1. GENERAL AWARENESS
BANK:- A bank is a legal entity which accepts deposits from general public and provides
loans and advances to his customers according to their demand.
The first bank in the world was bank of venice which was setup in Itlay in 1157.
The first bank in India was setup in 1770 was bank of Hindustan.
Bank of Hindustan gets failed in year 1782.
After that bank of Calcutta was established in 1806
Bank of Bombay established in 1840
Bank of madras established in 1843. The three above banks works as presidency
banks in India.
In the year 1920 these banks were merged and formed Imperial bank of india.
In year 1921 the imperial bank of india act was passed.Imperial bank of india gets
nationalized in year 1955 with a new name State bank of India.
RBI act was passed in year 1934,and RBI started its working in year 1935 as the
controller of banks.
The first time nationalization of banks takes place after nationalizing the 14 banks in
year 1969.
Onwords more six banks nationalized in 1980.
Below are chart showing the name of nationalized banks with few details.
BANK NAME ESTABLISHMENT TAG LINE CHAIRMAN
Indian Overseas Bank 10th Feb 1937 GOOD PEOPLE TO GROW Shri. M.Narendra
WITH
Allahabad Bank 1865 A TRADITION OF TRUST Shri J P Dua
Andhra Bank 28 November FOR ALL YOUR NEEDS R Ramachandran
1923
Bank of Baroda 1908 INDIA’S INTERNATIONAL M D Mallya
BANK
Bank of India 1906 RELATIONSHIP BEYOND Alok Kumar Misra
BANKING
Bank of Maharashtra 16th Sept 1935 ONE FAMILY ONE BANK SHRI A.S.
BHATTACHARYA
Canara Bank 1906 TOGATHER WE CAN S.Raman
Central Bank of India 21 December CENTRE TO YOU SINCE 1911
1911
Dena Bank 1938 YOUR TRUSTED FAMILY Sh D.L.Rawal

2. BANK
Corporation Bank 1906 Prosperity for All Ajai Kumar
Indian Bank 1907 YOUR TECH-FRIENDLY T.M.Bhasin
BANK
Oriental Bank of 19 February WHERE EVERY INDIVIDUAL Nagesh Pydah
Commerce 1943 IS COMMITTED
Punjab & Sind 1908 WHERE SERVICE IS A WAY SHRI PARVEEN
Bank(P&SB) OF LIFE KUMAR ANAND
Punjab National Bank 1895 THE NAME YOU CAN BANK K.R.Kamath
(PNB) UPON
Syndicate Bank Ltd. 1925 FAITHFULLY FRIENDLY Basant Seth
Uco Bank 1943 68 YEARS OF EXCELLENCE Shri Arun Kaul
Union Bank of India 11 Nov 1919 GOOD PEOPLE TO BANK Mavila Vishwanathan
(UBI) WITH Nair
United Bank of India 1950 THE BANK WHICH BEGANS Bhaskar Sen
(UBI) WITH “U”
Vijaya Bank 1931 A FRIEND YOU CAN BANK Albert Tauro
UPON
State Bank of India(SBI) 1806,1840,1843 THE NATION BANKS ON Pratip Chaudhuri
US…

3. FUNCTIONS OF RBI
Functions are those functions which every central bank of each nation performs all over the
world. Basically these functions are in line with the objectives with which the bank is set up.
It includes fundamental functions of the Central Bank. They comprise the following tasks.
Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing
currency notes except one rupee note and coins of smaller denomination. These currency notes are
legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and
1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency
notes for other denominations. It issues these notes against the security of gold bullion, foreign
securities, rupee coins, exchange bills and promissory notes and government of India bonds.
Banker to other Banks : The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in the country. The RBI can control the
volumes of banks reserves and allow other banks to create credit in that proportion. Every
commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in
need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last
resort.
Banker to the Government : The RBI being the apex monitory body has to work
as an agent of the central and state governments. It performs various banking function such
as to accept deposits, taxes and make payments on behalf of the government. It works as a
representative of the government even at the international level. It maintains government
accounts, provides financial advice to the government. It manages government public debts
and maintains foreign exchange reserves on behalf of the government. It provides overdraft
facility to the government when it faces financial crunch.
Exchange Rate Management : It is an essential function of the RBI. In order to
maintain stability in the external value of rupee, it has to prepare domestic policies in that
direction. Also it needs to prepare and implement the foreign exchange rate policy which
will help in attaining the exchange rate stability. In order to maintain the exchange rate
stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each
other.

4. Credit Control Function : Commercial bank in the country creates credit
according to the demand in the economy. But if this credit creation is unchecked or
unregulated then it leads the economy into inflationary cycles. On the other credit creation
is below the required limit then it harms the growth of the economy. As a central bank of
the nation the RBI has to look for growth with price stability. Thus it regulates the credit
creation capacity of commercial banks by using various credit control tools.
Supervisory Function : The RBI has been endowed with vast powers for
supervising the banking system in the country. It has powers to issue license for setting up
new banks, to open new braches, to decide minimum reserves, to inspect functioning of
commercial banks in India and abroad, and to guide and direct the commercial banks in
India. It can have periodical inspections an audit of the commercial banks in India.
Promotional Functions of RBI ↓
Along with the routine functions, central banks especially in the developing country like
India have to perform numerous functions. These functions are country specific functions
and can change according to the requirements of that country. The RBI has been performing
as a promoter of the financial system since its inception. Some of the major development
functions of the RBI are maintained below.
Development of the Financial System : The financial system comprises
the financial institutions, financial markets and financial instruments. The sound and
efficient financial system is a precondition of the rapid economic development of the
nation. The RBI has encouraged establishment of main banking and non-banking institutions
to cater to the credit requirements of diverse sectors of the economy.
Development of Agriculture : In an agrarian economy like ours, the RBI has
to provide special attention for the credit need of agriculture and allied activities. It has
successfully rendered service in this direction by increasing the flow of credit to this sector.
It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after
the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional
Rural Banks (RRBs).

5. Provision of Industrial Finance : Rapid industrial growth is the key to faster
economic development. In this regard, the adequate and timely availability of credit to
small, medium and large industry is very significant. In this regard the RBI has always been
instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM
BANK etc.
Provisions of Training : The RBI has always tried to provide essential training
to the staff of the banking industry. The RBI has set up the bankers' training colleges at
several places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.e
BSC and College of Agriculture Banking i.e CAB are few to mention.
Collection of Data : Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several topics. It includes interest rate,
inflation, savings and investments etc. This data proves to be quite useful for researchers
and policy makers.
Publication of the Reports : The Reserve Bank has its separate publication
division. This division collects and publishes data on several sectors of the economy. The
reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI
Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This
information is made available to the public also at cheaper rates.
Promotion of Banking Habits : As an apex organization, the RBI always tries
to promote the banking habits in the country. It institutionalizes savings and takes measures
for an expansion of the banking network. It has set up many institutions such as the Deposit
Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. These
organizations develop and promote banking habits among the people. During economic
reforms it has taken many initiatives for encouraging and promoting banking in India.
Promotion of Export through Refinance : The RBI always tries to
encourage the facilities for providing finance for foreign trade especially exports from India.
The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee
Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

6. Supervisory Functions of RBI ↓
The reserve bank also performs many supervisory functions. It has authority to regulate and
administer the entire banking and financial system. Some of its supervisory functions are
given below.
Granting license to banks : The RBI grants license to banks for carrying its
business. License is also given for opening extension counters, new branches, even to close
down existing branches.
Bank Inspection : The RBI grants license to banks working as per the
directives and in a prudent manner without undue risk. In addition to this it can ask for
periodical information from banks on various components of assets and liabilities.
Control over NBFIs : The Non-Bank Financial Institutions are not influenced by
the working of a monitory policy. However RBI has a right to issue directives to the NBFIs
from time to time regarding their functioning. Through periodic inspection, it can control
the NBFIs.
Implementation of the Deposit Insurance Scheme : The
RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits
of small depositors. All bank deposits below Rs. One lakh are insured with this corporation.
The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.
MONETARY POLICY
The actions of a central bank, currency board or other regulatory committee that determine
the size and rate of growth of the money supply, which in turn affects interest rates.
Monetary policy is maintained through actions such as increasing the interest rate, or
changing the amount of money banks need to keep in the vault (bank reserves).

