Banking and Financial Awareness – 101

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17 Oct, 2015

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1) Ushering another banking revolution in the country, the Reserve Bank of India (RBI) on 16 September 2015 accorded “in-principal” approval for 10 small finance banks. These banks will focus on small geographies for operations but with a strong capital base. Which 10 entities were selected for these small banks? – 1) Au Financiers, 2) Capital Local Area Bank, 3) Disha Microfin, 4) Equitas Holdings, 5) ESAF Microfinance, 6) Janalakshmi Financial Services, 7) RGVN (North East) Microfinance, 8) Suryoday Micro Finance, 9) Ujjivan Financial Services and 10) Utkarsh Micro Finance

Explanation: The selection of these small banks was on the basis of the recommendations from three different committees, backed by a detailed case study for each applicant, including that by an External Advisory Committee chaired by former deputy governor Usha Thorat. An important factor was proposed to reach into unbanked areas and underserved sections of the population. Draft guidelines for licensing of small finance banks were released for public comments on 17 July 2014 and based on the comments, the final norms for licensing of small finance banks were issued on 27 November. Earlier, in 2009 a Committee on Financial Sector Reforms under Raghuram Rajan, now the RBI governor, had examined the relevance of small banks in the Indian context.

2) Reserve Bank of India (RBI) Governor Raghuram Rajan cut the benchmark Repo rate by 50 basis points to a four-year low of 6.75%. This reduction was done in the 4th Bi-monthly Monetary Policy Statement of 2015-16, that he presented on 29 September 2015. When was the last time a single-time reduction of 50 basis points in Repo rate was done? – On 4 March 2009

Explanation: The last single-time reduction of 50 basis points in the Repo rate was done on 4 March 2009, when the rate was reduced from the then 5.50% to 5.00%. After that no 50 basis point reduction in Repo rate was done till 29 September 2015. The Repo rate of 6.75% is also the lowest rate since 3 May 2011. The cut is the third one during fiscal year 2015-16 and fourth one during 2015 and this means that Repo rate has been cut by 100 basis points during 2015-16. Repo (or Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate decreases, borrowing from RBI becomes cheaper. Repo rate is the primary reflector of interest rates in the economy. It is worth mentioning that the corporate world as well as the Union Finance Ministry had made impassioned calls to reduce Repo rate. Indian industry is desperate for a pick-up in credit growth but has been hampered by a lack of monetary transmission of earlier cuts by banks, a point that RBI Governor forcefully made to public sector banks. The BSE Sensex, which traded with nearly 300 points down ahead of the RBI policy announcement, bounced back in the green with gain of 162 points by the end of trading.

Important Highlights of the 4th Bi-monthly Monetary Policy Statement

  • Repo rate cut by 50 bps to 6.75%
  • Reserve repo rate cut to 5.75%
  • Cash Reserve Ratio (CRR) unchanged at 4%
  • Growth estimate for 2015-16 marginally cut to 7.4% from 7.6%
  • FPI investment limit in Government bonds to be hiked to 5% by 2018


3) Just after announcement of reduction in Repo rate by the Reserve Bank of India (RBI), country’s largest lender State Bank of India (SBI) on 29 September slashed minimum lending or base rate by 0.4%. What is the new base rate of SBI after this reduction? – 9.4%

Explanation: Just after Repo rate reduction by the RBI, the SBI decided to reduce the base rate by 0.40% to 9.3% with effect from 5 October 2015. With the reduction in the base rate, all loans of SBI, including home, auto and corporate, would become cheaper by at least 0.40%, making RBI’s base rate the lowest in the market. The SBI, thus also set the trend for benign interest rate regime.


4) Which private bank became the latest entrant to India’s banking sector on 1 October 2015 as it unveiled its banking operations on this day with 23 branches? – IDFC Bank

Explanation: IDFC Bank is backed by infrastructure financier IDFC (or Infrastructure Development Finance Company). It started its banking operations initially with 23 branches based primarily in Madhya Pradesh, Mumbai and Delhi initially. The bank is focusing on the wholesale banking segment initially and is expected to launch retail and small and medium enterprises (SME) banking from January 2016. IDFC and micro-finance company Bandhan were the only two entities among 20-odd aspirants that had received banking licences from the Reserve Bank of India (RBI) during 2014. Bandhan had already unveiled its banking operations from August 2015.

5) What is the name of the 60-year-old regulatory entity of country’s commodities markets that was merged with the capital markets watchdog SEBI on 28 September 2015 to bring to surface first major case of merger of two regulators in India? – Forward Markets Commission (FMC)

Explanation: Forward Markets Commission (FMC) was merged into Securities and Exchange Board of India (SEBI) with effect from 28 September as Union Finance Minister Arun Jaitley rang the customary stock market bell to formalise the amalgamation at Mumbai. With this merger, the commodities market entities would get a timeframe of up to one year to adjust to the new regulations as they would have to follow the same norms that are applicable to their peers in the equity segment. It is worth mentioning that this merger was planned by the Congress Government. However, the announcement of this merger was done in the Union Budget 2014-15. The apparent regulatory failure of FMC in the National Spot Exchange Ltd. scam case had precipitated this merger. The FMC has been regulating commodities markets since 1953, but lack of powers has led to wild fluctuations and alleged irregularities remaining untamed in this market segment.

