States by the small and medium enterprises rather than foreign investors. It is worth mentioning that Chief Secretaries of States participating in the “Make in India” workshop inaugurated by Prime Minister Modi in New Delhi during December 2014 had finalised this action plan on “Ease of Doing Business”. It was decided later to evaluate States to assess progress by June 2015.

10) The Reserve Bank of India (RBI) on 14 September 2015 announced canceling the certificate of registration of which entity of the Sahara Group? – Sahara India Financial Corporation Limited

Explanation: The registration certificate of Sahara India Financial Corporation Limited (SIFCL) to act as a non-banking financial company (NBFC) was cancelled effective 3 September 2015 under the RBI Act. Following this, SIFC cannot transact the business of a non-banking financial institution. It is worth mentioning that in June 2008 the RBI had banned the finance company from accepting deposits. During its investigations, RBI had found SIFCL had continuously flouted know-your-customer norms, as well as those relating to asset-liability management and investments. SIFCL was registered on December 1998, with an office in Lucknow.

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