7. MONETARY POLICY
1. VRR-VARIABLR RESERVE RATIO MORAL SAUSION
CRR-CASH RESERVE RATIO CREDIT RATIONING
SLR – STATUTORY LIQUIDITY RATIO CONSUMER CONTROL
2. LAF – LIQUIDITY ADJUSTMENT FACILITY MARGIN CONTROL
BANK RATE PUBLICITY
REVERSE REPO RATE
REPO RATE
3. OPEN MARKET OPERATION
QUANTITATIVE CONTROL :- Quantitative control means to control the
banks in value terms.
CRR :- The reserve requirement (or cash reserve ratio) is a central bank regulation that
sets the minimum reserves each commercial bank must hold (rather than lend out) of
customer deposits and notes. It is normally in the form of cash stored physically in a bank
vault (vault cash) or deposits made with a central bank.

8. SLR :- Statutory liquidity ratio is the amount of liquid assets, such as cash, precious
metals or other approved securities, that a financial institution must maintain as reserves
other than the cash with the Central Bank. The statutory liquidity ratio is a term most
commonly used in India.
BANK RATE :- Bank rate is the rate of interest which a central bank charges on the
loans and advances that it extends to commercial banks and other financial intermediaries.
Changes in the bank rate are often used by central banks to control the money supply.
REPO RATE :- Repo rate is the rate at which banks borrow funds from the RBI to
meet the gap between the demand they are facing for money (loans) and how much they
have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow
money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate.
REVERSE REPO RATE :- The rate at which RBI borrows money from the banks
(or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool
when it feels there is too much money floating in the banking system If the reverse repo
rate is increased, it means the RBI will borrow money from the bank and offer them a
lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI
(which is absolutely risk free) instead of lending it out (this option comes with a certain
amount of risk).
OPEN MARKET OPERATION :- Open market operations (also known as
OMO) is the buying and selling of government bonds on the open market by a central bank.
It is the primary means of implementing monetary policy by a central bank. The usual aim of
open market operations is to control the short term interest rate and the supply of base
money in an economy, and thus indirectly control the total money supply. This involves
meeting the demand of base money at the target interest rate by buying and selling
government securities, or other financial instruments. Monetary targets such as inflation,
interest rates or exchange rates are used to guide this implementation.

9. QUALITATIVE CONTROL :- A major aspect of quality control is the
establishment of well-defined controls. These controls help standardize both production
and reactions to quality issues. Limiting room for error by specifying which production
activities are to be completed by which personnel reduces the chance that employees will
be involved in tasks for which they do not have adequate training.
MORAL SAUSION :- Often termed simply 'suasion', it has been used to
persuade banks and other financial institutions to keep to official guidelines. The 'moral'
aspect comes from the pressure for 'moral responsibility' to operate in a way that is
consistent with furthering the good of the economy.
CREDIT RATIONING :- The process of making credit less easily available or
subject to high interest rates or imposing ban on discounting of negotiable instruments.
CONSUMER CONTROL :- By this measure reserve bank of india controls the
purchasing power of the customers through banks.
MARGIN CONTROL :- By this measure RBI controls the margins of the
commercial banks which effects the number of persons who wants to avail loans from the
bank.
PUBLICITY :- By this measure RBI provides informations regarding banking
informations and currencies.

10. TYPES OF BANKS
1. CENTRAL BANK:- Central bank is a controller of banks of every country.in India the Reserve
bank is central bank which controls banks and maintain the positions of liquidity.
2. COMMERCIAL BANK:- Commercial banks are those banks which maintains the interaction
with general public and provides credit facilities to commerce and industries.
3. SCHEDULED BANKS:- Scheduled Banks in India are those banks which have been included in
the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those
banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
4. NON- SCHEDULED BANKS:- Non scheduled banks are those banks which are not registered
under schdule of RBI act, 1934. In india, only Jammu & Kashmir bank is non schduled bank.
5. DEVELOPMENT BANKS:- Development banks are those banks which are established for
providing credit facilities to a particular sector for their development and promotion.
6. SPECIALISED BANK :- Specialised banks are foreign exchange banks, industrial banks,
development banks, export-import banks catering to specific needs of these unique
activities. These banks provide financial aid to indutries, heavy turnkey projects and foreign
trade.
7. CO-OPERATIVE BANKS :- Cooperative banking is retail and commercial banking organized on
a cooperative basis. Cooperative banking institutions take deposits and lend money in most
parts of the world. Cooperative banking, as discussed here, includes retail banking carried
out by credit unions, mutual savings banks, building societies and cooperatives, as well as
commercial banking services provided by mutual organizations (such as cooperative
federations) to cooperative businesses.
8. REGIONAL RURAL BANKS :- The Government of India set up Regional Rural Banks (RRBs) on
October 2, 1975. Initially, five RRBs were set up on October 2, 1975 which were sponsored
by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and
United Bank of India. Capital share being 50% by the central government, 15% by the state
government and 35% by the scheduled bank.These are banks which provides finance to rural
sectors.
9. NATIONALISED BANKS :- Nationalization, also spelled nationalisation, is the process of
taking an industry or assets into government ownership by a national government or
state.[1] Nationalization usually refers to private assets, but may also mean assets owned by
lower levels of government, such as municipalities, being transferred to the public sector to
be operated by or owned by the state. The opposite of nationalization is usually privatization
or de-nationalization, but may also be municipalization.

11. TOTAL DEPOSITS OF BANK
TOTAL DEPOSITS OF BANK
TERM DEPOSITS
TERM DEPOSITS DEMAND DEPOSITS
DEMAND DEPOSITS
FIXED ACCOUNT RECURRING SAVING
SAVING CURRENT
CURRENT
FIXED ACCOUNT RECURRING
ACCOUNT ACCOUNT
ACCOUNT ACCOUNT
ACCOUNT
ACCOUNT
TERM DEPOSITE:- The deposits which we kept with banks for a specific time period are
known as term deposits.
a) FIXED ACCOUNT :- when a person deposits his specific amount for a specific time
period is known as fixed deposits and the account in which these deposits are
maintained are called fixed account.
b) RECURRING ACCOUNT :- when a person deposits his amount for a specific time period
in periodic installments is known as recurring deposits and the account in which
these deposits are maintained are called recurring account.
DEMAND DEPOSITS :- The deposits which are accepted and refunded by banks according to
the demands of their customers are known as demand deposits.
a) SAVING ACCOUNT :- It is a type of facility which is given by the banks to his customers
in which a customer can save his part of income and can withdraws according to his
needs.They get interests on their savings.
b) CURRENT ACCOUNT :- It is a type of facility which is given by the banks to big
businessmen,companies,and institutions since there are limited transactions in saving
account so that account is not suitable for them. They need a account which have