6) The Reserve Bank of India (RBI) on 24 September 2015 notified new norms pertaining to change in ownership of borrowing entities. These new norms allow banks to upgrade credit facilities extended to borrowing entities upon a change in ownership, so long as the ownership has been changed outside ‘Strategic Debt Restructuring Scheme’. What will be the benefit of this change for the banks? – This change will give banks more flexibility to bring in a change in ownership of borrowing entities which are under stress

Explanation: The move would also enhance banks’ ability to bring in a change in ownership of borrowing entities which are under stress primarily due to operational/ managerial inefficiencies despite substantial sacrifices made by the lending banks. However, the new norm come with an important condition – the banks should clearly establish that the acquirer does not belong to the existing promoter group. Further, the new promoter should have acquired at least 51% of the paid up equity capital of the borrower company.

7) The Finance Ministry on 24 September 2015 announced which new and important exemption on the Minimum Alternate Tax (MAT)? – It announced MAT exemption to foreign companies with no permanent establishment (PE) in India with effect from assessment year 2001-02

Explanation: This means companies not having a permanent establishment or place of business in India would not come under MAT with effect from April 2001. With this exemption the Finance Ministry thus cleared more air from the issue of Minimum Alternate Tax (MAT) on foreign portfolio investors (FPIs). This is also expected to come as a big relief for Mauritius-based Castleton from the Supreme Court so far as MAT is concerned. Apart from this, the MAT will also not apply on a foreign company belonging to a country having a double tax avoidance agreement (DTAA). The ministry will propose an amendment with retrospective effect to Section II5 JB of the Income Tax Act, in this regard. The move came after Finance Minister Arun Jaitley had promised investors at a gathering some days back that pending tax disputes would be resolved soon.

8) What is Union Govt.’s disbursement target for micro and marginal businesses under MUDRA scheme by the end of the current fiscal, as announced by Union Finance Minister Arun Jaitley on 25 September 2015? – Rs. 1.22 lakh crore

Explanation: MUDRA has been established as a subsidiary of SIDBI with an initial corpus of Rs 5,000 crore to provide capital to all banks seeking refinancing of small business loans under Pradhan Mantri Mudra Yojana (PMMY). The Finance Minister also informed that as much as Rs. 24,000 crore has been disbursed under the scheme to about 37 lakh small entrepreneurs. PMMY loans fall into three categories – Shishu (up to Rs 50,000), Kishore (Rs 50,000-Rs 5 lakh) and Tarun (Rs 5-10 lakh).

9) The Securities and Exchange Board of India (SEBI) on 22 September 2015 imposed the biggest-ever fine of Rs. 7,269.5 crore on which construction and real estate entity for illegal and fraudulent mobilisation of funds from the public? – PACL

Explanation: In its order of 22 September, the SEBI said that PACL made huge illegal mobilisation of money, leading to consequent profit to the tune of over Rs. 2,423 crore in a short span of less than one year. It said that there cannot be a better case than this which deserves the maximum penalty and imposed penalty of Rs. 7,269.5 crore on PACL. This is the biggest-ever fine imposed by SEBI on any single entity. The penalty follows another order by SEBI last year (2014) wherein PACL was asked to refund Rs 49,100 crore it had collected through illicit schemes over a 15-year period. SEBI’s probe had revealed that PACL and its four directors – Tarlochan Singh, Sukhdev Singh, Gurmeet Singh and Subrata Bhattacharya, had mobilised funds from the general public through illicit collective investment schemes including in the name of purchase and development of agriculture land. The company was running a land purchase scheme, where it was raising money from public to buy land. In the guise of selling agricultural land, it collected Rs. 49,100 crore from 5.85 crore customers over a period of 15 years by promising them that the investments in the schemes of the company are highly profitable. This is the biggest-ever amount, as also the largest number of investors, so far involved in a case found to be running illegal money pooling scheme.

10) The insurance benefit payable to dependents of the members of the Employees’ Provident Fund Organisation (EPFO) was enhanced to Rs. 6 lakh in a meeting of the Central Board of Trustees of the EPFO held on 16 September 2015. What was the present benefit limit for the same? – Rs. 3.60 lakh

Explanation: The move to enhance the insurance benefit payable to dependents of the members of the EPFO under the Employees Deposit Linked Insurance Scheme, 1976, will benefit four crore EPF contributing members. The money is paid to dependents on the death of subscribers to the scheme. It was also decided to remove the condition of continuous employment of one year under the current employer for eligibility to the insurance scheme. Even a day’s employment was enough to be eligible.

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