GENERAL AWARENESSBANK:- 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 CHAIRMANIndian Overseas Bank 10th Feb 1937 GOOD PEOPLE TO GROW

WITHShri. M.Narendra

Allahabad Bank 1865 A TRADITION OF TRUST Shri J P Dua

Andhra Bank 28 November 1923

FOR ALL YOUR NEEDS R Ramachandran

Bank of Baroda 1908 INDIA’S INTERNATIONAL BANK

M D Mallya

Bank of India 1906 RELATIONSHIP BEYOND BANKING

Alok Kumar Misra

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 1911

CENTRE TO YOU SINCE 1911

Dena Bank 1938 YOUR TRUSTED FAMILY Sh D.L.Rawal

BANKCorporation Bank 1906 Prosperity for All Ajai Kumar

Indian Bank 1907 YOUR TECH-FRIENDLY BANK

T.M.Bhasin

Oriental Bank of Commerce

19 February 1943

WHERE EVERY INDIVIDUAL IS COMMITTED

Nagesh Pydah

Punjab & Sind Bank(P&SB)

1908 WHERE SERVICE IS A WAY OF LIFE

SHRI PARVEEN KUMAR ANAND

Punjab National Bank (PNB)

1895 THE NAME YOU CAN BANK UPON

K.R.Kamath

Syndicate Bank Ltd. 1925 FAITHFULLY FRIENDLY Basant SethUco Bank 1943 68 YEARS OF EXCELLENCE Shri Arun KaulUnion Bank of India (UBI)

11 Nov 1919 GOOD PEOPLE TO BANK WITH

Mavila Vishwanathan Nair

United Bank of India (UBI)

1950 THE BANK WHICH BEGANS WITH “U”

Bhaskar Sen

Vijaya Bank 1931 A FRIEND YOU CAN BANK UPON

Albert Tauro

State Bank of India(SBI) 1806,1840,1843 THE NATION BANKS ON US…

Pratip Chaudhuri

STRUCTURE OF RESERVE BANK OF INDIA

1 GOVERNOR

4 DEUPTY GOVERNOR

4 BOARD OF DIRECTORS

10 EXECUTIVE DIRECTORS

FINANCE SECRETARY

FUNCTIONS OF RBIFunctions 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.

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).

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.

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 POLICYThe 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).

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.

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.

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.

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.

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

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

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.

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

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

framework2. 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

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

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.

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 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.

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.

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.

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

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

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 MeasuresThe 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.

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 MeasuresFiscal 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.

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.

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.

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 expendituresI = gross private domestic investmentG = government consumption and gross investment expendituresX = gross exports of goods and servicesM = gross imports of goods and services

Note: (X - M) is often written as XN, which stands for "net exports"

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 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 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 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.

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. EQUIPREFThey 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 SHARESThe 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.

7. TRACKING STOCKSA 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 BONDSAlso 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 RECEIPTSA 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. DERIVATIVESA 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 thederivative.

13. PARTICIPATORY NOTESAlso 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.

14. HEDGE FUNDA 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 FUNDSAn 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 ETFA 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 inmoney 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 andprovides liquidity to the lenders. Common Money Market Instruments are as follows:

Treasury Bills (T-Bills): Treasury Bills, one of the safest money market instruments, areshort 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. 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.

Money Market Account: It can be opened at any bank in the similar fashion as a savingsaccount. However, it is less liquid as compared to regular savings account. It is a low risk accountwhere the money parked by the investor is used by the bank for investing in money marketinstruments and interest is earned by the account holder for allowing bank to make suchinvestment. Interest is usually compounded daily and paid monthly. There are two types ofmoney market accounts:

Money Market Transactional Account: By opening such type of account, the accountholder can enter into transactions also besides investments, although the numbers oftransactions are limited.

Money Market Investor Account: By opening such type of account, the accountholder can only do the investments with no transactions.

Money Market Index: To decide how much and where to invest in money market an investorwill 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 patternof the money market instruments.

Salomon Smith Barney’s World Money Market Index- Money market instruments areevaluated 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 moneymarket instrument. The prevailing market rate of this instrument i.e. the rate at whichthe banker’s acceptance is traded in secondary market, is also used as a moneymarket index.

LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Ratealso serves as good money market index. This is the interest rate at which banksborrow funds from other banks.