12. unlimited transactions so, current account is suitable as there is no limitation of
transactions in this account..
It means short-term funds which fly from centre to centre in the world to secure
higher interest rate or to avoid political or other risks.
BANKING TERMS
HOT MONEY :- It means short-term funds which fly from centre to centre in the world to
secure higher interest rate or to avoid political or other risks.
CHEAP MONEY :- Credit available at low interest rates (but not lower borrower
qualifications). When governments want to encourage business activity to generate
employment, they lower the reserve requirements for banks who are able to increase their
lending at lower rates and without loss of profit. Also called easy money, it is the opposite of
tight money. See also free money.
FAIT MONEY :- Fiat money is money that has value only because of government regulation
or law. The term derives from the Latin fiat, meaning "let it be done", as such money is
established by government decree. Where fiat money is used as currency, the term fiat
currency is used.
FIAT MONEY :- Non cash but liquid assets (such as gilt edged securities) that can be easily
converted into cash but are not used as a medium of exchange in everyday transactions.
Depending on its type, a near money may or may not be included in a definition of money
supply.
DEAR MONEY :- money which has to be borrowed at a high interest rate, and so restricts
expenditure by companies.
NON-PERFORMING ASSETS :- Non-performing assets means an assets or account of
borrower ,which has been classified by a bank or financial institution as sub
standard,doubtful or loss assets,in accordance with the directions or guidelines relating to
asset classification issued by the Reserve Bank of India.
BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION(BIFR) :- The Board of
experts named the Board for Industrial and Financial Reconstruction (BIFR) was Set up in
January, 1987 and functional with effect from 15th May 1987. The Appellate Authority for

13. Industrial and Financial Reconstruction (AAIRFR) was constituted in April 1987. Government
companies were brought under the purview of SICA in 1991 when extensive changes were made in
the Act including, inter-alia, changes in the criteria for determining industrial sickness.
NATIONAL ELECTRONIC FUND TRANSFER(NEFT) is a nation-wide system that
facilitates individuals, firms and corporates to electronically transfer funds from any bank
branch to any individual, firm or corporate having an account with any other bank branch in
the country. For being part of the NEFT funds transfer network, a bank branch has to be
NEFT-enabled. As at end-January 2011, 74,680 branches / offices of 101 banks in the
country (out of around 82,400 bank branches) are NEFT-enabled. Steps are being taken to
further widen the coverage both in terms of banks and branches / offices.
REAL TIME GROSS SETTLEMENT (RTGS) are funds transfer systems where transfer
of money or securities takes place from one bank to another on a "real time" and on "gross"
basis. Settlement in "real time" means payment transaction is not subjected to any waiting
period. The transactions are settled as soon as they are processed. "Gross settlement"
means the transaction is settled on one to one basis without bunching or netting with any
other transaction. Once processed, payments are final and irrevocable.
INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS):- are principles-based
Standards, Interpretations and the Framework (1989) adopted by the International
Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known
by the older name of International Accounting Standards (IAS). IAS were issued between
1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).
On 1 April 2001, the new IASB took over from the IASC the responsibility for setting
International Accounting Standards. During its first meeting the new Board adopted existing
IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.
BASEL COMMITTEE ON BANKING SUPERVISION(BCBS) :-is a committee of banking
supervisory authorities that was established by the central bank governors of the Group of
Ten countries in 1975. It provides a forum for regular cooperation on banking supervisory
matters. Its objective is to enhance understanding of key supervisory issues and improve the
quality of banking supervision worldwide. The Committee also frames guidelines and
standards in different areas - some of the better known among them are the international
standards on capital adequacy, the Core Principles for Effective Banking Supervision and the
Concordat on cross-border banking supervision.

14. CORE BANKING :- is normally defined as the business conducted by a banking institution
with its retail and small business customers. Many banks treat the retail customers as their
core banking customers, and have a separate line of business to manage small businesses.
Larger businesses are managed via the corporate banking division of the institution. Core
banking basically is depositing and lending of money. CORE:- Centralized Online Real-Time
Exchange (banking).
PURCHASING POWER PARITY (PPP) :- is a measure of long-term equilibrium exchange
rates based on relative price levels of two countries. The idea originated with the School of
Salamanca in the 16th century and was developed in its modern form by Gustav Cassel in
1918. The concept is founded on the law of one price, the idea that in absence of
transaction costs and official barriers to trade, identical goods will have the same price in
different markets when the prices are expressed in terms of one currency.
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANISATION(UNIDO),
French/Spanish acronym ONUDI, is a specialized agency in the United Nations system,
headquartered in Vienna, Austria. The Organization's primary objective is the promotion
and acceleration of industrial development in developing countries and countries with
economies in transition and the promotion of international industrial cooperation. It is also
a member of the United Nations Development Group.
CAPITAL FUNDS :- Equity contribution of owners. The basic approach of capital adequacy
framework is that a bank should have sufficient capital to provide a stable resource to absorb any
losses arising from the risks in its business. Capital is divided into different tiers according to the
characteristics / qualities of each qualifying instrument. For supervisory purposes capital is split
into two categories: Tier I and Tier II.
TIER I CAPITAL :- A term used to refer to one of the components of regulatory capital. It
consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items
are deemed to be of the highest quality because they are fully available to cover losses
Hence it is also termed as core capital.
TIER II CAPITAL :- Refers to one of the components of regulatory capital. Also known as
supplementary capital, it consists of certain reserves and certain types of subordinated

15. debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb
losses arising from a bank's activities. Tier II's capital loss absorption capacity is lower than
that of Tier I capital.
BASEL CAPITAL ACCORD :- The BASEL Capital Accord is an Agreement concluded among
country representatives in 1988 to develop standardised risk-based capital requirements for
banks across countries. The Accord was replaced with a new capital adequacy framework
(BASEL II), published in June 2004. BASEL II is based on three mutually reinforcing pillars hat
allow banks and supervisors to evaluate properly the various risks that banks face. These
three pillars are:
1. Minimum capital requirements, which seek to refine the present measurement
framework
2. supervisory review of an institution's capital adequacy and internal assessment process;
3. market discipline through effective disclosure to encourage safe and sound banking
practices
RISK WEIGHTED ASSETS :- The notional amount of the asset is multiplied by the risk
weight assigned to the asset to arrive at the risk weighted asset number. Risk weight for
different assets vary e.g. 0% on a Government Dated Security and 20% on a AAA rated
foreign bank etc.
CRAR(CAPITAL TO RISK WEIGHTED ASSETS RATIO) :- Capital to risk weighted assets
ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for
credit risk, market risk and operational risk. The higher the CRAR of a bank the better
capitalized it is.
CREDIT RISK :- The risk that a party to a contractual agreement or transaction will be
unable to meet its obligations or will default on commitments. Credit risk can be
associated with almost any financial transaction. BASEL-II provides two options for
measurement of capital charge for credit risk
1.standardised approach (SA) - Under the SA, the banks use a risk-weighting schedule
for measuring the credit risk of its assets by assigning risk weights based on the rating
assigned by the external credit rating agencies.
2. Internal rating based approach (IRB) - The IRB approach, on the other hand, allows
banks to use their own internal ratings of counterparties and exposures, which permit

16. a finer differentiation of risk for various exposures and hence delivers capital
requirements that are better aligned to the degree of risks. The IRB approaches are of
two types:
a) Foundation IRB (FIRB): The bank estimates the Probability of Default (PD)
associated with each borrower, and the supervisor supplies other inputs such as Loss
Given Default (LGD) and Exposure At Default (EAD).
b) Advanced IRB (AIRB): In addition to Probability of Default (PD), the bank estimates
other inputs such as EAD and LGD. The requirements for this approach are more
exacting. The adoption of advanced approaches would require the banks to meet
minimum requirements relating to internal ratings at the outset and on an ongoing
basis such as those relating to the design of the rating system, operations, controls,
corporate governance, and estimation and validation of credit risk components, viz.,
PD for both FIRB and AIRB and LGD and EAD for AIRB. The banks should have, at the
minimum, PD data for five years and LGD and EAD data for seven years. In India,
banks have been advised to compute capital requirements for credit risk adopting the
SA.
MARKET RISK :- Market risk is defined as the risk of loss arising from movements in
market prices or rates away from the rates or prices set out in a transaction or
agreement. The capital charge for market risk was introduced by the BASEL
Committee on Banking Supervision through the Market Risk Amendment of January
1996 to the capital accord of 1988 (BASEL I Framework). There are two methodologies
available to estimate the capital requirement to cover market risks:
1) The Standardised Measurement Method: This method, currently implemented by
the Reserve Bank, adopts a ‘building block’ approach for interest-rate related and
equity instruments which differentiate capital requirements for ‘specific risk’ from
those of ‘general market risk’. The ‘specific risk charge’ is designed to protect against
an adverse movement in the price of an individual security due to factors related to
the individual issuer. The ‘general market risk charge’ is designed to protect against
the interest rate risk in the portfolio.
2) The Internal Models Approach (IMA): This method enables banks to use their
proprietary in-house method which must meet the qualitative and quantitative

17. criteria set out by the BCBS and is subject to the explicit approval of the supervisory
authority.
OPERATIONAL RISK :- The revised BASEL II framework offers the following three
approaches for estimating capital charges for operational risk:
1) The Basic Indicator Approach (BIA): This approach sets a charge for operational risk
as a fixed percentage ("alpha factor") of a single indicator, which serves as a proxy for
the bank’s risk exposure.
2) The Standardised Approach (SA): This approach requires that the institution
separate its operations into eight standard business lines, and the capital charge for
each business line is calculated by multiplying gross income of that business line by a
factor (denoted beta) assigned to that business line.
3) Advanced Measurement Approach (AMA): Under this approach, the regulatory
capital requirement will equal the risk measure generated by the banks’ internal
operational risk measurement system. In India, the banks have been advised to adopt
the BIA to estimate the capital charge for operational risk and 15% of average gross
income of last.
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS(ICAAP) :- In terms
of the guidelines on BASEL II, the banks are required to have a board-
approved policy on internal capital adequacy assessment process (ICAAP) to
assess the capital requirement as per ICAAP at the solo as well as
consolidated level. The ICAAP is required to form an integral part of the
management and decision-making culture of a bank. ICAAP document is
required to clearly demarcate the quantifiable and qualitatively assessed
risks. The ICAAP is also required to include stress tests and scenario
analyses, to be conducted periodically, particularly in respect of the bank’s
material risk exposures, in order to evaluate the potential vulnerability of
the bank to some unlikely but plausible events or movements in the market
conditions that could have an adverse impact on the bank’s capital.

18. Supervisory Review Process (SRP):- Supervisory review process envisages
the establishment of suitable risk management systems in banks and their review by the
supervisory authority. The objective of the SRP is to ensure that the banks have adequate
capital to support all the risks in their business as also to encourage them to develop and
use better risk management techniques for monitoring and managing their risks.
Market Discipline :- Market Discipline seeks to achieve increased transparency
through expanded disclosure requirements for banks.
Credit risk mitigation :- Techniques used to mitigate the credit risks through
exposure being collateralised in whole or in part with cash or securities or guaranteed by a
third party.
Mortgage Back Security :- A bond-type security in which the collateral is provided
by a pool of mortgages. Income from the underlying mortgages is used to meet interest
and principal repayments.
Derivative :- A derivative instrument derives its value from an underlying product.
There are basically three derivatives
a) Forward Contract- A forward contract is an agreement between two parties to buy or
sell an agreed amount of a commodity or financial instrument at an agreed price, for
delivery on an agreed future date. Future Contract- Is a standardized exchange tradable
forward contract executed at an exchange. In contrast to a futures contract, a forward
contract is not transferable or exchange tradable, its terms are not standardized and no
margin is exchanged. The buyer of the forward contract is said to be long on the contract
and the seller is said to be short on the contract.
b) Options- An option is a contract which grants the buyer the right, but not the obligation,
to buy (call option) or sell (put option) an asset, commodity, currency or financial
instrument at an agreed rate (exercise price) on or before an agreed date (expiry or
settlement date). The buyer pays the seller an amount called the premium in exchange for
this right. This premium is the price of the option.
c) Swaps- Is an agreement to exchange future cash flow at pre-specified Intervals.
Typically one cash flow is based on a variable price and other on affixed one.
Duration :- Duration (Macaulay duration) measures the price volatility of fixed income
securities. It is often used in the comparison of interest rate risk between securities with
different coupons and different maturities. It is defined as the weighted average time to
cash flows of a bond where the weights are nothing but the present value of the cash flows

19. themselves. It is expressed in years. The duration of a fixed income security is always
shorter than its term to maturity, except in the case of zero coupon securities where they
are the same.
Modified Duration :- Modified Duration = Macaulay Duration/ (1+y/m), where „y‟ is
the yield (%), „m‟ is the number of times compounding occurs in a year. For example if
interest is paid twice a year m=2. Modified Duration is a measure of the percentage
change in price of a bond for a 1% change in yield.
Net NPA :- Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims
received and held pending adjustment + Part payment received and kept in suspense
account + Total provisions held).
Coverage Ratio :- Equity minus net NPA divided by total assets minus intangible
assets.
Slippage Ratio :- (Fresh accretion of NPAs during the year/Total standard assets at
the beginning of the year)*100
Restructuring :- A restructured account is one where the bank, grants to the
borrower concessions that the bank would not otherwise consider. Restructuring would
normally involve modification of terms of the advances/securities, which would generally
include, among others, alteration of repayment period/ repayable amount/ the amount of
installments and rate of interest. It is a mechanism to nurture an otherwise viable unit,
which has been adversely impacted, back to health.
Substandard Assets :- A substandard asset would be one, which has remained NPA
for a period less than or equal to 12 months. Such an asset will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterised by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Asset :- An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, - on the basis of
currently known facts, conditions and values - highly questionable and improbable.

20. Loss Asset :- A loss asset is one where loss has been identified by the bank or internal
or external auditors or the RBI inspection but the amount has not been written off wholly.
In other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recovery value.
Off Balance Sheet Exposure :- Off-Balance Sheet exposures refer to the
business activities of a bank that generally do not involve booking assets (loans) and taking
deposits. Off-balance sheet activities normally generate fees, but produce liabilities or
assets that are deferred or contingent and thus, do not appear on the institution's balance
sheet until and unless they become actual assets or liabilities.
Current Exposure Method :- The credit equivalent amount of a market related off-
balance sheet transaction is calculated using the current exposure method by adding the current
credit exposure to the potential future credit exposure of these contracts. Current credit exposure
is defined as the sum of the positive mark to market value of a contract. The Current Exposure
Method requires periodical calculation of the current credit exposure by marking the contracts to
market, thus capturing the current credit exposure. Potential future credit exposure is determined
by multiplying the notional principal amount of each of these contracts irrespective of whether the
contract has a zero, positive or negative mark-to-market value by the relevant add-on factor
prescribed by RBI, according to the nature and residual maturity of the instrument.
Cost income ratio (Efficiency ratio) :- The cost income ratio reflects the
extent to which non-interest expenses of a bank make a charge on the net total income
(total income – interest expense). The lower the ratio, the more efficient is the bank.
Formula: Non interest expenditure / Net Total Income.
CASA Deposit :- Deposit in bank in current and Savings account.
Liquid Assets :- Liquid assets consists of: cash, balances with RBI, balances in
current accounts with banks, money at call and short notice, inter-bank placements due
within 30 days and securities under “held for trading” and “available for sale” categories
excluding securities that do not have ready market.
Market Liability Ratio :- Inter-bank and money market deposit liabilities to
Average Total Assets.

21. ALM :- Asset Liability Management (ALM) is concerned with strategic balance sheet
management involving all market risks. It also deals with liquidity management, funds
management, trading and capital planning.
ALCO :- Asset-Liability Management Committee (ALCO) is a strategic decision making
body, formulating and overseeing the function of asset liability management (ALM) of a
bank.
Foreign Currency Convertible Bond :- A bond issued in foreign currency
abroad giving the investor the option to convert the bond into equity at a fixed conversion
price or as per a pre-determined pricing formula.
CRR :- Cash reserve ratio is the cash parked by the banks in their specified current
account maintained with RBI.
SLR :- Statutory liquidity ratio is in the form of cash (book value), gold (current market
value) and balances in unencumbered approved securities.
LIBOR :- London Inter Bank Offered Rate. The interest rate at which banks offer to
lend funds in the interbank market.
Basis Point :- Is one hundredth of one percent. 1 basis point means 0.01%. Used for
measuring change in interest rate/yield.

22. INTERNATIONAL ORGANISATIONS
WORLD BANK :- The World Bank is a vital source of financial and technical assistance to
developing countries around the world. Our mission is to fight poverty with passion and
professionalism for lasting results and to help people help themselves and their environment by
providing resources, sharing knowledge, building capacity and forging partnerships in the public
and private sectors.
TAG LINE OF WORLD BANK :- WORKING FOR A WORLD FREE OF POVERTY
REPORT OF WORLD BANK :- WORLD DEVELOPMENT REPORT
WORLD BANK
ESTABLISHED IN MEMBER COUNTRIES
1945 193
IDA IFC IBRD MIGA ICSID
IDA INTERNATIONAL DEVELOPMENT ASSOCIATION
IFC INTERNATIONAL FINANCE ORGANISATION
IBRD INTERNATIONAL BANK FOR RESEARCH AND DEVELOPMENT
MIGA MULTILATERAL INVESTMENT GURANTEE AGENCY
ICSID INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DESPUTES

23. IDA :- The International Development Asso- ciation (IDA) is the part of the World Bank
that helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by
providing interest-free credits and grants for programs that boost economic growth, reduce
inequalities and improve people’s living conditions.
IFC :- IFC is a dynamic organization, constantly adjusting to the evolving needs of our
clients in emerging markets. We are no longer defined predominantly by our role in
providing project finance to companies in developing countries.
IBRD :- The International Bank for Reconstruction and Development (IBRD) aims to
reduce poverty in middle-income and creditworthy poorer countries by promoting
sustainable development through loans, guarantees, risk management products, and
analytical and advisory services. Established in 1944 as the original institution of the World
Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit
of its 187 member countries.
MIGA :- MIGA is a member of the World Bank Group. Our mission is to promote foreign
direct investment (FDI) into developing countries to help support economic growth, reduce
poverty, and improve people's lives.
ICSID :- ICSID is an autonomous international institution established under the
Convention on the Settlement of Investment Disputes between States and Nationals of
Other States with over one hundred and forty member States. The Convention sets forth
ICSID's mandate, organization and core functions. The primary purpose of ICSID is to provide
facilities for conciliation and arbitration of international investment disputes.
IMF (INTERNATIONAL MONETARY FUND) :- The International Monetary
Fund (IMF) is an organization of 187 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty around the world.
REPORT OF IMF :- WORLD ECONOMIC OUTLOOK

24. SDR (SPECIAL DRAWING RIGHTS) :- The special drawing right (SDR) is an
international reserve asset, created by the IMF in 1969 to supplement the existing official
reserves of member countries. Countries can exchange SDRs for hard currency at the IMF.
The SDR also serves as the unit of account of the IMF and some other international
organisations. Its value is based on a basket of key international currencies.
ADB (ASIAN DEVELOPMENT BANK) :- Established in 1966, we are a major
source of development financing for the Asia and Pacific region. With more than $17.5
billion in approved financing, and 2,800 employees from 67 countries, ADB - in partnership
with member governments, independent specialists and other financial institutions - is
focused on delivering projects that create economic and development impact.
TAG LINE OF ADB :- FIGHTING POVERTY IN ASIA AND THE PACIFIC
REPORT OF IMF :- ASIAN DEVELOPMENT REPORT
INFLATION :- The rate at which the general level of prices for goods and services
is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop
severe inflation, along with severe deflation, in an attempt to keep the excessive
growth of prices to a minimum.
CONTROLLING INFLATION :- There are broadly two ways of controlling inflation
in an economy – Monetary measures and fiscal measures.
There are broadly two ways of controlling inflation in an economy:
1). Monetary measures and
2). Fiscal measures
I).Monetary Measures
The most important and commonly used method to control inflation is monetary policy of
the Central Bank. Most central banks use high interest rates as the traditional way to fight or
prevent inflation.

25. Monetary measures used to control inflation include:
(i) bank rate policy
(ii) cash reserve ratio and
(iii) open market operations.
Bank rate policy is used as the main instrument of monetary control during the period of
inflation. When the central bank raises the bank rate, it is said to have adopted a dear
money policy. The increase in bank rate increases the cost of borrowing which reduces
commercial banks borrowing from the central bank. Consequently, the flow of money from
the commercial banks to the public gets reduced. Therefore, inflation is controlled to the
extent it is caused by the bank credit.
Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which
reduces the lending capacity of the commercial banks. Consequently, flow of money from
commercial banks to public decreases. In the process, it halts the rise in prices to the extent
it is caused by banks credits to the public.
Open Market Operations: Open market operations refer to sale and purchase of
government securities and bonds by the central bank. To control inflation, central bank sells
the government securities to the public through the banks. This results in transfer of a part
of bank deposits to central bank account and reduces credit creation capacity of the
commercial banks.
II). Fiscal Measures
Fiscal measures to control inflation include taxation, government expenditure and public
borrowings. The government can also take some protectionist measures (such as banning
the export of essential items such as pulses, cereals and oils to support the domestic
consumption, encourage imports by lowering duties on import items etc.).
DEFLATION :- A general decline in prices, often caused by a reduction in the supply of
money or credit. Deflation can be caused also by a decrease in government, personal or
investment spending. The opposite of inflation, deflation has the side effect of increased
unemployment since there is a lower level of demand in the economy, which can lead to an
economic depression. Central banks attempt to stop severe deflation, along with severe
inflation, in an attempt to keep the excessive drop in prices to a minimum.

26. CONTROLLING DEFLATION :- To fight deflation, attempts must be made to raise
the volume of aggregate effective demand. It will output, income and employment in the
economy, Effective demand can be increased partly by consumption expenditure and partly
by increasing investment expenditure. Various measures to increase consumption and
investment expenditures in the economy.
1. Reduction in Taxation: The government should reduce the number and burden of
various taxes levied on commodities. This will increase the purchasing power of the people. As a result,
the demand for goods and services will increase. Moreover, sufficient tax relief should be given to
businessmen to encourage investment.
2. Redistribution of Income: Marginal propensity to consume can be raised by a
redistribution of income and wealth from the rich to the poor. Since the marginal propensity to
consume of the poor is high and that of the rich is low, such a measure will help increasing the
aggregate demand in the economy.
3. Repayment of Public Debt: During deflation period, the government can repay the old
public debts. This will increase the purchasing power of the people and push up effective demand.
4. Subsidies: The government should give subsidies to induce the businessmen to increase
investment.
5. Public Works Programme: The government should also directly undertake public works
programme and thus increase expenditure in public sector. Care should, however, be taken that the
public works policy of the government does not adversely affect investment in the private sector; it
should supplement, and not supplant, private investment. For this, it is important that only those
projects should be selected for the government's public works policy, which is either too big or not so
profitable to attract private investment.
6. Deficit Financing: In order to have significant expansionary effects, the government's
public works schemes should be financed by the method of deficit financing, i.e,, by printing new
money. The government should adopt a budgetary deficit (excess of government expenditure over its
revenue) and cover this deficit through deficit financing. Deficit financing makes available to the
government sufficient resources for its developmental programmes without adversely affecting
investment in the private sector.
7. Reduction in Interest Rate: By adopting a cheap money policy, the monetary
authority of a country reduced the interest rate, which stimulates investment and thereby expands
economic activity in the economy.
8. Credit Expansion: The central bank and the commercial banks should adopt a policy
of credit expansion to promote business and industry in the country. Bank credit should be made easily
available to the entrepreneurs for productive purposes.

27. 9. Foreign Trade Policy: To control deflation, the government should adopt such a foreign
trade policy that, on the one hand, increases exports, and, on the other hand, reduces imports. This
kind of policy will go a long way in solving the problem of overproduction, and help overcoming
deflation.
10. Regulation of Production: Production in the economy should be regulated in such a
way that the problem of over-production does not arise. Attempts should be made to adjust production
with the existing demand to avoid over-production. In short, fiscal policy alone or monetary policy
alone is not sufficient to check deflation in an economy. A proper co- ordination of fiscal, monetary and
other measures is essential to effectively deal with the deflation ary situation.
NATIONAL INCOME :- The total net value of all goods and services produced within a
nation over a specified period of time, representing the sum of wages, profits, rents, interest, and
pension payments to residents of the nation.
GDP (GROSS DOMESTIC PRODUCT) :- A measure of the value of the
total production in a country, usually in a given year. Gross domestic product is calculated by adding
together total consumer spending, total government spending, total business spending, and the value of
net exports. GDP is considered one of the leader indicators of the health of a nation's economy. GDP
growth is considered desirable and represents the fact that businesses are producing and that
consumers and the government are buying. It is often used as a way to measure a country's standard of
living. See also: GNP.
GNP (GROSS NATIONAL PRODUCT) :- A measure of the value of what a
country's citizens produce in a given year, whether or not the production occurred in that country. To
calculate GNP, one takes the GDP and adds to it all earnings made by domestic citizens in a different
country. One then subtracts from this quantity all earnings made in the home country by non-citizens.
GNP is less commonly used now because it has become a less accurate tool for calculating what a
domestic economy produces, as more countries have citizens working abroad.
GDP at factor cost = GDP at factor cost + net national income from abroad – net income earned by
foreigner.
NNP (NET NATIONAL PRODUCT) :- The monetary value of finished goods
and services produced by a country's citizens, whether overseas or resident, in the time period being
measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase
new goods to maintain existing stock (i.e., depreciation).
NNP at factor cost = GNP at factor cost – DEPRECIATION.
NNP at factor cost = NNP at market price - indirect taxes + subsidies.

28. MEASUREMENT OF NATIONAL INCOME
1. OUTPUT OR PRODUCTION METHOD :- The output approach
focuses on finding the total output of a nation by directly finding the total value of all goods and
services a nation produces. Because of the complication of the multiple stages in the production of a
good or service, only the final value of a good or service is included in total output. This avoids an
issue often called 'double counting', wherein the total value of a good is included several times in
national output, by counting it repeatedly in several stages of production.
2. INCOME METHOD :- The income approach equates the total output of a
nation to the total factor income received by residents of the nation. The main types of factor
income are:
1. Employee compensation (= wages + cost of fringe benefits, including unemployment,
health, and retirement benefits);
2. Interest received net of interest paid;
3. Rental income (mainly for the use of real estate) net of expenses of landlords;
4. Royalties paid for the use of intellectual property and extractable natural resources.
All remaining value added generated by firms is called the residual or profit. If a firm has
stockholders, they own the residual, some of which they receive as dividends. Profit includes the
income of the entrepreneur - the businessman who combines factor inputs to produce a good or
service.
NDP at factor cost = Compensation of employees + Net interest + Rental & royalty income + Profit
of incorporated and unincorporated firms + Income from self-employment.
National income = NDP at factor cost + NFIA (net factor income from abroad).
3. EXPENDITURE METHOD :- The expenditure approach is basically an
output accounting method. It focuses on finding the total output of a nation by finding the total
amount of money spent. This is acceptable, because like income, the total value of all goods is equal
to the total amount of money spent on goods. The basic formula for domestic output combines all
the different areas in which money is spent within the region, and then combining them to find the
total output.
GDP = C + I + G + (X - M)
WHERE :
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
Note: (X - M) is often written as XN, which stands for "net exports"

29. BUDGET :- The dictionary meaning of budget is a systematic plan for the expenditure of a
usually fixed resource during a given period. Thus, Union Budget, which is a yearly affair, is a
comprehensive display of the Government’s finances. It is the most significant economic and financial
event in India. The Finance Minister puts down a report that contains Government of India’s revenue
and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31.
REVENUE BUDGET :- The revenue budget consists of revenue receipts of the
government (revenues from tax and other sources) and the expenditure met from these revenues.
Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as
income tax, corporate tax, excise, customs and other duties which the government levies. Non-tax
revenue consist of interest and dividend on investments made by government, fees and other receipts
for services rendered by Government.
CAPITAL BUDGET :- It consists of capital receipts and payments. The main items of
capital receipts are loans raised by Government from public which are called Market Loans, borrowings
by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from
foreign Governments and bodies and recoveries of loans granted by Central Government to State and
Union Territory Governments and other parties.
CAPITAL EXPENDITURE :- Funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain
or increase the scope of their operations. These expenditures can include everything from repairing a roof to
building a brand new factory.
INDIRECT TAXES :- These are the taxes paid by consumers when they buy goods and
services. These include excise and customs duties. Customs duty is the charge levied when goods are
imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the
manufacturer on items manufactured within the country. These charges are passed on to the consumer.
DIRECT TAXES :- These are the taxes that are levied on the income of individuals or
organisations. Income tax, corporate tax, inheritance tax are some examples of direct taxation. Income
tax is the tax levied on individual income from various sources like salaries, investments, interest etc.
Corporate tax is the tax paid by companies or firms on the incomes they earn.
PLANNED EXPENDITURE :- plan expenditures are estimated after discussions
between each of the ministries concerned and the Planning Commission. Plan expenditure forms a
sizeable proportion of the total expenditure of the Central Government. The Demands for Grants of the
various Ministries show the Plan expenditure under each head separately from the Non-Plan
expenditure.
NON - PLANNED EXPENDITURE :- Non-plan revenue expenditure is accounted
for by interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to
government employees, grants to States and Union Territories governments, pensions, police, economic

30. services in various sectors, other general services such as tax collection, social services, and grants to
foreign governments.
CENTRAL PLAN OUTLAY :- It is the division of monetary resources among the
different sectors in the economy and the ministries of the government.
FISCAL POLICY :- This is the gap between the government`s total spending and the sum of
its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds
required by the government to completely meet its expenditure.
FINANCE BILL :- The proposals of the Government for levy of new taxes, modification of
the existing tax structure or continuance of the existing tax structure beyond the period approved by
Parliament are submitted to Parliament through the Finance Bill.
The Budget documents presented in terms of the Constitution have to fulfil certain legal
and procedural requirements and hence may not by themselves give a clear indication of
the major features of the Budget.
To facilitate an easy comprehension of the Budget, certain explanatory documents are
presented along with the Budget.
AD-VALOREM DUTIES :- An ad valorem tax is typically imposed at the time of a
transaction (a sales tax or value-added tax [VAT]), but it may be imposed on an annual basis (real or
personal property tax) or in connection with another significant event (inheritance tax, surrendering
citizenship,or tariffs).
APPROPRIATION BILL: - the Budget proposals and Voting on Demands for Grants
have been completed, Government introduces the Appropriation Bill. The Appropriation Bill is
intended to give authority to Government to incur expenditure from and out of the Consolidated Fund
of India. The procedure for passing this Bill is the same as in the case of other money Bills.
BUDGET DEFICIT :- A financial situation that occurs when an entity has more money
going out than coming in. The term "budget deficit" is most commonly used to refer to government
spending rather than business or individual spending. When it refers to federal government spending, a
budget deficit is also known as the "national debt." The opposite of a budget deficit is a budget surplus,
and when inflows are equal to outflows, the budget is said to be balanced.
COUNTERVAILING DUTIES :- A duty placed on imported goods that are being
subsidized by the importing government. This helps to even the playing field between the domestic
producers and the foreign producers receiving subsidies.
CONSOLIDATED FUND :- Treasury's current account with the central bank through
with all or almost all of a government's expenditures and receipts pass.
CONTINGENCY FUND :- An amount kept in reserve to guard against possible losses. t
may be used for urgent expenditure in anticipation that the money will be approved by Parliament, or

31. for small payments that were not included in the year's budget estimates. The Contingencies Fund Act
1974 sets the size of the fund as two percent of the amount of the government budget in the preceding
year.
CENVAT :- The definition of Capital Goods, Exempted Goods, Final products and the inputs has
been provided in Rule 2 of CENVAT Credit Rules, 2002. It also included the list of items eligible for
Capital Goods as well as for the inputs.
CURRENT ACCOUNT DEFICIT :- A substantial current account deficit is not
necessarily a bad thing for certain countries. Developing counties may run a current account deficit in
the short term to increase local productivity and exports in the future.
CUSTOM DUTIES :- Customs is an authority or agency in a country responsible for
collecting and safeguarding customs duties and for controlling the flow of goods including animals,
transports, personal effects and hazardous items in and out of a country. Depending on local legislation
and regulations, the import or export of some goods may be restricted or forbidden, and the customs
agency enforces these rules.
DISINVESTMENTS :- A company or government organization will divest an asset or
subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to
better use that garners a higher return on investment.
EXCISE DUTIES :- An excise or excise tax (sometimes called a duty of excise special tax) is
commonly referred to as an inland tax on the sale, or production for sale, of specific goods; or, more
narrowly, as a tax on a good produced for sale, or sold, within a country or licenses for specific
activities. Excises are distinguished from customs duties, which are taxes on importation. Excises are
inland taxes, whereas customs duties are border taxes.
FISCAL DEFICIT :- A fiscal deficit is regarded by some as a positive economic event. For
example, economist John Maynard Keynes believed that deficits help countries climb out of economic
recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of
a balanced budget policy.
MONETISED DEFICIT :- It is amount by which fiscal deficit is going to be financed by
printing of currency.
NATIONAL DEBT :- The total outstanding borrowings of the central government
Exchequer. It is the debt owed by the government as a result of earlier borrowing to finance budget
deficits.
MIR :- Maximum Information Rate (MIR) in reference to Broadband Wireless refers to maximum
bandwidth the Subscriber Unit will be delivered from the wireless access point in kbit/s.
PERFORMANCE BUDGET :- Decisions made on these types of budgets focus more
on outputs or outcomes of services than on decisions made based on inputs. In other words, allocation

32. of funds and resources are based on their potential results. Performance budgets place priority on
employees' commitment to produce positive results, particularly in the public sector.
PRIMARY DEFICIT :- Amount by which a government's total expenditure exceeds its
total revenue, excluding interest payments on its debt.
CALL MONEY
MARKET

33. CAPITAL MARKET :- A capital market is a market for securities (debt or equity), where
business enterprises and government can raise long-term funds. It is defined as a market in which
money is provided for periods longer than a year, as the raising of short-term funds takes place on other
markets (e.g., the money market). The capital market is characterized by a large variety of financial
instruments: equity and preference shares, fully convertible debentures (FCDs), non-convertible
debentures (NCDs) and partly convertible debentures (PCDs) currently dominate the capital market,
however new instruments are being introduced such as debentures bundled with warrants,
participating preference shares, zero-coupon bonds, secured premium notes, etc.
INSTRUMENTS OF CAPITAL MARKET
1. SECURED PREMIUM NOTES :-
SPN is a secured debenture redeemable at premium issued along with a detachable warrant, redeemable after
a notice period, say four to seven years. The warrants attached to SPN gives the holder the right to apply and
get allotted equity shares; provided the SPN is fully paid.
2. DEEP DISCOUNT BONDS :-
A bond that sells at a significant discount from par value and has no coupon rate or lower coupon rate than
the prevailing rates of fixed-income securities with a similar risk profile. They are designed to meet the long
term funds requirements of the issuer and investors who are not looking for immediate return and can be sold
with a long maturity of 25-30 years at a deep discount on the face value of debentures.
3. EQUITY SHARES WITH DETACHABLE WARRANTS :-
A warrant is a security issued by company entitling the holder to buy a given number of shares of stock at a
stipulated price during a specified period. These warrants are separately registered with the stock exchanges
and traded separately. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing
the issuer to pay lower interest rates or dividends.
4. FULLY CONVERTIBLE DEBENTURES WITH INTEREST :-
This is a debt instrument that is fully converted over a specified period into equity shares. The conversion
can be in one or several phases. When the instrument is a pure debt instrument, interest is paid to the
investor. After conversion, interest payments cease on the portion that is converted. If project finance is
raised through an FCD issue, the investor can earn interest even when the project is under implementation.
Once the project is operational, the investor can participate in the profits through share price appreciation and
dividend payments.
5. EQUIPREF
They are fully convertible cumulative preference shares. This instrument is divided into 2 parts namely Part
A & Part B. Part A is convertible into equity shares automatically/compulsorily on date of allotment without
any application by the allottee.
6. SWEAT EQUITY SHARES
The phrase `sweat equity' refers to equity shares given to the company's employees on favorable terms, in
recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares
of the company, so they become part owners & participate in the profits, apart from earning salary. This
gives a boost to the sentiments of employees & motivates them to work harder towards the goals of the
company.

34. 7. TRACKING STOCKS
A tracking stock is a security issued by a parent company to track the results of one of its subsidiaries or lines
of business; without having claim on the assets of the division or the parent company. It is also known as
"designer stock". When a parent company issues a tracking stock, all revenues and expenses of the applicable
division are separated from the parent company's financial statements and bound to the tracking stock.
8. DISASTER BONDS
Also known as Catastrophe or CAT Bonds, Disaster Bond is a high-yield debt instrument that is usually
insurance linked and meant to raise money in case of a catastrophe. It has a special condition that states that
if the issuer (insurance or Reinsurance Company) suffers a loss from a particular pre-defined catastrophe,
then the issuer's obligation to pay interest and/or repay the principal is either deferred or completely forgiven.
9. MORTGAGE BACKED SECURITIES(MBS)
MBS is a type of asset-backed security, basically a debt obligation that represents a claim on the cash flows
from mortgage loans, most commonly on residential property. Mortgagebacked securities represent claims
and derive their ultimate values from the principal and payments on the loans in the pool. These payments
can be further broken down into different classes of securities, depending on the riskiness of different
mortgages as they are classified under the MBS.
10. GLOBAL DEPOSITORY RECEIPTS/ AMERICAN DEPOSITORY
RECEIPTS
A negotiable certificate held in the bank of one country (depository) representing a specific number of shares
of a stock traded on an exchange of another country. GDR facilitate trade of shares, and are commonly used
to invest in companies from developing or emerging markets. GDR prices are often close to values of related
shares, but they are traded and settled independently of the underlying share.
11. FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs)
A convertible bond is a mix between a debt and equity instrument. It is a bond having regular coupon and
principal payments, but these bonds also give the bondholder the option to convert the bond into stock.
FCCB is issued in a currency different than the issuer's domestic currency.
12. DERIVATIVES
A derivative is a financial instrument whose characteristics and value depend upon the characteristics and
value of some underlying asset typically commodity, bond, equity, currency, index, event etc. Advanced
investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security,
to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are often
leveraged, such that a small movement in the underlying value can cause a large difference in the value of the
derivative.
13. PARTICIPATORY NOTES
Also referred to as "P-Notes" Financial instruments used by investors or hedge funds that are not registered
with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy
India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains
collected from the underlying securities go back to the investors. These are issued by FIIs to entities that
want to invest in the Indian stock market but do not want to register themselves with the SEBI.

35. 14. HEDGE FUND
A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of
investment and trading activities in both domestic and international markets, and that, in general, pays a
performance fee to its investment manager. Every hedge fund has its own investment strategy that determines
the type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in a
broad range of investments including shares, debt and commodities.
15. FUND OF FUNDS
A "fund of funds" (FoF) is an investment strategy of holding a portfolio of other investment funds rather than
investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-
manager investment. A fund of funds allows investors to achieve a broad diversification and an appropriate
asset allocation with investments in a variety of fund categories that are all wrapped up into one fund.
16. EXCHANGE TRADED FUNDS
An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An
ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of
its underlying assets over the course of the trading day.
17. GOLD ETF
A gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose value depends on
the price of gold. In most cases, the price of one unit of a gold ETF approximately reflects the price of 1
gram of gold. As the price of gold rises, the price of the ETF is also expected to rise by the same amount.
Gold exchange-traded funds are traded on the major stock exchanges including Zurich, Mumbai, London,
Paris and New York There are also closed-end funds (CEF's) and exchange-traded notes (ETN's) that aim to
track the gold price.
MONEY MARKET :- Money market means market where money or its equivalent can be
traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in
money or credit who wish to generate liquidity. It is better known as a place where large institutions
and government manage their short term cash needs. For generation of liquidity, short term
borrowing and lending is done by these financial institutions and dealers. Money Market is part of
financial market where instruments with high liquidity and very short term maturities are traded.
Due to highly liquid nature of securities and their short term maturities, money market is treated as a
safe place. Hence, money market is a market where short term obligations such as treasury bills,
commercial papers and banker’s acceptances are bought and sold.
Money Market Instruments: Investment in money market is done through money
market instruments. Money market instrument meets short term requirements of the borrowers and
provides liquidity to the lenders. Common Money Market Instruments are as follows:
 Treasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, are
short term borrowing instruments of the Central Government of the Country issued through the
Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so
attractive. It is available both in primary market as well as secondary market. It is a promise to pay a
said sum after a specified period. T-bills are short-term securities that mature in one year or less
from their issue date. They are issued with three-month, six-month and one-year maturity periods.

36. The Central Government issues T- Bills at a price less than their face value (par value). They are
issued with a promise to pay full face value on maturity.
 Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are
transactions or short term loans in which two parties agree to sell and repurchase the same security.
They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only
between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities,
T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells
specified securities with an agreement to repurchase the same at a mutually decided future date and
price.
 Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a
short term unsecured promissory note issued by corporates and financial institutions at a discounted
value on face value. They are usually issued with fixed maturity between one to 270 days and for
financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a
company has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate its
receivables before 6 months. The company is in need of funds. It can issue commercial papers in form
of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6
months.
 Certificate of Deposit: It is a short term borrowing more like a bank term deposit
account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive
interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued
in any denomination. They are stamped and transferred by endorsement. Its term generally ranges
from three months to five years and restricts the holders to withdraw funds on demand.
 Banker’s Acceptance: It is a short term credit investment created by a non financial
firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and
accepted by a bank. It is a buyer’s promise to pay to the seller a certain specified amount at certain date.
The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral.
The person drawing the bill must have a good credit rating otherwise the Banker’s Acceptance will not
be tradable. The most common term for these instruments is 90 days. However, they can very from 30
days to180 days.

37. Money Market Account: It can be opened at any bank in the similar fashion as a savings
account. However, it is less liquid as compared to regular savings account. It is a low risk account
where the money parked by the investor is used by the bank for investing in money market
instruments and interest is earned by the account holder for allowing bank to make such
investment. Interest is usually compounded daily and paid monthly. There are two types of
money market accounts:
Money Market Transactional Account: By opening such type of account, the account
holder can enter into transactions also besides investments, although the numbers of
transactions are limited.
Money Market Investor Account: By opening such type of account, the account
holder can only do the investments with no transactions.
Money Market Index: To decide how much and where to invest in money market an investor
will refer to the Money Market Index. It provides information about the prevailing market rates.
There are various methods of identifying Money Market Index like:
Smart Money Market Index- It is a composite index based on intra day price pattern
of the money market instruments.
Salomon Smith Barney’s World Money Market Index- Money market instruments are
evaluated in various world currencies and a weighted average is calculated. This
helps in determining the index.
Banker’s Acceptance Rate- As discussed above, Banker’s Acceptance is a money

38. market instrument. The prevailing market rate of this instrument i.e. the rate at which
the banker’s acceptance is traded in secondary market, is also used as a money
market index.
LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate
also serves as good money market index. This is the interest rate at which banks
borrow funds from other banks.